Praxeology: Recent Episodes
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Praxeology is the distinctive deductive method used in Austrian economics and the science of human action, as understood by the Austrian School.
Economic calculation is not an either-or proposition. Even in so-called market economies like that of the USA, there is plenty of government intervention that distorts market processes.
Original Article: "Economic Calculation Is Nonbinary"
The simplest action of economics—beneficially mutual voluntary exchange—is also its most profound. People serve each other while improving their own lot in life.
Original Article: "The Simplicity and Significance of Mutual Economic Exchange"
Praxeology is the method of economics.
Download the slides from this lecture at Mises.org/MU23_PPT_05.
Recorded at the Mises Institute in Auburn, Alabama, on 24 July 2023.
Some economists have tried to apply psychology to economic analysis, but psychology is not what drives economic activity.
Original Article: "Understanding the Difference between Praxeology and Psychology"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Keynesians and fellow travelers hold the Phillips curve to be sacrosanct. But because the Phillips curve cannot establish causality, it is useless as economic theory.
Original Article: "The Phillips Curve Is an Economic Fable"
This Audio Mises Wire is generously sponsored by Christopher Condon.
One of the fundamental tenets of Austrian economics is the ordinal value scale. Augustine articulated the idea more than a thousand years before Carl Menger wrote his pathbreaking Principles of Economics.
Original Article: "Saint Augustine, Proto-Austrian"
This Audio Mises Wire is generously sponsored by Christopher Condon.
While artificial intelligence has its merits, it still cannot perform the job of the Misesian entrepreneur. That is a good thing.
Original Article: "Will AI Learn to Become a Better Entrepreneur than You?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The Need to Be Whole: Patriotism and the History of Prejudiceby Wendell BerryShoemaker and Company, 2022; x + 513 pp.
Wendell Berry, a poet, novelist, and philosopher well known for his protests against mechanized agriculture and for his defense of the “land ethic,” is not a thinker one would immediately associate with Ludwig von Mises, and indeed, in economic theory the two are far apart. But there is nevertheless a passage in Mises’s Socialism that is central to Berry’s concerns.
The passage I have in mind is this:
When society’s existence is threatened, each individual must risk his best to avoid destruction. Even the prospect of perishing in the attempt can no longer deter him. For there is then no choice between either living on as one formerly lived or sacrificing oneself for one’s country, for society, or for one’s convictions. Rather, must the certainty of death, servitude, or insufferable poverty be set against the chance of returning victorious from the struggle. War carried on pro aris et focis [for hearth and home] demands no sacrifice from the individual. One does not engage in it merely to reap benefits for others, but to preserve one’s own existence.
Berry uses a similar idea to explain and defend the South’s standpoint in the Civil War, but he does not do so in the way one might expect. Far from extolling the virtues of antebellum slavery, he condemns it as a grievous sin. In this connection, he makes an interesting criticism of John C. Calhoun, who deemed manual labor beneath the dignity of gentlemen, fit only for slaves. Berry argues that it was in part the unwillingness of elements among the Southern planter elite to acknowledge the virtue of work that led them to turn away from the Jeffersonian position that slavery is a great evil. In this connection, Berry quotes John Quincy Adams, a great opponent of slavery whom he admires: “I told Calhoun I could not see things in the same light—It is in truth all perverted sentiment—mistaking labor for slavery, and dominion for Freedom” (Adams, quoted on p. 298).
If slavery was wrong, why, then, does Berry defend the South’s position in the Civil War? His answer is that the great bulk of those who fought for the South did so not to entrench slavery but rather to protect their land and homes from invasion: “But from the point of view of the Confederate soldiers, the great fact of the war, once it had begun, was that their country had been, and was going to be invaded. They shared with [Robert E.] Lee a settled determination to defend their homelands and their people” (p. 203).
In arguing in this way, Berry agrees with Murray Rothbard, another thinker not usually coupled with him. Like Berry, Rothbard argues that the Southerners were defending their lands from invasion:
In 1861, the Southern states, believing correctly that their cherished institutions were under grave threat and assault from the federal government, decided to exercise their natural, contractual, and constitutional right to withdraw, to “secede” from that Union. The separate Southern states then exercised their contractual right as sovereign republics to come together in another confederation, the Confederate States of America. If the American Revolutionary War was just, then it follows as the night the day that the Southern cause, the War for Southern Independence, was just, and for the same reason: casting off the “political bonds” that connected the two peoples. In neither case was this decision made for “light or transient causes.” And in both cases, the courageous seceders pledged to each other “their lives, their fortunes, and their sacred honor.”
If it is objected that without the war, the end of slavery might have been indefinitely postponed, Berry admits that he has no easy answer but that he does know that the violence of war exacts tremendous costs. He reminds us that the “crusade” mentality led to later disasters:
[The Civil War] remains popularly credited as the solution, entirely good, of our worst national problem. So successful were we at solving our own great problem that we have generously undertaken to solve international problems and the problems of other nations also by force of war and with the same assurance of our goodness in doing so. If we have a sort of notion of preventability, we are not long detained by it. We appear never to bother with the question of net good. We went to war in Iraq and Afghanistan as if such questions could not be asked, as if no useless war had ever been fought, and in a nationalist confusion of pride, fear, moral certainty, and (never dismissible) the allure of profits in the war industries. (p. 85)
In condemning the stern moralism of the Northern aggressors, Berry again finds himself at one with Rothbard.
The Civil War seems to me to have been, to an extent sufficiently noticeable, a conflict of patriotism, which is to say love for one’s actual country or the land under one’s feet, against nationalism, which is to say allegiance just short of worship to a political idea or ideal and to a government. The difference is well illustrated by the anthems of the two sides: the jaunty “Dixie,” which celebrates the “land where I was born,” versus “The Battle Hymn of the Republic,” a hymn sure enough of a sanctified nationalism, in which the misfortunate Jesus once again shows up in uniform. (p. 250)
In like fashion, Rothbard says:
The Northern war against slavery partook of fanatical millennialist fervor, of a cheerful willingness to uproot institutions, to commit mayhem and mass murder, to plunder and loot and destroy, all in the name of high moral principle and the birth of a perfect world. The Yankee fanatics were veritable [Isabel] Patersonian humanitarians with the guillotine: the Anabaptists, the Jacobins, the Bolsheviks of their era. This fanatical spirit of Northern aggression for an allegedly redeeming cause is summed up in the pseudo-Biblical and truly blasphemous verses of that quintessential Yankee Julia Ward Howe, in her so-called “Battle Hymn of the Republic.”
We have much to learn from Berry’s profound defense of the local and particular against militarism and fanaticism.
While behavioral economics claims to be an effective way of measuring individual economic behavior, it actually sets back authentic economic analysis.
Original Article: "Behavioral Economics Challenges the Rationality of Consumer Choices"
This Audio Mises Wire is generously sponsored by Christopher Condon.
After praising Mises for his work on socialism, Tyler Cowen goes on to claim Human Action is "cranky and dogmatic." "Brilliant and insightful" would have been more truthful.
Original Article: "Misunderstanding Mises, Again"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Mainstream economists claim that data alone can explain economic actions. Austrians know that without theory, data explains nothing.
Original Article: "Facts and Data Have No Meaning without a Theory to Explain Them"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
It is easy to think of supply and demand curves as being key to economic analysis. In reality, they can't tell us much, and emphasizing them actually stands in the way of better understanding economic processes.
Original Article: "What Do Supply and Demand Curves Really Tell Us? Not Very Much"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Standard neoclassical definitions of money call it a means of exchange and a store of value. But is this correct?
Original Article: "Cryptocurrency as Money—Store of Value or Medium of Exchange?"
This Audio Mises Wire is generously sponsored by Christopher Condon. '
Praxeology is the method of economics.
Download the slides from this lecture at Mises.org/MU22_PPT_03.
Recorded at the Mises Institute in Auburn, Alabama, on 25 July 2022.
Jordan Peterson is turning his eye toward Austrian economics. Unlike the many conservatives who see free market advocacy as some sort of "dangerous fundamentalism," Peterson seems to get it.
Original Article: "Jordan Peterson on Austrian Economics: Free Markets Are 'Profoundly Equitable'"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Arguments for equal pay are popular in our body politic, but what happens if some of those arguments are based upon the faulty logic of the labor theory of value?
Original Article: "Are Equal Pay Arguments Based upon the Labor Theory of Value?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
In the past few weeks, I’ve been involved in an email exchange about the differences in methodology between the Austrian school and the Chicago school. The correspondence has revealed some surprising misunderstandings of a key Austrian view, demonstrated preference, and what I hope to do in this week’s article is to give an account of that view and some of the misunderstandings about it.
The best account of demonstrated preference is in Murray Rothbard’s essay “Towards a Reconstruction of Utility and Welfare Economics” (1956). Essentially, the doctrine is this. When you make a choice, it’s usually among a few options. The choice is an action, and the action demonstrates, or reveals, that the option, or preference, that you choose ranks higher than the competing options. As Rothbard puts it,
Human action is the use of means to arrive at preferred ends. Such action contrasts to the observed behavior of stones and planets, for it implies purpose on the part of the actor. Action implies choice among alternatives. Man has means, or resources, which he uses to arrive at various ends; these resources may be time, money, labor energy, land, capital goods, and so on. He uses these resources to attain his most preferred ends. From his action, we can deduce that he has acted so as to satisfy his most highly valued desires or preferences.
The concept of demonstrated preference is simply this: that actual choice reveals, or demonstrates, a man’s preferences; that is, that his preferences are deducible from what he has chosen in action. Thus, if a man chooses to spend an hour at a concert rather than a movie, we deduce that the former was preferred, or ranked higher on his value scale. Similarly, if a man spends five dollars on a shirt we deduce that he preferred purchasing the shirt to any other uses he could have found for the money. This concept of preference, rooted in real choices, forms the keystone of the logical structure of economic analysis, and particularly of utility and welfare analysis.
When we talk about “preferences” or “options” here, what is meant are the alternatives that an actor has in mind when he decides what to do. We aren’t assuming that these preferences remain constant over a substantial period of time, much less that the actor has “in his mind” a list of all possible actions he could take in all possible worlds and that this list also remains the same for a long period. Because we don’t assume these things, we also don’t assume “transitivity of preferences.” If you prefer A to B, B to C, and A to C, then your preferences are transitive; but if your preferences are A over B, B over C, and C over A, they are intransitive. Many people think that intransitive preferences are irrational, for reasons we won’t go into here.
In the Austrian view, this issue doesn’t arise, because we’re concerned only with someone’s choice at a particular time. If the actor now has to choose between A and B, we don’t assume that he considers how to choose in situations that involve other options, nor do we assume that his preference for A over B remains constant. As Rothbard puts it, “The prime error here is the assumption that the preference scale remains constant over time. There is no reason whatever for making any such assumption. All we can say is that an action, at a specific point of time, reveals part of a man’s preference scale at that time. There is no warrant for assuming that it remains constant from one point of time to another.”As Rothbard points out, there is a difference between constancy and consistency, and the former isn’t a requirement of reason.
[C]onstancy and consistency are two entirely different things. Consistency means that a person maintains a transitive order of rank on his preference scale (if A is preferred to B and B is preferred to C, then A is preferred to C). But the revealed preference procedure does not rest on this assumption so much as on an assumption of constancy —that an individual maintains the same value scale over time. While the former might be called irrational, there is certainly nothing irrational about someone’s value scales changing through time. Hence, no valid theory can be built on a constancy assumption.
One of the participants in the email exchange raised this objection:
It [demonstrated preference] at most reveals his higher preference, his preference between two alternatives he is free to choose between…. Consider a prude who is made unhappy by other people’s consumption of pornography. In the free market society he doesn’t have the option of forbidding it, even though his highest preference might be an otherwise free market plus a ban on pornography. If there were only two other people in the society he could offer to pay them to agree not to consume pornography, but in a society of millions transaction costs plus the public good problem—the ban is a public good from the standpoint of all the other prudes—make that impractical.
The mistake here is that demonstrated preference concerns only choices that face an actor at a time. It isn’t about how he ranks possible states of affairs. I’d “prefer,” in one sense of that word, a world in which everyone held the correct view (mine, of course) of how society should be organized, but that sense of preference isn’t relevant to Austrian economics.
Another comment about demonstrated preference didn’t aim to undermine it directly, but rather to show that the doctrine brought with it baggage Austrians wouldn’t welcome. Austrians are against logical positivism, but, the commenter said,
[t]here is actually something like logical positivism in Austrian economics. I mean the idea that one can’t make interpersonal utility comparisons, as well as the more fundamental idea that “preference” must mean “revealed preference”. This is very reminiscent of the positivistic idea that all meaningful statements must be testable by sensory observation. Good rationalists reject this assumption.
Maybe they do, but “demonstrated preference,” as Austrians use this concept, means that choice reveals the chooser’s highest preference. It isn’t a claim about the meaning of “preference.”
This objection, one must say, doesn’t “demonstrate” much acquaintance with Austrian economics. It’s good to have it anyway. As W.V.O. Quine once said, “Every knock a boost.
Recorded at the Mises Institute in Auburn, Alabama, on 20 July 2021. Download the slides from this lecture at Mises.org/MU21_PPT_11.
Key methodological differences between Austrians were highlighted in Milton Friedman's "The Methodology of Positive Economics." A key piece of conflict: Friedman's focus on prediction rather than explanation.
Original Article: "Milton Friedman's Methodological Mistake"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
In this plenary address from the 2021 Austrian Economic Research Conference, Douglas B. Rasmussen speaks on some of the philosophical principles behind Rothbard's work with the action axiom.
The F. A. Hayek Memorial Lecture, sponsored by Greg and Joy Morin. Recorded at the Mises Institute on March 19, 2021. Includes an introduction by Peter G. Klein.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
Expanded Second Edition Foreword by Jeff Deist Congratulations! You hold in your hands one of the best collections of essays from one of the most vital and challenging thinkers on the planet. This book is a compendium of sorts, a cross section of Professor Hans-Hermann Hoppe’s best work across several decades arranged in one accessible volume. It originally was published by Laissez Faire Books in 2012, but languished without the audience it deserved. This volume rejuvenates that work with no less than six new chapters and more than a hundred new pages not found in the earlier version, along with some much-needed publicity and promotion.
Academics and social scientists today tend toward hyperspecialization, but Dr. Hoppe does not make this mistake. In this approach he joins a long line of important thinkers who did not confine themselves to a narrow academic discipline and did not care to “stay in their lane.” We forget that many twentieth century economists, for example, capably applied knowledge in history, philosophy, logic, anthropology, sociology, epistemology, politics, and ethics to their work—including Ludwig von Mises, Hoppe’s inspiration, and Murray N. Rothbard, Hoppe’s mentor. In that very important sense Hoppe continues and builds on the work of both men.
If you are new to Hoppe’s work, this is an excellent introduction and survey to his syntheses of history, anthropology, property, ethics, and state. If you already know and enjoy Hoppe, you will find here a “Hoppe reader”: many of his best and most representative articles across a range of topics in one accessible volume. Consider it almost a reference guide, from which readers can guide themselves back to his lengthy books and articles. But this book has something for everyone, from his rigorous yet often overlooked implications of capitalism and socialism to his broadside against democracy on property rights grounds. Even the new or casual reader will come away with an excellent understanding of Hoppe’s work and worldview.
The title of course comes from Claude-Frédéric Bastiat, the great nineteenth-century French economic journalist and liberal. Bastiat gave us “The Great Fiction” to describe the government mechanisms by which people attempt to live at the expense of others. The state is always present in Hoppe’s work, whether front and center or lurking in the background. Hoppe’s subtitle, Property, Economy, Society, and the Politics of Decline gives an unsubtle clue as to what readers should expect: a damning indictment of the political world and its twenty-first-century managerial superstates. In Hoppe’s world, the state is a wholly decivilizing institution: a predator rather than protector, a threat to property and peace. Markets and entrepreneurs produce goods, governments produce “bads”: taxation (theft), regulation (semi-ownership, thus semi-socialism), devalued money (central banks), war (defense), injustice (state courts and police), and the ruinous effects of high time preference (democracy). Like Bastiat, Hoppe has no patience for obscuring or soft pedaling the realities of our political world.
Part one of the book deals with the development of human society and the concomitant rise of two often opposing forces, namely property and states. Here Hoppe explains civilization rising against a backdrop of greater productivity enabled by the painfully slow shift from nomadic to agrarian living. Once sufficient calories could be yielded from land, concepts of family and ownership come into greater focus. The Enlightenment and Industrial Revolution create more and more prosperity, a proto-middle class, while feudal and monarchical arrangements face pressure from subjects developing greater wealth and literacy. This pressure explodes in the nineteenth century, as groups of largely decentralized kingdoms, principalities, territories, and city-states come under the full sway of national boundaries and governments. The twentieth century ushers in the era of full democratic government in the West: the Great War washes away the last vestiges of Old Europe, while growing economic and military power places the United States squarely at the helm of an international order.
Hoppe, of course, does not accept at face value the notion of the twentieth century as “liberal,” and in fact finds much of it illiberal. A particular favorite from part one is a chapter from Democracy: The God That Failed titled “On Democracy, Redistribution, and the Destruction of Property.” This essay beautifully encapsulates all of his fundamental critiques of modern mass democracy, namely that it produces bad, shortsighted politicians who care nothing about their nation’s capital stock; bad, shortsighted voters who care nothing about future generations; bad, expansionary economic and foreign policy; and bad, central bank money to pay for it all. Citizens, unlike subjects of yesteryear, enjoy the illusion that government is “us.” But an illusion is all it is, and Hoppe enjoys slaying this most sacred of cows.
Part two focuses on the hugely important but often overlooked relationship between money and the state. While kings and sovereigns once enjoyed debasing money to line their pockets, modern central banks turn seigniorage into something far more systemic and harmful. Fiat money enables politicians to fund welfare and warfare programs unimaginable in previous generations, increasing state power at every turn. It also distorts virtually every economic decision made across society, resulting in gross inefficiency and malinvestment. Society suffers, purchasing power erodes, but an undeserving and state-connected banking class benefits from all the new money. The quintessential Hoppean explanation for this sordid process, namely power, is nicely presented in chapter 9, “Why the State Demands the Control of Money.”
Part three forays into Dr. Hoppe’s economic theory, particularly in the area of method. Much of what we consider to comprise modern economics is wrong, and in particular wrong because it subverts the role of theory with empiricism, statistics, math, and modeling. Human actors apply deeply subjective values to all economic goods, values which change almost constantly. They are not atoms or vectors to be studied by testing hypotheses with data, but volitional beings to which we must apply axiomatic deductive reasoning. Hoppe gives readers a crash course in certainty, uncertainty, and probability, to show their uses and more importantly their limitations in economics.
Part four considers the important subject of intellectual history in the context of the broad Austro-libertarian movement, and includes a truly heartfelt speech from Hoppe on his friend and colleague Rothbard which is sure to move you. It also includes a typically Hoppean critique of Friedrich von Hayek’s political theory, which in Hoppe’s view compares very unfavorably to his work in monetary policy and the knowledge problem. This section finishes with the text of Hoppe’s sweeping talk titled “The Libertarian Quest for a Grand Historical Narrative,” a marvelous narrative about where we have been and where we might be going.
Finally, part five is a collection of interviews with Dr. Hoppe and autobiographical essays, including one conducted by yours truly. These interviews give a better sense of Hoppe as a person and thinker, and greater insight into his development both personally and professionally. Readers will find plenty of intellectual ammunition here, along with answers to many of the simplistic challenges posed to Hoppe’s idealized conception of a private law society.
Reading Hans-Hermann Hoppe is always a pleasure and never a chore, because both the subjects and Dr. Hoppe’s command of them quickly win the reader’s attention and even admiration. Most academic writing is almost unbearable; and as alluded to earlier it is designed to appeal only to a tiny group of PhDs who work in a very limited area or subfield. Hoppe, by contrast, produces academic treatments of much broader and foundational issues which manage to hold appeal for intelligent lay audiences. The footnotes, the diamond-sharp deductive logic, the references to earlier works and thinkers—all the hallmarks of academic journals are there—without the tedium and hubris.
Hoppe is the rare intellectual who never preens or bores, and never loses the plot. He keeps things close to the bone, one might say: not quite sparse but never ornate or superfluous. There are no twenty-page detours into some faintly related topic merely for show, a habit even the best of academics sometimes fall prey to. Not Dr. Hoppe. His work inevitably strips out the nonessential and gets to the root of the issue at hand. Sometimes that essential and unadulterated focus comports with popular sentiment and thinking; oftentimes it does not. Hence his controversial reputation in certain emotive circles. But Hoppe, like any good social scientist, has an obligation to seek truth and help us understand the world. Thus he never appeals to the reader’s existing pretensions or prejudices, but instead always demands we follow the praxeological path of understanding human actors as they really are.
In other words, truth—unadorned and uncomfortable as it may be—is the end goal of any good social scientist. Thus, Dr. Hoppe is an unflinching advocate for reality and logic, and one you cannot ignore.
Forcing one person to take medication or vaccines for the benefit of another person is directly opposed to basic notions of self-ownership and human rights.
Original Article: "State-Mandated Vaccines Are a Moral Minefield"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Human action cannot be analyzed in the same way that one would analyze objects. These quantitative methods do not improve our knowledge of the driving causes in economics.
Original Article: "Quantitative Methods in Economics Can Describe—but Not Explain—Events"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Professor Per Bylund of Oklahoma State University is the author of The Seen, The Unseen, and the Unrealized. 2020 is the year social scientists failed to show us the unseen, namely the staggering and still unfolding economic, social, medical, and human costs of Covid lockdowns. Dr. Bylund and Jeff Deist discuss Covid and government responses against the backdrop of ripple effects, Say's law, "market failure," and the inability of bureaucrats to make rational tradeoffs. They also discuss Dr. Bylund's upcoming project for the Mises Institute: an Austrian economics primer, under 100 pages, available as a very inexpensive paperback.
Find Dr. Bylunds book at mises.org/Unrealized
And follow him on Twitter @PerBylund
Abstract: This paper expands Fuller’s (2013) analysis of the net present value and interest rate changes in the context of the Austrian business cycle theory. During the boom phase of the business cycle, the economy shifts to a more risky position as the result of entrepreneurs’ profit targeting. To quantify this risk the duration, defined as the number of periods that elapse before the average present value dollar is received from a stream of cash flows, can be used. The new risk-adjusted net present value is created after applying the duration to capital asset pricing model determining the discount rate that should be used to calculate the present value of the project.
JEL Classification: B53, E22, E40, E52, G31, G32 Joanna Kruk (jkruk67@gmail.com) is a recent graduate of the Cracow University of Economics and Jagiellonian University.
- INTRODUCTION The Austrian business cycle theory (ABCT) gained the interest and endorsement of non-Austrians as a valid theory shortly after the outbreak of the 2007/08 crisis. Then, major focus was placed on macrolevel aggregates such as the volume of loans, the threat of large scale bankruptcy or the supply of money. Little attention was paid to the analysis of corporate finance and the causes of companies’ erroneous decisions about initiating and carrying out unprofitable undertakings. One direct cause of the collapse was identified as cheap credit, which engenders a reallocation of resources between stages of production. That is inconsistent with the intertemporal preferences of consumers. In particular, lowering the interest rate below its natural level causes production to become more future-oriented. Artificially low interest rates are not only the cause of incurring new debts by companies, but are also the reason why less efficient companies enter the market. Due to the poor quality of their projects, these less efficient companies are more likely to mobilize necessary funds if funds are less limited, which is the result of expansionary monetary policy. Correspondingly, there are numerous entrepreneurs that will receive investment funds only when credit is “easy.” (Engelhardt, 2013) Moreover, erroneous decisions to engage more resources to projects which cannot be successfully completed are implemented, making the situation worse than it otherwise would be.
The aim of this paper is to analyze corporate finance from an ABCT perspective with a focus on the excessive risk-taking by companies. While the main literature about the business cycle focuses on the effects of certain policies on the aggregate and general shift of the economy to more risky positions, the motivation of financial decisions on a micro-level can shed new light on the foundations of the emergence of the business cycle. The vast difference between the profitability of an investment project relative to the interest rate change was previously discussed by Fuller (2013) using the net present value and the marginal efficiency of capital to show how interest rates affect the intertemporal allocation of capital and shift the resources to more roundabout projects. Enriching the analysis in risk assessment could lead to a further conclusion regarding the subject. One of the frequently used risk measures is duration, used in capital budgeting and precisely described by Blocher and Clyde (1979) and Johnson (2005).
In this paper, we plan to analyze previous work on the cycle effects on the microenvironment from the Austrian perspective, along with financial literature research on risk assessment, in order to try to capture the impact of interest rates changes based on financial decisions of firms with on numeric examples.
- THE CORPORATE APPROACH TO THE AUSTRIAN BUSINESS CYCLE THEORY The Austrian business cycle theory was developed in the first half of the 20th century, mostly by Ludwig von Mises and Friedrich von Hayek. The main focus of the theory was placed on the intertemporal coordination and allocation of resources. In the market economy, the role of price signals was emphasized, as it is the major indicator of entrepreneurs’ success in fulfilling their clients’ demands. Special attention was paid to interest rates since the core of the ABCT is how artificially low-interest rates, which are falling below their natural level, influence the economic activity of agents.
As formulated by Rothbard (1978), the unhampered market interest rate is determined only by the “time-preferences” of the agents. People choose money right now over a promise made in the present to receive the same amount of money in the future, which means that their time preference is positive. Time preference also indicates the distribution of people’s income between savings and consumption. When the interest rate falls as the result of government intervention, rather than as a change in people’s preferences, an artificial boom starts. Agents are deceived into thinking that there is a greater amount of savings available for their investment projects, so they begin to engage more capital, particularly in lengthy and time-consuming undertakings, which previously were unprofitable due to the higher cost of financing them.
The main focus of Austrian economists is placed on emphasizing the disruption of intertemporal resources allocated between stages of production, resulting in malinvestments. At the later stage, these projects turn out to be impossible to complete since there are not enough resources to finish all undertakings initiated during the boom episode. This argument was originally formulated by Ludwig von Mises: “Projects which would not have been thought profitable if the rate of interest had not been influenced by the manipulations of the banks, and which, therefore, would not have been undertaken, are nevertheless found profitable and can be initiated.” (Mises 1912, 26)
In the microscale during the expansionary phase of the business cycle, firms will prefer to expand production. Since the interest rate is regarded not only as a cost factor but also as a factor of capitalization, decreasing the interest rate creates an incentive for investments in fixed capital by way of capitalization of future yields (Machlup 1935). This is the effect of the increased present value of future return, which is capitalized at the new, lowest interest rate. This reasoning applies to both lowering interest rates directly by the central bank and to credit expansion. In the second scenario, the newly available funds push down the interest rate and create the impression that there are more resources available for investment in lengthy projects. At the same time, the decreased interest rate is the reason people are less willing to keep their income as savings, thus the further discrepancy between real and natural interest rate is created (Engelhardt 2012).
The main reason for keeping interest rates low is to boost the economic activity of agents. As a direct consequence, on a corporate finance level, it causes an increase in debt to capital ratio but also has an effect on capital budgeting decisions as described by Cwik (2008). Firms tend to not only increase the volume on investments but also replace investment in working capital with investment in fixed capital, widening the distance between real-time preference and the one imposed by the nominal interest rates. After the boom ends, these projects are abandoned as they are no longer able to generate positive cash flows. Some of the fixed capital used in undertaking can be moved to other projects, which was described by Wood (1984) as the illusion of depression: when companies decide to quit unprofitable undertakings, thus causing a decline in economic activity, but releasing the necessary resources for more effective projects. The resources which cannot be engaged in another project due to their specifics are considered sunk costs.Mises (1949) used the distinction for convertible and partially or nonconvertible capital: “It is expedient to substitute the notion of the convertibility of capital goods for the misleading distinction between fixed and free or circulating capital. The convertibility of capital goods is the opportunity offered to adjust their utilization to a change in the data of production.”
- INFLUENCE OF INTEREST RATE CHANGES ON THE NPV OF THE INVESTMENT PROJECT Net Present Value is an indicator used in order to compare projects realized in different periods of time and with different lengths. It uses the discounted cash flow generated by the activity. The present value of delayed payoff can be found by multiplying the payoff by a certain discount factor, which is less than 1. If the value of the discount factor was greater it would mean that the dollar tomorrow is worth more than a dollar today, which denies positive time preference. Net present value is defined as follows:
(1) [[{"fid":"93412","view_mode":"image_no_caption","fields":{"alt":"kruk01","class":"media-element file-default","data-delta":"1","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk01","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"1":{"alt":"kruk01","class":"media-element file-default","data-delta":"1","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk01","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"kruk01","class":"media-element file-image-no-caption","data-delta":"1"}}]]
where:
CFt = a cash flow to be received in a period of time t,
r = discount rate.
Ludwig von Mises and Irving Fisher suggest using the present value approach to economic calculation since the price of an investment project is moving towards the present value of the project’s expected cash flows.Both values are equal in equilibrium or in the Evenly Rotating Economy. Present value approach was also advocated by Rothbard (1962, 62–63):
It is clear that the higher the rate of discount, the lower the present value of the future good will be, and the greater the likelihood of abstaining from the investment. On the other hand, the lower the rate of discount, the higher the present value of future goods will be on the actor’s value scale, and the greater the likelihood of its being greater than the value of present goods forgone, and hence of his making the investment.
The consequences of interest rate changes and their effect on the valuation of projects were examined by Fuller (2013) and can be presented graphically:
Figure 1. Net Present Value Profile
[[{"fid":"93413","view_mode":"image_no_caption","fields":{"alt":"figure 1","class":"media-element file-default media-wysiwyg-align-center","data-delta":"2","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"figure 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"2":{"alt":"figure 1","class":"media-element file-default media-wysiwyg-align-center","data-delta":"2","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"figure 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"figure 1","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"2"}}]]
Diagram from Fuller (2013).
There are three indications of the NPV profile shape: the NPV of the project increases as the interest rate falls, the chart is curved, so the NPV profile becomes flattened as the interest rate falls, meaning that the change in interest rates causes not proportional change in NPV and this dependence is explicit in long term investment projects in particular, since the longer stream of cash flows is discounted. Third, the NPV profile intersects the interest rate axis at the point where NPV is zero, indicating the positive NPV area on the right from the vertical axis (Fuller, 2013).
If the present value is used as an indicator of a project’s profitability, then the expected reinvestment rate should be used as a discount factor, since comparing two projects of a different outlays requires comparing in relative, rather than absolute terms. In that case, it is necessary to compare “present value per dollar of outlay” (Solomon, 1956). The valid comparison can be made not only with similar projects but also with two different courses of action, which can be brought to the same measure using NPV.
Wealth maximizing investors use NPV to rank their investment projects while competition in the market creates a tendency for the price of an investment project to equal the present value of expected cash flows. This is because investors will bid up the price when it is below the present value and bid it down when it is above, a simple arbitrage process. In the wooden and steel bridge example first described by Hansen (1953, 118) and later developed by Fuller (2013), there is presented the disproportionate effect of the change of the interest rate on the short-term and long-term projects. Since the lowering of interest rates favors longer projects, it is intuitive that these projects are usually associated with greater uncertainty, since they absorb resources for a longer period of time. The risk of the interest rate change may be one of the components that has an impact on how safe the particular investment is. For the purpose of expanding and quantifying this intuition, risk measures such as duration can be used.
- DURATION AS A RISK MEASURE One of the reasons for the 2007 crisis was aggressive profit targeting. As a result, agents tended to focus on the higher return from their investments, neglecting the difference in risk associated with their decisions. Since they were acting in the low rates environment, in the long term, more risky projects seemed more attractive as there was a possibility to achieve higher profits by engaging in these. That is the reason we cannot exclude risk from its role in the profitability of the investment projects, and this factor should be included in further analysis. It is not surprising that risk is positively correlated with higher potential profit. As a result of entrepreneurs being more likely to forecast consumers’ demand in the near future, they generate greater errors in forecasting longer periods. Therefore, on average, there is a higher probability of erroneously forecasting more distant cash flow than those forecasts of cash flows to be received in the relatively near future.
In the short run, if we examine the wealth generated by the project without adjusting the forecasted values for risk, the output of the economy appears better when it is associated with an incipient boom. Consequently, in the medium or long run, collapse starts when this risk taken by the entities materializes.Materialization of risk may be explained by an example: when a large number of companies engage in similar ventures, with a 70 percent probability of success each, it means that, on average, this will end up as a loss for about 30 percent of companies. In the beginning, the projects generate positive cash flows and investments pay off, but eventually at least part of the risky investments will not succeed and the bust phase of the business cycle begins. Generally, the lower the interest rate, the more profitable investments in more roundabout projects appear. At the same time, the risk grows. This implies shifting the economy to a more risky position with higher potential returns (Cowen, 1997).
To quantify this risk, the risk-adjusted NPV as a measure of profitability should be used. Since wealth maximizing investors are evaluating projects only using risk-free NPV they may underestimate the risk associated with their investment decisions. One of the risk measures for the purpose of adjusting NPV for risk can be the duration measure. It was discovered and developed by Frederic Macaulay (1938) for the purpose of measuring the average time an investor waits to retrieve his money from an investment. Hicks independently derived “average period,” an equivalent measure of elasticity, with respect to a discount ratio (Hicks 1939, 186). Although it has other applications, duration has been successfully used in problems regarding the reduction of basis risk, and even Macaulay himself was primarily focused on “the risk-proxying properties of his measure, despite the assigned name duration.” (Cox, Ingersoll, and Ross, 1979) Although it was originally designed for bonds, it was later developed to be used effectively in capital budgeting (Blocker and Stickney, 1979). The duration is represented as follows:
(2) [[{"fid":"93414","view_mode":"image_no_caption","fields":{"alt":"kruk02","class":"media-element file-default","data-delta":"3","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk02","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"3":{"alt":"kruk02","class":"media-element file-default","data-delta":"3","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk02","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"kruk02","class":"media-element file-image-no-caption","data-delta":"3"}}]]
where:
CFt = a cash flow to be received units of time from today, beginning with t=1 period from today,
r = an appropriate discount rate for determining the present value of the cash flow,
t = units of time.
The formula represents a weighted average of the stream payments, where the maturity of each payment is weighted by the proportion of the total value of an asset accounted for by the payment (Haugen 1990), so the duration, in a way, represents an average life of an asset.
For the purpose of capital budgeting, the duration can be measured as the duration of the net cash inflows and the duration of the net cash outflows (Durand 1974, 25). The properties of this measure, as Blocher and Stickney (1979) pointed out, are as follows:
The duration of a stream of cash flows is always less than the time of the last cash flow (unless the stream is single cash flow, in which case duration is equal to the number of periods which elapse until that last cash flow).The difference between a project’s life and its duration is relatively small for shorter-lived projects but increases as the life of the projects is increased.Duration varies inversely with the discount rate used. The higher the discount rate, the shorter will be the time until the average present value dollar is received.For a project with a zero or positive net present value at the certain discount rate used, duration increases at a decreasing rate as the foreseen life of the project is increased, but it is bounded.Duration is relatively insensitive to the discount rate used for shorter-lived projects but becomes more sensitive to the discount rate as life is increased. (pp. 3–4) When used in predicting bonds’ prices, duration assumes a linear relationship between price and changes in interest rates. In reality, however, prices rise more than proportionally as interest rates fall and decrease at an increasing rate as interest rates rise. As a result, the duration will underestimate the price increase, meaning that the risk can still be undervalued.
To illustrate the calculation of duration we will use the following example:
Table 1. Duration Calculation[[{"fid":"93415","view_mode":"image_no_caption","fields":{"alt":"table 1","class":"media-element file-default media-wysiwyg-align-center","data-delta":"4","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"4":{"alt":"table 1","class":"media-element file-default media-wysiwyg-align-center","data-delta":"4","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"table 1","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"4"}}]]
For this project, the duration is 1.74 and this is the number we receive by dividing the sum of the column (5) by the sum of the column (4).
Duration is also used as a measure of expected changes in market prices of bonds after a change in interest rates. The relation between duration (D), price (P) and interest rate (r) is described by the equation:
(3) [[{"fid":"93416","view_mode":"image_no_caption","fields":{"alt":"kruk03","class":"media-element file-default","data-delta":"5","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk03","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"5":{"alt":"kruk03","class":"media-element file-default","data-delta":"5","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk03","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"kruk03","class":"media-element file-image-no-caption","data-delta":"5"}}]]
Meaning, ceteris paribus, the greater the duration, the more sensitive will be a bond’s price to changes in the interest rate. The elasticity aspect of duration ensures its usefulness in capital budgeting decisions for the purpose of a measurement of a loss in the net present value of a project suffered from a change in required rates of return. In two comparable projects the shorter the duration, the less net present value of the project is vulnerable for interest rate changes (Blocher and Stickney, 1979) and the safer the investment, since the investors are waiting for the return, on average, for a shorter period of time. There is, however, a side effect of this approach: when investors expect the interest rate to fall, the investment in projects with a longer duration will experience a larger increase in their value than others, meaning that investors may shift to those projects if NPV valuation is not supported by further risk analysis. It may be perceived as the proper investment decision as long as the low interest rate environment is controlling. The problem is that longer investment projects are considered more attractive. But it is probable that the interest rate will increase during the project’s life. That will change profitability drastically.
Since duration reflects the average length of time consumed waiting for receipt of the cash flow generated by the project, it also demonstrates the liquidity of the project. It competes in that area with a conventional payback method,Payback period is the amount of time it takes to recover the cost of an investment. but duration surpasses payback period in that function since only duration can be incorporated in the analysis of NPV, and not as a supporting indicator alone.
- DURATION EFFECTS ON NPV Since, as explained in the above analysis, investors after lowering interest rates are switching their preferences to more capital-intensive, longer-term investments, at the same time, on average, they turn to projects with a longer duration. This means that during the phase of the boom of the business cycle economy shifts to a more risky position. Since the agents are targeting profit, there is a little attention paid to the risk exposure, measured by duration, of their projects.
Taking into the examination the example presented by Fuller (2013) of the two alternative projects, the further analysis of two investment projects will be carried out: a wooden bridge requiring a lower financial expense of 2,000 units and providing a constant cash flow of 1,000 in the next 3 years, and a steel bridge requiring the expense of 5,000 units and providing 0 units cash flow for the next 2 years, and a constant 1,000 units for the following 8 years, which is presented in the following table:
Table 2. Cash Flows Schedule[[{"fid":"93417","view_mode":"image_no_caption","fields":{"alt":"table 2","class":"media-element file-default media-wysiwyg-align-center","data-delta":"6","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"6":{"alt":"table 2","class":"media-element file-default media-wysiwyg-align-center","data-delta":"6","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"table 2","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"6"}}]]
The interest rate for which these projects generate the same net present value, meaning that they should be indifferent in the investors ranking, is approximately 5.48 percent. Discounted by this rate, the net present value of the projects is around 699.10 units. Calculating the duration for both provides more information about the expected returns. Since the duration for wooden bridge equals 1.96, and for the steel bridge it is 6.22, investors have to wait for returns from invested capital more than three times longer if they decide to invest in the steel bridge, which is associated with a higher risk for their income. But further assume that the investors demand a higher return and the interest rate increases from 5.48 percent to 7 percent. In this scenario, the net present value of the wooden bridge decreases only to 624.32 from 699.10, which is about an 11 percent decrease, while the steel bridge net present value decreases from 699.10 to just 215.56, which constitutes a 61 percent decrease, showing how sensitive projects with a large duration are to changes in interest rates.
This may explain why even a slight change in the interest rates may cause a dramatic change in the profitability of a project. Since in the present low rate environment, we expect that the average undertaken project has a longer duration, the expected vulnerability to the discount rate changes also increases.
Table 3. NPV and Duration Schedule[[{"fid":"93418","view_mode":"image_no_caption","fields":{"alt":"table 3","class":"media-element file-default media-wysiwyg-align-center","data-delta":"7","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 3","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"7":{"alt":"table 3","class":"media-element file-default media-wysiwyg-align-center","data-delta":"7","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 3","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"table 3","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"7"}}]]
To fully understand the duration’s significance in NPV analysis we present selected values in the table. The first conclusion is that the greater the interest rate, the smaller the duration is. It is the result of the NPV profile. When we increase the discount factor used for future cash flows, the more advanced payments are getting a lower share in the total NPV sum compared to prior payments. As a result, using the duration interpretation, we do not wait as long for future cash generated by the project as we do when using the same payment with a lower interest rate, due to the fact that later payments are given less significance. It also must be noted that the duration changes associated with interest rate changes are not substantial and are even small for the shorter projects.
The second conclusion which we can derive from the values in the table is that the greater the duration, the greater NPV loss from the increase of the interest rate. It is worth noting that this is only true for nominal values.
Figure 2. Duration Profile[[{"fid":"93419","view_mode":"image_no_caption","fields":{"alt":"figure 2","class":"media-element file-default media-wysiwyg-align-center","data-delta":"8","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"figure 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"8":{"alt":"figure 2","class":"media-element file-default media-wysiwyg-align-center","data-delta":"8","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"figure 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"figure 2","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"8"}}]]
In Figure 2, different duration values for different interest rates are presented. Although changes are not significant, it can be easily seen that the values for duration for the shorter project, the wooden bridge, are steady. Despite the fact that the NPV and the returns from investment are changing, the average waiting period for the investor to recover his money from the investment is not. In case of the longer, more deferred project, we see a steady drop in duration value as the interest rate increases. Although, as we mentioned, generally shorter projects are less risky, in this case the decline in duration is associated with decreasing share of later payments in overall value. That means that the greater weight is given to the less distant payments, which is decreasing the duration, but at the same time NPV values are decreasing on a larger scale.
If the interest rate is artificially reduced by a central bank, the duration gap between shorter-lived and longer projects increases. This causes a greater hazard for the second type of projects as their payment is not only subject to interest rate risk, which can be measured by duration, but is also subject to the uncertainty associated with changing economic conditions of business.
Longer-term projects are more information sensitive and are subject to profitability changes due to uncertainty. Even though this is unquantifiable, the entrepreneurs have to make a prediction about the forecasted cash flows generated by the company investment decisions. As described by Ludwig von Mises (1951, 27): “There is no certainty about the future state of the market and about the height of these earnings. They can only be determined by speculative anticipation on the part of the entrepreneur.”
The duration may prove useful to quantify at least some risks regarding the previously estimated profit not being realized. The duration may show that not every long term project is equally risky—e.g., risk may also depend on how flat the yield curve is for a particular project.The flat yield curve indicates that there is almost no difference between short-term and long-term rates for bonds and notes of similar quality.
- RISK-ADJUSTED THE NET PRESENT VALUE Since the net present value is sensitive to interest rate changes, especially long-term projects should not be discounted with a nominal interest rate. Expanding the analysis for the illiquidity risk-adjusted interest rate could further develop the analysis. For projects in which annual cash flows constitute an annuity, the algorithm for the duration is reduced to:
(4) [[{"fid":"93420","view_mode":"image_no_caption","fields":{"alt":"kruk04","class":"media-element file-default","data-delta":"9","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk04","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"9":{"alt":"kruk04","class":"media-element file-default","data-delta":"9","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk04","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"kruk04","class":"media-element file-image-no-caption","data-delta":"9"}}]]
Where r is the value which equates the present value of the inflows to the price of the investment. For project analysis it can be the yield rate, the cost of capital rate, a risk-adjusted rate, or any rate that an investor may use as a required rate of return (Brown and Kulkarni 1993).
To perform the NPV analysis, the company can estimate the discount rate for each project using the Capital Asset Pricing Model (CAPM) method.CAPM defines the relationship between systematic risk and expected return for assets. While it is not the method consistent with the Austrian theory, it is still one of the most popular tools used by large companies on the market, which is the reason we cannot neglect its importance. Graham and Harvey (2001) surveyed 392 CFOs about the cost of capital, capital budgeting, and capital structure. The results indicate that “the CAPM is by far the most popular method of estimating the cost of equity capital: 73.5% of respondents always or almost always use the CAPM. The second and third most popular methods are average stock returns and a multibeta CAPM, respectively” (Graham and Harvey 2001). CAPM is also popular among academics. Research conducted by Welch (2008) revealed that about 75 percent of finance professors still advocate using the CAPM to estimate the cost of capital. Furthermore, there is evidence that while the CAPM deliberately fails to predict asset prices, it is more useful for the purpose of estimating the cost of capital (Da, Guo, Jagannathan 2012). Even if we do not fully acknowledge the prediction made using the CAPM model including the duration in the equation may reduce the entrepreneurial mistakes caused by the non-risk-adjusted version of it, which is the reason the model is included in the paper.
The model determines the required rate of return for an investment as the sum of the risk-free rate (Rf) and a premium, which is the product of beta and the difference between the market rate of return (Rm) and the risk-free rate:
(5) [[{"fid":"93421","view_mode":"image_no_caption","fields":{"alt":"kruk05","class":"media-element file-default","data-delta":"10","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk05","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"10":{"alt":"kruk05","class":"media-element file-default","data-delta":"10","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk05","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"kruk05","class":"media-element file-image-no-caption","data-delta":"10"}}]]
In order to obtain beta coefficients for investments, the method requires regressing the returns of the projects against the market returns, if available. In the case of the wooden and steel bridges, the most reasonable assumption is the beta coefficient for both projects moving in exactly same direction and having the same impact of changes on required return as a market,Beta belonging to the interval (0,1) means that the investment is reacting slower than the market, and beta greater than 1 means that every time the market rate changes the required rate of return changes more than the market rate. meaning that beta equals 1 and using the market return of 5 percent (for which the steel bridge is a more attractive investment using net present value as an indicator). The risk-free rate is usually described as the government bonds’ rate since they are currently considered the safest investment. We further make a conservative assumption that the risk-free rate is at 2 percent, meaning that 3 percent is the risk premium.The greater the risk premium, the greater impact duration will have on the risk-adjusted net present value. Since private investments usually have a few times higher return than the risk free rate, the 3 percent risk premium is a safe assumption.
We will now try to adjust the net present value of the wooden and steel bridges from the example using the following equation presented by Brown and Kulkarni (1993):
(6) [[{"fid":"93422","view_mode":"image_no_caption","fields":{"alt":"kruk06","class":"media-element file-default","data-delta":"11","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk06","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"11":{"alt":"kruk06","class":"media-element file-default","data-delta":"11","format":"image_no_caption","alignment":"","field_file_image_alt_text[und][0][value]":"kruk06","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"kruk06","class":"media-element file-image-no-caption","data-delta":"11"}}]]
where:
i = the rate of return adjusted for duration and timing of the cash flows
r = the required rate of return on a project,
D(i,n)= duration of a project with periodic cash flow over n years discounted at the rate appropriate for the duration of that project
D(r,n)= the duration of a project with equal periodic returns over the project life of n years discounted at the r rate
The equation derives from the standard CAPM equation with inclusion of liquidity adjustment coefficient (Di,n/Dr,n). A justification for including this ratio in the equation is that the “the ratio of duration of any project of n years life to the duration of a uniform series project of the same life, when multiplied by the risk factor should produce a close approximation to what the rate should be to correct for duration” (Brown and Kulkarni 1993). Since Dr,n is the function of only the project’s life and rate and it assumes equal periodic returns over the life of the project, it can be calculated using equation (4) using r just as in the CAPM model.
The values of i and Di,n remain to be calculated. We know that for a project with a higher earlier duration, the risk is decreased, so adjusting for the duration of the projects also decreases the discount rate. This is analogous to the case of the projects with lower earlier cash flows. Therefore we know that if the duration of the project is less than Dr,n, then i will be less than r, and i will be greater than r if the duration of the project is greater than Dr,n, as in this case. We find values of i and Di,n in the following way: first, we assume i = r and compute Di,n using (2). Then we find the difference between the left and right sides of (6). Therefore, we know whether our i lies in the interval [0, r] or [r, ∞]. Finally, we may use any method for finding roots, such as the bisection method, to find the value of i that makes both sides of (6) equal, again using (2) for finding Di,n.
For a steel bridge the proper discount rate i equals 5.65 percent with duration Di,n 6.21. Since the wooden bridge generates stable cash flows every year Di,n=Dr,n for this project, this means that the discount rate for this project is the same as the initially used 5 percent.
Table 4. NPV and Risk-Adjusted NPV Comparison[[{"fid":"93423","view_mode":"image_no_caption","fields":{"alt":"table 4","class":"media-element file-default media-wysiwyg-align-center","data-delta":"12","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 4","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"12":{"alt":"table 4","class":"media-element file-default media-wysiwyg-align-center","data-delta":"12","format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"table 4","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"table 4","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"12"}}]]
Even though the steel bridge seemed the more attractive investment at the 5 percent discount rate and was higher in the NPV ranking, after adjusting the discount rate for the risk, the new risk-adjusted NPV changed the valuation, and in the effect the safer investment: the wooden bridge project is preferred.
- CONCLUSION Since the net present value is a frequently used indicator of the profitability of projects, when we consider its disadvantages—volatility resulting from even subtle interest rate changes—enhancing this measure for quantification of this risk can provide further information for investors. Since the duration of a project captures the impact of both uncertainty of future income and sensitivity for interest range changes in low rate environments, it can be used as a measure for interest risk changes and as a factor in determining the risk-adjusted NPV value. As presented in this paper, adjusting for risk can produce a different order of profitability of projects, enriching the analysis and preventing more risk-averse investors from taking excessive risk, which inextricably linked with longer investment projects.
It is worth noting that using such models for the purpose of making future predictions may constitute a part of the entrepreneur’s verstehen. In order to forecast future conditions of economic activity, entrepreneurs must use qualitative forecasts that are supported by his judgment. This was also the view emphasized by Rothbard (1997): “Misesian Man knows a lot; but he does not know everything and he must try to estimate the future, given various quantitative and qualitative estimates of change.” Duration is definitely among important parameters which have to be taken under consideration by entrepreneurs.
Previous research on corporate finance was focused on the liquidation phase and depression (Cwik 2008) or the focus was placed on the roundaboutness of projects (Cachanosky, Lewin 2014). A deeper understanding of financial foundations of the business cycle can increase knowledge of the effects of an easy monetary policy along with a better understanding of causal relations between companies’ decisions and any emerging crisis. While there is a common agreement about the wrong valuation of risk by companies throughout the business cycle, there is little evidence about the foundations of this factor underestimation. One of the reasons may be using measures that are not risk-adjusted and which may create an illusion of profitability in a current low rate environment.
George Reisman is economics professor emeritus at Pepperdine University. He is one of the few people to get his PhD under Mises. After sharing anecdotes about Mises and Rand, he discusses his contributions to economic theory. In particular, Reisman argues that profits, not wages, are the original form of income.
Mentioned in the Episode and Other Links of Interest: The YouTube version of this interviewGeorge Reisman’s website and Capitalism.net, and his Twitter accountReisman’s book Capitalism. #CommissionsEarned (As an Amazon Associate I earn from qualifying purchases.)Reisman’s Notes on his translation of Bohm-Bawerk on value theoryReisman on James Mill and Say’s LawIsrael Kirzner’s review of Capitalism For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
David Friedman is one of the pioneering theorists of anarcho-capitalism, as laid out in his book The Machinery of Freedom. In this free-wheeling discussion, he discusses physics versus economics, the work of Ronald Coase, his dad’s view of anarchism, and what happened to the SlateStarCodex site.
Mentioned in the Episode and Other Links of Interest: The YouTube version of this interview.David Friedman’s homepage.David’s book The Machinery of Freedom. Heinlein’s classic The Moon Is a Harsh Mistress. #CommissionsEarned (As an Amazon Associate I earn from qualifying purchases.)David debates Bob at Porcfest on Austrian vs. Chicago School methodology in economics.One of Walter Block’s essays on hanging from an apartment flagpole.The website SlateStarCodex and the post Bob mentioned, “You Are Still Crying Wolf,” which defended Trump from accusations of racism. For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Professor Jonathan Newman joins the show to discuss exchange and prices through the lens of Rothbard's Man, Economy, and State (chapters 2–4). This is vintage Rothbard: precise definitions; hardcore explanations of property, prices, and exchange; the problems of "hegemonic" state violence; and a "beautiful" (per Dr. Newman) conception of social cooperation. Menger and Mises are important in this discussion too, as Rothbard elaborates on the origins of money and the Regression Theorem. Don't miss this great show!
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Additional Resources Dr. Joe Salerno's introduction to Man, Economy, and State: Mises.org/SalernoMES
Man, Economy, and State: Mises.org/MES
Today's solo show kicks off our reading of Rothbard's landmark Man, Economy, and State with a look at Chapter 1, "Fundamentals of Human Action." So much of what economics texts get wrong is laid out brilliantly here by Rothbard, who gives readers the basics of action, means/ends, time, ranking, factors of production, and capital in this 77 page master class. The short appendix at the end of the chapter alone is a bombshell—demystifying the correct form for economic analysis, and explaining why psychology is not praxeology. Don't miss this introduction to the book you know you need to read!
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
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Providing the opening for Mises’s great methodological work gave Rothbard the opportunity to set down his perspective on the importance of the praxeological method.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Forgotten Greatness of Rothbard’s Preface to Theory and History".
Abstract: The concept of intellectual property (IP) has been variously criticized as incompatible with natural rights and detrimental to the dissemination of innovations. In this paper I argue that it can be criticized on an even more fundamental level—namely as a praxeological impossibility. More specifically, it is suggested that since ideas are not economic goods, but preconditions of action, and since physical goods transformed by ideas become as heterogeneous (and thus as intellectually unique) as the individuals who enact such transformations, no economic goods can be meaningfully designated as appropriable in virtue of embodying the objectively definable value of one’s intellectual labor. In view of the above, I subsequently suggest that IP protection laws constitute an exceptionally arbitrary and thus exceptionally disruptive form of interventionism directed against the very essence of the entrepreneurial market process.
JEL Classification: K00, L26, O34, P48 Jakub Bożydar Wiśniewski (jakub@cantab.net) is an assistant professor at the Institute of Economics at the University of Wroclaw and an affiliated scholar with the Ludwig von Mises Institute Poland.
- INTRODUCTION The concept of intellectual property (IP) has been criticized from a number of distinct perspectives. Proponents of libertarian ethics have criticized it as incompatible with the axiom of self-ownership and the resultant structure of natural rights. More specifically, they have pointed out that the category of property applies exclusively to scarce goods, while ideas—that is, the fruits of intellectual labor—are superabundant in virtue of their infinite replicability. Thus, forcibly restricting their replication amounts to a major act of aggression against the bodily integrity and physical property of the replicating agent (Kinsella 2008).
On the other hand, mainstream economists have demonstrated that patents and copyrights, far from promoting innovation, actually hinder economic development and Schumpeterian creative destruction. This is due to the fact that patent and copyright holders are effectively intellectual monopolists, capable of nipping in the bud the commercial development of any given idea (Boldrine and Levine 2008).
While acknowledging the validity and significance of the above criticisms, this paper offers a different take on the titular concept. Instead of suggesting that intellectual property is morally indefensible or economically harmful, it suggests that it is praxeologically impossible. In other words, this paper suggests that intellectual property laws constitute not so much an attempt at monopolizing a praxeologically distinct category of resources, but rather an arbitrary curtailment of entrepreneurial initiatives aimed at resource heterogenization. This, in turn, implies that the so-called protection of intellectual property creates not so much “intellectual monopolists,” but rather uninvited institutional co-owners (Hülsmann 2006) of their potential business competitors’ arbitrarily selected physical property.
The following section states the argument in more detail. Section 3 considers some potential counterarguments to the proposition, and section 4 concludes with a presentation of some of its further ramifications.
- THE ARGUMENT The fundamental insight of the marginalist-subjectivist tradition in economics is the observation that what makes a good is not its physical characteristics, but its ability to enter into causal relationships with subjective preference scales of purposive agents. Thus, even physically identical goods may differ significantly in terms of their economic value in virtue of their differing causal histories and ideational connections.
However, this crucial emphasis on the subjective nature of economic value does not change the fact that genuine economic goods, in order to qualify as such, have to exhibit objective physical scarcity. Otherwise they are not goods, but the “general conditions” of action (Rothbard 2004, 4). In other words, the marginalist-subjectivist tradition—particularly as exemplified by the Menger-Mises branch—avoids the twin pitfalls of hypersubjectivism and panphysicalism: it postulates that physically scarce objects become economic goods by being “mixed” with the ideational processes of intentional beings.
Hence, ideation turns out to be a psychological rather than a praxeological activity—in and of itself it does not fall within the purview of economic analysis, nor, by extension, within the purview of property valuation. It is only when it is translated into action that it becomes a fundamental datum of economic theory and history. And yet, as soon as it enters the realm of demonstrated preferences, it inevitably heterogenizes the resulting goods, thereby ensuring their intellectual and valuational distinctness.
This is because human action is necessarily future oriented and thus entrepreneurial in the broad sense of the term—it consists not in frictionless adjustment of supply and demand, but in the deployment of scarce means toward specific ends to be accomplished in the uncertain future (Salerno 2008). Hence, ideas, viewed as preconditions of agency, are never, strictly speaking, replicated—instead, they are adapted to one’s specific circumstances, plans, and capabilities. This, in turn, implies that as soon as a particular agent transforms particular physical objects in accordance with a given idea—even if this idea is “borrowed” from someone else—they become unique goods, infused with his unique productive touch. It should be noted here that this argument is independent of the contention that property rights apply exclusively to the physical integrity of a resource, not to its value, since the latter derives entirely from the mental states of all those individuals who are interested in putting it to some use (Hoppe and Block 2002). Although few may be willing to reject this contention in full and endorse the notion that maintaining the value of one’s resources can extend to owning others’ mental states, some may be willing to concede the inadmissibility of certain actions that diminish the value of another’s assets. Underselling the originator of a “novel product” by offering exact replicas of his merchandise could be thought of as a canonical example here. However, the argument advanced in the present paper uproots this issue entirely, since it points out that physically identical products cannot be regarded as identical in terms of the sources of their value, thus making their putative ownership and their potential positive externalities a moot point.
This observation is exceptionally striking in the context of entrepreneurship narrowly conceived—that is, in the context of exercising the ownership function over capital structures of production created and recreated under conditions of uncertainty (Foss and Klein 2012). After all, the essential determinant of the success of any given business plan is not the physical capabilities of the resources owned by a given businessman, nor even the objectively definable ideas embodied in them, but the subjective evaluation of the potential residing in these and other elements of the overall entrepreneurial vision and the corresponding capital stock (Kirzner 1997). Objectively definable inventions are technical, not economic, phenomena—it is only when they help bring about subjectively conceived innovations that they contribute to economic growth and development (McCloskey 2010). This is by no means simply a repetition of the anti-IP argument that an idea is a general prerequisite of production and not subject to ownership. It is also the realization that, as far as their productive potential is concerned, ideas implemented in concrete processes of production are entirely dissimilar to ideas conceived in abstract terms. Thus, to regard all physical objects whose creation involved some use of the fruits of one’s mental labor as falling within the ambit of one’s “intellectual property” is to commit a fundamental categorical mistake—i.e., to confuse the results of subjective plans with their objective mental preconditions.
If, on the other hand, one were to claim that it is precisely the specific conceptual content of those mental preconditions that can be subjected to intellectual property protection, then an equally flagrant categorical mistake would be made. After all, such a claim would amount to trying to obtain exclusive use not of the results of any given action, but of a necessary prerequisite of a potentially infinite range of actions. In other words, it would amount to trying to put a price tag on something that is naturally priceless—on something that is not just contingently nonscarce (as so-called free goods are), but is necessarily so (as all general conditions of action have to be).
To use a specific example, this would involve attempting to obtain exclusive use not of any particular product of, say, spelling or singing, but of the very concepts of spelling or singing. Taken to its ultimate conclusion, such an approach would paralyze all human action, destroying humankind almost on the spot by making everyone unsure of whether engaging in perfectly mundane activities violates someone else’s intellectual property rights. And if one tried to avoid this conclusion by suggesting that it is only sufficiently complex concepts that merit this kind of exclusive appropriation, one natural response would be to point out that such a suggestion smacks of sheer legalistic arbitrariness, since it has to rely on a purely discretionary standard of “sufficient complexity.” Admittedly, making it a matter of pure legal convention which ideas are subject to IP protection would not be a logically incoherent move, but it would be a move bereft of any appeal to economic justification. More specifically, it would offer no support for the claim that the purpose of licensing the use of complex concepts is to allow their authors to reap their full market value, since it would not involve laying down any precise methods of measuring the extent to which the market value of any given good derives from its embodying any such concept (Cordato 1992, 80).
Furthermore, it has to be borne in mind that all entrepreneurial activity involves resource heterogenization (Lewin and Baetjer 2011), even if it does not consist in the Schumpeterian kind of entrepreneurship, which is typically associated with the introduction of innovations and other quintessentially conceptual tasks. Hence, for instance, buying a trademarked product and simply relocating it from a relatively saturated market to a relatively unsaturated one in order to sell it at a profit suffices to create a substantially new product, associated with uniquely specific preference scales, valuational conditions, and organizational structures. In fact, in today’s age of electronic transactions an act of physical relocation is not even necessary: it suffices to engage in online arbitrage to heterogenize physically and conceptually identical goods in a productive manner. After all, if all human action is broadly entrepreneurial—that is, it requires creative confrontation with the uncertain future—then exploiting arbitrage opportunities is solidly innovative in its own right (Kirzner 2009).
In other words, even, say, using a general scientific formula in production without in any way altering it should count as an instance of adaptation rather than replication, since its successful commercialization requires integrating it with a specific, time- and space-bound capital structure of production. To repeat, ideational replication is a purely mental operation, and it is only entrepreneurial implementation of replicated ideas that can be economically meaningful in this context, since only the latter can be economically profitable or unprofitable, and thereby also more or less successful in addressing the problem of natural (i.e., nonartificial) scarcity.
Moreover, it must be stressed that the argument presented here is not reducible to the more familiar contention that ideas cannot be subject to property rights, since rights are, by definition, enforceable claims, with the “force” component tying in to the physical aspect of human control over scarce resources. Although this contention is perfectly reasonable, it does not immediately answer the objection that the originator of a certain idea may regard himself as a partial owner of all the scarce resources that in some degree embody its distinctive conceptual features. Of course, at this point one might make a solid case that the creative process, although certainly capable of increasing the value of specific goods, nevertheless does not automatically imply ownership of them, be it complete or partial. This, however, would shift the discussion to the normative level, having to do with defining the ethical or legal criteria of genuine appropriation. This argument is purely praxeological: it points out that there is no necessary valuational link between the conceptual features of ideas contemplated in abstract terms and the conceptual features of specific goods that incorporate those ideas.
In other words, the process of ideation might be thought of in terms of identifying potential profit opportunities, but from a realistically conceived entrepreneurial standpoint such opportunities are only imagined rather than discovered (Klein 2008). And since the fruits of one’s imagination can be translated into actual business ventures in an endless variety of ways, it is incoherent to claim that the value of imagined profit opportunities can be automatically imputed to their actually exploited counterparts, entitling the originators of the former to the proceeds from the latter.
In sum, the subjectivist theory of value coupled with a praxeological understanding of the market process leads to the conclusion that, economically speaking, intellectual property is a contradiction in terms. In short, ideas are not economic goods, but preconditions of action, while physical goods transformed by ideas become as heterogeneous (and thus as intellectually unique) as the individuals who enact such transformations. This, in turn, implies that as important as it is to point out the efficiency-reducing and normatively troubling consequences of so-called intellectual property protection, it is possible to raise doubts about the concept on an even more fundamental, purely logical level.
- POTENTIAL COUNTERARGUMENTS Let us now analyze some potential counterarguments to the suggestion advanced in the present paper.
First, it might be claimed that, regardless of one’s views on the normative aspects of the titular concept, it is an overstatement to deny its descriptive coherence. After all, one might say, it is perfectly reasonable to define the fruits of one’s intellectual labor as goal-specific technical recipes,For the purpose of this paper, the terms “recipe,” “idea,” and “concept” are treated as interchangeable. readily identifiable in terms of the specific material effects that their implementation produces. This, in turn, should make it conceptually unobjectionable to designate the goods that embody such effects as bearing the marks of one’s intellectual property, even if we do not believe that such “property” is associated with enforceable natural rights or economically beneficial consequences.
The main problem with this suggestion is that, once again, it conceives of goods in technical rather than economic terms and treats ideas as if they were praxeological rather than psychological factors. Since, however, economics deals with subjective evaluations embodied in demonstrated preferences, not with scientific discoveries and their technical content, it must reject the notion that there always exists a unique, objective description of the way in which any given good can usefully incorporate a technical recipe. On the contrary, subjectivist economics, coupled with a mature theory of capital and entrepreneurship, clearly recognizes the fact that productive factors are essentially characterized in terms of their subjectively perceived attributes, functions, and uses (Foss, Foss, Klein, and Klein 2007). Hence, there is a potentially infinite number of ways in which any given technically defined object can be imbued with the fruits of entrepreneurial creativity, alertness, and foresight, thereby becoming not just conceptually novel, but also endowed with unique economic value.
Another objection that might be leveled against the titular contention is that it cannot claim universal economic validity, since it refers to a strictly normative concept (i.e., property), while economics is a positive science. Thus, one might argue, it is a category mistake to ascribe inherent incoherence to a phenomenon whose definition is ultimately a matter of legal convention or moral imagination.
The primary error of this counterargument lies in confusing the value freedom of economics with its supposed value irrelevance. Although clearly value-free as far as the contents of its theorems are concerned, economics is crucially dependent on the evaluative and normative concepts contained in its descriptions of the catallactic order (Casey 2012). For instance, the theorem of the impossibility of rational economic calculation under socialism clearly refers to the importance of certain normative institutions (private property in the means of production, free exchange of private property titles, etc.), but it does so exclusively in order to elucidate the nature of the corresponding logically necessary causal relations, without proclaiming their ethical desirability. By the same token, the theorem in question also demonstrates that certain normative visions—such as that of an economically thriving socialist commonwealth—are not so much ethically wrong as they are inherently unviable. To put it differently, ethical evaluations of intrinsically incoherent concepts are inevitably futile, since they run afoul of the principle of “ought implies can,” which often reveals such concepts to be misleading placeholders for something altogether different.
Thus, the fact that the titular contention refers to a normative concept in no way detracts from its strictly positive character. After all, it does not matter in this context whether or not one endorses the notion of intellectual property on ethical grounds—what matters is that such an endorsement cannot be couched in economically meaningful language. Consequently, the argument of this text does not violate the distinction between the positive and the normative—instead, it aims at demonstrating that it is the proponents of intellectual property who necessarily violate the distinction between the psychological and the praxeological.
At this point, one might argue that the above train of thought rests on the dubious premise that if an idea is by nature a general condition of action, this cannot be changed by legal enactment. In fact, however, no such premise is presupposed. Although it is clearly possible to legislate artificial scarcity into existence, it is impossible to ground such legislation in praxeologically meaningful facts. In other words, although it is possible to prosecute individuals or organizations for the supposed unlawful use of another’s ideas, it does not change the purely praxeological observation that anchoring any given abstract idea in the specific circumstances of one’s individual venture turns it into a fundamentally distinct idea, with no necessary valuational link between the two akin to that postulated by the Mengerian law of imputation. Hence, appealing to the conceivability of artificial scarcity in no way impugns the value freedom of this paper’s contention.
Finally, it might be suggested that the supposed economic coherence of the notion of intellectual property can be established by pointing to the specificity of the interventionist effects caused by IP protection laws. If, for instance, one subscribes to the claim that such laws hinder economic development and the corresponding creation and dissemination of innovations, then one implicitly recognizes the existence of a special category of goods whose preemptive appropriation by patent and copyright holders leads to economically suboptimal results. Thus, one might argue, intellectual property emerges as an economically meaningful concept in virtue of the economically meaningful effects of its legal enforcement.
The chief weakness of the above contention is the implicit assumption that praxeologically specific consequences must be associated with a praxeologically distinct category of goods in order to retain their analytical meaningfulness. It is the case, however, that they might as well be associated with a praxeologically distinct kind of activities. For example, in the context under consideration it might be suggested that IP protection laws hamper not so much the production and dissemination of “intellectual goods,” but the very process of heterogenization of goods—that is, the process whereby physically scarce objects become increasingly differentiated through their association with individual entrepreneurial visions. In other words, IP laws might be plausibly regarded not as a means of preemptive appropriation of “intellectual goods,” but as a tool for implementing the principles of “conservative socialism” (Hoppe 1989, chap. 5). Hence, it seems perfectly feasible to recognize the economically harmful effects of interventions aimed at the suppression of entrepreneurial utilization and reutilization of generally accessible ideas without being simultaneously committed to accepting the economic meaningfulness of the concept of intellectual property.
In sum, far from being an exaggeration, the claim that so-called intellectual property is incoherent as an economic notion appears to be a solidly justifiable proposition. Let me now conclude by briefly exploring some of its further analytical ramifications and practical implications.
- CONCLUSION If intellectual property is indeed a praxeologically meaningless concept, then, as proposed in the previous section, IP laws do not prevent entrepreneurs from utilizing freely a specific, precisely definable category of goods, but instead serve as a pretext for essentially arbitrary acts of opportunistic interventionism. This indicates that they are far more capable of paralyzing the operation of the market process than is suggested by the traditional arguments centered on the economically stifling influence of “intellectual monopolies.” More concretely, IP laws’ definitional arbitrariness appears particularly capable of saddling entrepreneurs with a highly troublesome layer of regime uncertainty (Higgs 1997), which does not generate additional (though predictable) costs for entrepreneurial activity so much as it makes such activity essentially unpredictable on the institutional level (Kinsella 1995, 150–51).
Furthermore, the laws in question are especially likely to cripple the operations of specifically “Schumpeterian” firms (Mueller 2003, chap. 4), that is, those that rely exceptionally heavily on creating value through resource heterogenization based on ingenious adaptation of existing technical recipes. Such firms, which are typically at the forefront of robust economic development, are especially exposed to the arbitrary interventionism of the established players, who are constantly on the lookout for excuses to accuse the newcomers of “intellectual free riding.” In addition, this kind of environment gives the management of Schumpeterian firms an extra incentive to join the establishment’s interventionist game as soon as possible, thereby perpetuating and further strengthening the vicious circle of rent seeking, cronyism, and enforced economic petrification.
Finally, the unhampered entrepreneurial transformation of various technical concepts is a phenomenon whose continuation is particularly important to a globally interconnected and organizationally complex society. If such a society suddenly becomes irresponsive to the economic challenges continually generated by its dynamically changing environment, which is bound to happen under conditions of repressed resource heterogenization, it will fall victim to institutional fragility (Taleb 2012) and become incapable of sustaining its complexity, ultimately collapsing under its own weight.
In conclusion, since intellectual property is a praxeologically incoherent term, IP laws turn out to constitute an exceptionally arbitrary and thus exceptionally disruptive form of interventionism directed against the very essence of the entrepreneurial market process (Kirzner 2017). Hence, intellectual property laws should be viewed as an even more fundamental obstacle to robust economic development than has been suggested by hitherto prevailing arguments.
In the second installment of our series on Mises's Human Action, Dr. David Gordon joins the show to walk us through Part One. The beginning of the book is considered its most "philosophical" material, where Mises lays out the basics of praxeology and epistemology as fundamental to understanding economics.
Dr. Gordon and host Jeff Deist consider each of the book's first seven chapters, with topics including: Mises's categories of action and causality, a priori disciplines, polylogism, "felt uneasiness," value and preferences, praxeology as it relates to time and uncertainty, probability and its application to human action, and the nature of production.
If you've wanted to read Human Action, this is your opportunity to hear it explained by great economists and scholars!
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Due to listener request, Bob Murphy offers further thoughts on Hoppe’s argumentation ethics, following his discussion with Stephan Kinsella. Bob then discusses Hoppe’s profound essays on praxeology, in which he argues that Mises has solved the famous mind-body problem in philosophy.
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Quarterly Journal of Austrian Economics 22, no. 2 (Summe 2019) full issue. ABSTRACT: This paper discusses the epistemological status and potential scope of the discipline of sociology based on the writings of Ludwig von Mises. More specifically, it presents his epistemological distinction between theory and history, and argues that sociology can be integrated in this framework as a historical discipline. As such, it must be a praxeologically guided study of general or specific social phenomena that already occurred or are likely to occur. Additionally, this paper addresses the general insights provided by Mises to questions of interest to the field of sociology—the division of labor and the evolution of society, the social effects of socialism and capitalism, class analysis, and the role of ideas in social change—in order to infer from it the general tasks that sociology, as a historical discipline, can accomplish in its study of social phenomena.
praxeology — history — epistemology — mises — sociology JEL Classifications: B53, Y80 Ludwig von Mises’s contributions to economics are widely known. For instance, his application of Carl Menger’s subjective theory of value to money (Mises [1912] 1953), his description of the necessary economic failure of any socialist regime (Mises [1920] 1963; [1922] 1951), and his reconstruction of economics as a theory of human action (Mises [1949] 1998) all stand as important contributions to the development of Austrian economics. But Mises was more than an economist; he was also a philosopher and sociologist. However, many of his insights to these fields of study are less well known. There is the work of Salerno (1990), which identifies reason, ideology, and the division of labor as the main vectors for social change in the Misesian interpretation of history. There is also the more recent comparison between the social rationalism of Mises and that of the French Idéologue Destutt de Tracy by Dorobăţ (2015), as well as a comparison between the social theories of Mises and of French sociologist Raymond Boudon by Fillieule (2014). Finally, we can find studies in which Mises’s work is compared to Max Weber’s work (Schütz 1967; Boettke and Storr 2002; Anderson 2004; Callahan 2007; Zafirovski 2010). However, there still lacks a more general analysis linking Mises’s epistemology with his answers to the particular questions sociologists have attempted to address. This general analysis will allow us to see the extent to which the study of Mises’s work can help sociologists understand the social world.
This article is therefore guided by two different but interconnected goals. In the first section of this paper, I want to explain how sociology can be understood in light of Mises’s general epistemological distinction between theory and history. Second, I want to present an outline of the general answers he provided to some of the most important questions that sociologists sought to address. From this, it will become possible to understand how a Misesian sociological investigation can be conducted.
- ON SOCIAL THEORY AND HISTORY Ludwig von Mises’s distinction between theory and history is perhaps one of his most general and useful epistemological insights. In short, theory constitutes the set of all praxeological categories (and a priori laws) framing our knowledge whereas history constitutes the description and analysis of particular or general empirical events or trends (Mises 1962, 44–6).
Theory and history are complementary. Indeed, Mises writes: “The fullness of reality can be mentally mastered only by a mind resorting both to the conception of praxeology and to the understanding of history” (Mises [1949] 1998, 642–43). Without theory, social scientists cannot meaningfully grasp and understand the empirical data of historyOn the necessity of conceiving empirical knowledge as being praxeologically framed, see Hoppe (1995, 69–70).; without history, they are condemned to know what limits their knowledge of the social world without ever using (applying) those limits to understand specific empirical events. In other words, theory (praxeology) provides boundaries to the set of possible interpretations about historical (empirical) reality. One cannot make sense of history if one does not know how to frame one’s interpretations.On the necessity of a “common ground” to determine the validity or possibility of a claim or interpretation and, in particular, on praxeology as such a common ground, see Hoppe (1989). As Mises (1962, 2) puts it: “For epistemology there is something that it must take as unchanging, viz., the logical and praxeological structure of the human mind.” Indeed, “knowledge is a tool of action. Its function is to advise man how to proceed in his endeavors to remove uneasiness.” And “the pure search for knowledge, not motivated by the desire to improve the external conditions of life, is also an action, i.e., an effort to attain a more desirable state of affairs.” (Mises 1962, 35). Praxeology therefore provides the conditions of possibility of the understanding of history: “Experience concerning human action,” Mises writes, “presupposes the category of human action and all that derives from it. If one does not refer to the system of the praxeological a priori, one must not and cannot talk of action” (Mises 1962, 42). Also, “Understanding presupposes and implies the logical structure of the human mind with all the a priori categories.” (Mises 1962, 48).
As Hoppe (1995, 20, 81) indicates, following Mises, it is because action is both a mental and an external process that one can acquire theoretical (a priori) knowledge about what frames historical (empirical) understanding.The same applies for predictions about future empirical events. See Hoppe (1995, 43-46, 81; 1997). Mises (1962, 42) indeed writes: “Both, a priori thinking and reasoning on the one hand and human action on the other, are the manifestations of the human mind. […] Reason and action are congeneric and homogeneous, two aspects of the same phenomenon.” Indeed, action is external behavior guided by thinking and reasoning; and the structure of action is discoverable through thinking about action. It thus frames its real—external—manifestations and, thereby, also frames thoughts about these external manifestations. Historical data provide a record of these empirical events whereas praxeological concepts provide the boundaries within which one can think about what caused these external manifestations. And the usefulness of these concepts depends on the extent to which they allow us to understand real actions. For instance, the praxeological law according to which every voluntary exchange is mutually beneficial is only useful to our knowledge if in history there was indeed (or we expect that there will be in the future) actors proceeding to what we know to be a voluntary exchange. There would be no need for a theory of exchange if we lived in a world where no exchange ever occurs. Theory must thus address, frame, and impose limits on the understanding of phenomena that occurred (or are likely to occur) in order to be useful (Mises 1962, 41).
With this in mind, it is possible to address the question of the epistemological status of sociology according to Mises.
1.1 Theory, History, and the Epistemological Status of Sociology
Other than the quite trivial claim that sociology is the study of society, there is no epistemological consensus on what sociology is and on how it should be studied. In particular, over the past few decades, the discipline has mostly become, to borrow the words of Anderson (2000, 77), a research program that “openly assumes an ideological tone palatable to only the most liberal of scholars or ignorant of laymen.” But Mises—although it is safe to assume that he would have been vigorously opposed to the epistemological status (or lack thereof) that is assigned to sociology by the current postmodern and neo-Marxist sociologists—died before he could have been aware that such research programs constituted any threat to the social sciences. However, he often discussed the sociology of many of the founders of the discipline such as that of Auguste Comte, Émile Durkheim, and, in much greater length, of Max Weber. In short, there are three meanings of the term “sociology” that were addressed by Mises: 1) sociology as praxeology, 2) holistic sociology (Comte, Durkheim), and 3) interpretive sociology (Weber). It is by analyzing what Mises had to say about each one of these meanings that we will be able to understand whether he considered sociology as a theoretical or a historical discipline.
Mises himself first termed “sociology” the theoretical science of human action. But he later deemed this to be a mistake, and changed the name of this science to “praxeology.” The reason for this was that the name sociology became widely used in a different sense than that used by Mises (Hülsmann 2007, 720). Sociology, Mises tells us—referring in particular to Weber’s work—is practiced as a discipline of descriptive or general history (Mises [1949] 1998, 30 n.1), not as the theoretical study of the logic of action. In his Memoirs, he wrote:
[…] I made the mistake of using the term “sociology” to designate the theory of human action. I should have used the term “praxeology.” That which one generally calls sociology today is not theoretical, but historical knowledge. Max Weber was quite right in describing what he saw to be sociology in terms of the humanities. He observed that this was the sociology that worked with the formation of ideal types. His error lay in assigning to it many praxeological elements and in seeing economics as a field serviced by the intellectual methods of understanding. My essay [“Sociology and History”] was primarily directed against Max Weber’s epistemology, about which I raised two objections: its failure to comprehend the epistemological characteristics of economics, and its distinction between rational actions and actions oriented otherwise. (Mises 2009, 106–07).
We will discuss in greater details the sociology of Weber later on. Suffice it to say here that the meaning of sociology as praxeology has been abandoned by Mises, and that, therefore, each time he refers to the term “sociology” in his earlier work (up to his 1929 essay “Sociology and History”), he refers to something quite distinct from what Weber (and many others) meant by the term.
The second meaning of the term that was addressed by Mises is the holistic sociologies of Comte and Durkheim. To say the least, he did not consider them to be very promising. The research program of Comte—the attempt to reproduce the methods of the natural sciences to the study of the social world (earlier called physique sociale), which then becomes an analysis of the necessary stages of human history (human “progress”) allowing us to predict the future evolution of society (Comte 1839, 450–70)—is characterized by Mises ([1957] 2007, 241) as “so shallow and impractical that no serious attempt was ever made to realize it.” That of Durkheim and the Durkheimians—a study of the social world that assigns to society the status of an acting entity which imposes its will on the individuals (Durkheim [1895] 1982)—is described as the unsatisfactory result of “arbitrary metaphysical effusions about the recondite meaning and end of the historical process [...]” (Mises [1957] 2007, 242) Sociology is then—in the senses given by Comte, Durkheim, and their followers—not a legitimate field of study, and we cannot, therefore, pass judgment about its epistemological status; it simply does not convey any useful knowledge other than by mere accident.
The third meaning of the term addressed by Mises—Weberian sociology—is worth discussing in more details. On the links between the Misesian epistemology and Weber’s work, scholars such as Zafirovski (2010)One can also find similar claims in Lachmann (1990). have argued that Mises’s praxeology is in fact identical or quasi-identical with what Weber termed sociology; it is merely “the Austrian school’s version of, alternative to, or different name for, sociology in Max Weber’s sense.” (Zafirovski 2010, 76) Although this can already be rejected based on the evidence provided earlier, we should nonetheless address the specific arguments that are supposed to support such a claim.
To provide evidence for this claim, Zafirovski first quotes Mises when he writes that “[sociology] promised to substitute true science for the rubbish and empty gossiping of the historians in developing an aposteriori science of ‘social laws’ to be derived from historical experience.” (Mises [1957] 2007, 308). Zafirovski (2010, 83) then adds that Mises thought of praxeology as being this “true science.” Combined with the fact that Mises elsewhere indicates a correspondence between general sociology and Weberian sociology, this is supposed to imply that the terms “praxeology” and “Weberian sociology” are interchangeable. However, Zafirovski’s argument completely ignores what Mises wrote in the following paragraph of the same page, that is: “Their interpretations [that of the sociologists, including Weber] were in many regards unsatisfactory. They were deluded by many of the fundamental errors of historicism. All but Collingwood failed entirely to recognize the unique epistemological character of economics.” (Mises [1957] 2007, 308). In other words, their contributions to history notwithstanding, they failed to understand that history and sociology must be framed by praxeology (and, in particular, economics) in order to provide correct interpretations of empirical reality. The science of praxeology must thus be recognized as epistemologically distinct from history and Weberian sociology. This, in addition to Mises’s explicit rejection of Weberian sociology as theoretical in his Memoirs, is enough evidence to understand that the terms “praxeology” and “Weberian sociology” are not interchangeable.The confusion may lie in the previously mentioned fact that Mises used to term “sociology” what he then decided to call “praxeology” and on the other fact that Mises was appreciative of Weber’s work. This confusion is especially apparent throughout Zafirovski’s paper. After wrongly indicating that praxeology and Weberian sociology are identical or quasi-identical, he attempts to distinguish it from history in order to give to Weberian sociology the epistemological status of theory. To do so, he often cites Mises’s books Socialism and Epistemological Problems of Economics and the distinction between “sociology” and history that is presented in it (2010, 77, 82, 84–5). But this is an error of anachronism; the content of these books was written in the 1920s when Mises attempted to name “sociology” the general science of human action. As we have seen, Mises later distinguished sociology (including Weberian sociology) from this science. Weberian sociology is recognized as useful by Mises, but as a historical discipline and not as a theoretical one.
This terminological issue has implications about the way in which one is to understand the Misesian epistemology. For if the view of praxeology as sociology prevails, then one has to ignore or dilute Mises’s distinction between theory and history. Indeed, if Weberian sociology is identical to Misesian praxeology (or if there exists a mere difference in degree between them), there is no point in distinguishing between what would then be a quite trivial variation in method, i.e., between the analysis of history through the use of more general ideal types and through the use of less general ideal types.This is what Alfred Schütz (1967) attempted to do. Schütz’s conception of the ideal type is distinct from that of Weber in at least one major aspect. It takes into account the manner in which we choose the main characteristics to construct it. For Schütz, then, the “ideal types” of “pure economic theory” are constructed based on the universal invariants of human action (they have the highest possible degree of “anonymity”) and constitute, as such, necessary truths about action (244). In this sense, there should remain a distinction between the theorems of praxeology and the extra tools used in historical and sociological understanding. The problem is that by subsuming both under the concept of “ideal types” one can easily be confused as to whether there exists an epistemological distinction between the study of theory and that of history. Schütz himself, although agreeing with Mises on the universality of economic theory, seems to have failed to recognize its aprioristic and non-hypothetical character (Kurrild-Klitgaard 2001, 127–28), which therefore requires different tools of analysis than the a posteriori and hypothetical study of history. A similar—but even more problematic—confusion appears in Lavoie (1986), where it is argued that Mises did not really wish to “dichotomize” theory and history (194) since he thought both were complementary. This is a strange argument for 1) a dichotomy does not imply, as Block (1989, 219–20) correctly pointed out, an absence of complementarity, and 2) Mises was quite emphatic, as has already been shown, in claiming that such a dichotomy exists. The point of the Misesian distinction is precisely that the laws of action constitute necessary transhistorical knowledge about the social world whereas the additional tools of historical analysis are temporary, hypothetical (albeit often useful) constructions.
Indeed, praxeology provides us with a corpus of apodictic, non-hypothetical statements about human action and its logical consequences. True enough, this is often insufficient in order to study in depth an empirical event or trend. A historian or sociologist can then use additional tools or constructions to grasp the social world insofar as these tools do not lead him to reach any conclusion that enters in contradiction with praxeological laws (Mises [1949] 1998, 61). But it is clear that Weberian sociology and the study of history through the construction of temporary and hypothetical ideal types are fundamentally distinct from praxeology.
Now, keeping this in mind, there is no question that Mises was influenced by Weber. The question is: how? And the answer must be, in light of all the evidence, that Weber influenced Mises in his understanding of the proper methods for general historical studies. For, according to the Misesian framework, the Weberian method of sociological inquiry is indeed a useful and appropriate one in the study of history. It considers individuality and rationality as the central points of the understanding of social phenomena, as Mises (1962, 45–6) insisted it should. It tries to discover the commonalities and distinctions between various individuals or the reaction of individuals to various social contexts and organizes them into ideal types. In brief, it attempts to attribute a meaning to a historical event or trend. As such, from the point of view of Mises’s epistemology, ideal types constitute additional hypothetical tools for the understanding of history (Mises [1949] 1998, 60).
In light of all this, then, what is the epistemological status of sociology according to Mises? The methods of holistic sociology do not contribute to our knowledge; no epistemological status can thus be assigned to it. Weberian sociology, however, is acceptable when properly understood. This type of sociological research is a part of historical and thymologicalThymology refers to the study of the cognitive origins (or formation) of those elements that motivate action (values, beliefs, ideas, thoughts). See Mises ([1957] 2005, 271–72; 1962, 46–51). French sociologist Raymond Boudon (2003) refined Weber’s methods for the study of social phenomena by providing a typology for the rationality of beliefs and values (instrumental, axiological, and cognitive) which one can use in order to understand historical events or trends. This can be seen as an attempt to systematize the historical (thymological) study of values, ideas, and knowledge leading to action. studies aimed at providing an understanding of social phenomena. Thus, the epistemological status of sociology is that of general historical analysis such as what a properly understood Weberian sociology envisioned. As such, it must be based on ideal types, methodological individualism, and the actor’s rationality.
1.2. On Methodological Individualism and Rationality
The absence of methodological cohesion within the sociological profession is one of the key features characterizing the main debates in the discipline. Turner (2001, 3–4) has identified the problem as being a “micro-macro” problem, or an “agency-structure” problem. In short, the methodological debate is about whether social phenomena can be understood as the result of social forces constraining the individual (social structures determine the phenomena) or as the result of individual actions. If social structures are what determine the emergence of social phenomena, then methodological holism (social facts are considered real independent entities influencing one another) would be the correct method to understand the social world, whereas if we can only reconstruct social phenomena through individual actions, then methodological individualism would be the correct method to understand society.There exists a variety of solutions suggested to resolve the micro-macro problem. Turner and Boyns (2001, 354) identify eight solutions (ranging from what they call “microchauvinism” to “macrochauvinism,” and including many midway solutions). Turner’s own solution “involves recognizing that social reality does indeed unfold along micro, meso, and macro dimensions; that each of these levels reveals its own emergent properties; that these properties are driven by forces distinctive to each level; that theory is to be about the dynamics of the forces operating at each level; and that theoretical integration will always be about how the properties of one level load the values for the unique forces operating at other levels.” (Turner 2001, 6). But this heterogeneity in properties based on the level of analysis can only be considered as heuristically useful, depending on the question asked. It may be admitted that for the mere purpose of describing structural changes then it is sufficient to look at how two structures change together. But to explain it requires that we go deeper. One can describe how the state grows as a result of changes in the structure of central banking, but one certainly does not explain why the structure of central banking changed in the first place or why there would be a causal link simply by doing so. This would require an investigation of typical individual motivations and actions. And surely, if one can only explain macro phenomena by reducing them to (micro) individual actions and motivations, then the macro level is not, ultimately, a completely distinct realm of analysis. Tobe sure, how a structure (macro phenomenon) emerged is not always relevant to the question asked. Only in this sense is it permissible to argue that structures “constrain” the individual. But these structures, as Mises ([1922] 1951, 315; [1957] 2007, 326) argued—and Turner and Boyns (2001, 361) seem to agree—do not render deterministic explanations; and one must, therefore, still look at typical individual characteristics in order to understand how and why the structure impacted individual thoughts and actions leading to the social phenomena of interest.
It is quite clear that, for Mises, every historical (and therefore sociological) analysis must use methodological individualism. Every action is individual action, and its meaning must be thought as individual meaning (Mises 1962, 43–4). This does not imply, of course, that the individual is by necessity “temporally prior” to the collectivity or to various social structures. There exists a multitude of different collectives (built around different goals) to which individuals adhere (Mises [1949] 1998, 42–3). But one must keep in mind that “A collective operates always through the intermediary of one or several individuals […]” (Ibid.) It is thus only metaphorically that one can attribute an action to a social group: “society itself is neither a substance, nor a power, nor an acting being.” (Mises 1962, 78). Such metaphors are often useful. But a scientific analysis may fall into error if it fails to realize that they are indeed mere metaphors.
Weber and Weberians such as sociologist Raymond Boudon understood this. For Boudon, the individual is the ultimate origin of social explanation (Boudon 2010, 16, 27). To both Mises and Boudon, it is only possible to understand a “macrosocial” phenomenon by considering it as the result of a multitude of particular actions and by assembling these particular actions “step by step, part by part.” (Mises [1949] 1998, 46). This is what Mises called “methodological singularism.” It is only by understanding smaller, singular, phenomena that we can understand larger, more complex ones. Likewise, Boudon argued that it is necessary to aggregate typical micro-sociological facts in order to make sense of macrosocial data (Boudon 1986, 16). The macro data can only be heuristically useful in the formulation of enigmas and of hypotheses of investigation (Boudon 1986, 313 n. 11). A cathedral, to adapt one of Mises’s examples, provides an enigma: why was it built?; how was it built?; etc. This “macro” datum requires an explanation; we wish to understand something about the processes that made this achievement possible. But, as Mises pointed out, understanding it requires that we reconstruct the actions of the various individuals involved in the project of building this cathedral (Mises [1949] 1998, 45). In the words of Mises: “In studying the actions of individuals, we learn also everything about the collectives and society. For the collective has no existence and reality but in the action of individuals. It comes into existence by ideas that move individuals to behave as members of a definite group and goes out of existence when the persuasive power of these ideas subsides. The only way to a cognition of collectives is the analysis of the conduct of its members.” (Mises 1962, 81).
Such an analysis presupposes that we understand acting men as rational men. They have reasons to think what they think and to do what they do. Every action, according to Mises, is necessarily rational in that it always follows a process of thought about the adequation of means towards the achievement of ends. Although Weber allowed, in his typology of social actions, for actions non-rationally oriented (Weber [1922] 1978, 24–5), Weberians such as Boudon have argued that an action can be thus classified only “residually,” that is, when it is impossible to understand an action in another way than by classifying it as a result of “impulses” (Boudon 1986, 294 n. 14). To Mises, these “actions” are, of course, mere behaviors. But since Boudon insists on the residual classification of such “actions,” there is usually no major contradiction between his and Mises’s methods of understanding.
If it is quite clear, then, that—according to the Misesian framework—Weberian sociology proceeds to analyze historical social phenomena in a satisfactory manner, it is not the case for sociologists that deny the validity of methodological individualism and rationalism. For instance, Durkheim’s method of using aggregated statistical data or legal codes in order to explain collective phenomena (explaining “social facts” by other, temporally prior or concomitant, “social facts”)—his methodological holism (see Durkheim [1895] 1982, 162)—presupposes action without properly taking it into account, and is therefore inadequate to provide any explanation at all. It is not “society” that imposes its “will” to the individuals, as Durkheim would have it, thereby allowing for a methodology that merely attempts to describe how an aggregate phenomenon Y followed another aggregate phenomenon X and that somehow pretends to have thus provided an explanation of Y. This method simply cannot provide any explanation of Y, for it is only a study of individual actions reconstructing phenomena X and Y that can help us elucidate questions such as: why was X followed by Y?; must X necessarily be always followed by Y?; and so forth.
- TOPICS OF SOCIOLOGY Rationality and individuality, then, are at the center of Mises’s analysis of social evolution and devolution. Societies improve or decline based on the degree to which the individuals that compose them understand the benefits of increasing the division of labor.
Praxeology alone can teach us that increasing the division of labor is a process which allows for the maintenance and increase of material standards of living. But to claim that this process constitutes an improvement presupposes that we accept a few empirical assumptions. First, it must be accepted that individual actors generally seek to increase their material conditions of living (Mises [1949] 1998, 180). Indeed, if this were not the case, one could not talk of social progress when labor is further divided. Second, it must be accepted that these same actors tend to have a relatively low time preference, i.e., they do not seek to quickly, and for a short period of time, increase these standards of living at the cost of their long-run standards of living. For if this were not accepted, a society where there is just enough division of labor to have some wealth and where it is possible to fight and steal would still allow many individuals to improve their material wealth in the short-run while sacrificing the long-run process which allows material wealth to grow. Once these hypotheses are accepted, it is possible to better understand Mises’s analyses of how societies emerge, grow, and fall. The following section will contrast Mises’s social analyses to that of some of the major figures of early sociology and derive from them the distinct, praxeologically guided, sociology of Ludwig von Mises.
2.1. Division of Labor and the Emergence of Society
The question of the link between division of labor and the evolution of societies has been studied in depth by many sociologists. For instance, French sociologist Émile Durkheim argued that division of labor is the outcome—not the cause—of social development. Indeed, Durkheim criticized Herbert Spencer and the economists for their alleged failure to provide a rigorous explanation of the causes of division of labor. He accuses them of presenting a simplistic explanation, i.e., an explanation according to which isolated individuals suddenly recognize the productive advantage that it implies and that dividing labor will therefore make them happier (Durkheim [1893] 2013, 212).
His argument against this doctrine is, briefly put, that since division of labor has no known limit, if Spencer and the economists were right, then there would be also no known limit to happiness. But the science of psychology indicates that happiness is limited. Therefore, Spencer and the economists failed to explain why we still divide labor further (Durkheim [1893] 2013, 214–15). For Durkheim, the cause of the extension or intensification of the division of labor must thus lie outside of the individual. He finds it in the increases in the volume and density of the population (244). The increases in volume and density imply a larger market, which creates new needs, but also an increase in competition that forces the weaker members of society to specialize in order to survive (251–52). In other words, it is the “struggle to survive”It is unclear if Durkheim employed the terms “struggle to survive” in the usual sense of fighting for scarce resources or in the confused sense of competing for them (or if he subsumed both under the same category). There is, however, a clear distinction between fighting and competing in that the latter allows for the allocation of scarce resources to those who are inclined to provide consumer goods that are more highly valued, whereas the former seeks to deprive others of what they have. See Mises ([1922] 1951, 320–21; 1962, 88). that “forces” an expansion of the division of labor (248).This argument was supposed to contradict Spencer’s description of the extension of the division of labor. However, as noted by Perrin (1995, 793–94), Spencer did consider the influence of population pressures as one of the causes of the extension of the division of labor. For Durkheim, then, division of labor is a consequence of society rather than a cause (241).This theory is not completely shared by other sociologists. See for instance Georg Simmel ([1900] 1978, 175), who argues that social bonds and societies emerged from exchanges. It is imposed on the individual actors rather than chosen willingly as a means to prosper.
But these forces are not as “external” to the individual as Durkheim would like them to be. True enough, changes in man’s social environment can become problematic. An increase in scarcity (which can indeed be affected by population pressures) decreases the output per capita. This is the Malthusian law of population. But this in no way forces society to divide labor in the same sense that the law of gravitation forces earthly objects to fall when thrown.Durkheim indeed thought that his theory has the same status in the social world as the law of gravitation has in the natural world. See Durkheim ([1893] 2013, 330 n.1). Rather, as Mises ([1922] 1951, 293 n.1, 315–16) indicated, division of labor must first be recognized by individuals as a means to increase productivity for it to be extended in order to overcome or alleviate the effects of the struggle for existence that would otherwise prevail.
Far from being something which society imposes on the individual, the division of labor is something which he agrees to participate in because he recognizes it as a solution to a problem. This contradicts Durkheim’s classification of the division of labor as what he calls a “social fact,” and which he defines as “[…] manners of acting, thinking and feeling external to the individual, which are invested with a coercive power by virtue of which they exercise control over him.” (Durkheim [1895] 1982, 52). The increase of the division of labor, for Mises, is a deliberate means that men use in order to achieve their goals more efficiently (Salerno 1990, 28). It is also precisely because of the higher productivity of the division of labor that we can sustain growths in population density and volume, as Mises ([1922] 1951, 293 n.1) indicated, and that we can substitute cooperation for the war of all against all that characterizes the struggle to survive (Mises [1949] 1998, 159, 175, 663).
Therefore, according to Mises, although it is true that society pre-exists the individual and that man is not born in a cultural or social vacuum (Mises [1922] 1951, 315; [1949] 1998, 143, 164), it is incorrect to argue that society causes cooperation and the division of labor. On the contrary, it is cooperation that allows the creation of sophisticated social bonds such as friendship or love; it is the capacity of man to recognize the superiority of the division of labor as compared to autarky that creates a web of social links which we call civilized society (Mises [1949] 1998, 143–45). Indeed, Mises wrote: “Human society is an intellectual and spiritual phenomenon. It is the outcome of a purposeful utilization of a universal law determining cosmic becoming, viz., the higher productivity of the division of labor.” (145). And elsewhere: “Civilization is a product of leisure and the peace of mind that only the division of labor can make possible.” (Mises [1922] 1951, 305).
The sociological question of the causes of social evolution and devolution is therefore resolved by Mises. Although Durkheim is right in insisting on the fact that division of labor presupposes at least a primitive form of trust,On the loyalty that characterizes primitive tribes, and on how it is the outcome of ideas, see Mises (1962, 81). this is insufficient to demonstrate that social development is merely driven by pressures that are external to the individuals. Indeed, individuals are by no means forced to participate in the division of labor; they do so because they recognize that this is beneficial to the achievement of their various purposes.
It is the division of labor, then, which allows social scientists to distinguish society as the rational form of cooperation it has become from the mere impulses to associate such as what can be found in groups of animals (Mises [1922] 1951, 297). It is the variations in the extent and the intensity to which labor is divided that determine the evolution or devolution of society and which make it scientifically understandable (299–300; [1949] 1998, 160). Social evolution is therefore teleological (Mises [1922] 1951, 291; Salerno 1990), i.e., based on the rational thinking of individuals associating in order to overcome or alleviate natural or social problems—to “remove uneasiness,” as Mises would put it. It is not the necessary consequence of external sui generis social forces, as Durkheim and other sociologists have argued. Civilization, to Mises, is the purposeful result of an increase in the division of labor and the capital accumulation it allows, whereas social decline is the result of the reduction of the division of labor.
To understand social history, then, sociology must first identify whether and how the individuals are willing to extend the division of labor. It must describe how societies and civilization historically evolved or devolved by using this general criterion.
2.2. The Social Effects of Socialism and Capitalism
One of the effects of socialism, Mises ([1922] 1951, 458, 497) indicates, is to destroy the division of labor, and, therefore, civilization. The opposite is the case for capitalism. It is because the market economy is based on the division of labor that it is possible to “regard each other as comrades in a joint struggle for welfare, rather than as competitors in a struggle for existence.” (Mises [1922] 1951, 294–95) Thus, according to Mises, capitalism allows us to see our neighbor as a friend rather than a foe, for we do not see him as someone that will deprive us of scarce resources, but as someone with whom we can exchange and prosper. In other words, capitalism allowed for civilization to emerge because it presupposes a division of labor that bridges the potential divisions between men. As Mises pointed out, it is vain to try to preserve civilization without preserving capitalism because high culture and polite society rest on economic means that can only be obtained in a sufficient amount when the division of labor is unimpaired by state intervention (310). Thus, capitalism allows society to civilize itself whereas socialism dismantles it.
Indeed, for Mises, the erosion of civilization is inevitable under socialism. Dissenting opinions are to be prohibited, for only the central authority (not the consumers) has the power to decide what is allowed and what is not. With the socialist regime being in charge of the allocation of all scarce resources, it is impossible, for instance, for any scientist, artist or writer to seek funds in another way than to satisfy those who are in charge of this regime (Mises [1922] 1951, 188–89). Thus, socialism puts an end to some of the highest achievements of civilization—arts and sciences. In stark contrast, a capitalist society allows anyone to sell his artistic or scientific work to the public or to find a sponsor (189).
Indeed, Mises (194) writes, capitalism protects freedom. Not in the sense that it annihilates the costs of all actions of course, but rather in the sense that it allows individuals to be protected against arbitrary rules to a larger extent than any alternative system (192–94). One must not see freedom as the absence of rules, but rather as the absence of arbitrary rules. Indeed, some rules are unavoidable if one wishes to live in a society. If one desires to obtain the economic benefits of the division of labor and the social benefits of friendship, love, and cooperation, then one must adapt his actions in light of what the others desire.
But the rules imposed by the State are arbitrary. The State is not capable of meaningful economic calculation, and can therefore not adapt its action with the preferences of society. It is bound to make decisions and create rules that are merely based on the preferences of the ruling class (Mises [1922] 1951, 195). Indeed, economic calculation based on private property renders the cost of many actions more apparent than it would be otherwise (Mises [1949] 1998, 230); it allows for the estimation of how various actions will be profitable (Salerno 1990, 48). Hence capitalism, by making the satisfaction of consumers a condition of possibility for profit, makes it clear that there exists a bilateral dependency between the producer and the consumer: the producer depends on the consumer because he needs to sell goods in order to become a consumer himself and the consumer depends on the producer because he needs to obtain goods in order to maintain or improve his standards of living. The freedom to trade allows for this fact to be understood and for one to see one’s fellow men as allies in the achievement of his own goals. And this freedom, by favoring the increase of the division of labor, provides society with the means to evolve into civilization.
We can now be more precise as to how sociology must describe the evolution of societies. It is by observing how socialistic or capitalistic a society is that one can understand its evolution. Because capitalism is the economic system allowing for an extension of the division of labor and because socialism destroys it, a sociologist can analyze social evolution by looking at whether and to what extent capitalism prevails in a given society.
2.3. On Class Conflicts
Mises wrote quite a lot on group or class conflicts. To be sure, his analysis of class conflicts is very different from the most famous one (and one of the most widely used in sociological analyses), i.e., that of Karl Marx. True, Marx’s analysis of class conflicts stems from the identification of an important question: Why is it that several groups within society seem to dislike or fight one another? But this is already giving too much credit to Marx. Indeed, class analysis was already used by many economists and social scientists before him. For instance, the non-socialist French industrialists—in particular Charles Dunoyer—had already delineated a framework for class analysis before (Leroux 2016, 86). It thus comes as no surprise that Mises’s own class analysis is much closer to that of Dunoyer and other French classical liberals than to that of Marx and the Marxists.This has been pointed out by Murray Rothbard in his 1978 preface to Mises’s The Clash of Group Interests. See Rothbard (2011, ix).
The question that both Marx and Mises attempted to answer is: why are there clashes between groups within society? The Marxist answer to this question is based on historical material conditions of production and class consciousness (Lukács [1923] 1971). It is because a dominated class is composed of individuals who realize the singularity of their own class with respect to its links to the material conditions of their time that irreconcilable interests become conflicts with the other—dominant—class. Under capitalism, the capital owners are the oppressors and have a common interest to keep and extend their “domination” over those who do not own the means of production. The laborers (proletarians) are the oppressed and, once they realize their oppression, have an interest in destroying the capitalist system which captures the plus-value of their labor (Marx and Engels [1848] 2012). According to the Marxists, there is only one way to arrive to a general state of peaceful interactions within society: one class (the proletarians) must violently take control of society as a whole and impose its own will on it.Mises (1990, 210–11) writes: “The Marxians promise us peace for the time after the final victory of the proletarians, precisely, in the words of Marx, after the working class will have passed ‘through long struggles, through a whole series of historical processes, wholly transforming both circumstances and men’.” Mises calls it the “peace of the graveyard,” as opposed to liberalism’s “peace of progress” (Mises [1922] 1951, 85).
But, as Mises pointed out many times, Marx’s class theory is, at best, unconvincing. One can indeed proceed to class distinctions based on the economic concepts of labor or capital in order to scientifically establish the distinctions between what it is to be a laborer and what it is to be a capital owner (Mises [1922] 1951, 331–32). But, first, the mere fact that such a distinction can be done for scientific purposes is no proof that the interests of the laborers are homogeneous or that the interests of the capital owners are homogeneous; and second, even if this were the case, it is still no proof that the interests of the laborer and that of the capital owner are necessarily opposed (in fact, quite the opposite is the truth: the so-called “oppressed” accepts, under capitalism, to exchange his labor time for an immediate income, see Mises [1922] 1951, 334–35).
Instead, argued Mises, class antagonism is the result of state privileges. One needs to explain why, given the heterogeneity in values and interests between various groups, they cannot coexist peacefully. For a variation in values and interests is not a sufficient condition to explain why one group pursues its own interests at the expense of another group. One must also look at the social context which constitutes the vector translating this original heterogeneity of group interests to the resulting situation of conflict. And this social context, for Mises, is the lack of respect for private property rights and for the market economy. In other words, it is because of the state’s redistributive or restrictive policies that diverging interests become class conflicts (Mises [1945] 2011, 10). Class conflicts, then, can only occur between two broadly conceived (and internally changing) classes: those who obtain privileges through the state, and those who must pay the price of these privileges; the productive class and the expropriating class (Hoppe 1990, 83–4).
Without State privileges, despite the multiplicity of individual or group interests, no group can advance its own interests at the expense of another (Mises [1945] 2011, 7). For Mises, a more general kind of “interests,” which he calls “long-run” or “rightly understood” interests, corresponds to this idea that specific interests can always, in the long-run, be realized more efficiently and without conflict in a market economy. Thus, Mises writes that the “rightly understood” interests are “harmonious” (16–7).As Leroux (2011, 136) noted, Mises’s formulation is very similar to that of Frédéric Bastiat. Not in the sense that all specific interests become exactly the same of course, but in the sense that their heterogeneity does not systematically lead to conflict and predation within society. In other words, the only way to achieve one’s most desired goals in a free market is to be able to first produce what the other members of society desire. It is in this sense that, although different, all interests are harmonious; everybody profits from the fact that everybody else achieves his goals. Systematic clashes cannot occur without state privileges: “Under free trade,” Mises tells us, “the manufacturers of shoes are simply competitors. They can be welded together into a group with solidarity of interests only when privileges supervenes, e.g., a tariff on shoes (privilegium favorabile) or a law discriminating against them for the benefit of some other people (privilegium odiosum).” (7).
Thus, in this perspective, we may understand social evolution or devolution by defining two broad classes: those who participate in and extend the process of division of labor (those who make a living by attempting to produce what is desired by consumers) and those who benefit from its destruction in the short-run (those who receive privileges from the state). The first class (the productive class or, using the French classical liberal terminology, the spoliés or the industrieux) is struggling in a fight against the second class (the spoliateurs).It becomes immediately clear what Marx’s mistake was; it was a misidentification of the “exploiters” and the “exploited” (Hoppe 1990, 83–5, 92 n.13). The whole history of mankind under statist conditions can indeed be understood by describing class conflicts between the productive class and the parasitic class. This is not the case with the arbitrary class distinctions of the Marxists. For a more detailed analysis of the similarities and differences between the Marxist and the Austrian theory of class conflicts, see Hoppe (1990). It is the task of history and sociology to identify the specific composition of these classes and to describe their interactions at any given time and place.
In order to assess the extent to which capitalism prevails (and, consequently, the extent to which division of labor and social evolution occur), a sociologist must then look at the specific group conflicts occurring in a society and their singularities. He must identify the composition of the productive class and of the parasitic class in order to understand the particular elements of socialism that prevent social evolution.
2.4. Ideology and the Role of Ideas
All of this leads to a final question: given that increasing the division of labor reduces class conflicts and leads to social evolution whereas the reduction of it leads to more class conflicts and social devolution, what factors determine the shift of societies towards one or the other? The most important factor, according to Mises, is the role of ideas and of ideology.
Vilfredo Pareto thought that what can convince a population to adopt certain ideas or ideologies are emotions or sentiments rather than reason (Valade 1990, 147). This is why, in his opinion, socialist ideas triumphed over classical liberal ideas. The former were defended by appealing to emotionally pleasing utopian promises whereas the latter were generally defended by mere arguments (Pareto 1902, 66–7). Some actions and ideas are therefore irrational. And this was the foundation of his sociology, i.e., the study of “non-logical” actions (Pareto 1917, 76; Valade 1990, 265).
In contrast, for Mises, there is no such thing as “non-logical actions.” Indeed, we have already seen that, according to him, every action must be conceived as rational to be understandable. There is no point in arguing against Pareto that emotions and sentiments play a role in shaping ideas. However, as Boudon for instance maintained, the manner in which passions are oriented is not intrinsic to them (Fillieule 2014, 102). Anger, for instance, can be used to appeal for either socialistic or capitalistic ideas. One must provide the public with justifications for why they should be angry at capitalism in order to convince them to support socialism. One must provide a plausible justification for attributing to capitalism an event or condition that makes people angry. Actions will be guided by accepted ideas.
Indeed, Mises ([1949] 1998, 177) argued that ideas and the process of thinking are presupposed by any action. The origin of these ideas is social, i.e., thought is always influenced by the social context of an individual. But this does not imply that society has any thoughts of its own that it imposes on the individuals (Mises 1990, 290–91). Only individuals can think. The individual must thus reconstruct, in his own mind, the ideas that he encounters in society into an ideology. For Mises ([1949] 1998, 178), an ideology includes elements of scientific ideas and elements of moral ideas. Praxeology has nothing to say about moral ideas, according to him. But from the moment we know or assume to know the ultimate ends of individuals, praxeology can judge the quality of the means that are thought to bring about the desired ends. Thus, any ideology aiming at human prosperity that is in any way antithetical to the division of labor will lead to failure (Mises [1949] 1998, 180–84). But describing how or why such ideology is accepted and how it is connected to a particular social change is a matter of history or thymology. And contextual rationality can be used as an additional tool to understand an ideology and the manner by which it spreads.This was noted by Fillieule (2014, 100–02).
For instance, Mises ([1922] 1951, 358) writes that the workers’ typical adherence to socialism can be understood by looking at what, given their social context, can lead them to accept the tenets of the socialist doctrine. Mises indicates:
The workman in the large or medium scale capitalist enterprise sees and knows nothing of the connections uniting the individual parts of the work to the economic system as a whole. His horizon as worker and producer does not extend beyond the process which is his task. He holds that he alone is a productive member of society, and thinks that everyone, engineer and overseer equally well as entrepreneur, who does not, like himself, stand at the machine or carry loads, is a parasite. Even the bank clerk believes that he alone is actively productive in banking, that he earns the profit of the undertaking, and that the manager who concludes transactions is a superfluity, easily replaceable without loss. Now from where he stands, the worker cannot see how things hang together. He might find out by means of hard thinking and the aid of books, never from the facts of his own working environment. Just as the average man can only conclude from the facts of daily experience that the earth stands still and the sun moves from east to west, so the worker, judging by his own experience can never arrive at a true knowledge of the nature and functioning of economic life. (Mises [1922] 1951, 358)
Given this fact, it becomes easier for the socialist ideologue to argue that it is the economic system of capitalism which makes the workers’ tasks underappreciated, and that substituting socialism for capitalism would bring them greater wealth and recognition. This helps shaping their own beliefs: “The masses incline towards Socialism, not because it really tends to their interests but because they believe that it does so.” (Mises [1922] 1951, 358) An ideology is propagated through the use of reasons provided to the public with the aid of which they can make sense of their own local situation and orient their passions (see Boudon 1986).
It is precisely because some actors are more prone to commit such errors that they support socialism; these actors truly believe that the market economy leads to an outcome which is ethically or economically undesirable, and this is the exact reason why they oppose it. It is without any doubt his belief that ideas are the driving force of action that led Mises to carefully address the mistakes of the socialist doctrine. For once the public is aware of them, it becomes difficult to implement it. True enough, resentment of those who succeed under capitalism can still be felt (see Mises [1956] 2008). But resentment does not constitute an argument. And once all arguments in favor of socialism are shown to be invalid, it becomes increasingly difficult to orient the public’s passions against capitalism: “Only ideas can overcome ideas and it is only the ideas of Capitalism and of Liberalism that can overcome Socialism. Only by a battle of ideas can a decision be reached.” (Mises [1922] 1951, 507)
To those like Pareto who believe that reason can never triumph over passions, Mises responds: “This pessimistic point of view is completely mistaken in its estimate of the influence which rational and quiet reflection can exercise on the masses. It also exaggerates enormously the importance of the part played by the masses, and consequently mass-psychological elements, in creating and forming the predominant ideas of an epoch.” (Mises [1922] 1951, 507–08) Since the masses are much less prone to think about ideas, they tend to accept the ideas of those who have the time and ability to do so (Ibid.). Educating the thinkers can then influence the ideas of the masses, which can then allow capitalism to triumph over socialism (510). But, it is true, the opposite can also occur.
It is ideas, then, as was also pointed out by Salerno (1990, 53), that are the driving forces of social change for Mises. And it is the task of history and sociology to study the variations in the spread of ideas and ideologies in order to understand social evolution or devolution (Mises 1990, 295, 297–98). Their task is to inquire about the reasons that made an idea consistent with the extension of the division of labor spread to the population sufficiently to bring social evolution (or that made an idea that is inconsistent with it spread to slow down or reverse this evolution).
Now let us sum up everything that has been said in the second section of this paper. Mises provided us with a general framework of understanding for sociological inquiries. In light of this, a sociologist must identify the reasons that made specific ideas prevail in society or in some of its parts. This can explain the specific composition of the productive class and the unproductive class of a society. This class composition then informs us on how, specifically, and to what extent, socialism or capitalism prevailed in a society. In turn, this explains how a society evolved or devolved, since capitalism leads to an increase in the division of labor whereas socialism leads to a decrease in it. We can thus, following Mises’s methodological singularism, reconstruct step by step the evolution or devolution of society while answering many singular sociological questions along the way. With all these insights, sociologists can usefully contribute to our understanding of social phenomena and social changes that occurred throughout history.
- CONCLUSION It has been shown in this paper that Ludwig von Mises, although primarily an economist, has addressed both the epistemological questions and many of the controversial topics of the discipline of sociology. In brief, sociology is a historical discipline. Its main task is to provide us with an understanding of actions and the results of actions that occurred in the past or are likely to occur in the future. It must in particular attempt to find the values and ideas that influenced the shift towards social evolution or devolution. It must also attempt to identify the reasons why these values and ideas prevailed.
To do so, praxeology is necessary but insufficient; sociology must use additional tools to analyze the social world. It must have specific criteria on which to base its judgements about social evolution or devolution, i.e., the extension or destruction of the process of division of labor. It must assume contextual rationality and use methodological individualism in order to identify whether and why different groups of individuals shared the values and ideas they had at the time and place they had them. It must find out if these values and ideas were consistent or antithetical to social evolution and connect them to historical trends. It requires the identification of classes of individuals based on whether their ideas, values, and actions were consistent or antithetical to social evolution. In brief, sociology must be a praxeologically oriented study of general history. In strike contrast to holistic sociology, a Misesian sociology (not unlike a properly understood Weberian or Boudonian sociology) is first interested in the individual and his rationality in order to understand larger complex social phenomena.
As such, and by considering “macrosocial” phenomena such as society or culture as the result of individual actions and interactions based on ideas (“microsocial” phenomena), Misesian sociology allows for a better understanding and explanation of social change than by considering macro phenomena as the ultimate bases of social explanations or by considering both macro phenomena and micro phenomena as analytically independent entities of equal importance in providing explanations. Contrary to contemporary metatheories such as that of George Ritzer (see Ritzer and Stepnisky 2018, 596–600), which often correctly assert that there exist interactions between the micro and the macro levels of explanation but fail to recognize the more fundamental character of action and thought in our understanding of social phenomena, Mises’s allows us to reconstruct macrosocial phenomena of interest from their ultimate origins in actions and ideas. Even when, from a strictly analytical perspective, an explanation seems to be only involving macrosocial phenomena, one can upon further investigation recognize that, ultimately, the proper explanation is rooted in actions and ideas. For instance, an increase in population can indeed explain why we divide labor more, as Durkheim argued, but this is only because individual actors recognize that dividing labor more is a means to avoid the decrease in standards of living it would otherwise bring. And the ultimate explanation for population increases must also be found in actions and ideas. Failing to recognize such microsocial origins to macrosocial phenomena can lead to the erroneous belief that individuals play only a very minor role (if any) in the formation of their own thoughts and actions, as Durkheim thought; the individual’s ideas and actions are then merely seen as the unavoidable result of deterministic social forces that are imposed on him. Although it is often heuristically useful to consider an aggregate social phenomenon as given in order to explain some other phenomena, one must always keep in mind while doing so that these social phenomena are ultimately rooted in actions and ideas.
These many insights of Mises can help sociologists (or economists interested in complementing their work with sociology) reconstruct the discipline of sociology on firmer grounds.
Dr. Joe Salerno joins Jeff Deist to explore another foundational topic: the method of economics. Mises developed praxeology, perhaps his most controversial contribution to economic science. Praxeology starts with fundamental axioms, then derives economic theory by working logically through a deductive process. As such, praxeology is at odds with logical positivism and empiricism—and presents a markedly different approach to economics.
Readings Ludwig von Mises, The Ultimate Foundation of Economic Science
Ludwig von Mises, Human Action, Part One, Chapter II: "The Epistemological Problems of the Sciences of Human Action"
Murray Rothbard, "In Defense of Extreme Apriorism"
Hans-Hermann Hoppe, Economic Science and the Austrian Method
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Download the pdf version here.
Introduction Economics is the youngest of all sciences. But it opened to human science a domain previously inaccessible and never thought of — the regularity in the sequence and interdependence of market phenomena.
Economic scientific inquiry is based on the uniformity and immutability of the logical structure of the human mind. It therefore can achieve results valid for all eras, races, and social classes.
The theory of catallactics (the science of exchanges) has to be built upon the solid foundation of the general theory of human action, praxeology.
Economic theory is quite obviously not perfect. But the increase in wealth and welfare were feasible only through the pursuit of those liberal policies which were the practical application of the teachings of economics.
I. ACTING MAN Human action is purposeful behavior, i.e., conscious adjustment to stimuli and to the conditions of its environment. It is in sharp contrast to unconscious behavior — the reflexes and the involuntary responses of the body’s cells and nerves to stimuli.
There are three prerequisites of human action: uneasiness, the image of a more satisfactory state and the expectation that purposeful behavior has the power to remove or at least alleviate the felt uneasiness. Without these conditions no human action is feasible.
Concrete value judgments and definite human actions are not open to further analysis. They are ultimate given.
Human action is necessarily always rational. The opposite of action is not irrational behavior, but a reactive response which cannot be controlled by the volition of the person concerned. Because praxeology is subjectivistic (it takes the value judgments of acting man as ultimate data), it is universally valid (objective).
In a world without causality and regularity of phenomena there would be no field for human reasoning and human action. Thinking and acting are the specific human features of man. There is only one logic that is intelligible to the human mind, and there is only one mode of action which is comprehensible to the human mind. The sole suitable method for studying the conditions of our nonhuman environment is provided by the category of causality. For the comprehension of action there is cognition and analysis of our own purposeful behavior.
II. THE EPISTEMOLOGICAL PROBLEMS OF THE SCIENCES OF HUMAN ACTION There are two main branches of the sciences of human action: praxeology and history. The subject matter of all historical sciences is the past. The study of history makes a man wise and judicious. The natural sciences too deal with past events. Every experience is an experience of something passed away, there is no experience of future happenings. But the experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. The postulates of positivism and kindred schools of metaphysics are therefore illusory. Neither experimental verification nor experimental falsification of a general proposition are possible in this field. Praxeology is a theoretical and systematic not historical science. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences.
There is no doubt that empiricism and pragmatism are right as far as they merely describe the procedures of the natural sciences. But it is no less certain that they are entirely wrong in their endeavors to reject any kind of a priori knowledge and to characterize logic, mathematics, and praxeology as empirical and experimental disciplines. The problem of the a priori does not deal with the problem of how consciousness and reason have emerged. It refers to the essential and necessary character of the logical structure of the human mind. The fundamental logical relations are not subject to proof or disproof. It is impossible to explain them to a being who would not possess them on his own account. The present state of the universe is the product of its past. And the category of action is logically antecedent to any concrete act.
We cannot think of a world without causality and teleology. Human knowledge is conditioned by the structure of the human mind. The content of primitive man’s thoughts differs from the content of our thoughts, but the formal and logical structure is common to both. The logical structure of mind is uniform with all men of all races, ages, and countries.
Aprioristic reasoning is purely conceptual and deductive. All its implications are logically derived from the premises and were already contained in them. But cognition from purely deductive reasoning is also creative and opens for our mind access to previously barred spheres. Without theory, the general aprioristic science of human action, there is no comprehension of the reality of human action. There is no action in which the praxeological categories do not appear fully and perfectly. Experience concerning human action differs from that concerning natural phenomena in that it requires and presupposes praxeological knowledge. This is why the methods of the natural sciences are inappropriate for the study of praxeology, economics, and history. We do not maintain that the theoretical science of human action should be aprioristic, but that it is and always has been so. The experience of a complex phenomenon — and there is no other experience in the realm of human action — can always be interpreted on the ground of various antithetic theories.
Praxeology deals with the actions of individual men. All actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. The life of a collective is lived in the actions of the individuals constituting its body. Thus the way to a cognition of collective wholes is through an analysis of the individuals’ actions. Those who what to start the study of human action from the collective units encounter an insurmountable obstacle in the fact that an individual at the same time can belong to various collective entities. The problems raised by the multiplicity of coexisting social units and their mutual antagonism can be solved only by methodological individualism.
The Ego is the unity of the acting being. It is unquestionably given and cannot be dissolved or conjured away by any reasoning or quibbling. The We is always the result of summing up which puts together two or more Egos. It is always single individuals who say We.
Praxeology does not deal with concrete action which a definite man has performed at a definite date and at a definite place, but only with what is necessary and universal in its performance. Universalism, collectivism, and conceptual realism see only wholes and universals. Thus they never find solutions, but antinomies and paradoxes only. The best-known instance is the value-paradox.
The content of human action (the ends aimed at and the means chosen and applied for the attainment of these ends) is determined by the personal qualities of every acting man. Inheritance and environment direct a man’s actions. He lives not simply as man in abstracto. As soon as he discovers that the pursuit of the habitual way may hinder the attainment of ends considered as more desirable he changes his attitude.
The study of all the data of experience concerning human action is the scope of history which should be wertfrei (neutral with regard to all value judgments). This postulate of Wertfreiheit can easily be satisfied in the field of the aprioristic science-logic, mathematics, and praxeology — and in the field of the experimental natural sciences. But History can never be anything else than distortion of fact. Economic history is possible only because there is an economic theory capable of throwing light upon economic actions. If there were no economic theory, reports concerning economic fact would be nothing more than a collection of unconnected data open to any arbitrary interpretation.
Sciences of human action are the comprehension of the meaning and relevance of human action. They apply for this purpose two different epistemological procedures: conception and understanding. Conception is the mental tool of praxeology, understanding is the specific mental tool of history. In the realm of physical and chemical events there exist constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action. We cannot substitute “quantitative economics” for “qualitative economics.” There are no constant relations, and consequently no measurement is possible. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions.
Everybody uses understanding in dealing with the uncertainty of future events to which he must adjust his own action. Action necessarily always aims at future uncertain conditions and thus is always speculation.
History deals with unique and unrepeatable events, with the irreversible flux of human affairs. Ideal types are the specific notions employed in the historical research and in the representation of its results. The ideal type has nothing at all to do with statistical means and averages. The ideal type is always the representation of complex phenomena of reality, either of men, of institutions, or of ideologies, therefore Homo oeconomicus is no ideal type.
All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action. Like logic and mathematics, praxeological knowledge is in us. The end of science is to know reality. Therefore praxeology restricts its inquires to the study of acting under those conditions and presuppositions which are given in reality. All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given. Of course, they have no practical significance in situations where these conditions are not established. Praxeology — and consequently economics, too — is a deductive system. No economic theorem can be considered sound that is not solidly fastened upon this foundation by an irrefutable chain of reasoning.
III. ECONOMICS AND THE REVOLT AGAINST REASON The economists had entirely demolished all socialist schemes produced up to their time. Therefore only one way could lead the socialists out of this impasse. They could attack logic and reason and substitute mystical intuition for ratiocination. Marx had asserted that human reason is constitutionally unfitted to find truth. The logical structure of mind is different with various social classes. The essence of Marxian philosophy is this: We are right because we are the spokesmen of the rising proletarian class.
It is different with the polylogism of the racists. The racists assert that there exists between various races a difference in the logical structure of mind.
But the categories of human thought and action are neither arbitrary products of the human mind nor conventions. They are biological facts and have a definite function in life and reality.
Therefore the statement that the interests of all proletarians uniformly require the substitution of socialism for capitalism is an arbitrary postulate of Marx and the other socialists.
Some supporters of the tenets of Marxism and racism are ready to admit that the logical structure of mind is uniform for all races, nations, and classes. They say that historical understanding, aesthetic empathy, and value judgments are conditioned by a man’s background.
But a theory is either correct or incorrect. It can never be valid for a bourgeois or an American if it is invalid for a proletarian or a Chinese.
IV. A FIRST ANALYSIS OF THE CATEGORY OF ACTION The end, goal, or aim of any action is always the relief from a felt uneasiness. A means is what serves the attainment of any end, goal, or aim. In this universe there exist only things. A thing becomes a means when human reason plans to employ it for attainment of some end and human action really employs it for this purpose. Economics is not about things and tangible material objects, it is about men, their meanings and actions. If means were not scarce, there would not be any action with regard to them. Economic goods which are fitted to satisfy human wants directly are called consumers’ goods. Means which can satisfy wants only indirectly are called producers’ goods. Those producers’ goods which are nearest to the production of a consumers’ good are ranged in the second order, and accordingly those which are used for the production of goods of the second order in the third order and so on. The purpose of such an arrangement of goods in orders is to provide a basis for the theory of value and prices of the factors of production. The first and ultimate valuation of external things refers only to consumers’ goods. All other things are valued according to the part they play in the production of consumers’ goods.
These scales are nothing but an instrument for the interpretation of a man’s acting. Value is not intrinsic. It is reflected in human conduct. There is no room left in the field of economics for a scale of needs different from the scale of values reflected in man’s actual behavior.
Action is an attempt to substitute a more satisfactory state of affairs for a less satisfactory one, i.e., exchange. The difference between the value of the price paid (the costs incurred) and that of the goal attained is called gain. Profit is purely subjective and ordinal. Therefore any calculation of values is impossible.
V. TIME The concepts of change and of time are inseparably linked together. Human reason is even incapable of conceiving ideas of timeless existence and of timeless action. The praxeological system implies the categories both of time and of causality.
Man becomes conscious of time when he plans to convert a less satisfactory present state into a more satisfactory future state.
Man’s time is scarce. He must economize it as he does other scarce factors. The economization of time is independent of the economization of economic goods and services.
Two actions of an individual are never synchronous. They succeed one another. Value judgments are not immutable and therefore a scale of value, which is abstracted from various, necessarily nonsynchronous actions of an individual, may be self-contradictory.
VI. UNCERTAINTY To acting man the future is hidden. If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own. The most that can be attained with regard to reality is probability.
There are two entirely different instances of probability. We may call them class probability (frequency probability) and case probability (the specific understanding of the sciences of human action).
Class probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena, but about the actual singular events or phenomena we know nothing but that they are elements of this class.
Case probability means: We know, with regard to a particular event, some of the factors which determine its outcome, but there are other determining factors about which we know nothing. Case probability is not open to any kind of numerical evaluation.
Praxeological knowledge makes it possible to predict the outcome of various modes of action. But it can never imply anything regarding quantitative matters.
VII. ACTION WITHIN THE WORLD Action does not attach the same value to the various portions of a supply of homogeneous means. Each portion is valued separately. What counts always and alone in valuing a compound of several units is the utility of this compound as a whole, i.e., the increment in well-being dependent upon it. The praxeological notion of utility (subjective use-value in the terminology the earlier Austrian economists) must be sharply distinguished from the technological notion of utility (objective use-value in the terminology of the same economists). Action does not measure utility or value, it chooses between alternatives. There is no such thing as a calculation of values. Man decides on the basis of marginal utility. Marginal utility is the utility derived from the least urgent employment of a unit of a homogeneous supply.
The law of returns (popularly called the law of diminishing returns) asserts that for the combination of economic goods of the higher orders (factors of production) there exists an optimum. If one deviates from this optimum by increasing the input of only one of the factors, the physical output either does not increase at all or at least not in the ratio of the increased input. If the effect brought about by one of the complementary factors is indivisible, the optimum is the only combination which results in the outcome aimed at.
The employment of the physiological functions and manifestations of human life as a means is called labor. Labor is a means, not an end in itself. People work only when they value the return of labor higher than the decrease in satisfaction brought about by the curtailment of leisure. To work involves disutility. Labor is the most scarce of all primary means of production because it is in this restricted sense nonspecific and because every variety of production requires the expenditure of labor. There can be abundance only in segments of the labor market.
Every product is the result of the employment both of labor and of material factors. Man economizes both labor and material factors. Labor gratifies the performer. On the one hand in the attainment of the product (immediately gratifying labor) and on the other hand in the satisfaction that the performance itself gives to the worker (immediately gratifying labor).
Production is not an act of creation. It is a transformation of given elements through arrangement and combination. It is the method that man, directed by reason, employs for the best possible removal of uneasiness.
VIII. HUMAN SOCIETY The total complex of the mutual relations created by concerted actions is called society. It is the outcome of a purposeful utilization of the higher productivity of the division of labor.
Society is not an entity living its own life, independent of and separate from the lives of the various individuals, acting on its own behalf and aiming at its own ends which are different from the ends sought by the individuals.
Individualism is a philosophy of social cooperation and the progressive intensification of the social nexus. On the other hand the application of the basic ideas of collectivism cannot result in anything but social disintegration and the perpetuation of armed conflict.
Liberalism is a political doctrine. It is an application of the theories developed by praxeology and especially by economics to definite problems of human action within society. It maintains that it is possible to convince the immense majority that peaceful cooperation within the framework of society better serves their rightly understood interests than mutual battling and social disintegration.
Cooperative action is more efficient than isolated action of self-sufficient individuals. Division of labor increases output per unit of labor expended. It intensifies the innate inequality of men.
The Ricardian law of association shows that even collaboration of the more efficient in every regard with less efficient in every regard results in benefit for both.
The isolated asocial man is a fictious construction. Seen from the point of view of the individual, society is the great means for the attainment of all his ends. People cooperate because this best serves their own interests.
Society is not merely interaction. It always involves men acting in cooperation with other men in order to let all participants attain their own ends.
Peace is the source of all social relations. Man must realize that respect for other people’s lives and health better serves his aim than the opposite mode of conduct. Utilitarian philosophy and classical economics recommend popular government, private property, tolerance, and freedom not because they are natural and just, but because they are beneficial.
IX. THE ROLE OF IDEAS Praxeology deals with reason only as far as it enables man to act. Action without thinking, practice without theory are unimaginable. It is always the individual who thinks. Society does not think. We have inherited from our forefathers not only a stock of goods; we have no less inherited ideas to which our thinking owes its productivity.
A world view is an opinion concerning the best means for removing uneasiness as much as possible. Ideology is the totality of our doctrines concerning individual conduct and social relations. They are not only scientific theories, but also doctrines about the ultimate ends which man should aim at in his earthly concerns. There can never be any cooperation between people divided by different world views. Logical thinking and real life are not two separate orbits. What is contradictory in theory, is no less contradictory in reality. The main objective of praxeology and economics is to substitute consistent correct ideologies for the contradictory tenets of popular eclecticism.
Society is always the creation of ideologies temporally and logically anterior. Action is always directed by ideas and might is the power to direct other people’s actions. He who is mighty, owes his might to an ideology.
Men are not infallible, they err very often. Only if men finally espouse policies reasonable and likely to attain the ultimate ends aimed at, will civilization improve.
X. EXCHANGE WITHIN SOCIETY An action performed by an individual without any reference to cooperation with other individuals, we may call autistic exchange. Within society cooperation substitutes interpersonal or social exchange for autistic exchanges.
There are two different kinds of social cooperation: cooperation based on contract (the logical relation between the cooperating individuals is symmetrical) and cooperation based on subordination (the logical relation between these two classes of men is asymmetrical).
No other distinction is of greater significance, both for human life and for the study of human action, than that between calculable action and noncalculable action.
XI. VALUATION WITHOUT CALCULATION The gradation of the means is like that of the ends, a process of preferring a to b. The basis of modern economics is the cognition that people buy and sell only because they appraise the things given up less than those received. Thus the notion of a measurement of value is vain. Valuing means to prefer a to b. In the market society there are money prices. Economic calculation is calculation in terms of money price.
Technology tells how a given end could be attained by the employment of various means. But the projects and designs of engineers would be purely academic if they could not compare input and output on common basis, i.e., money prices. Thus money becomes the vehicle of economic calculation.
The task which acting man wants to achieve by economic calculation is to establish the outcome of acting by contrasting input and output.
XII. THE SPHERE OF ECONOMIC CALCULATION The prices of goods and services are either historical data describing past events or anticipations of probable future events. Because the main task of economic calculation is to deal with change the latter is more important.
Economic calculation cannot comprehend things which are not sold and bought against money. There are things which cannot at all be evaluated in money. And so it is nonsensical to reckon national income or national wealth.
Exchange ratios (money prices) are subject to perpetual change because the conditions which produce them are perpetually changing.
Shortcomings in the government’s handling of monetary matters gave birth to the ideas which finally generated the slogan "stabilization.” But stability is an empty and contradictory notion. The urge toward action, i.e., improvement of the conditions of life, is inborn in man. In the realm of action there is nothing perpetual but change.
Economic calculation does not require stability of purchasing power. For the sake of economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money. Economic calculation is not imperfect because it does not correspond to the confused ideas of people yearning for a stable income not dependent on the productive processes of men.
XIII. MONETARY CALCULATION AS A TOOL OF ACTION Monetary calculation is the method of calculating employed by people acting within the frame of society based on private control of the means of production. Praxeology and economics could only emerge when acting man had succeeded in creating methods of thinking that made it possible to calculate his actions.
XIV. THE SCOPE AND METHOD OF CATALLACTICS Economics must study not only the market phenomena, but no less the hypothetical conduct of an isolated man and of a socialist community. It must not restrict its investigations to "economic" actions, but must deal also with "uneconomic" actions.
Catallactics is the analysis of those actions which are conducted on the basis of monetary calculation.
The specific method of economics and praxeology is the method of imaginary constructions. Economics tries to elucidate the operation of a pure market economy (there is no interference of factors foreign to the market). Only at a later stage it turns to the study of the various problems raised by interference with the market on the part of governments and other agencies employing coercion and compulsion.
Action tends toward a state of rest, absence of action. People keep on exchanging on the market until no further exchange is possible because no party expects any further improvement of its own conditions from a new act of exchange. But the state of rest will disappear as soon as the momentary conditions which brought it about change.
The evenly rotating economy is characterized by the elimination of change in the data and of the time element (not to confuse it with the stationary economy). It is the only adequate method of analyzing the changes.
When economics employs the terms entrepreneur, capitalist, landowner, worker, and consumer it speaks of catallactic categories. The economic categories refer to purely integrated functions. Acting man by necessity combines various functions.
XV. THE MARKET The market economy is the social system of the division of labor under private ownership of the means of productions. There is in the operation of the market no compulsion and coercion. The market economy is real because it can calculate.
The fundamental notion of economic calculation is the notion of capital and its correlative, income. The immediate end of acquisitive action is to increase, or at least to preserve, the capital, the whole complex of goods evaluated in money terms.
In the past civilization and private property have been linked together. There is no experience to the effect that socialism could provide a standard of living as high as that provided by capitalism. The concept of capitalism is as an economic concept immutable. It means market economy.
Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. They determine precisely what should be produced, in what quality, and in what quantities. Capitalists, entrepreneurs, and landowners can only preserve and increase their wealth by filling best the orders of the consumers.
Biological competition must not be confused with social competition. In the market economy competition manifests itself in the facts that the sellers must outdo one another by offering better or cheaper goods and services and that the buyers must outdo one another by offering higher prices. This is catallactic competition. Its function is to safeguard the best satisfaction of the consumers which they can attain under the given state of the economic data.
Freedom and liberty are not to be found in nature. A man is free as far as he can live and get on without being at the mercy of arbitrary decisions on the part of other people. The market does not directly prevent anybody from arbitrarily inflicting harm on his fellow citizens, it only puts a penalty upon such conduct. There is no kind of freedom and liberty other than the kind which the market economy brings about.
The inequality of wealth and income is an essential feature of the market economy. The rewarding of an individual’s effort according to its value provides an incentive to everybody to exert his faculties and abilities to the utmost.
In the monetary calculus profit appears as a surplus of money received over money expended. The only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers. If all entrepreneurs anticipated correctly the future state of the market, there would be neither profits nor losses.
In the imaginary construction of a stationary economy the total sum of all entrepreneurs’ profits equals the total sum of all entrepreneurs’ losses. It is different in a progressing economy, i.e., an economy in which the per capita quota capital invested is increasing. In such an economy there is an excess in the total sum of entrepreneurial profits over that of losses. We must realize that entrepreneurial profits are not lasting phenomenon but only temporary. In the long run every increase in productivity benefits exclusively the workers and some groups of the owners of land and of capital goods.
Technicians have the ability and the skill to perform definite kinds and quantities of work. But it is the entrepreneur qua entrepreneur who directs their labor toward definite goals. To relieve himself of involvement in too much detail, he can appoint assistant managers to whose solicitude he entrusts the care of subordinate entrepreneurial duties. Whenever the operation of a system is not directed by the profit motive, it must be directed by bureaucratic rules.
Each individual, driven by the urge to remove his own uneasiness as much as possible, tries to sell on the dearest market and to buy on the cheapest market. The resultant of these endeavors is not only the price structure but no less the social structure, the assignment of definite tasks to the various individuals.
There is no automatism in the "mechanism" of the market. There are only men consciously and deliberately aiming at ends chosen. There is no anonymity, there is I and you and Bill and Joe and all the rest. And each of us is both a producer and a consumer.
The consumer is not omniscient. To convey to him information about the actual state of the market is the task of business propaganda. It must be obtrusive and blatant. It should not be forbidden.
The market economy as such does not respect political frontiers. Its field is the world. Thus the idea of the Volkswirtschaft, the sovereign nation’s total complex of economic activities directed and controlled by the government, is the most radical denial of all the principles of the market economy.
XVI. PRICES Catallactics in conceiving the pricing process necessarily reverts to the fundamental category of action, the preference given to a over b. It deals with the real prices as they are paid in definite transactions and not with imaginary prices. Market prices are entirely determined by the value judgments of men as they really act. Prices tend toward a point at which total demand is equal to total supply. We know only market prices not the curves.
The prices of the goods of higher orders are ultimately determined by the prices of the goods of the first or lowest order (consumers’ goods). They are ultimately determined by the subjective valuations of all members of the market society. However we are faced with a connection of prices, not with a connection of valuations. Economic calculation always deals with prices, never with values.
In the calculation of the entrepreneur costs are the amount of money required for the procurement of the factors of production. The fact that a project is not profitable because costs are higher than proceeds is the outcome of the fact that there is a more useful employment available for the factors of production required. The entrepreneur adjusts his effort to the best possible satisfaction of the needs of the consumers by embarking upon those business projects from which he expects the highest surplus of proceeds over costs. Production must stop at the point at which the marginal utility of the increment no longer compensates for the marginal increase in the disutility of costs.
The antagonism between the logical and the mathematical economists is not a dispute about heuristic questions, but a controversy concerning the foundations of economics. The mathematical method is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. There is no such thing as quantitative economics. There is in the field of human action no means of dealing with future events other than that provided by understanding. All investigations concerning the relation of prices and costs presuppose both the use of money and the market process.
Competitive prices are the outcome of a complete adjustment of the sellers to the demand of the consumers. The whole economic process is conducted for the benefit of the consumers.
Catallactics does not deal with monopoly as such but with monopoly prices. Monopoly is for the emergence of monopoly prices not the only prerequisite. There is a further condition required, namely a certain shape of the demand curve. Not every price at which a monopolist sells a monopolized commodity is a monopoly price. Monopoly prices are only prices at which it is more advantageous for the monopolist to restrict the total amount to be sold than to expand his sales to the limit which a competitive market would allow. In dealing with monopoly prices we must always search for the monopolized factor. If no such factor exists, no monopoly prices can emerge. The optimum monopoly price yields the highest net proceeds. Duopoly and oligopoly are not special varieties of monopoly prices, but merely a variety of the methods applied for the establishment of a monopoly price.
The great monopoly problem mankind has to face today is not an outgrowth of the operation of the market economy. It is a product of purposive action on the part of governments. Monopolistic action is advantageous for the monopolist only if total net proceeds at a monopoly price exceed total net proceeds at the potential competitive price. Restrictive action is always advantageous for the privileged group and disadvantageous for those whom it excludes from the market.
The market is peopled by men who are not omniscient. The buyer must always rely upon the trustworthiness of the seller. Good will is the renown a business acquires on account of past achievements. It implies the expectation that the bearer of the good will in the future will live up to his earlier standards.
Monopoly prices can emerge only from a monopoly of supply. A monopoly of demand does not bring about a market situation different from that under not monopolized demand.
The individual consumer may react to monopoly prices in different ways. However he may react, his satisfaction appears to be impaired from the viewpoint of his own valuations. He is not so well-served under monopoly prices as under competitive prices.
There can appear on the market conditions which make it possible for the seller to discriminate between two buyers. He can obtain prices which may sometimes even rise to the point at which the whole consumer’s surplus of a buyer disappears. Price discrimination on the part of the buyer can only be practiced if the government interferes.
It would be absurd to look upon a definite price as if it were an isolated object in itself. What is called a price is always a relationship within an integrated system which is the composite effect of human valuations.
Prices cannot be constructed synthetically. They are the result of a certain constellation of market data, of actions and reactions of the members of a market society.
XVII. INDIRECT EXCHANGE Interpersonal exchange is called indirect exchange if, between the commodities and services the reciprocal exchange of which is the ultimate end of exchanging, one or several media of exchange are interposed.
In the marketability of the various commodities and services there prevail considerable differences. A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production. Money is the most marketable good. Money serves as the generally accepted and commonly used medium of exchange.
The demand for a medium of exchange is the composite of two partial demands: the demand displayed by the intention to use it in consumption and production and that displayed by the intention to use it as a medium of exchange. The relation between the demand for money and the supply of money determines the height of purchasing power (the amount of other goods which can be obtained in giving away a medium of exchange). Today’s money relation is shaped on the ground of yesterday’s purchasing power.
The use of media of exchange and the keeping of cash holdings are conditioned by the changeability of economic data. Money in itself is an element of change, the driving force of new changes. The notion of a neutral money is no less contradictory than that of a money of stable purchasing power.
Changes in the purchasing power of money can either occur in the demand for and supply of money (cash-induces changes) or in the demand for and supply of the other goods and services (goods-induced changes). The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.
All results of economic calculation and all conclusions derived from them are conditioned by the vicissitudes of cash-induced changes in purchasing power. A medium of exchange without a past is unthinkable. But as far as cash-induced changes in purchasing power are expected, a second factor enters the scene, the anticipation of these changes.
Under the standard of commodity money the monetary units were merely names for a definite weight of gold, within very narrow margins precisely determined by the laws. A second sort of money, credit money, evolved out of the use of money-substitutes. If credit money loses its character as a claim against a bank it will become fiat money.
Claims to a definite amount of money, payable and redeemable on demand, we call money-substitutes. Money-certificates (representatives of a corresponding amount of money kept in the reserve) do not play any role in the determination of the purchasing power of money. The quantity of fiduciary media, amount of substitutes which exceeds the money reserve, influences the determination of money’s purchasing power and of prices and — temporarily — also of the rate of interest.
Limits to the increase in the quantity of fiduciary media, if there is only one bank:
First : It must avoid any action which could make the clients suspicious.
Second : It must not increase the amount of fiduciary media at such a rate and with such speed that the clients get the conviction that the rise in prices will continue endlessly at an accelerated pace.
For a multiplicity of independently coexisting banks the limits are narrower than those drawn for a single bank with an unlimited clientele. A bank can never issue more money — substitutes — than its clients can keep in their cash holdings. The individual client can never keep a larger portion of his total cash holding in money-substitutes than that corresponding to the proportion of his turnover with other clients of his bank to his total turnover. Thus a limit is drawn to the issue of fiduciary media. So not government but free banking is the only method available for the prevention of the dangers inherent in credit expansion.
The role money plays in international trade is not different from that in domestic trade. A transfer of money from one country into another country is always the outcome of intended changes in the cash holdings of the residents. But the balance of payments is always in balance.
If there is only one kind of money. Then the final price of cotton in Amsterdam cannot exceed the final price in New York by more than the cost of transportation. If more than one kind of money is used as medium of exchange, the mutual exchange ratio between them is determined by their purchasing power. The so-called unfavorable balance of payments is the effect of a deliberate restriction of cash holdings.
Things on the money market are the same as on all other markets. The lender from country A will therefore only venture lending in country B if the difference in the market rate of interest between A and B is large enough to cover an expected fall in the price of currency B as against currency A.
In the money economy there is a very substantial difference in the degree of marketability of the various commodities. One may speak of the secondary marketability of the vendible goods. Thus the size of cash holding can be reduced if goods of a high degree of secondary marketability, secondary media of exchange, are available.
The inflationist assertion that "expansionism" is the driving force of economic progress is the worst of all evils. The general progressive upward movement of all prices does not bring about improvement in well-being. It results in the complete breakdown of the monetary system.
The attempts to create a double standard of both metals, gold and silver, failed lamentably. It was this failure which generated the gold standard. The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. It was an international standard as required by international trade and the transactions of the international money and capital market. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.
XVIII. ACTION IN THE PASSING OF TIME Between the action and the attainment of the end sought there always elapses a fraction of time. The period of production and the duration of serviceableness are for acting man categories in planning future action. He chooses also between want-satisfaction in the nearer and in the remoter future (choice of a period of provision).
Time for man is not a homogeneous substance of which only length counts. Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Time preference is a categorical requisite of human action. If not, we would always accumulate, we would never consume and so satisfy our wants. Every step toward want-satisfaction is guided by time preference.
Saving and accumulation of capital is the first step on the way toward improvement of material well-being. The capital goods have no productive power of their own. The difference between the price of a capital good and the sum of the prices of the complementary original factors of production required for its reproduction is entirely due to the time difference.
Neither acting man himself nor economic theory needs a measurement of the time expended in the past for the production of goods available today. To satisfy the most urgent of the not yet satisfied wants, he must know the length of the waiting time which separates him from the attainment of the various goals among which he has to choose. Acting man counts waiting time and the period of production always from today on. If one wants to resort to methods of production with which the quantity of output is higher per unit of input expended, one must lengthen the period of production.
Capital is always in the form of definite capital goods. Every unit of capital is therefore dedicated to definite processes of production. The conversion of a process of production (the convertibility of capital goods — the opportunity to adjust their utilization to a change in the data of production) becomes as a rule the more difficult the nearer it has come to its termination.
All material wealth is a residuum of past activities and is embodied in concrete capital goods of limited convertibility. Thus the choice of ends and of the means for the attainment of our ends is influenced by the past. The smaller the degree of convertibility, the more realization of technological improvement is delayed.
All capital goods are transient. Capital is always accumulated by individuals. Some actors are accumulating additional capital. Others are at the same time consuming capital previously accumulated. We may say that a transfer of capital took place.
The limited convertibility of the capital goods does not immovably bind their owner. In this sense the stock exchange becomes simply "the market," the focal point of the market economy.
If an individual employs a sum of money not for consumption but for the purchase of factors of production, saving is directly turned into capital accumulation, increased cash holding and increased capital accumulation.
XIX. THE RATE OF INTEREST Time preference manifests itself in originary interest, i.e., the discount of future goods as against present goods. Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remoter periods of the future. Interest is not the specific income derived from the utilization of capital goods. It is an outcome of the higher valuation of present goods as compared with future goods. There prevails a tendency toward the equalization of this ratio for all commodities. It is not "the price paid for the services of capital."
Under the conditions of a market economy the rate of originary interest is equal to the ratio of a definite amount of money available today and the amount available at a later date which is considered as its equivalent.
But every gross interest in the changing economy includes not only originary interest but also entrepreneurial profit. The activities of the entrepreneurs tend toward the establishment of a uniform rate of originary interest in the whole market economy.
XX. INTEREST, CREDIT EXPANSION, AND THE TRADE CYCLE The neutral rate of interest is the ratio between prices of present and of future goods. With neutral money, a neutral rate of interest would be conceivable. But if there were deferred payments we must furthermore assume the eventuality of future changes in purchasing power. Neutralization of the rate of interest could be attained by allowance for such changes, i.e., the positive or negative price premium. However, all these assumptions are only imaginary. In the changing economy, the rate of interest can never be neutral. The price premium is not the product of an arithmetical operation. It is the outcome of the promoters’ understanding of the future. The price premium always lags behind the changes in purchasing power.
The gross rates of interest as determined on the loan market are not uniform. They include an entrepreneurial component which varies for each specific deal. If the market rate deviates from the height which the state of originary interest and the supply of capital goods available for production would require, then the market rate of interest fails to fulfill the function it plays in guiding entrepreneurial decision. Changes in the money relation can possibly influence the rate of originary interest.
The rate of originary interest is determined by the discount of future goods as against present goods. It is essentially independent of the supply of money. But the gross market rate of interest can be affected by changes in the money relation as long as credit expansion goes on. There continues a pressure upon the gross market rate of interest. The gross market rate would have to rise on account of the positive price premium. Now the drop in interest rates makes some projects appear profitable and realizable which a correct calculation, based on an interest rate not manipulated by credit expansion, would have shown as unrealizable. Business activities are stimulated. A boom begins. In order to continue enlarged production all entrepreneurs need additional funds. But if the credit expansion consists in a single injection the boom must very soon stop. The entrepreneurs cannot procure the funds they need for the further conduct of their ventures. The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The additional investment is only possible to the extent that there is an additional supply of capital goods available. But the boom is not overinvestment. It does not result in restriction of consumption but rather in an increase in consumption, it does not procure more capital goods for new investment. The final outcome of the credit expansion is general impoverishment.
In the course of a deflationary process a temporary tendency toward a rise in the gross market rate of interest ensues. Projects which would have appeared profitable before appear so no longer. The deadlock ceases only when falling prices and wage rates are by and large adjusted to the new money relation. Then the loan market (gross market rate of interest) too adapts itself to the new state of affairs. But this contraction produces neither malinvestment nor overconsumption.
All present-day governments are fanatically committed to an easy money policy. The recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The popularity of inflation and credit expansion manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Depression is called crisis, slump, bad business. But real economic progress means improvement in the quality and quantity of products. If we apply this yardstick to the various phases of the cyclical fluctuation of business, we must call the boom retrogression and the depression progress. Wage rates must drop and people must restrict their consumption temporarily until the capital wasted by malinvestment is restored.
XXI. WORK AND WAGES A man may overcome the disutility of labor for various reasons. On this basis we may distinguish introversive labor from the extroversive labor.
But only extroversive, not immediately gratifying labor is a topic of catallactic disquisition. It is performed for the sake of an end which is beyond its performance and the disutility which it involves. The joy and the tedium of labor are psychological phenomena which influence neither the individual’s subjective valuation of the disutility and the mediate gratification of labor nor the price paid for labor on the market.
If bare labor is sold and bought as such, either by an entrepreneur engaged in production for sale or by a consumer eager to use the services rendered for his own consumption, the price paid is called wages. For acting man his own labor is not merely a factor of production but also the source of disutility. A uniform type of labor or a general rate of wages do not exist. Indirectly each sector of the labor market is connected with all other sectors. Connexity exits no less between labor and the material factors of production. The height of wage rates for each kind of labor is determined by its marginal productivity.
A job-seeker who does not want to wait will always get a job in the unhampered market economy. It is only necessary to reduce the amount of pay he is asking for or to alter his occupation or his place of work. We may call this kind of unemployment market-generated catallactic unemployment. Unemployment in the unhampered market is always voluntary. Unemployment is a phenomenon of a changing economy.
Catallactics always refers to gross wage rates. If laws or business customs force the employer to make other expenditures besides the wages he pays to the employee, the height of net wage rates is reduced.
The horror of starvation no longer terrifies people living in a capitalist society. He who is able to work earns much more than is needed for bare sustenance. In the capitalist society there prevails a tendency toward a steady increase in the per capita quota of capital invested. Consequently the marginal productivity of labor, wage rates, and the wage earners’ standard of living tend to rise continually. But this improvement is not the manifestation of an inevitable law. It is a tendency resulting from the interplay of forces which can freely produce their effects only under capitalism. Within a capitalist commonwealth the minimum of subsistence plays no catallactic role.
The fundamental facts affecting the supply of labor are:
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Every individual can expend only a limited quantity of labor.
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This definite quantity cannot be performed at any time desired. The interpolation of periods of rest and recreation is indispensable.
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Not every individual is able to perform any kind of labor.
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Special care is needed to preserve man’s abilities.
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Fatigue impairs the quantity and the quality of the performance.
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Men prefer leisure to labor. They attach disutility to labor.
Wage earners stop working at the point at which the mediate gratification expected no longer outweighs the disutility involved in the performance of additional work. The terms of the labor contract refer to all working conditions, not merely to the height of wage rates. The labor legislation by and large achieved nothing more than to provide a legal ratification for changes which the interplay of market factors had brought about previously.
The price which the seller of labor can obtain on the market depends on the data of the market. Wage rates are always equal to the price of the full produce of labor. The particular feature of the labor market is that the worker is not merely the purveyor of the factor of production labor, but also a human being and that it is impossible to sever the man from his performance. In the absence of institutional migration barriers workers move from the comparatively overpopulated areas to the comparatively underpopulated until everywhere (market wage rates) M = (standard wage rates) S + (attachment component) A + (cost component) C.
XXII. THE NONHUMAN ORIGINAL FACTORS OF PRODUCTION Differential rent is a general phenomenon and is not limited to the determination of the prices of land. The abler worker earns a "rent" when compared with the wages earned by his less skillful competitors. Land is a factor of production, and the laws determining the formation of the price of land are the same that determine the formation of the prices of other factors of production.
With regard to the soil, too, the actors must choose between processes of production which render higher output at the expense of productivity in later periods and processes which do not impair future physical productivity.
The quantity of soil available is so vast that only the most productive pieces of land are utilized. Consequently the marginal soil yields no rent in the Ricardian sense. Submarginal land is appraised positively because one anticipates its utilization in later days.
Its price is the sum of all its future rents, each of them discounted at the rate of originary interest. In the changing economy people take due account of expected changes in the market data.
XXIII. THE DATA OF THE MARKET For praxeology data are the bodily and psychological features of the acting men. These data, although permanent in their structure, are perpetually fluctuating and varying. But no statement concerning these data can be made without reference to a definite set of economic theorems.
All the theorems of catallactics are valid also with regard to action influenced by social or physical pressure, e.g., war and conquest.
The subject matter of praxeology is not only the study of society, but the study of real man as a datum. Thus economics is neutral with regard to all value judgments of people.
Every change in the market data has its definite effects upon the market. It takes a definite length of time, the period of adjustment, before the market is completely adjusted to the new state of affairs. Catallactics deals with all the various individuals’ reactions to the changes in the data.
The legal concepts of property do not fully take account of the social function of private property. The right of property should entitle the proprietor to claim all the advantages which the good’s employment may generate on the one hand and would burden him with all the disadvantages resulting from its employment on the other hand. But if some of the consequences of his action are outside of this sphere, he will disregard them. He will embark upon certain projects only because the laws release him from responsibility for some of the costs incurred. He will abstain from other projects merely because the laws prevent him from harvesting all the advantages derivable. The laws are in some respects deficient. A law that is not valid for all, may grant to those who are exempt the opportunity to reap either differential rent or monopoly gains.
XXIV. HARMONY AND CONFLICT OF INTERESTS What produces a man’s profit in an unhampered market society is not his fellow citizen’s plight, but the fact that he alleviates or entirely removes what causes his fellow citizen’s feeling of uneasiness. The ultimate source of profits is always the foresight of future conditions.
Men want more than merely to live and to copulate, they want to live humanly. An improvement in conditions usually results in a smaller increase in population figures. If not, men would have never succeeded in the establishment of social bonds and in the development of civilization. Acting man rationalizes the satisfaction of his sexual appetites. The transition to capitalism is thus accompanied by two phenomena: a decline both in fertility rates and in mortality rates. The average duration of life is prolonged.
Nature does not generate peace and good will. The means of subsistence are scarce and do not grant survival to all. What makes friendly relations between human beings possible is the higher productivity of the division of labor. It removes the natural conflict of interests. Catallactic competition is substituted for biological competition. It makes for harmony of the interests of all members of society. The catallactic competition of those who are eager to have shoes makes shoes cheaper, not more expensive. This meaning of the theorem of harmony of the rightly understood interests of all members of the market society stresses two points: First, that everybody is interested in the preservation of the social division of labor. Second, that in the market society consumers’ demand ultimately directs all production activities.
In the market society the proprietors of capital and land can enjoy their property only by employing it for the satisfaction of other people’s wants.
Economic conflicts do not spring from the operation of the unhampered market society. It is not capitalism that produces them, but precisely the anticapitalistic policies designed to check the functioning of capitalism. They are an outgrowth of the various governments’ interference with business.
XXV. THE IMAGINARY CONSTRUCTION OF A SOCIALIST SOCIETY All older social reformers wanted to realize the good society by a confiscation of all private property and its subsequent redistribution. These plans became unrealizable when the large-scale enterprises in manufacturing, mining, and transportation appeared. The age-old program of redistribution was superseded by the idea of socialization.
The socialist doctrine rests upon three dogmas:
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Society is an omnipotent and omniscient being.
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The coming of socialism is inevitable.
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The coming of socialism is desirable.
The essential mark of socialism is that one will alone acts. The employment of all factors of production is directed by one agency only.
XXVI. THE IMPOSSIBILITY OF ECONOMIC CALCULATION UNDER SOCIALISM The problem under socialism is that one cannot, in comparing costs to be expended and gains to be earned, resort to any arithmetical operation. There is no rational choice of means for the best possible attainment of the ultimate ends sought.
Only in the last years have socialist writers embarked upon designing schemes for socialist economic calculation. Of course, they have lamentably failed in this task.
The problem of socialist economic calculation is precisely this: in the absence of a capital market (an outcome of abolition of private property of the means of production), i.e., market prices for the factors of production, a computation of profit or loss is not feasible.
The neosocialists want to abolish private control of the means of production, market exchange, market prices, and competition. But at the same time they want to organize the socialist utopia in such a way that people could act as if these things were still present. But the capitalist system is not a managerial system. One cannot play speculation and investment.
The state of equilibrium cannot be computed (by means of mathematical equations and operations) on the basis of the knowledge of conditions in a nonequilibrium state. It is no less erroneous to believe that such knowledge of the conditions under a hypothetical state of equilibrium could be of any use for acting man in a changing economy.
XXVII. THE GOVERNMENT AND THE MARKET Capitalism and socialism can never be confounded with one another. The system of interventionism or of the hampered market economy is still market economy. The authority interferes with the operation of the market economy, but does not want to eliminate the market altogether.
State and government are not ends, but means. They are designed to make the social order adopted operate safely, the delimitation of governmental functions must be adjusted to its requirements. They have to safeguard the smooth functioning of social cooperation.
There is the idea of erecting a social system on the twofold basis of private property and of moral principles restricting the utilization of private property. The system recommended, say its advocates, will be neither socialism nor capitalism nor interventionism. But the supporters of these doctrines fail to recognize the role which those motives of action they condemn as vicious play in the operation of the market economy. Because what integrates the individual’s actions into the whole of the social system of production is the pursuit of his own purposes.
Laissez-faire means: Let each individual choose how he wants to cooperate in the social division of labor, let the consumers determine what the entrepreneurs should produce. Let the common man choose and act, do not force him to yield to a dictator.
The problems involved in direct government interference with consumption are not catallactic problems.
XXVIII. INTERFERENCE BY TAXATION To keep the social apparatus of coercion and compulsion running, governments must resort to taxation.
A neutral taxation would not divert the operation of the market from the lines in which it would develop in the absence of any taxation. But the idea of neutral tax is unrealizable. The total tax is the antithesis of the neutral tax. It confiscates all incomes and estates.
The fiscal and nonfiscal objectives of taxation do not agree with one another. The appropriate taxes are low and do not perceptibly disarrange production and consumption. Beyond a moderate limit, taxes turn into devices for the destruction of the market economy.
There are three classes of tax interventionism:
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The tax aims at totally suppressing or at restricting the production of definite commodities.
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The tax expropriates a part of income or wealth.
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The tax expropriates income and wealth entirely.
XXIX. RESTRICTION OF PRODUCTION Restriction of production means that the government either forbids or makes more difficult or more expensive the production of definite articles. The effect of its interference is that people are prevented from using their knowledge and abilities, their labor, and their material means of production in the way in which they would earn the highest returns and satisfy their needs as much as possible. Such interference makes people poorer and less satisfied.
A restrictive measure, while placing the immense majority at a disadvantage, may temporarily improve some people’s position. They are asking for such measures because they want to be privileged. The most striking example is provided by protectionism. The main function of protectionist devices today is to disguise the real effects of interventionism. These popular policies pretend to improve the wage earners’ material well-being while they are in fact impairing it.
One cannot construct a system of economic action out of such restrictive measures alone. No complex of such measures can be linked together into an integrated economic system. They belong in the sphere of consumption, not in the sphere of production.
XXX. INTERFERENCE WITH THE STRUCTURE OF PRICES Interference with the structure of the market means that the authority aims at fixing prices for commodities and services and interest rates at a height different from what the unhampered market would have determined. In resorting to such measures the government wants to favor either the buyer (maximum prices) or the seller (minimum prices).
The market price equalizes supply and demand at every instant. But if government fixes prices this equilibrium of demand and supply is disturbed. There emerges a tendency to shift production activities from the production of the goods affected by the maximum prices into the production of other goods. This outcome is, however, manifestly contrary to the intentions of the government. It is a complete failure. The policy of interventionism will by necessity always disintegrate and destroy any social entity.
The market wage rates tend toward the establishment of full employment. Where there is neither government nor union interference with the labor market, there is only voluntary or catallactic unemployment. But as soon as external pressure and compulsion, be it on the part of the government or on the part of the unions, tries to fix wage rates at a higher point institutional unemployment emerges. No one has ever succeeded in the effort to demonstrate that unionism could improve the conditions and raise the standard of living of all those eager to earn wages.
The only point that matters is the relation between the number of workers and the quantity of capital goods available. A tendency toward higher wage rates is not the cause, but the effect, of technological improvement and capital accumulation.
XXXI. CURRENCY AND CREDIT MANIPULATION The simplest and oldest variety of monetary interventionism is debasement of coins for the sake of debt abatement. The authority assigns to the cheaper currency full legal tender power. While debt abatement improves the conditions of those who were already indebted at the moment, it impairs the position of those eager or obliged to contract new debts.
A metallic currency was not subject to government manipulation. The new variety of the gold exchange standard called the flexible gold exchange standard has been substituted for the principle of the rigid parity. The only reason for its acceptance was to make reiterated inflationary moves technically as simple as possible for the authorities.
The objectives of devaluation were:
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To preserve the height of nominal wage rates while real wage rates should rather sink.
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To make commodity prices, especially the prices of farm products, rise in terms of domestic money.
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To favor the debtors at the expense of the creditors.
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To encourage exports and to reduce imports.
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To attract more foreign tourists and to make it more expensive for the country’s own citizens to visit foreign counties.
One must first of all stress the point that all its alleged blessings are temporary only. Moreover, they depend on the condition that only one country devalues while the other countries abstain from devaluing their own currencies. A general acceptance of the principles of the flexible standard must therefore result in a mutual overbidding between the nations. At the end of this race is the complete destruction of all nations’ monetary systems.
Credit expansion is the government’s foremost tool in its struggle against the market economy. The inescapable consequences of credit expansion are shown by the theory of the trade cycle. While making the whole community poorer, it may still enrich some strata.
If a government fixes the parity of its domestic credit or fiat money against gold or foreign exchange at a higher point than the market a state of affairs results which — very inadequately — is called a scarcity of foreign exchange. To maintain such artificial state of affairs, the government has to go a step further. It nationalizes foreign exchange transaction, it subsidizes the export, it raises import duties. Then, of course, foreign exchange control works.
XXXII. CONFISCATION AND REDISTRIBUTION In the market economy the dualism of two independent processes, that of production and that of distribution, does not exist. If government wants to distribute it must first confiscate. But capitalism is founded upon the expectation that no such expropriation will occur. If this expectation is absent, people will prefer to consume their capital instead of safeguarding it for the expropriator.
The main instrument of confiscatory interventionism is taxation. Thus the accumulation of new capital is slowed down. A check is placed upon the rise in the productivity of labor and upon the concomitant rise in real wage rates.
XXXIII. SYNDICALISM AND CORPORATIVISM Syndicalism wants to give the ownership of the plants to the workers employed in them. The syndicalists want to transform consumers’ democracy into a producers’ democracy. But this idea is fallacious, for the sole end and purpose of production is consumption. Corporativism was merely an Italian replica of British guild socialism. The fundamental idea both of guild socialism and of corporativism is that every branch of business forms a monopolistic body, the guild or corporazione. This entity enjoys full autonomy and self-government. The mutual relations between the various guilds are settled by direct bargaining from guild to guild or by the decisions of a general assembly of the delegates of all guilds. The government interferes only when an agreement between the various guilds cannot be attained.
Things are turned upside down. Production becomes an end in itself. In short, it is nonsense.
XXXIV. THE ECONOMICS OF WAR The wars fought by primitive tribes were unlimited or total wars. They aimed at total victory and total defeat. The disintegration of feudalism produced the limited warfare.
The idea of durable peace was resurrected in the body of nineteenth-century liberalism. These liberals realize that what can safeguard durable peace is not simply government by the people, but government by the people under unlimited laissez-faire. While laissez-faire eliminates the causes of international conflict, government interference with business and socialism create conflicts for which no peaceful solution can be found. The substitution of the welfare state for the laissez-faire state has transformed the limited war between royal armies into total war.
In the long run war and the preservation of the market economy are incompatible. But this does not mean that a nation which is forced to repel foreign aggressors must substitute government control for private enterprise. If it were to do this, it would deprive itself of the most efficient means of defense.
The emergence of the international division of labor requires the total abolition of war. Modern civilization is a product of this philosophy.
XXXV. THE WELFARE PRINCIPLE VERSUS THE MARKET PRINCIPLE The various schools of Sozialpolitik admit that the market economy increases the quantity and improves the quality of products. But it is deficient from the social point of view. The principle of welfare must be substituted for that of profits. Capitalism is bad, they say, because there is poverty, inequality of incomes and wealth, and insecurity.
But poverty is not caused by capitalism, but by the absence of capitalism. What is wrong with poor countries is that the per capita quota of capital invested is extremely low when compared with the capital equipment of the rich countries.
The inequality of incomes and wealth is an inherent feature of the market economy. Its elimination would entirely destroy the market economy. It is precisely inequality that generates social cooperation and civilization. It is the device to secure for the whole of mankind the maximum of benefits it can derive from it. What makes the existence and the evolution of society possible is precisely the fact that peaceful cooperation under the social division of labor in the long run best serves the selfish concerns of all individuals. Under the system of inequality the selfishness impels a man to save and always to invest his savings in such a way as to fill best the most urgent needs of the consumers. Under the system of equality this motive fades. And it is additional capital accumulation alone that brings about technological improvement, rising wage rates, and a higher standard of living.
The concept of security is that wage earners and small farmers match to the concept of stability held by the capitalists. But in an unhampered market economy the absence of security is the principle for a steady improvement in material well-being.
Neither economic thinking nor historical experience suggest that any other social system could be more beneficial to the masses than capitalism. The results speak for themselves.
XXXVI. THE CRISIS OF INTERVENTIONISM Wars, economic depressions, mass unemployment and famines are not the outcome of capitalism but of interventionism.
The essence of the interventionist policy is to take from one group to give another. With the present height of income and inheritance tax rates the reserve fund out of which the interventionists seek to cover all public expenditure is rapidly shrinking. The whole doctrine of interventionism collapses when this fountain is drained off.
The reasons are twofold:
First: Restrictive measures always restrict output and the amount of goods available for consumption.
Second: All varieties of interference with the market phenomena not only fail to achieve the ends aimed at, but bring about a state of affairs which is less desirable than the previous state of affairs.
XXXVII. THE NONDESCRIPT CHARACTER OF ECONOMICS Particular theorems of economics are not open to any verification or falsification on the ground of experience. They cannot work if not accepted by a majority of the people. The masses choose between the ideologies developed by the intellectual leaders of mankind. If they prefer bad doctrines, nothing can prevent disaster. A social system, however beneficial, cannot work if it is not supported by public opinion.
XXXVIII. THE PLACE OF ECONOMICS IN LEARNING Economics, like logic and mathematics, is a display of abstract reasoning. Economics can never be experimental and empirical.
The early economists never conceived of economics as a profession. The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist in designing various measures of government interference with business.
The economist does not and cannot calculate the future structure of the market. What people expect from the economists is beyond the power of any mortal man.
Economics deals with the interconnectedness of all the phenomena of action. The catallactic problems cannot become visible if one deals with each branch of production separately. There are no such things as “economics of labor” or “economics of agriculture.” There is only one coherent body of economics.
Teaching at the elementary level necessarily, as soon as one concerns the teaching of history and economics, turns into indoctrination. But this cannot mean that economics should remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. On the contrary, it is the main and proper study of every citizen.
XXXIX. ECONOMICS AND THE ESSENTIAL PROBLEMS OF HUMAN EXISTENCE Science (economics) does not value, but it provides acting man with all the information he may need with regard to his valuations. But praxeology and economics never tell a man what ends he should aim at. They merely show how a man must act if he wants to achieve his ends. Economics does not value the aims sought by a man. It deals only with the means fit for the attainment of definite ends.
If people disregard its teachings and warnings, they will not annul economics, they will stamp out society and the human race.
G.P. Manish highlights the life and work of Philip Wicksteed, a theologian and scholar from the late 19th and early 20th century. Though not a fan of the free market, Wicksteed made many contributions to Austrian price theory.
Wicksteed recognized that economics is a branch of praxeology, studying human action and choices necessitated by scarcity. Wicksteed placed man—specifically not an all-knowing man, as was in fashion at the time—at the center of economic analysis, siding with Menger in the Marginalist Revolution.
The Who Is? podcast is available on iTunes, Google Play, Stitcher, Soundcloud, and via RSS.
[Full issue of the Quarterly Journal of Austrian Economics 20, no. 4 (2017)]
ABSTRACT: This paper addresses the debate on indifference within the remit of praxeology, as unfolded between Hoppe and Block. It argues that the whole controversy between the two authors stem from the fact that they conceive of choice differently. Simultaneously, there is an attempt made to sharpen the authors’ respective positions and to scrutinize the implications thereof while confronting them with our common-parlance linguistic intuitions. In other words, the paper pretends to show what follows from both positions on what is chosen; that is, what sorts of elements does an opportunity set consists of (be it, as will be argued, psychologically and intensionally defined end-states or particular action-tokens). Finally, the paper is concluded by demonstrating relative merits of the Blockian position over the Hoppean one as the former appears to be closer to the letter of praxeology as such.
KEYWORDS: indifference, choice, praxeologyJEL CLASSIFICATION: A10, B40, D01The debate under scrutiny here extended throughout as many as four papers and still seems unresolved. Therefore, far from claiming to provide a conclusive solution, I posit that the entire controversy is misconstrued in that it employs the notion of choice equivocally. How does Hoppe interpret choice and what exactly does his ingenious and elegant device achieve?Hoppe effectively says that if a person is genuinely indifferent between a pair of options A and B (they are equally valued by him), and B and C (they are also equally valued but occupy a lower position on the person’s value scale), then the person’s choice (as understood normally) between A, B, C, D is in fact reducible to the choice between the following two disjunctive alternatives: 1) A xor B 2) C xor D, where xor denotes a disjunctive alternative. On the face of it, Hoppe’s position seems convincing. It sticks to the orthodox praxeological position stating that it is only strict preference that makes sense of a choice and seemingly does justice to indifference reducing it to a logical operator. Thus, indifference cannot result in choice. The person therefore cannot choose either between A and B or between C and D. It seems that it clearly draws the demarcation line between choice and indifference. A choice occurs always under strict preference; whereas indifference, as not being acted upon, is conceived of as a psychological relation holding between the equally valued options (described in psychological and intensional terms), which the subject does not (and cannot) choose between. On the other hand, Block (2009, p. 57) believes that Hoppean resourceful description misses the mark and cannot make sense of an actual choice, as conceived of by Block. Block invokes an example of a transaction between a butter vendor and his customer. The former disposes of one unit of butter, while the latter pays with a particular note. Block hastens to add that the vendor “does not at all choose ‘a’ unit of butter. Rather he picks a specific one. […] And, it is the same with the buyer. He picks a specific dollar with which to pay for the butter, not, merely ‘a’ dollar.” The said divergence between the two authors is readily noticeable now. The Blockian conception of choice seems to be about the specifics of the state of affairs brought about by an economic actor. After all, it is quite telling that Block employs the concept of picking up (or choosing) when it comes to the vendor’s giving up a particular unit of butter and to the customer giving up one of his notes. It is needless to say that Hoppe would construe of this transaction as follows, the choices being (in the descending order of value):
1) Giving up a unit of butter and getting a note of money
2) Not giving up a single unit of butter but getting no unit of money,
where 1) would be an unanalyzed version of Hoppean disjunctive-alternative interpretation, which, given 100 hundred units of butter, would read as follows:
1) Give up unit 1, xor unit 2, xor unit 3…. xor unit 100,
where indifference is accommodated into a series of logical operators of disjunctive alternatives. In other words, Hoppe is committed to saying that a vendor does not choose between those 100 units of butter at all. His choice is merely between giving up a unit or not, with the first option being strictly preferred and acted upon. Conspicuously then, the authors talk past each other as far as the notion of choice is concerned. My thesis is that Hoppe implicitly assumes that the opportunity set comprise psychologically and intensionally described end-states. This construal tallies smoothly with the Hoppean (2005, 2009) correct description of an action. After all, Hoppe is explicitly concerned with the mentalist aspect of an action, the mere behavioral underpinnings (of course assuming that the person was acting in the first place) being insufficient for the determination of what the actor strictly preferred. What my interpretation also explains is why Block (2009, p. 58) does not “give two hoots about whether or not we achieve a correct description of someone’s action.” I therefore posit that Block, when taken to his logical extremes, would have to admit that what was chosen was all the details and peculiarities of the state of affairs actually brought about by the actor. Basically, what sheds light on the scrutinized controversy is action-type/action-token distinction.Technically speaking, such unique physical instantiations of generically (intentionally) described action-types are referred to as action-tokens (See Steiner, 1994). Trivially, there can be infinitely many action-tokens subsumed under one action-type. For instance, going to a cinema (action-type) can be satisfied by numerous action-tokens (e.g. going to a cinema C by the route R at a specific time T). On the other hand, one and the same action-token can satisfy numerous action-types (or Hoppean correct descriptions of an action, with the proviso that the correct description of an action resides in the mind of an actor, whereas an action-type abstracts from all the peculiarities and contingencies of the action-tokens that satisfy it). For example, going to a cinema C by the route R at a specific time T may be an instance of strolling around, reaching a specific destination D that R is only a part of etc. To sum up, Block and Hoppe could not settle the issue since Hoppe conceives of choice as operating in the set of psychologically defined action-tokens, whereas for Block, what was picked up (and hence also set aside) are action-tokens (as defined extensionallyAn anonymous reviewer incisively hinted at the possibility that my account of action in terms of action-token might be behavioristically skewed, that is that I try to describe actions in purely physical terms. Rather, my attempt is to individuate action-tokens and to propose them as a domain of choice. Also, I would readily concede that behavior does not rank as action just yet. It takes a purpose for behavior to qualify as action. In other words, a behavior-token (to coin a word) qualifies as an action-token only when it is a purposeful behavior-token. My point is that whatever the purpose for our behavior-token is, that behavior-token constitutes an action-token. If our purposes therefore vary, the action-token instantiated in the unique spatiotemporal dimensions remains what it is: the same action-token. For example, the physically identical series of bodily movements might be motivated by our willingness to dance or to impress our friends, or to confuse them for that matter. Yet, as long as the movements are the same in spatiotemporal terms (while the reasons therefore vary), we would speak of the same action-token., e.g., by dint of Cartesian spatiotemporal coordinates).That is why we can validly say that it was this very unit of butter which was given up and thus valued least. The Hoppean intensional psychological account cannot make sense of why it was this (and not the other) unit of butter which was given up. In fact, Hoppe would basically say that this particular unit was not given up—numerical identity did not matter at all. What mattered is a qualitative identity, that is the fact that it was a unit of butter (See Block and Barnett, 2010, p. 11)
Now, what are the relative merits of Block’s position over Hoppe’s? First and foremost, Hoppe’s account seems trivial. Once Hoppe has introduced the correct description of the action, action cannot say anything over and above Hoppe’s descriptions. Hoppe starts with the correctly described value scale of an actor; so, when ultimately some action takes place, it is the former which is projected onto the latter. Therefore, the latter cannot elucidate the former in any way. The doctrine of demonstrated preference would now look redundant. What is worse, a value scale, which Hoppe would have to admit, exists independently of and prior to action, which plainly runs against Mises’s (1998, pp. 94–96) construal of the relation between action and value scales.
The second indictment against Hoppe is that his theory resorts to psychologizing. If we take his correct description of the action seriously, we should start doing an exercise in psychology. For let us imagine, drawing on Hoppe’s (2005) famous example of the mother trying to decide whether to save Peter or Paul who are both drowning, that the mother decides to save Peter only because she knew that it was only Peter who knew some secret information she was eager to find out. In other words, let us imagine that if neither of them had been trusted with a secret, she would have been genuinely indifferent between saving Peter or Paul or none. Now, in the actual fact, because the mother is aware that it is Pater who is trusted with the information she is striving to save, what she demonstrates by the act of saving Pater is that she prefers to save the information to not saving it. So what does this actual act of saving Peter demonstrate? Hoppe is (ex hypothesi, that is on the grounds of our assumed correct description of the mother’s action) unable to say that she preferred to save Peter. He must say that she indeed preferred to save the information (willy-nilly, together with Peter) to not saving it. Therefore, this act does not demonstrate anything over and above what Hoppe already knows due to the correct description of the mother’s action. In this case, praxeologists observing the mother’s action from a third-person perspective would have no means to say what the mother preferred. They would have to either do reverse psychology or simply ask her about her motives only to determine her preferences. So the question arises: does this sole particular reason (that the mother in fact wanted to save the information) have a bearing on what the action demonstrates? No. What we apodictically know is that the mother strictly preferred the world in which Peter survives rather than Paul—for whatever reason. The last statement is simply description-independent and a priori true regardless of the actual motivation driving the mother to rescue Peter. Let us note, that if we understand choice as relating to action-tokens, the issue of motivations or correct descriptions of actions does not even emerge.
Finally, the Hoppean position may look a little clumsy when we realize that if we bear with Hoppe and admit that the mother was genuinely indifferent between Peter and Paul and in the actual fact she rescued Peter, we are linguistically paralyzed and we cannot say that she chose Peter. According to Hoppe, what we are only entitled to say is that she was indifferent between the two and what she did choose is to save one son instead of neither of them. Although this position is logically coherent, our linguistic intuition recoils at the thought of us being unable to say that the mother obviously chose Peter. Instead, action-token understanding of a choice would readily and triumphantly admit that the preference for rescuing Peter was exactly what the mother demonstrated because this very state of affair in which Peter survives was brought about by her action, the reasons therefore being simply irrelevant, which is again the very part and parcel of praxeology.Somehow, paradoxically, it seems that the debate between the two authors was raging partly outside the realm of praxeology. After all, Hoppe’s insistence on the correct description of an action transcends praxeology and, alas, enters psychology (See Wysocki, 2016).
[Full issue of the Quarterly Journal of Austrian Economics 20, no. 4 (2017)]
KEYWORDS: free choice, counterfactuals, economic lawsJEL CLASSIFICATION: B00, B40, B53INTRODUCTIONIn a series of articles written around the turn of the century, Guido Hülsmann has tried to answer one simple question: “How can we reconcile the idea that there are laws of human action, that manifest themselves in market prices and the structure of production, with the idea that there is also freedom of choice?” (Hülsmann, 2000, p. 48) He has addressed the question most extensively in his “Facts and Counterfactuals in Economic Law” (Hülsmann, 2003), but his distinctive approach is present in several other articles as well (Hülsmann, 1998, 1999, 2000, 2004). Moreover, the first explicit development of this insight is in Hülsmann (1999), in response to Caplan’s elaborate critique of the Austrian methodology, thereby indicating how crucial the issue is to praxeology as an intellectual enterprise, and to that extent to Austrian economics. Mateusz Machaj has commented on the very core of Hülsmann’s proposal (Machaj, 2012). As an epigraph, he chose a quote from Morpheus in The Matrix: “What happened, happened, and couldn’t have happened any other way”—pun intended or not against Hülsmann’s (metaphysical) libertarianism. This paper will briefly present Hülsmann’s main claim, Machaj’s comments, and offer a reply to those comments, further clarifying Hülsmann’s point.
HÜLSMANN’S CLAIMHülsmann considers the essence of scientific explanation to give “a law-based account of facts in terms of other facts, so scientists search for and study laws that exist among the things observed in our world. A thing X is scientifically “explained” if we can show that there exists a constant (e.g., causal) relationship between X and another thing Y.” (Hülsmann, 2003, p. 67) However, given the existence and nature of free human choice, no constant relationships seem to exist between a particular human choice or action, and, quite literally, anything else in the universe. There are no necessary constant relationships between anything a person does at a certain point in time, and anything preceding that choice in time—including all the past choices of that person—or anything in the world at that instant, including all facts about that person, that could explain the choice made. Sciences such as psychology, sociology, or first-hand acquaintance with a person can mitigate the strictness of that fact, but metaphysically it remains the case—unless one adopts some version of determinism. Economics, likewise, can mitigate the implications of (metaphysical) free choice by adopting some stylized ‘homo oeconomicus’ that works in most cases or is sufficiently useful for purposes of prediction and modelling. As Hülsmann puts it in his critique of neoclassical economics: “They want to analyze how people act as a corollary or sequel of given circumstances; that is, they want to explain human behavior in terms of other observable and introspectively knowable facts.” (Hülsmann, 1999, p. 5) The significance of Hülsmann’s proposal is that it grounds the existence of economic laws precisely on the metaphysical irreducibility of free choice with alternative possibilities, instead of trying to mitigate its implications:
I will argue that the bulk of economic laws are based on relationships that are contained within choice. The visible part of a choice, the realised alternative, brings an observable fact into being, for example, a walk in a park. This fact stands in certain essential relationships to the unrealised alternatives of the same choice, for example, staying home to watch TV, staying home to eat ice cream, etc. These unrealised alternatives are the other side of choice, its invisible part. They have no actual existence for the very reason that they are unrealised alternatives.” (Hülsmann 2003, p. 70, emphasis in original)
This proposal is a philosophical treasure trove—or hornet’s nest—but the main implication for economic methodology would be that economics can therefore provide us with strict counterfactual laws that do not need a ceteris paribus (CP) clause. If the essential relationships discovered by economists are between facts within choice, it is unconditioned by what is or is not happening ‘outside’ the choice. Economists can therefore not merely predict what will happen other things being equal, but what will happen regardless of other things—but compared to counterfactual, unrealized possibilities. That is, the seemingly problematic metaphysical status of human choice, as being unrelated to anything outside of that choice, has become the very foundation for the epistemological robustness of economic laws.
MACHAJ’S COMMENTSMachaj critically engaged the very core of Hülsmann’s proposal (Machaj, 2012), ultimately defending a modified version of the ceteris paribus approach. He gives a stylized reconstruction of Hülsmann’s argument by introducing a simplified equation for capital accumulation, for illustrative purposes only, whereby K stands for the amount of accumulated capital, T for the influence of taxation, and the letters A, B, C, D for other factors affecting the amount of capital:
K = f(A, B, C, D, T)
(Machaj, 2012, pp. 445–446)
In the CP approach as understood by Hülsmann and Machaj, assessing the influence of taxation on capital accumulation would look thus:
K↓ = f(A, B, C, D, T↑)
(Machaj, 2012, p. 446)
That is, only if the other factors remain constant can we know that an increase in taxation will lead to a decrease in capital accumulation.
Machaj grants Hülsmann’s basic point that we can weaken this strict ceteris paribus rule towards a counterfactual rule, because even with other factors (A, B, C, D) influencing K, we can still know that the increase in T led to a lower level of K than otherwise would have been the case. Hence, even if all the other factors contributed towards a higher level of K, and a higher level of K than in the previous period was indeed obtained, still the level would have been even higher without the increase in T. But here is his worry:
There are numerous possible worlds in the counterfactual ladder—which possible world does Hülsmann advise us to hide behind the phrase “otherwise would have been”? Certainly he cannot have in mind the whole set of all the possible worlds that could have existed. (Machaj, 2012, p. 448, emphasis in the original)
He makes this point more explicit with the capital accumulation equation used above, asking us first to consider a case where the other factors changed as well:
K = f(A↑, B↓, C↑, D↑, T↑)
(Machaj, 2012, p. 448)
For such a case, the counterfactual law would be that the capital level is lower than in the counterfactual state of affairs in which taxation was not increased. But as Machaj points out, we simply do not know what that other scenario would have looked like—except for the level of taxation—so we do not know whether or not capital would have been higher. If we do not know what’s behind the question marks, we do not know what happens:
K′ = f(A?, B?, C?, D?, T)
(Machaj, 2012, p. 449)
Hence, he concludes:
The suggested answer would be that in the alternate scenario other factors have to change in the same way as in the actualized scenario of increased taxation: K′ = F(A↑, B↓, C↑, D↑, T) [...] Factors do not have to stay the same, but in counterfactual scenarios they have to change in the same way as in the factual scenario. That is why the counterfactual approach can be seen as a broader ceteris paribus assumption. (Machaj, 2012, p. 449, emphasis in the original)
To sum up, Machaj grants to Hülsmann that we can go beyond a strict CP rule claiming that economic laws only hold between different points in time where all other factors remain the same, but that Hülsmann’s counterfactual approach only holds if we compare the factual scenario to a counterfactual scenario in which the other factors changed in the same way as in the factual scenario. That is, the CP rule still holds, but between two possible scenarios at one point in time (one with, one without a tax increase) instead of between two scenarios at different points in time.
A COMMENT ON MACHAJ’S COMMENTHowever, Hülsmann’s point is that the counterfactual law quite literally does apply to “the whole set of all the possible worlds that could have existed.” It does not matter at all what is behind these question marks in the counterfactual case, and hence these counterfactual laws are indeed unconditioned by evolutions in these other factors. Hülsmann’s point is precisely that no matter what one fills in for these question marks, in each and every counterfactual state of affairs, K’>K.
To continue on the toy-model, let
(K1, K2, K3, …, Kn)
stand for all possible states of affairs where taxes were increased, with the four other variables varying in all possible ways. In each and every one of these cases, there is a corresponding scenario
(K’1, K’2, K’3,…, K’n)
in which taxes would not have been increased and where capital accumulation therefore would have been higher. Hence, no matter in which of the possible increased-taxation scenarios we end up, the counterfactual scenarios in which taxes would not have been increased are ones with a higher level of capital accumulation
(K’1>K1, K’2>K2, K’3>K3, ... , K’n>Kn),
or:
∀ i ∈ {1, 2, 3, …, n) : K’i > Ki
The CP rule still holds between any of these pairs, with the only changed variable being T, whereas all others remain constant. Hence, looking backwards in time, one can indeed point at the one factual scenario (e.g. K3) and say that in the counterfactual case (K3’), capital would have been higher.
However, when choosing for a higher level of taxation, it is not only not yet known in which scenario one is, it is strictly speaking not yet settled—it is still metaphysically ‘open’—which counterfactual scenario will obtain, given the countless free choices of other persons affecting the course of events. The validity of the law therefore does not depend upon that one CP pair of the factual and counterfactual scenario (K’3 > K3), but upon the entire range of possible scenarios for which (K’i > Ki) holds at the very moment of choosing. The validity of the purported economic law holds regardless of—unconditioned by the fact—which scenario eventually obtains, and the case for Hülsmann’s strong claim still stands.
CONCLUSIONHülsmann’s proposal is rife with philosophical assumptions, and implications for economic methodology. Carefully unpacking them all will require a lot more work and cooperation between economists and philosophers, but the stakes are high—both for praxeology and economics if they claim to be a science of (free) human action, and for philosophy for seeing how a science of free action is at all possible. After the stimulating challenge by Machaj, this paper offered a further contribution to clarify and strengthen that project.
[The author wishes to thank Dr. Guido Hülsmann, Dr. Mateusz Machaj, and Geraldine Waelkens for clarifications and stimulating discussions.]
Our guest Michael Watson joins Jeff Deist after delivering a provocative paper last week at our research conference comparing Mises and Thomas Aquinas. They discuss Misesian praxeology, Catholicism, charity, altruism, and personal relationships in an attempt to decide what acts lie within and without the scope of economics.
Are humans really super-rational Homo Economicus beings, per John Stuart Mill? No, according to Mises, who posits that we operate under conditions of bounded rationality using means-ends approaches. How do we reconcile our ethical worldviews with value-free economics? And how can we apply economics and praxeology to things like religious faith, love, and even involuntary conditions like slavery and war?
[Murray Rothbard wrote this in 1956. It originally appeared in the Southern Economic Journal (January 1957) and was reprinted in Rothbard's, The Logic of Action One (1997) and Economic Controversies (2011).]
The stimulating methodological controversy between Professors Machlup and Hutchison proves that there are sometimes more than two sides to every question.Terence W. Hutchison, “Professor Machlup on Verification in Economics,” Southern Economic Journal (April 1956): 476–83; Fritz Machlup, “Rejoinder to a Reluctant Ultra-Empiricist,” ibid., pp. 483–93. In many ways, the two are debating at cross-purposes: Professor Hutchison is primarily tilting against the methodological (and political) views of Professor Ludwig von Mises; his most serious charge is that Professor Machlup’s entire position is, at bottom, an attempt to cloak the Misesian heresy in the garments of epistemological respectability. Professor Machlup’s reply, quite properly, barely mentions Mises; for, in fact, their methodological views are poles apart. (Machlup’s position is close to the central “positivist” tradition of economic methodology.) But, in the meanwhile, we find that Professor Mises and “extreme apriorism” go undefended in the debate. Perhaps an extreme apriorist’s contribution to this discussion may prove helpful.
First, it should be made clear that neither Professor Machlup nor Professor Hutchison is what Mises calls a praxeologist, that is, neither believes (a) that the fundamental axioms and premises of economics are absolutely true; (b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true; (c) that there is consequently no need for empirical “testing,” either of the premises or the conclusions; and (d) that the deduced theorems could not be tested even if it were desirable.he praxeological tradition, though named only recently, has a long and honored place in the history of economic thought. In the first great methodological controversy in our science, John Stuart Mill was the positivist and Nassau Senior the praxeologist, with J.E. Cairnes wavering between the two positions. Later on, the praxeologic method was further developed by the early Austrians, by Wicksteed, and by Richard Strigl, reaching its full culmination in the works of Ludwig von Mises. Mises’s views may be found in Human Action (New Haven, Conn: Yale University Press, 1949), and in his earlier Grundprobleme der Nationalökonomie [translated into English as Epistemological Problems of Economics (Princeton, N.J.: D. Van Nostrand, 1960]. On the similarity between Senior and Mises, see Marian Bowley, Nassau Senior and Classical Economics (New York: Augustus M. Kelley, 1949), chap. 1, esp. pp. 64–65. Lionel Robbin’s Essay on the Nature and Significance of Economic Science was emphatically praxeologic, although it did not delve into the more complex methodological problems. Both disputants are eager to test economic laws empirically.
The crucial difference is that Professor Machlup adheres to the orthodox positivist position that the assumptions need not be verified so long as their deduced consequents may be proven true — essentially the position of Professor Milton Friedman — while Professor Hutchison, wary of shaky assumptions takes the more empirical — or institutionalist — approach that the assumptions had better be verified as well.
Strange as it may seem for an ultra-apriorist, Hutchison’s position strikes me as the better of the two. If one must choose between two brands of empiricism, it seems like folly to put one’s trust in procedures for testing only conclusions by fact. Far better to make sure that the assumptions also are correct. Here I must salute Professor Hutchison’s charge that the positivists rest their case on misleading analogies from the epistemology of physics.
This is precisely the nub of the issue. All the positivist procedures are based on the physical sciences.On the differences between the methodologies of praxeology and physics, see Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, Mary Sennholz, ed., (Princeton, N.J.: D. Van Nostrand, 1956), pp. 226ff). It is physics that knows or can know its “facts” and can test its conclusions against these facts, while being completely ignorant of its ultimate assumptions. In the sciences of human action, on the other hand, it is impossible to test conclusions. There is no laboratory where facts can be isolated and controlled; the “facts” of human history are complex ones, resultants of many causes. These causes can only be isolated by theory, theory that is necessarily a priori to these historical (including statistical) facts. Of course, Professor Hutchison would not go this far in rejecting empirical testing of theorems; but, being commendably skeptical of the possibilities of testing (though not of its desirability), he insists that the assumptions be verified as well.
In physics, the ultimate assumptions cannot be verified directly, because we know nothing directly of the explanatory laws or causal factors. Hence the good sense of not attempting to do so, of using false assumptions such as the absence of friction, and so on. But false assumptions are the reverse of appropriate in economics. For human action is not like physics; here, the ultimate assumptions are what is clearly known, and it is precisely from these given axioms that the corpus of economic science is deduced. False or dubious assumptions in economics wreak havoc, while often proving useful in physics.This holds also for Professor Machlup’s “heuristic principles” which area allegedly “empirically meaningful” without being verifiable as true. I do not wish to deny that false assumptions are useful in economic theory, but only when they are used as auxiliary constructs, not as premises from which empirical theories can be deduced. The most important such construct is the evenly-rotating economy, or “equilibrium.” It is not intended that this state be considered as real, either actual or potential. On the contrary, the empirically impossible ERE is constructed precisely in order to analyze theoretically a state of no-change. Only by analyzing a fictive changeless state can we arrive at a proper analysis of the changing real economic world. However, this is not a “false” assumption in the sense used by the positivists, because it is an absolutely true theory of a changeless state, if such a state could exist.
Hence, Professor Hutchison is correct in wishing to establish the assumptions themselves. But these premises do not have to be (indeed, cannot be) verified by appeal to statistical fact. They are established, in praxeology, on a far more certain and permanent basis as definitely true. How, then, are these postulates obtained? Actually, despite the “extreme a priori” label, praxeology contains one Fundamental Axiom — the axiom of action — which may be called a priori, and a few subsidiary postulates which are actually empirical. Incredible as it may seem to those versed in the positivist tradition, from this tiny handful of premises the whole of economics is deduced — and deduced as absolutely true. Setting aside the Fundamental Axiom for a moment, the empirical postulates are: (a) small in number, and (b) so broadly based as to be hardly “empirical” in the empiricist sense of the term. To put it differently, they are so generally true as to be self-evident, as to be seen by all to be obviously true once they are stated, and hence they are not in practice empirically falsifiable and therefore not “operationally meaningful.” What are these propositions? We may consider them in decreasing order of their generality: (1) the most fundamental — variety of resources, both natural and human. From this follows directly the division of labor, the market, etc.; (2) less important, that leisure is a consumer good. These are actually the only postulates needed. Two other postulates simply introduce limiting subdivisions into the analysis. Thus, economics can deductively elaborate from the Fundamental Axiom and Postulates (1) and (2) (actually, only Postulate 1 is necessary) an analysis of Crusoe economics, of barter, and of a monetary economy. All these elaborated laws are absolutely true. They are only applicable in concrete cases, however, where the particular limiting conditions apply. There is nothing, of course, remarkable about this; we can enunciate as a law that an apple, unsupported, will drop to the ground. But the law is applicable only in those cases where an apple is actually dropped. Thus, the economics of Crusoe, of barter, and of a monetary economy are applicable when these conditions obtain. It is the task of the historian, or “applied economist,” to decide which conditions apply in the specific situations to be analyzed. It is obvious that making these particular identifications is simplicity itself.
When we analyze the economics of indirect exchange, therefore, we make the simple and obvious limiting condition (Postulate 3) that indirect exchanges are being made. It should be clear that by making this simple identification we are not “testing the theory”; we are simply choosing that theory which applies to the reality we wish to explain.
The fourth — and by far the least fundamental — postulate for a theory of the market is the one which Professors Hutchison and Machlup consider crucial — that firms always aim at maximization of their money profits. As will become clearer when I treat the Fundamental Axiom below, this assumption is by no means a necessary part of economic theory. From our Axiom is derived this absolute truth: that every firm aims always at maximizing its psychic profit. This may or may not involve maximizing its money profit. Often it may not, and no praxeologist would deny this fact. When an entrepreneur deliberately accepts lower money profits in order to give a good job to a ne’er-do-well nephew, the praxeologist is not confounded. The entrepreneur simply has chosen to take a certain cut in monetary profit in order to satisfy his consumption — satisfaction of seeing his nephew well provided. The assumption that firms aim at maximizing their money profits is simply a convenience of analysis; it permits the elaboration of a framework of catallactics (economics of the market) which could not otherwise be developed. The praxeologist always has in mind the proviso that where this subsidiary postulate does not apply — as in the case of the ne’er-do-well — his deduced theories will not be applicable. He simply believes that enough entrepreneurs follow monetary aims enough of the time to make his theory highly useful in explaining the real market.I do not mean to endorse here the recent strictures that have been made against the monetary-profit maximization assumption — most of which ignore long-run as opposed to short-run maximization. The curious idea that failure to pursue monetary goals is “irrational,” or refutes economics, is similar to the old notion that consumers were being irrational, or “uneconomic,” when they preferred to pay higher prices in stores nearer to them, or with a more congenial atmosphere.
We turn now to the Fundamental Axiom (the nub of praxeology): the existence of human action. From this absolutely true axiom can be spun almost the whole fabric of economic theory. Some of the immediate logical implications that flow from this premise are: the means-ends relationship, the time-structure of production, time-preference, the law of diminishing marginal utility, the law of optimum returns, etc. It is this crucial axiom that separates praxeology from the other methodological viewpoints — and it is this axiom that supplies the critical “a priori” element in economics.
First, it must be emphasized that whatever role “rationality” may play in Professor Machlup’s theory, it plays no role whatever for Professor Mises. Hutchison charges that Mises claims “all economic action was (or must be) ‘rational.’”Hutchison, “Professor Machlup on Verification in Economics,” p. 483. This is flatly incorrect. Mises assumes nothing whatever about the rationality of human action (in fact, Mises does not use the concept at all). He assumes nothing about the wisdom of man’s ends or about the correctness of his means. He “assumes” only that men act, that is, that they have some ends, and use some means to try to attain them. This is Mises’s Fundamental Axiom, and it is this axiom that gives the whole praxeological structure of economic theory built upon it its absolute and apodictic certainty.
Now the crucial question arises: how have we obtained the truth of this axiom? Is our knowledge a priori or empirical, “synthetic” or “analytic”? In a sense, such questions are a waste of time, because the all-important fact is that the axiom is self-evidently true, self-evident to a far greater and broader extent than the other postulates. For this Axiom is true for all human beings, everywhere, at any time, and could not even conceivably be violated. In short, we may conceive of a world where resources are not varied, but not of one where human beings exist but do not act. We have seen that the other postulates, while “empirical,” are so obvious and acceptable that they can hardly be called “falsifiable” in the usual empiricist sense. How much more is this true of the Axiom, which is not even conceivably falsifiable!
Postivists of all shades boggle at self-evident propositions. And yet, what is the vaunted “evidence” of the empiricists but the bringing of a hitherto obscure proposition into evident view? But some propositions need only to be stated to become at once evident to the self, and the action axiom is just such a proposition.
Whether we consider the Action Axiom “a priori” or “empirical” depends on our ultimate philosophical position. Professor Mises, in the neo-Kantian tradition, considers this axiom a law of thought and therefore a categorical truth a priori to all experience. My own epistemological position rests on Aristotle and St. Thomas rather than Kant, and hence I would interpret the proposition differently. I would consider the axiom a law of reality rather than a law of thought, and hence “empirical” rather than “a priori.” But it should be obvious that this type of “empiricism” is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes. For (1) it is a law of reality that is not conceivably falsifiable, and yet is empirically meaningful and true; (2) it rests on universal inner experience, and not simply on external experience, that is, its evidence is reflective rather than physicalSee Professor Knight’s critique of Hutchison’s Significance and Basic Postulates of Economic Theory. Frank H. Knight, “What is Truth in Economics?” Journal of Political Economy (February 1940): 1–32. ; and (3) it is clearly a priori to complex historical events.Professor Hutchison may have had me in mind when he says that in recent years followers of Professor Mises try to defend him by saying he really meant “empirical” when saying “a priori.” Thus, see my “Praxeology, Replay to Mr. Schuller,” American Economic Review (December 1951): 943–44. What I meant is that Mises’s fundamental axiom may be called “a priori” or “empirical” according to one’s philosophical position, but is in any case a priori for the practical purposes of economic methodology.
The epistemological pigeon-holing of self-evident propositions has always been a knotty problem. Thus, two such accomplished Thomists as Father Toohey and Father Copleston, while resting on the same philosophical position, differ on whether self-evident propositions should be classified as “a posteriori” or “a priori,” since they define the two categories differently.Thus, Copleston calls self-evident principles “synthetic propositions a priori” (though not in the Kantian sense) — synthetic as conveying information about reality not contained logically in previous premises; and a priori as being necessary and universal. Toohey virtually obliterates the distinctions and terms self-evident propositions synthetic — a posteriori, because, while being necessary and universals, they are derived from experience. See F.C. Copleston, S.J., Aquinas (London: Penguin Books, 1955), pp. 28 and 19–41; John J.H. Toohey, S.J., Notes on Epistemology (Washington, D.C.: Georgetown University, 1952), pp. 46–55. All this raises the question of the usefulness of the whole “analytic-synthetic” dichotomy, despite the prominence implicitly given it in Hutchison’s Significance and Basic Postulates of Economic Theory. For a refreshing skepticism on its validity, and for a critique of its typical use of dispose of difficult-to-refute theories as either disguised definitions or debatable hypotheses, see Hao Wang, Notes on the Analytic-Synthetic Distinction,” Theoria 21 (Parts 2–3, 1955): 158ff.
From the Fundamental Axiom is derived the truth that everyone tries always to maximize his utility. Contrary to Professor Hutchison, this law is not a disguised definition — that they maximize what they maximize. It is true that utility has no concrete content, because economics is concerned not with the content of a man’s ends, but with the fact that he has ends. And this fact, being deduced directly from the Action Axiom, is absolutely true.See Hutchison, “Professor Machlup on Verification Economics,” p. 480. Alan Sweezy fell into the same error when he charged that Irving Fisher’s dictum: “each individual acts as he desires,” since not meant as a testable proposition in psychology, must reduce to the empty “each individual acts as he acts.” On the contrary, the dictum is deducible directly from the Action Axiom, and is therefore both empirically meaningful and apodictically true. See Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 225–28.
We come finally to Mises’s ultimate heresy in the eyes of Professor Hutchison: his alleged logical deduction of “wholesale political conclusions” from the axioms of economic science. Such a charge is completely fallacious, particularly if we realize that Professor Mises is an uncompromising champion of “Wertfreiheit” not only in economics, but also for all the sciences. Even a careful reading of Hutchison’s selected quotations from Mises will reveal no such illegitimate deductions.Thus: “Liberalism starts from the pure sciences of political economy and sociology which within their systems make no valuations and say nothing about what ought to be or what is good or bad, but only ascertain what is and how it is.” Quoted by Hutchison, “Professor Machlup on Verification Economics,” p. 483n. Indeed, Mises’s economics is unrivalled for its avoidance of unanalyzed ad hoc value judgments, slipped into the corpus of economic analysis.
Dean Rappard has posed the question: how can Mises be at the same time a champion of “Wertfreiheit in economics and of laissez-faire” liberalism, a “dilemma” which leads Professor Hutchison to accuse Mises of making political deductions from economic theory?William E. Rappard, “On Reading von Mises,” in On Freedom and Free Enterprise, M. Sennholz, pp. 17–33.
The following passages from Mises give the clue to this puzzle:
Liberalism is a political doctrine. ... As a political doctrine liberalism (in contrast to economic science) is not neutral with regard to values and ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to their valuational principles. While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness ... abundance to poverty. It teaches men how to act in accordance with these valuations.Mises, Human Action, pp. 153–54; also see pp. 879–81.
Economic science, in short, establishes existential laws, of the type: if A, then B. Mises demonstrates that this science asserts that laissez-faire policy leads to peace and higher standards of living for all, while statism leads to conflict and lower living standards. Then, Mises as a citizen chooses laissez-faire liberalism because he is interested in achieving these ends. The only sense in which Mises considers liberalism as “scientific” is to the extent that people unite on the goal of abundance and mutual benefit. Perhaps Mises is overly sanguine in judging the extent of such unity, but he never links the valuational and the scientific: when he says that a price control is “bad” he means bad not from his point of view as an economist, but from the point of view of those in society who desire abundance. Those who choose contrasting goals — who favor price controls, for example, as a route to bureaucratic power over their fellow men, or who, through envy, judge social equality as more worthwhile than general abundance or liberty — would certainly not accept liberalism, and Mises would certainly never say that economic science proves them wrong. He never goes beyond saying that economics furnishes men with the knowledge of the consequences of various political actions; and that it is the citizen’s province, knowing these consequences, to choose his political course.
One of the highlights of our Austrian Economics Research Conference is the interaction between scholars and entrepreneurs, and the new ideas that such conversations spark. Here business consultant Hunter Hastings outlines how technological innovation is already making centralized "designed" systems obsolete, and how artificial intelligence opens up a whole new era of spontaneous order.
The Murray N. Rothbard Memorial Lecture, sponsored by Helio Beltrão. Presented at the Austrian Economics Research Conference at the Mises Institute in Auburn, Alabama, on 11 March 2017. Includes introductory remarks by Joseph T. Salerno.
The Austrian Economics Core Curriculum course lays out the fundamentals of Austrian Economics. Drawing on the tradition of Mises and Rothbard, the course begins with Praxeology, the study of human action, from which economic principles are deduced. An exposition of subjective value and the division of labor follow, providing the requirements for exchange and markets. From there, the concepts of money’s origin and value are explored, with the interest rate coordination of consumer preferences and the structure of production and business cycles. Finally, the crucial role of the entrepreneur in the market economy and economic calculation are explained.
Featuring lectures by David Gordon, Jörg Guido Hülsmann, Jeffrey M. Herbener, Lucas M. Engelhardt , Roger W. Garridon, Joseph T. Salerno, and Peter G. Klein.
Students that complete this course will earn a certificate of completion.
Quarterly Journal of Austrian Economics 19, no. 1 (Spring 2016): 112–115
Robert P. Murphy’s Choice: Cooperation, Enterprise, and Human Action seeks to provide the reader with a "modern condensed treatment” of Ludwig von Mises’s Human Action. Robert P. Murphy is a long-time contributor to Austrian economics, and has been a serious student of Mises’s work, having authored the Study Guide to Human Action in 2010, and the Study Guide to The Theory of Money and Credit in 2011. In Choice, Murphy uses Human Action as the primary source, but, as a good professor, focuses his efforts not on simply relaying what is already “in the book,” but on emphasizing the important, explaining the difficult, and elucidating the context. The result is a book that can serve as a companion to—or, for many, even a substitute for—reading Mises’s rather imposing Human Action.
Quarterly Journal of Austrian Economics 18, no. 4 (Winter 2015): 436–455
ABSTRACT: Ludwig von Mises’s social rationalist views on society, first discussed in Salerno (1990), do not appear to have any precursors in the history of economic thought. The present paper highlights the contributions of a French philosopher, A.L.C. Destutt de Tracy, to the theory of social development as one precursor of Mises’s theory. I use extensive textual evidence to highlight the important similarities between the social theories presented in De Tracy’s Treatise on Political Economy and Mises’s Human Action. The systematic exposition of these social rationalist views focuses on three aspects: their praxeological foundation, the economic factors which bring about human association, and the global consequences of these social phenomena.
KEYWORDS: social theory, rationalism, human action, division of labor, Ludwig von Mises, Destutt de Tracy JEL CLASSIFICATION: B10, B31, B53 I. Introduction Social theory, which includes sociology, economics, and political theory, among others, has had a long and complicated development, emerging as a distinct field of science only in the 20th century. From the pre-Enlightenment era to modern and post-modern developments, the evolution of these disciplines has consistently moved in one particular direction: from putting forth a worldview and creating overarching paradigms, towards developing only particular theories that explain only particular circumstances (Baert and da Silva, 2010). As one consequence of this trend, economics has gradually diverged from social theory: economists began using the tools of physical sciences, while other social theorists had little use for economic theory. Notwithstanding, a handful of economists have continued to consider economics and social theory as inseparable. One such case was Ludwig von Mises, perhaps best known for his comprehensive work on praxeology, i.e. the science of human action.
Only in the last decade of the 20th century has Mises’s social theory been brought to the attention of modern scholars. In his seminal 1990 article, “Ludwig von Mises as Social Rationalist,” Joseph Salerno argues that Mises elaborated “his own uniquely rationalist position” (1990, p. 26) on social evolution, different from the meliorism of liberal Enlightenment and the Hayekian spontaneous order approach. Salerno expounds a brief and clear summation of Mises’s views, which he calls ‘social rationalism’: “all social interactions and relationships are thought out in advance and therefore, society originates and evolves as a product of reason and teleological striving... society is a consciously-devised “strategy,” “a man-made mode of acting” in the war against scarcity” (1990, pp. 26–28). In Mises’s own words, social evolution represents “the development of the division of labor” and one can “trace the origin of everything concerned with society in the development of the division of labor” (Mises, 1962, pp. 301, 303).
Mises’s unique social theory does not appear to have had any precursors. However, in a lecture delivered in 2005, Salerno briefly hinted at an early member of the French Liberal School, Destutt de Tracy, as one author who preceded and shared Mises’s rationalist and catallactic views on society.
Antoine Louis Claude Destutt, Comte de Tracy (1754–1836) was a French aristocrat of Scottish descent, philosopher and economist, who is best known for having coined the term idéologie for the science of ideas (Chisholm, 1911, p. 126). De Tracy belongs to the tradition of the French Liberal School, whose influence on the development of economics in France began with the publication of Jean-Baptiste Say’s treatise in 1803, and extended over an entire century, roughly until the death of Gustave de Molinari in 1912 (Salerno, 1978, p. 65). The paradigm in which De Tracy and other French liberals operated diverged significantly from the British Classical School,By the 20th century, French economists had been exiled in a dark corner of the history of economic thought, wrongly dismissed as pamphleteers and popu-larizers of British classical economics. However, Rothbard (2006) has extensively shown that French liberal thought had not been an uninformed apology for British laissez-faire, but had important contributions to economic theory. Salerno (2001) also established that institutional factors—such as an unfavorable change in educational policies in France—had led the School into disrepute. Subsequent research (Hülsmann, 2001; Thornton, 2001) added evidence to Salerno and Roth-bard’s original claims, praising the contributions of French liberals on topics such as methodology, theory of value, entrepreneurship, and capital theory. springing from the contributions of French physiocrats and having been “nourished by a long and glorious tradition which reached back through Condillac, Turgot, Quesnay and Cantillon to the Scholastics” (Salerno, 1978, p. 66). To this tradition belong also Frédéric Bastiat (2007) Michel Chevalier (1842), Jean-Gustave Courcelle-Seneuil (1858), Ambroise Clément (1867) and Paul Leroy-Beaulieu (1914).
Scholars have scrutinized in detail De Tracy’s philosophical work on ideology and secularism (Kennedy, 1978; Head, 1985; Byrnes, 1991; Dekens, 2003), and his subjectivist approach and deductive methodology (Klein, 1985; Salerno, 1988; Patalano, 2015). Further attention was given to his views on entrepreneurship (Hébert and Link, 2006) or money and banking (Terrell, 2009), his liberal stance on government policy (Rothbard, 2006; Nemo, 2006; Faccarello, 2010), and even the impact of his philosophical system on Stendhal’s novels (Alciatore, 1950; Smith, 1956) and J.-B. Say’s social analysis (Forget, 2001).
Yet so far, no historians of thought have been spared to attend to De Tracy’s views on social theory. His ideas on how society evolves and develops and how this process both originates from
and reflects upon the human condition have suffered a similar fate to Mises’s work on the topic. The purpose of this paper is to address this neglect, and to connect the contributions of Mises and Destutt de Tracy on social theory. I use the textual evidence found in the two authors’ major works to flesh out Salerno’s insight that De Tracy was a precursor of Mises’s social rationalism.
A close scrutiny of De Tracy’s Treatise on Political Economy and Mises’s works, particularly Human Action, highlights striking similarities between De Tracy’s and Mises’s contributions, written more than 130 years apart, although no direct intellectual lineage connecting the two authors has been documented so far. Joseph Salerno (1988; 2001) shows that 19th century French liberals influenced prestigious economists such Carl Menger, Eugen von Böhm-Bawerk, or Knut Wicksell, and thus De Tracy’s ideas could have reached Mises indirectly.Hülsmann (2007, p. 112) shows that Condillac’s treatise, Commerce and Government, has been one of the main sources of inspiration for Carl Menger’s works, who was fluent in French. He also argues that Mises “continued the tradition of the British classical economists and of the great eighteenth- and nineteenth-century French économistes” (Hülsmann, 2007, p. 87). But Mises himself did not cite any precursors of his thoughts on the matter. The similarities between Mises and de Tracy’s works raise thus some interesting questions: if there is indeed a filiation of ideas between the two authors, why has it not been acknowledged by Mises, or discovered later by scholars? Alternatively, if no such historical connection exists, why have the two authors developed congruent social theories? Although I do not attempt to answer either of these questions in the remainder of this paper, mapping the similarities between Mises and De Tracy’s works can constitute a preliminary note on the subject, to be used as a basis for future research in answering those questions.
In my analysis, I follow three basic elements of both social theories, which the authors deal with explicitly: the paradigmatic foundation, the factors that bring about human association and cooperation, and the global consequences of these social phenomena. To this end, the remainder of this paper is structured as follows: I begin in section II with their views on human will, human action, and acquiring economic means, and highlight the praxeological foundation the two authors shared—which could explain many of the similarities between their theories. Section III delves into the rationalist and catallactic explanations of the evolution of society, where I argue that for both Mises and De Tracy, society is a gradual, reinforced development of economic exchange and division of labor. Section IV discusses the natural extension of society to a global phenomenon, exploring the analogous views of Mises and De Tracy on international trade, war, and peaceful cooperation. Throughout the paper, De Tracy’s views are compared with those of Mises in a systematic, step-by-step exposition. As I rely extensively on the textual evidence found in the two treatises, critical analysis is limited to those cases where it facilitates a better presentation of the arguments.
II. A Praxeological Foundation Destutt de Tracy’s four-volume treatise Elements of Ideology was conceived as an exposition of the “complete knowledge of our intellectual faculties,” from which we deduce the only solid “first principles of all the other branches of our knowledge” (De Tracy, 2009, p. xx). Understanding what these faculties are is fundamental, in De Tracy’s view, to understanding how social relations and economic phenomena are established.
De Tracy begins the fourth volume, Treatise on Political Economy (also called Treatise on Will), by arguing that “we form judgments of that which we experience, of that which we feel, of that which we see, in a word of all which affects us; we distinguish the parts, circumstances, causes and consequences thereof; and this is to judge of it” (De Tracy, 2009, p. 60). The fundamental difference between humans and all other merely “sentient” beings De Tracy identifies as the former’s capacity to act, motivated by a rational will, where intellectual faculties form our knowledge of the world and inform human judgment. He writes: “man… is a being willing in consequence of his impressions and of his knowledge, and acting in consequence of his will” (De Tracy, 2009, p. 23). Equally, Mises argues in Human Action that reason is a man’s “particular and characteristic feature,” and that “man alone has the faculty of transforming sensuous stimuli into observation and experience… [and] alone can arrange his various observations and experiences into a coherent system” (Mises, 1998, p. 177).
In De Tracy’s view, therefore, human volition is one of the primary intellectual faculties and the fundamental mover of all action. He further defines human will as “the general and universal faculty of finding one thing preferable to another, that of being so affected as to love better such an impression, such a sentiment, such an action, such a possession, such an object, than such another” (De Tracy, 2009, p. 24).De Tracy’s definition of human will also indicates that his subsequent theory of exchange in the division of labor, discussed below, was underpinned by elements of a subjective value theory. For a brief explanation of De Tracy’s views on subjective value—which he had acquired from J.-B. Say—see Terrell (2009, pp. ii–iv). Furthermore, he argues, this “faculty of willing produces in us the ideas of wants and means, of riches and deprivation, of rights and duties, of justice and injustice” (De Tracy, 2009, p. xxv). As a result, De Tracy’s investigation of all subsequent social and economic phenomena—which are the result of human action directed by volition—begins from the choices of human beings.
Mises also positions human wants as the alpha and omega of any economic and social system. First, in the very beginning of his magnum opus, Mises gives a definition of human will similar to De Tracy’s: “Will means nothing else than man’s faculty to choose between different states of affairs, to prefer one, to set aside the other, and to behave according to the decision made in aiming at the chosen state and forsaking the other” (Mises, 1998, p. 13). On this precise definition, which underpins the more universal science of praxeology, Mises establishes his economic analysis: “Choosing determines all human decisions.... All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another.... No treatment of economic problems proper can avoid starting from acts of choice” (Mises, 1998, p. 3).
Human action is for both Mises and De Tracy the meaningful manifestation of reason and will, the judgment of observations and experiences thus materialized. De Tracy argues that “in the employment of our faculties, in our voluntary actions, consists all the power we have; …the acts of our will which direct these actions are the source of all our means” (De Tracy, 2009, p. 38; emphasis added). Hence, human beings are not only sentient and willing, but also able to act in a rational and conscious way. Mises concurs with this view in his own analysis: human action “is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life” (Mises, 1998, p. 11).
Both authors also find that what informs human will and thus motivates human action is the perpetual state of uneasiness in which all individuals find themselves at any point in time. De Tracy explains that we always have “the desire of being delivered from that state, whatsoever it is, in which we actually are; which consequently appears actually as a state of uneasiness, more or less displeasing. [...] While it exists it is a manner of being felt and incommodious, and from which we have consequently a want of being delivered” (De Tracy, 2009, p. 35; emphasis added).In the French edition of his treatise, published originally in 1823, Destutt de Tracy describes “uneasiness” using the French term “malaise,” which can be defined as a feeling of general discomfort or unease. This is also the term used in the French translations of Mises’s Human Action. Cf. De Tracy (2011 [1823]). Without this uneasiness, and without the conscious and rational desire to substitute the current state of affairs for another, human action would not be possible. Mises uses the same concept in his explanation: “acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state. The incentive that impels a man to act is always some uneasiness” (Mises, 1998, p. 13; emphasis added).
Our actions can transform external resources into actual means for the attainment of ends because we can judge our observations and experiences, and organize them in a coherent system. This allows us to understand causal relations between elements of the natural world and their potential serviceableness to our satisfaction. In thus entering the sphere of economic science, both Mises and De Tracy emphasize this causal recognition, through action, as an essential step for material things to become economic goods—subject to the teleological, rational plans of men. The French philosopher explains this process as follows:
We do not possess a good field or a good utensil, but because we have well recognized the properties of the first material, and rendered easy the manner of making it useful.... It is then always from the employment of our faculties that all these goods arise. [...] We could not appropriate one of those beings, nor convert the smallest parcel of them to our use, but by our action on them and by the employment of our faculties to this effect (De Tracy, 2009, pp. 38–40; emphasis added).
In a consonant explanation, Mises shows that “a thing becomes a means when human reason plans to employ it for the attainment of some end and human action really employs it for this purpose.” He continues: “parts of the external world become means only through the operation of the human mind and its offshoot, human action” (Mises, 1998, p. 92).
In brief, human will, the intellectual faculty of choosing between different states of affairs, motivates human action; and action, in turn, transforms external things into economic means. In consequence, economic and social phenomena are the result of this conscious, rational, and purposeful behavior, where human beings interfere in the causal relations of the external world to create means for the satisfaction of their subjective goals.
We can thus argue that both De Tracy and Mises consider human action as the foundation of economic and social theory proper,Rothbard (2006, I: 4; p. 7) explains that “for de Tracy, this ‘science of human understanding’ is the basic foundation for all the human sciences… the discipline studying all forms of human action, a study meant to be a respecter of individuals and their interaction.” and in this regard we can identify De Tracy as a proto-praxeologist. Let us now analyze in detail the arguments put forth by Mises and De Tracy for a rationalist and catallactic view of society.
III. Two Rationalist and Catallactic Views on Society According to Mises, the fundamental task of any science endeavoring to determine the origins of society “can only consist in the demonstration of those factors which can and must result in [human] association and its progressive intensification” (Mises, 1998, p. 160). Both De Tracy and Mises have in fact been faithful to this principle in the construction of their theories. They began by delineating the object of their investigation and their approach, and continued by explaining the primary factors determining social evolution. Proceeding from these factors and from the social processes they engender, they reached a definition of society. Let us now discuss these steps in turn, and compare Mises and De Tracy’s positions through the available textual evidence.
As we have seen above, human reason allows us to perceive causality in nature and adjust it for the production of means to achieve our ends. But man does not—and cannot—survive isolated, simply in relation with nature. Thus, any social theory must focus on man seen originally as a social being. De Tracy argues that it would be “superfluous, having the human species principally in view, to occupy ourselves longer with beings that should be sentient and willing, but living insulated. Man cannot exist thus. [...] Man can exist only in society. It is then the social state, which is our natural state, that with which we ought alone to occupy ourselves” (De Tracy, 2009, pp. 59–60; xxx). Correspondingly, Mises argues that “man appeared on the scene of earthly events as a social being. The isolated asocial man is a fictitious construction” (Mises, 1998, p. 164).
How should this social state be studied first and foremost? Destutt de Tracy begins his scrutiny of society “under its economical condition, that is to say relatively to our most direct wants, and to the means we have of satisfying them” (De Tracy, 2009, p. 60). Such an investigation, De Tracy argues, will “lead us surely to estimate the value and utility of all our actions, to judge of their merits by their consequences, and consequently of the merit of those sentiments which determine us to one action rather than another” (De Tracy, 2009, p. 61). Mises too gives primacy to economic considerations in his analysis of social development, arguing that “man becomes a social being… in aiming at an improvement in his own welfare” (Mises, 1998, p. 160). For both Mises and De Tracy, the ultimate reasons for social evolution are to be found in the economic sphere and thus the analysis of society must proceed from an economic point of view.
What are then the factors that determine people’s decisions to associate? First, Mises and De Tracy both refer to the rational ability of human beings to perceive the benefits of their association and cooperation. De Tracy writes: “It is then impossible that we should not soon be aware of the utility we may derive from the succour of our fellow beings; from their assistance in our wants, from the concurrence of their will, and of their force with ours... always, and every where [sic]” (2009, p. 60; emphasis added). Or, in Mises’s words, “every step by which an individual substitutes concerted action for isolated action results in an immediate and recognizable improvement in his conditions” (Mises, 1998, p. 146; emphasis added).
If men can rationally and consciously choose between two states of affairs, they are then able to understand the benefits of cooperation in relation to those of isolated production. In consequence, the recognition of the benefits of living in a society does not have anything to do with instincts or happenstance.Forget (2001) argues that De Tracy’s idéologie—which influenced J.-B. Say to reject Smith’s spontaneous order social analysis—“emphatically reject[ed] the idea that social institutions evolve and develop as an unplanned response to the uncoordinated behavior of many discrete and self-interested agents” (Forget, 2001, p. 194; emphasis added). However, Forget seems to misconstrue De Tracy’s doubts about the spon-taneous order of society as a call for social planning by a legislator or an educator (cf. Forget, 2001, 207–208). The more plausible interpretation, given the evidence in this paper as well as De Tracy’s skepticism of government action throughout his body of work, is that his social analysis fits squarely with Mises’s social rationalism, in which society is neither centrally planned, nor accidental, but the purposeful outcome of many discrete rational decisions to associate and cooperate. Man, De Tracy writes, “has the intellectual means… to make conventions with his fellow beings… [and] he alone has a real society” (2009, p. 66). For Mises as well, “society is the product of thought and will. It does not exist outside thought and will” (Mises, 1962, p. 291).
Whence do the benefits of cooperation arise? The answer to this is detailed in Mises’s exposition of the Law of Association, which according to its author “makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation” (Mises, 1998, p. 159). Mises argues that cooperation is more productive than isolated labor for two reasons: “First: the innate inequality of men with regard to their ability to perform various kinds of labor. Second: the unequal distribution of the nature-given, nonhuman opportunities of production on the surface of the earth” (Mises, 1998, p. 157). He further shows that “if and as far as labor under the division of labor is more productive than isolated labor, and if and as far as man is able to realize this fact, human action itself tends toward cooperation and association; man becomes a social being” (Mises, 1998, p. 160).
De Tracy agrees with Mises with regards to the factors that determine the superior productivity of labor under cooperation. The French philosopher writes: “When several men labour reciprocally for one another, every one [sic] can devote himself exclusively to the occupation for which he is fittest, whether from his natural dispositions or from fortuitous circumstances; and thus he will succeed better” (De Tracy, 2009, p. 67).De Tracy argues in terms of Smith’s absolute advantage, likely due to the fact that David Ricardo’s treatise was published in 1817, the same year as De Tracy’s Treatise. Nevertheless, De Tracy’s view is not as problematic as Smith’s, for he writes: “we are all producers or manufacturers,—because there is no person so unfortunate as never to do any thing [sic] useful” (De Tracy, 2009, p. 79). We can then charitably reconcile De Tracy’s position, from this point of view, with the comparative advantage approach that Mises held. This social cooperation can also be understood, as Destutt de Tracy defines it, as an exchange of occupations: “[a man] exchanges one manner of occupying himself against another, which becomes more advantageous to him than the other would have been. [...] By the effect of social combinations, and by the separation of the different kinds of occupation, which is its consequence, every one devotes himself to a particular kind of industry” (De Tracy, 2009, pp. 61, 79). This exchange of occupations, always beneficial for both parties and undertaken precisely because men perceive and understand these benefits, brings about specialization or “what is called the division of labour, which in civilised society is sometimes carried to an inconceivable point, and always with advantage” (De Tracy, 2009, p. 67).
Under these circumstances, what is society? Both authors’ definitions are worth quoting at length:
I do not fear to announce it. Society is purely and solely a continual series of exchanges. It is never any thing [sic] else, in any epoch of its duration, from its commencement the most unformed, to its greatest perfection. And this is the greatest eulogy we can give to it, for exchange is an admirable transaction, in which the two contracting parties always both gain (De Tracy, 2009, p. 61).
Equally for Mises (1998, p. 143), society is “division of labor and combination of labor,”
an outcome of human action... the outcome of a purposeful utilization of a universal law determining cosmic becoming, viz., the higher productivity of the division of labor. As with every instance of action, the recognition of the laws of nature is put into the service of man’s efforts to improve his conditions (Mises, 1998, p. 145).
[...] seen from the point of view of the individual, society is the great means for the attainment of all his ends… [where] each participant sees the other partner’s success as a means for the attainment of his own (Mises, 1998, pp. 164, 168).
The two authors also show that division of labor and specialization go, in time, through a process of intensification. According to De Tracy, the great benefits of society “augment in an incalculable ratio, in proportion as they are perfected, and every degree of amelioration, in the social order, adds still to the possibility of increasing and better using them” (De Tracy, 2009, pp. 67–68). Or, in Mises’s words, division of labor “is itself a factor bringing about differentiation… [which] intensifies the innate inequality of men. [...] Vocational types emerge, people become specialists” (Mises, 1998, p. 164).
Last but not least, there is also a remarkable similarity between the two authors’ critiques of alternative social theories. Destutt de Tracy comments in passing on Smith’s concept of “propensity to exchange,” drawing attention to the importance of understanding cooperation as rational and purposeful, and not spontaneous or accidental. He writes: “Smith… is the first who has remarked that man alone makes exchanges, properly speaking. [...] I regret that in remarking this fact he has not sought its cause with more curiosity. It was not for the author of the theory of moral sentiments to regard as useless a scrutiny of the operations of our understanding” (De Tracy, 2009, p. 66). De Tracy also charitably interprets Rousseau’s social contract theory, elegantly reconciling it with his own view of society as a catallactic process: “It is evident [people] could not live together, if by a convention formal or tacit they did not promise each other, reciprocally, surety. Well! this convention is a real exchange; every one renounces a certain manner of employing his force, and receives in return the same sacrifice on the part of all the others” (De Tracy, 2009, p. 61).
Both remarks are echoed by Mises, who is, however, more dismissive of Rousseau’s theory. Mises’s critical views are contained in the chapter on society and the law of association in Human Action, where he argues,
In order to comprehend why man did not remain solitary... we do not need to have recourse to... the empty hypostasis of an innate urge toward association. Neither are we forced to assume that the isolated individuals or primitive hordes one day pledged themselves by a contract to establish social bonds. The factor that brought about primitive society and daily works toward its progressive intensification is human action that is animated by the insight into the higher productivity of labor achieved under the division of labor (Mises, 1998, pp. 159–160).
IV. The International Division of Labor The previous two sections have shown that according to Destutt de Tracy and Ludwig von Mises, society evolves through voluntary economic interactions between individuals, in which everybody rationally and purposefully strives for their own rightly understood interest. The two rationalist and catallactic theories of social evolution, written 130 years apart, can thus be briefly summarized in one central definition: society represents the complex inter-human relationships which result from the purposeful recognition of the mutual benefits of economic cooperation. In this view, division of labor and society are equivalent. “Commerce is the whole of society,” writes Destutt de Tracy, because “society from its origin is essentially nothing but a continual commerce, a perpetual series of exchanges of every kind” (De Tracy, 2009, pp. 66, 98).
Let us now discuss the global consequences of social cooperation and of the progressive intensification of social and economic bonds identified by the two authors.
Destutt de Tracy and Mises trace in their writings the gradual development of society from the smallest areas to a global dimension. According to De Tracy, division of labor and commerce unite “in the first place inhabitants of the same canton. Then the different cantons of the same country, and finally different nations” (De Tracy, 2009, p. xxxiii). In the same way, Mises argues that society develops “subjectively by enlarging its membership…. Originally confined to the narrowest circles of people, to immediate neighbors, the division of labour gradually becomes more general until it eventually includes all mankind” (Mises, 1962, p. 314).
As a logical consequence of this reasoning, international trade is to be simply understood as the international division of labor. De Tracy writes that “the greatest advantage of external commerce, the only one meriting attention, is its giving a greater development to that which is internal” (De Tracy, 2009, p. xxxiii). The purpose of international trade, De Tracy continues, is “to establish between different nations the same relations which interior commerce establishes between different parts of the same nation, to constitute them, if we may thus speak, in a state of society with one another; to enlarge thus the extent of market for all, and by this mean increase likewise the advantages of the interior commerce of every one” (De Tracy, 2009, p. 101; emphasis added). By the same token, Mises makes a more general, theoretical point about the separation between theories of domestic and foreign trade. Mises writes: “there is no basis for seeking a fundamental difference between the effects of freedom in domestic trade and in foreign trade. If the mobility of capital and labor internally differs only in degree from their mobility between countries, then economic theory can also make no fundamental distinction between the two” (Mises, 1983, p. 92).Mises’s analysis is more sophisticated than De Tracy’s on this matter, as Mises also challenges the restrictive assumptions of the Ricardian comparative cost principle. For instance, Mises argues thatthe tendency inheres in free trade to draw labor forces and capital to the locations of the most favorable natural conditions of production without regard to political and national boundaries… therefore, unrestricted free trade must lead to a change in the conditions of settlement on the entire surface of the earth; from the countries with less favorable conditions of production capital and labor flow to the countries with more favorable conditions of production (Mises, 1983, p. 92).
The logical conclusion which follows from the fact that international exchange is the natural extension of local cooperation is that international trade is necessarily beneficial to all parties involved in transactions across national borders. Mises puts it briefly and clearly: “The international division of labor is a more efficient system of production than is the economic autarky of every nation. The same amount of labor and of material factors of production yields a higher output. This surplus production benefits everyone concerned” (Mises, 2010, p. 73). De Tracy also describes the benefits of international commerce as “owing to the better employment of every local advantage and of the faculties of every individual, without a necessity for [any] nation to have made the smallest profit at the expense of any other nation” (De Tracy, 2009, p. 100).
Notwithstanding these benefits of social cooperation, both De Tracy and Mises acknowledge with regret that men have many times in history tried to hamper its development through numerous economic and military conflicts. These conflicts undermine the basic premise of social cooperation, i.e. its peaceful, voluntary character. Destutt de Tracy laments the fact that amongst “the efforts of men, for the amelioration of their lot... always a great portion of the human power has been employed in hindering the progress of the other... [and] many times perhaps all has been lost and destroyed, even the knowledge acquired, even the capacity of re-commencing that which had been already done” (De Tracy, 2009, p. 65). Mises also asserts that “when men fight against men… there is, between the fighting parties, reciprocal effect and mutual relation, but no society” (Mises, 1998, p. 168).
At the same time, both Mises and De Tracy reveal that the progressive intensification of division of labor and international cooperation remain the surest ways to offset these anti-social initiatives. Mises, for example, explains that “all waging of war is dependent on the state of the division of labor reached at the time. Autarkic economies can go to war against each other; the individual parts of a labor and trade community can do so, however only insofar as they are in a position to go back to autarky. For that reason, with the progress of the division of labor we see the number of wars and battles diminishing ever more and more” (Mises, 1983, p. 182). It is likely De Tracy has similar arguments in mind when, continuing his discussion on the effects of war, he optimistically comforts his readers that there are “many reasons we ought to be assured against the fear of such misfortunes in future” (De Tracy, 2009, p. 65).
Government intervention remains, however, the one danger against which human society must fight from within, and to the effects of which it is nowadays more exposed than ever. As laissez-faire political economists, both De Tracy and Mises repeatedly caution readers against the perils of partial or total state control over market prices. Through either conspicuous or subtle means—such as price controls or alterations in the purchasing power of money respectively—governments make economic organization based on the division of labor more and more impracticable.
Destutt de Tracy described the ultimate consequences of these actions as a world in which “society ceases and universal brigandage begins…. All trades are abandoned. There is no longer possibility of living on the produce of regular industry: every one subsists on what he can conceal, or on what he can lay his hands, as in an enemy’s country.... We may say in the strictest sense, that society is dissolved; for there is [sic] no longer any free exchanges” (De Tracy, 2009, p. 113). Mises also believed that sustained government intervention in the structure of money prices could not be accomplished “without overthrowing the system of social division of labor” (Mises, 1953, p. 247). He argued that “it is the social spirit, the spirit of social cooperation, which forms, develops, and upholds societies. Once it is lost, the society falls apart again. The death of a nation is social retrogression, the decline from the division of labour to self-sufficiency. The social organism disintegrates into the cells from which it began. Man remains, but society dies” (Mises, 1962, p. 309).For these ideas, Mises acknowledged an intellectual debt not to Destutt de Tracy, but to the French sociologist Jean Izoulet (1895), from whom both Mises and Herbert Spencer (1860) borrowed the imperfect analogy between human societies and the ‘division of labour’ among cells of biological organisms. Mises, however, qualified this analogy: “The process that differentiates and integrates homogeneous cells is completely different from that which led to the growth of human society out of self-sufficient individuals. In the second process, reason and will play their part in the coalescence, by which the previously independent units form a larger unit and become parts of a whole, whereas the intervention of such forces in the first process is inconceivable” (Mises 1962, 291).
VI. Conclusion The purpose of this paper was to offer a preliminary note on some important similarities between Destutt de Tracy and Mises’s theories on social evolution. As we have seen, the two authors share a praxeological foundation for their theories, i.e. they understand human action, informed by human reason, as the prime mover of all economic and social phenomena. Consequently, both Mises and Destutt de Tracy advanced a catallactic and rationalist view of social evolution, in which society is the outcome of purposeful human behavior, of the rational discovery of the benefits of association and cooperation. For both authors, society was synonymous with division of labor and free economic exchange.
It remains a task for future research in the history of thought to establish whether Destutt de Tracy’s Treatise on Political Economy should be considered the ‘locus classicus’ of the social rationalism which found its fullest expression in Mises’s Human Action. This investigation should also be extended to reveal the yet undocumented influence of Destutt de Tracy on Misesian thought, as well as to assess the importance of social rationalism relative to other social theories. Yet even without a documented historical and intellectual link between the works of Mises and Destutt de Tracy, the contributions of both authors retain their originality and uniqueness in a panoply of social theories that originate outside the teleological realm of human rationality and economic cooperation.
On this week's episode, we feature a 2011 talk at the Mises Institute given by Hans-Hermann Hoppe on the subject of praxeology: the science of human action. It's a term and topic that can be intimidating to some people — and at nearly 50 minutes, Hoppe's talk is quite a bit longer than our usual weekend show — but it is vitally important to understand why praxeology is the proper economic methodology. Listeners will enjoy and benefit from Hoppe's razor-sharp discussion.
Walter Block has assembled thirty chapters defending behavior that is probably offensive to most Americans, such as dwarf tossing and stereotyping, and many that are downright illegal, such as dueling and smuggling. Plus, he's provided us with humorous cartoons at the end of many chapters. The bottom line message in Freedom in All Realms: Defending the Undefendable is that the true test of our commitment to personal liberty doesn't come when we permit others to engage in those peaceable, voluntary acts with which we agree. It comes when we permit others to engage in peaceable, voluntary acts we find offensive. (Walter E. Williams)
This weekend, we feature a lecture by Dr. Robert Murphy that was recorded at our inaugural Mises Boot Camp this past summer. Bob gave an introductory talk that sets the Austrian framework, and lays out how we should go about understanding economics. It's a great refresher for those who are familiar with the Austrian school, but it's also a great primer to share with your friends who are no so familiar.
The world waits to see if next week is finally the week that the groundhogs at the Fed announce their long-anticipated interest rate hike. Can the economy survive whatever small bump the Fed deals out? Perhaps, but any temporary stability doesn’t change the inherent instability of our current monetary regime. Even with today’s technology, central planners can’t predict the future or know the “optimal quantity of money.” Only by returning to true sound money, and a proper appreciation for the market, will true, sustainable prosperity emerge.
In honor of the twenty-fourth anniversary of the collapse of the Soviet Union, we have a special guest on the latest episode of Mises Weekends, Dr. Yuri Maltsev. A Mises Senior Fellow and a Soviet economist during the Gorbachev era, Maltsev shares his thoughts on the West’s enduring love affair with socialism. He and Jeff also discuss its political consequences in regard to Obama, Trump, and the Bernie Sanders phenomenon. This is an interview you won’t want to miss.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Piketty Is Wrong: Markets Don’t Concentrate Wealth by Louis RouanetWhy Gold-Backed Money Doesn’t Bring Booms and Busts by Frank ShostakEnd the Sugar Tax Now by Gary GallesGovernment Debt Is Not Like Private Debt by Simon WilsonNo, "Big Data" Can’t Predict the Future by Per Bylund"Capitalism" Destroyed Itself? by Matt McCaffreyBlowing Up the Death Star Didn’t Destroy Economy, Building It Did by Tho BishopMan, Economy, and Beer: Rothbard-Themed Gastropub Opens in ConnecticutArticle Submission Guidelines for Mises DailyIndia’s Failing Gold Monetization Scheme: Seizure Imminent? by Paul-Martin FossViva Venezuela ... But Not Yet by Carmen Elena DorobățGun Control Fails: What Happened in England, Ireland, and Canada by Ryan McMakenTranscript: Ask David Gordon AnythingTop Ten Most-Read mises.org Articles in NovemberGerman translation of "PC is Control, Not Etiquette"Thanks, Janet Yellen: Homeownership in US Falls to 25-Year Low by Ryan McMakenWhy the No-Fly-List Gun Ban Is a Terrible Idea by Tho BishopBubble Watch: No-Down-Payment Jumbo Mortgage Makes a Comeback by Paul-Martin Foss
With Google’s dominance in the online search engine market we entered the Age of Free. Indeed, services offered online are nowadays expected to be offered at no cost. Which, of course, does not mean that there is no cost to it, only that the consumer doesn’t pay it. Early attempts financed the services with ads, but we soon saw a move toward making the consumer the product. Today, free and unfree services alike compete for “users” and then make money off the data they collect.
Data has always been used, but what’s new for our time is the very low (or even zero) marginal cost for collecting and analyzing huge amounts of data. The concept of “Big Data” is taking over and is predicted to be “the future” of business.
There’s a problem here, and it is the over-reliance on the Law of Large Numbers in social forecasting. Statistical probabilities for events may mathematically converge to the mean, but is it applicable in the real world? The answer is most definitely yes in the natural sciences. Repeated controlled experiments will weed out erroneous explanations or causes to phenomena, at least assuming we’re good enough at separating and controlling those causes.
What about the social sciences? In this age of scientism, as Hayek called it, we’re told “Big Data” will completely transform production, logistics, and sales. The reason for this is that vendors can better target customers and even foresee what they might want next. Amazon.com does this on their web site in crude form, where they make suggestions based on your purchase history and what others with similar purchase histories have searched for. Sometimes it works, and sometimes it doesn’t.
There is some regularity to our interests and behavior. All of us are, after all, human beings — and we’re formed in certain cultures. So one American with interests x, y, and z may have other interests similar to another American who also has an interest in x, y, and z.
Human Behavior Is UnpredictableBut similarity is not the same thing as prediction. Amazon.com’s suggestions or the highly annoying ads following you around web sites are useful methods for sellers because they can somewhat accurately identify what not to offer. Exclusion of very low-probability interests increases the probability for suggesting something that the person behind the eyeballs focusing on the computer screen may be interested in.
To use as prediction, however, exclusion of almost-zero probability events is far from sufficient. Indeed, prediction requires that we are able to accurately exclude all but one or a couple highly probable outcomes. And we have to be able to rely on that these predictions turn out to be true. Otherwise we’re just playing games, and so we’re making guesses. Sure, they’re educated guesses (because we’ve excluded the impossible and almost-impossible), but they’re still games and guesses.
Where Big Data FailsSpeaking of guesses, Microsoft’s Bing search engine, which powers the Windows digital assistant Cortana among other things, has produced a prediction engine with the purpose of predicting sports and other results. They rely on very advanced algorithms and huge amounts of collected data.
Amazingly, they did very well initially and predicted the outcomes of the World Cup perfectly. So maybe we can use Big Data to get a glimpse of the future?
No, not so. The Bing teams are learning a lesson only Austrians and, more specifically, Misesian praxeologists, seem to be alone in grasping: that there are no constants in human action, and therefore that predictions of social phenomena are impossible. Pattern predictions, as Hayek called them, may not be impossible, but predictions of exact magnitudes are. For instance, we can rely on economic law (such as “demand curves slope downward”) to estimate an outcome such as “the price will be lower than it otherwise would have been,” but we can’t say exactly what that price will be.
When it comes to sports, reality shows and other competitions between individuals or teams, the story is exactly the same. The team with a better track record doesn’t always win. Why? They have objectively performed better than the other team, perhaps exclusively so, but this doesn’t say anything about the future. We’re not here referring to the philosophical doubt as in “will the sun shine tomorrow?” (maybe something changes completely the sun’s ability to shine during the night).
The Social Sciences Are DifferentIn the social sciences we’re dealing with complex phenomena. Action and, especially, its outcome is the result of a complex system of social interaction, psychology, and much more. Are the players in both teams as motivated and focused as they were before? Did anything in their personal lives affect their mindsets or psyches? How do the players within their teams and players in other teams react on each other before and during the game? A team with a poor track record can upset a team with an objectively better track record; this happens all the time. Sometimes for the sole reason that the better team underestimates the worse team, or because the underdog feels no pressure to perform and therefore plays less defensively.
Bing’s prediction engine struggles with this, just as we would predict. As Windows Central reported recently, the prediction engine had its “worst week yet” picking only four of fourteen winners in the NFL. Overall, its track record was approximately two-thirds right and one-third wrong (95–53). It’s definitely better than tossing a coin, but pretty far from actually predicting the results.
In other words, if you’re placing bets you may want to use the Bing prediction engine. That is, unless you have the type of tacit, implicit understanding of what’s going on that the engine is missing. Maybe you can beat it, or maybe not. In either case, you cannot count on coming out a victor each and every time.
The reason for this is that the outcome simply cannot be predicted perfectly — or even close to it. Even the players themselves cannot predict who’ll win a game, but they may have inside information about whether their own team seems motivated and focused. It is not a perfect method, however, and it certainly cannot be scientific.
Even with Big Data there’s no predicting of social events — there’s only guessing. Yes, guessing with access to huge amounts of data is easier, at least if the data is reliable and relevant. But a good guess is not the same thing as a prediction; it is still a guess, and it can be wrong. Winning every time requires luck.
Quarterly Journal of Austrian Economics 18, no. 3 (Fall 2015)ABSTRACT: Ludwig von Mises’s most important legacy is the foundation and analysis of catallactics, i.e., the economics of interpersonal exchange, as a sub-discipline of praxeology, the science of human action. In this paper, based both on Mises’s methodical framework and on insights by Tadeusz Kotarbinski and Max Weber, a “praxeology of coercion,” or, more precisely, an analysis of interpersonal actions involving threats, is developed. Our investigation yields both a reviewed taxonomy of human action and a first analysis of the elements of this theory, which we term cratics. This shall establish the basis for adjacent studies, furthering Mises’s project regarding the science of human action.
KEYWORDS: Austrian school, praxeology, catallactics, coercionJEL CLASSIFICATION: B53
For decades, Ludwig von Mises (1881–1973) was the leading spokesman for the Austrian school of economics. An advocate of free markets and a critic of government interference, he stood for peaceful and voluntary cooperation. Whenever possible, he spoke out for individual freedom. Yet he grew up in Europe when socialism was on the rise and people wanted government to regulate “profiteering” capitalists who “exploited” workers. How did Mises, schooled in such an environment, acquire free market ideas?
Mises was born in pre-World War I Austria-Hungary and raised in Vienna. As a young man Ludwig surely had a healthy interest in fun and games, but he was also a conscientious student. At seven, he was already reading newspapers and collecting extra newspaper editions. His early interest was in history. But when he read Carl Menger’s Principles of Economics (1871) and encountered the subjective, marginal utility theory of value, he realized that economics was not history but a science of reason and logic. As Mises wrote later, reading Menger made him an economist.
While still at the Gymnasium, the equivalent of high school, young Ludwig adopted a motto from Virgil, “Do not yield to the bad, but always oppose it with courage.” Menger’s explanation that subjective values guide the actions of individuals enabled Mises to recognize that the “good,” for which he would strive “with courage,” was whatever promoted freedom from individuals to seek their subjective values. And anything that prevented individuals from pursing their personal subjectively-chosen goals was the “bad” to which he would refuse to yield. Thus an understanding of subjective value theory made Mises an advocate of individual freedom.
With the realization that everyone’s actions were always guided by his or her subjective values, permitted Mises to explain all economic phenomena as the results of what people do in the attempt, as Mises put, to “relieve some felt uneasiness.” Prices, wages, the division of labor, barter, media of exchange, trade, interest rates, even markets themselves, evolve as countless individuals, act, adapt, and readapt as he or she thinks best given the circumstances, each hoping to attain his or her various personal goals. Thus the economic phenomena we assume as “given and on which we base our actions are the unintended consequences of countless purposive actions of individuals.
I once asked Mises what original idea he had contributed. His reply: “Everything I have written and said I learned from someone else.” True, no doubt. But the genius of Mises, like that of an inventor or entrepreneur, rests on creating something new and original by further developing something already known. By adding something to earlier theories, he made at least three major contributions. First, he developed economics as a logical science and integrated it with all other knowledge. Second, he pointed out that a socialist society, without private property owners competing with one another, would not be able to discover where, when, and how best to use property in production. And third, by reasoning from Knut Wicksell’s theory that a “natural interest rate” prevails on the market among would-be borrowers and lenders, Mises explained the trade cycle as due to interest rates forced down artificially, distorting the “natural interest rate,” disturbing the loan market and causing widespread business ups and downs.
By recognizing that all individuals, everywhere and always, act on the basis of their subjective values Mises explained not only economic phenomena but also how individuals adapt and adjust when non-market forces disturb and distort market phenomena. Thus, Mises built on subjective value theory and added to knowledge. This was Mises’s genius!
Quarterly Journal of Austrian Economics 18, no. 2 (Summer 2015)ABSTRACT: Throughout his works on methodology, Mises presented economics as part of a more comprehensive science of human action, praxeology. The relation between the two was hierarchical. Praxeology encompassed economics, which was human action under the conditions of monetary calculation, together with any other number of disciplines that could be derived from the categories of human action under specifically assumed conditions. This paper argues that politics/political science can form a sub-field of praxeology. Based on the dichotomy between the economic and political means, politics is going to be defined as the discipline that studies the logic implied by a specific form of human interaction: one individual living off the efforts of another by extracting his resources. Starting from this, the paper provides an outline of politics, and argues that elements of an a priori theory of politics can be found in the writings of Austrian school scholars, although they have not yet been grouped under a specific field. The paper also argues that a distinctive field of politics will aid Austrian scholars in better distinguishing their approach from the positivist insights provided by the Public Choice school. A distinctive field of politics will lead to a better understanding of how far the a priori can go, and where the thymological enters the scene.
KEYWORDS: politics, praxeological theory of politics, methodologyJEL CLASSIFICATION: B53, B40, D72
We're now in the world of negative interest rates, and Mises’s insights about human action are the key to understanding the implications of this, and in understanding the impossibility of a negative “natural” or “originary” interest rate, writes Thorsten Polleit.
This audio Mises Daily is narrated by Robert Hale.
Some economists have been arguing that the “equilibrium real interest rate” (that is the “natural interest rate” or the “originary interest rate”) has become negative, as a “secular stagnation” has allegedly caused a “savings glut.”See, for instance, Gregory Mankiw, "It May be Time for the Fed to Go Negative," New York Times, 18 April 2009; or the talk given by Larry H. Summers at the IMF Economic Forum, 8 November 2013.
The idea is that savings exceed investment, and that a negative real interest rate is required for bringing savings in line with investment. From the viewpoint of the Austrian school, the notion of a “negative equilibrium real interest rate” doesn’t make sense at all.For important readings about the "pure time-preference theory of interest," see Jeffrey M. Herbener, ed., The Pure Time-Preference Theory of Interest (Auburn, Ala.: Mises Institute, 2011).
To show this, let us develop the case step by step. To start with, one should make a distinction between two types of interest rates: There is the market interest rate, and there is the originary interest rate.
The market interest rate is the outcome of the supply of and demand for savings in the market place. It can be observed, for instance, in the deposit, bond, or loan market for different maturities and credit qualities.
The originary interest rate is a category of human action, saying that acting man values goods available at present more highly than goods available in the future. In other words: Future goods trade at a price discount relative to present goods. For instance, 1 US$ available today is preferred over 1 US$ available in one year’s time.
If 1 US$ to be received in one year’s time is valued at, say, 0.909 US$, the originary rate of interest is 10 percent. (1 US$ divided by 0.909 minus 1 gives you 0.10, or 10 percent, for that matter.) 10 percent is here the originary interest rate (disregarding any other premia).
The “Originary Interest Rate” Reflects a Value DifferentialThe originary interest rate is expressive of a value differential, which results from so-called time-preference.For a thoroughgoing explanation, see Ludwig von Mises, Human Action: A Treatise on Economics, The Scholar’s Edition (Auburn, Ala.: Mises Institute, 2008), Chapter XIX: “The Interest Rate,” pp. 521 – 534. The term time-preference denotes that acting man prefers an earlier satisfaction of wants over a later satisfaction of wants.
Time-preference is always and everywhere positive, and so is the originary interest rate. This is, first and foremost, what common sense would tell us.
If the originary interest rate was near-zero, it means that you prefer two apples available in, say, 1,000 years over one apple available today. A truly zero originary interest rate implies that the actor's planning horizon or “period of provision” is infinitely long, which is another way of saying that he would never act at all but would continually push the attainment of his goals into the future.
The notion that time-preference and the originary interest rate could be zero, does not only sound absurd, it is also a logical impossibility: Positive time-preference and a positive originary interest rate are logically implied in the irrefutably true “axiom of human action.”
Human action is purposive behavior, implying the use of means to achieve ends. Action requires time (it is impossible to think otherwise). Thus, time is an indispensable and scarce means for achieving ends. As such, it must be economized, which necessarily implies that an earlier satisfaction of wants is preferred over a later satisfaction of wants.
For (praxeo-)logical reasons, therefore, time preference and the originary interest rate cannot fall to zero, let alone become negative. The implications of a negative originary interest rate cannot even be conceived by the human mind: A zero originary interest rate already implies no action ever into eternity.
Unconvincing ArgumentsHowever, some argue that due to growing uncertainties related to longer life expectancy, people might increasingly prefer future consumption over present consumption; and that this could push time preference and the originary interest rate into negative territory.
No doubt, peoples’ time preference may decline over time, implying that savings out of current income increases while consumption declines. While time preference and thus the originary interest rate can fall, for logical reasons they cannot hit zero, though, let alone become negative.
Another argument refers to the issue of “saturation” and runs as follows: Let’s assume you have two apples, and you eat one of them. Your hunger is now saturated, so that you prefer eating the remaining apple tomorrow over eating it today. Doesn’t this prove that people may value future goods more highly than present goods, that time preference and the originary interest rate may be negative?
No it doesn’t. Non-consumption of the second apple today can easily be explained by the fact that the marginal utility of eating the apple now is lower than eating it tomorrow or the next day, even when the future marginal utility is discounted by a positive originary interest rate.
That said, the example above is misconstrued.The correct example would be as follows: You are hungry and have an apple. In this case, no doubt, you would prefer eating the apple today over eating it tomorrow. In other words: You value the apple readily available today more highly than an apple readily available tomorrow. It does not illustrate the relevant case, namely the case in which acting man considers alternative uses of one and the same good — and thus doesn’t prove at all that time preference and thus the originary interest rate can be negative.
The End of the Market EconomyWhat is the relationship between the market interest rate and the originary interest rate? In the loan market, for instance, the interest rate on loans is adjusted to the rate or originary interest. If, for instance, the originary rate of interest is 2 percent and the credit and inflation premia are 1 percent, respectively, the market interest rate would be 4 percent.
Market interest rates may become negative in real terms. In a “hampered market,” for instance, the central bank can push the real market interest rate into negative territory. However, this does not, and cannot, represent an equilibrium, as time preference and thus the originary interest rate cannot become negative.
Should a central bank really succeed in making all market interest rates negative in real terms, savings and investment would come to a shrieking halt: as time preference and the originary interest rate are always positive, “capitalistic saving” — the accumulation of goods designed for improving the production process — would come to an end. Capital consumption would ensue, throwing mankind back into poverty. It would be the end of the market economy.
It might be interesting to note in this context that, for instance, the German national socialists had called for the abolition, the prohibition of the interest rate. Now you know why: Without a positive (originary) interest rate, the market economy will cease to function.
The True Purpose of Negative-Interest-Rate PolicyFor some reason, those who argue that the originary interest rate has become negative seem to overlook that the originary interest rate is a phenomena which is not confined to credit markets. It pervades all markets in which present goods are exchanged for future goods.See Murray N. Rothbard, Man Economy, and State (Auburn, Ala.: Mises Institute, [1962] 2001), chapter 6 “Production: The Rate of Interest and Its Determination,” pp. 313 – 386.
For instance, the originary interest rate prevails at each stage of the economy’s time-consuming roundabout production. The originary interest rate also exists in the stock market, where investors exchange present money against a claim on future money (that is a firm’s dividend payment).
If they wanted to be consistent, the believers in a negative originary interest rate would have to call for a policy that does not only make interest rates negative in real terms in the credit market, but also in the markets for, say, stocks and housing.
However, a policy that advocates destroying firms’ values and peoples’ housing wealth wouldn’t be taken too kindly by the public at large; and those economists recommending it couldn’t expect being cheered.
The consequence of a policy of a negative real market interest rate should have become obvious by now: It is an actually perfidious policy for debasing the real value of outstanding debt; and it is a recipe for wreaking havoc on the economy.
Image source: iStockphoto
Throughout most of human history, the iron law of wages held sway. From Chapter 2, "From The Malthusian Trap To the Industrial Revolution: Reflections on Social Evolution". Narrated by Millian Quinteros.
Why did it take so long until we gave up a hunter-gatherer existence in favor of an existence as agricultural settlers? And why did it take more than another 10,000 years until mankind’s seemingly final escape from the Malthusian trap? From Chapter 2, "From The Malthusian Trap To the Industrial Revolution: Reflections on Social Evolution". Narrated by Millian Quinteros.
Hoppe begins human history only 50,000 years ago, when “anatomically modern man” had evolved into “behaviorally modern man.” This is an eminently reasonable starting point, too. From Chapter 1, "On the Origin of Private Property and the Family". Narrated by Millian Quinteros.
Hans-Hermann Hoppe addresses the rise of family structures, the development of private property, social evolution prior to the Industrial Revolution, and the rise of the state — all without regard for cherished myths.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Download the complete audio book (10 MP3 files) in a single zip file.
At some point in time the landmass available to help satisfy human needs could no longer be enlarged. In economic jargon, the supply of the production factor “land” became fixed, and every increase in the size of the human population had to be sustained by the same, unchanged quantity of land. From Chapter 1, "On the Origin of Private Property and the Family". Narrated by Millian Quinteros.
The technological invention that solved (at least temporarily) the problem of a steadily emerging and re-emerging “excess” of population and the attendant fall of average living standards was a revolutionary change in the entire mode of production. From Chapter 1, "On the Origin of Private Property and the Family". Narrated by Millian Quinteros.
The Foreword to A Short History of Man: Progress and Decline by Hans-Hermann Hoppe. Narrated by Millian Quinteros.
For economic theory the question of how to increase wealth and get rich has a straightforward answer. From Chapter 2, "From The Malthusian Trap To the Industrial Revolution: Reflections on Social Evolution". Narrated by Millian Quinteros.
Hans-Hermann Hoppe turns the standard account of historical governmental progress on its head. While the state is an evil in all its forms, monarchy is, in many ways, far less pernicious than democracy.
Narrated by Millian Quinteros.
Just as the Industrial Revolution and the attendant escape from the Malthusian trap was by no means a necessary development in human history, so its success and achievements are also not irreversible. From Chapter 2, "From The Malthusian Trap To the Industrial Revolution: Reflections on Social Evolution". Narrated by Millian Quinteros.
In the introduction to his A Short History of Man: Progress and Decline, Hoppe outlines his goal of contributing to the old tradition of grand social theory and render the long course of human history from its very beginnings to the present age more intelligible. Narrated by Millian Quinteros.
Mises moves beyond economics to address questions regarding the foundation of all social science. He discusses his methodological dualism: one approach for hard sciences and another for the social sciences.
Rothbard writes,
It is Mises's great methodological work, explaining the basis of his approach to economics, and providing scintillating critiques of such fallacious alternatives as historicism, scientism, and Marxian dialectical materialism. This audiobook is narrated by John Pruden. The full text is available online here.
Download the complete audiobook (18 MP3 files) here. This audiobook is also available on Soundcloud and Apple Podcasts.
Volume 7, No. 4 (Winter 2004)The praxeological method is an efficacious way to investigate the fundamental theoretical questions at the heart of any study of human endeavor. Unfortunately, however, Austrian economists have often erred in portraying the method as subjective and nonempirical. It is neither. It is rooted in empirical reality and concentrates on valuations that are relational and objective. For some Austrians those distinctions are, more than anything else, just semantic differences. For another branch of the Austrian School, they represent significant conceptual differences, and result in a departure from the foundational work of Carl Menger.
Volume 8, No. 3 (Fall 2005)Why is logic, usually thought of as a branch of philosophy, important to Austrian scholars, most of whom are economists and not philosophers? The aim of this paper is to sketch a number of reasons and draw some conclusions. It is worth observing, first, that David Gordon’s An Introduction to Economic Reasoning , possibly the only economics text written from an Austrian-School point of view, begins with a brief discussion of deductive logic as the primary tool of economics.
Volume 9, No. 4 (Winter 2006)Joseph T. Salerno (2004) has presented us with the choice of pursuing economics as a vocation or profession. The focus of the vocational economist is the pursuit of truth whereas the professional economist works primarily to earn an income, enhance his reputation, or influence political decisions. This dichotomy also presents itself when economics professors seek to instruct courses for economics majors, but in the case of education, the question is do we want to train our students to be vocational or professional economists. For Misesian professors teaching intermediate macroeconomics, there is a tension between leading students in the development of sound economic theory and providing them with a working knowledge of the multitude of macroeconomic models they will encounter in graduate studies. Should teachers of undergraduate economics focus more on economic truth that helps students understand the way things really are or more on various macroeconomic models and hot research topics and techniques they may see if they choose to go on to graduate study? What follows are suggestions for meeting the challenge of intermediate macroeconomics by providing intermediate undergraduate students with a working knowledge of the disarray we call modern macroeconomics, evaluated with sound economic theory one derives within the Misesian tradition.
Volume 9, No. 4 (Winter 2006)Editorial:Our hope in publishing this symposium is to assist other instructors in teaching Austrian macroeconomics at the intermediate level and to inspire those who are inclined and equipped to contribute publications which will advance this under-developed field of economic pedagogy. The publication of this symposium also reflects a strong and continuing commitment by the editors of this journal to encourage and improve academic education in all fields of Austrian economics and we welcome future submissions that advance this mission.
Volume 10, No. 2 (Summer 2007)
A sizable number of examiners of Austrian economics have come to hold a mistaken view that Hoppe’s and Rothbard’s stances on the nature and status of the action axiom are fundamentally incompatible. Mr. Drum’s comments indicate that the misperception extends beyond the realm of academic discourse; it has entered everyday conversations about Austrian economics on internet forums.
Volume 10, No. 3 (2007)
This article deals with the epistemological bases for the axiom of action and more particularly with man’s capacity to have an a priori knowledge. The simplest argument in favour of the true a priori character of the axiom of action is the introspective one. It is sufficient to look at oneself to see that it is obvious that man acts intentionally. A part of the Austrian school, after Lachman, estimated that this introspective argument was insufficient. They preferred to go the way proposed by Max Weber and to base social sciences on the construction of ideal types. Nevertheless, this article shows that by defining the introspection as an ideal type we solve neither the induction problem nor the historicity of intellectual categories problem (1). The ideality of types creates assumptions (Utopia) whereas their typicity creates historical categories. The theory of the ideal type of Schütz seeks well to leave historicity while insisting on the ideality. On the contrary, the economic hermeneutics of Lavoie focuses its attention on historicity. To leave these difficulties, it is preferable to return to the philosophical sources of Menger, i.e. to the realistic aristotelian tradition and more particularly to the thomist one. In the second part of the paper we confirm coming back to the philosophical origin of Menger’s theory, the aristotelian and the thomist school. Thomist philosophy of knowledge resulted in defining introspection as a form of qualitative induction, and to support that the axiom of the action is a judgement, i.e. the combination of two universalities known thanks to the capacity of abstraction of man’s intelligence. In that way, it is possible to think of the axiom of action as of a historical category and universality. To affirm that man has reasons to act (intention) is at the same time a discovery and a truth proposal a priori.
Volume 12, Number 4 (2009)
Robbins contributed the most definitive modern definition of the discipline, one which is now widely accepted. Although limited by his overly restrictive assumptions on information, his definition represented a great leap forward in the profession’s self-understanding. The major limitation of Robbins’s definition is the implicit assumption that ends, means, and their relationships are known in advance with final certainty. This leaves open no role for entrepreneurial experimentation and assumes knowledge which is only discoverable through entrepreneurial alertness and inquiry. The following three papers were presented at the Austrian Scholars Conference March 2007. They were part of a panel to reassess the influence on contemporary Austrian economics of Lionel Robbins’s An Essay on the Nature and Significance of Economic Science on the occasion of the 75th Anniversary of its publication.
Volume 12, Number 4 (2009)
The author believes the evidence presented in this paper raises serious questions for Kirzner’s interpretation of Robbins’s Essay. Mises certainly treated Robbins’s book as an important contribution to the science of human action and did not draw a distinction between the Robbins’s economizing man and his own concept of the purposive actor. Furthermore, contrary to Kirzner’s claim, the economizing framework, at least as Robbins understood and applied it, does not ineluctably lead to a static theory of the market. In fact Robbins’s remarks on theoretical issues that are scattered throughout the Essay reveal a conception of the market that is dramatically dynamic and process-oriented.
Volume 15, Number 4 (Winter 2012)
The two main principles of the praxeological system elaborated by Mises are his concept of action and his epistemological apriorism. This paper illustrates these principles in the field of the sociology of delinquency. It first shows that the Misesian concept of action is very helpful in order to (1) understand why a praxeological turn occurred in the 1950s with the critique of the culturalist approach to criminality, and (2) analyze some of the main theoretical developments that took place afterwards, such as the social control theory, the low self-control theory, and the routine activity theory. The paper then shows that, behind their positivist façade these sociological theories illustrate rather than contradict the aprioristic character of the theoretical sciences of human action.
Volume 2, No. 4 (Winter 1999) We have tried to take Caplan to task for his many errors of omission and commission. Nevertheless, we think his was a very worthwhile article. Why? First, its quality. As a critique of Austrianism it far surpasses many of the others cited above, and is easily in the class of Nozick (1977), which we certainly mean as high praise. Second, it is important for the profession as a whole to at least be aware of the praxeological tradition, and the publication of an article critical of it in as prestigious a periodical as the Southern Economic Journal cannot but help in this regard. It is no exaggeration to state that the typical member of the economics profession is far more aware of another heterodox view, Marxism, than he is of Austrianism. And yet, surely even Caplan would agree, the latter has far more to offer the practitioner of economics than the former.
Volume 2, No. 1 (Spring 1999) No reasonable man can contend that the relations between price and supply is in general, or in respect to certain commodities, constant. We know, on the contrary, that external phenomena affect different people in different ways, that the reactions of the same people to the same external events vary, and that it is not possible to assign individuals to classes of men reacting in the same way. . . . The mathematical economists. . . formulate equations and draw curves which are supposed to describe reality. In fact they describe only a hypothetical and unrealizable state of affairs. —Ludwig von Mises Human Action: A Treatise on Economics (p. 348) It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis . . . that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed. . . . Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols. —John Maynard Keynes The General Theory of Employment, Interest, and Money (pp. 297–98)The following is an attempt to unravel a major tangle in contemporary sociological theory and research. Sociologists tend to ignore the clear distinction between exchange and power in social life. This peculiarity by itself can account for a great deal of the victimization and exploitation sociologists ponder in their theoretical writings and purport to find in empirical research.It will be argued here that the problem stems from two related but distinguishable branches. The first, which is taken up in section one, is an endemic confusion between positive and logical theory that goes beyond simple inadvertence. Sociologists seek a profundity and seriousness in their work that belies the constraints entailed in any consistent theoretical perspective. Switching implicitly, and perhaps unconsciously, from one paradigm to another provides an illusion of scope which, though it may be within the legitimate reach of the social philosopher,[1] is clearly out of the grasp of a social science. There can be no objection to social philosophy when it is clearly identified, but when it is put in the place of a logically consistent mode of analysis—or of understanding—it works a sleight-of-hand that would convince the unwary that the latter has been fairly derived from the former.Section two focuses on the other branch, which is the sociological concept of “unequal exchange.” Sociologists in the main have never accepted exchange on a purely conceptual level. What they view as exchange in social life has been defined so broadly as to encompass virtually the universe of interaction itself. Unmistakable signs of the resort to coercion by a party to social interaction can thus be construed by the sociologists as evidence of an inequity inherent in exchange. Robbery at gunpoint can be described in the language of social exchange, simply by changing or to for in the imperative command, “Your money or your life!” It is in this way that one can portray even the most personal interactions as essentially political acts. As we have heard it repeated monotonously since the 1960s, marriage is political and sex is the purest manifestation of power.The major implications of these theoretical oddities, as outlined in the first two sections, provide the substance of section three. Concerns here are focused first on the dangers inherent in sociological confusions between voluntary exchange and coercion and, second, on the manner in which sociology might be most easily reoriented. The discussion is carried over briefly into a fourth and concluding section that addresses the longstanding difficulties sociologists have experienced in coming to grips with the phenomenon of change.A smattering of remarks pertaining to the recent historical context of the ideas unfolded herein has been included to accommodate readers for whom it may be unfamiliar. In no sense, however, can the following be taken as a study in the history of ideas. Despite the sharpness of criticism, it should be emphasized here at the outset that there is no reason to suspect the discipline would wither from the scene were sociologists to surrender their ideological beliefs. To the contrary, the social sciences provide an arena in which praxeology[2] can develop simultaneously along a number of divergent dimensions. By default, over the past generation or so, economists or the economically trained have taken over substantial portions of the work being done in history, political science, and sociology.[3] One may welcome or deplore this invasion of traditional turfs, as it were, but, if nothing else, it serves to demonstrate the intrinsic value of the various substantive divisions of social reality. The work that can be accomplished in the sociological arena will prove inexhaustible.
Power and ParadigmsIntrospection and observation conspire to suggest that people employ means to achieve ends. The most sophisticated among us have realized for some time[4] that the proposition can neither be proved logically, nor established empirically, but there is nothing between nature and artifice to stay us from recognizing it as a fundamental axiom of action. If we follow Rothbard (1962, p. xi) in adding a subsidiary postulate which establishes “a variety of human and natural resources,” we will picture a world in which individuals choose from a variety of potential means in order to achieve a multiplicity of ends. Conversely, of course, one may assume instead that choice is illusory in the sense that means and ends have already been determined by some suprahuman agency; or empty because the pairing of means and ends is invariant, save for remediable ignorance and error; or powerless because the world is a chaotic place in which the relation between means and ends is utterly arbitrary.[5]Disregarding the province of powerless choices on the grounds that it lies beyond anyone’s measure of science, we are left with an action theory that incorporates choice and the deterministic realms of illusory and empty choice. For these latter, the varieties of natural and human resources appear as stimuli, one upon another, in patterned arrangements of such sensitivity and complexity as may defy complete scientific solution for an indefinite period. In the interim, terms like stimulus, cause, or independent variable can be used interchangeably. One could extend the list to include such words as “trigger,” “exciter,” or perhaps “coerce.” The elimination of choice abolishes “action” in favor of “behavior,” which, in turn, can be referred to as the dependent variable, the response, the effect, or even “compliance.” Where choice is disallowed, nothing remains but cause and effect and special definitions of power become otiose.Max Weber’s apposite definition of political power (1921, pp. 52–56) is, therefore, an item of some theoretical importance to sociology, first in that he saw fit to provide it, but also by way of its universal currency and acceptance among sociological theorists and researchers. Political power, as Weber said, consists both in the monopolistic use of physical force by government to exact compliance from the citizenry, and, more importantly, because of the frequency with which it is used in everyday life, the credible threat that physical force will be availed if in the absence of timely compliance.[6]Insofar as sociologists allude to power, coercion, compulsion, physical force, etc., they signal a commitment to the theory of action, which cannot then be shunted aside in favor of one variety of behavioral theory or another. This practice of inconsistency, so deeply ingrained in the discipline, has been defended by George Ritzer (1980), among many others, on the ground that sociology is a multiple paradigm science. Ritzer speaks volubly of a micro-macro continuum (1990, p. 347), while others describe the micro and macro as discrete yet co-valid perspectives (e.g., Blau 1977, p. 3).[7] Co-validity implies validity at the same moment in the sense indicated by the solution to a set of simultaneous equations—but this is out of the question. The systems of independent and dependent variables which are the fruit of a macro or positive methodology appear from the standpoint of logical theory as unanticipated outcomes of spontaneous individual actions (e.g., Hayek 1937). From an action perspective the positive laws amount only to spurious correlations which can be considered predictive only insofar as prevailing expectations and the interaction patterns which emerge from them remain as they have been. The independent variable of such systems appears to the action theorist as the reification of some set of unexamined relationships which are themselves dependent upon the circumstances of the moment and that can only be appended to theory in the form of special assumptions.[8] For the positivist, of course, action, with its paraphernalia of interactive choices, is no more than a clever trick that unenlightened men and women play on themselves. Logical and positive theories stand at the antipodes. Sociology may indeed abide as an affair of multiple paradigms, but they are not co-valid and the continuum is a creature of art.Unlike politics, theory cannot flourish as an accommodation between rival perspectives. An academic discipline can certainly function as a big tent which tolerates competing viewpoints including even the hiatus of positive explanation versus logical understanding that has animated sociology for so many decades. The alternative of slurring this fundamental distinction, however, by means of recurring ad hoc references to continua and co-valid viewpoints is tantamount to obscurantism. It may seem reasonable to suppose that a social science can explain phenomena, on the one hand, while it develops a basis for the understanding of those same phenomena on the other, but this is an illusion. The phenomena are not the same. If social behavior can be explained via the axioms of positive science, the impulse toward understanding will evaporate. The very ideas of action, understanding, and choice will give way to the essentially meaningless laws of positive science.[9] The idea that the ultimate data of dualistic or pluralistic interpretations of experience can be traced back to a common source is a metaphysical interpretation rather than an assumption which could be any part of an experimental natural science (Mises 1962, pp. 117–20).
The Mysteries of ExchangeUnfortunately Weber also used the term “power” in reference to an empirical probability that one individual might exact compliance from another by means of a frown, a gesture, or some other intimation of hope or displeasure not amounting to a coercive threat. The typical case is that of the person who accepts the unwanted suggestions of another in his or her own interest in maintaining or furthering a valued relationship. This is a straightforward interpersonal exchange which should be clearly distinguished from apprehensions of physical force. If the compliance is strictly onesided, which is to say that no advantage is sought by the donor, the action belongs in the category of “autistic exchange” wherein “the donor acquires the satisfaction which the better condition of the receiver gives to him” (Mises 1998, p. 196).To whatever degree Weber may have sown confusion by using power as a term to designate compliance irrespective of its source, his contemporary Carl Menger fathomed the conceptual subtleties of interpersonal exchange with uncommon clarity. After more than a century his lucid discussion retains a freshness that can be appreciated by anyone newly approaching the subject. Menger recognized the powerful tendency to regard “the magnitude of price as the essential feature of an exchange.” Given the obtrusiveness of prices in the exchange process and our ability to measure their magnitudes, he found it unremarkable that we tend to regard “the quantities of goods in an exchange as equivalents.” Appearances to the contrary notwithstanding, any such commonsensical conclusion precipitates a confusion from which the mainstream of sociological thinkers have yet to emerge. “Commodities that are equivalents in the objective sense of the term do not exist—even on given markets and at a given point in time” (Carl Menger 1871, pp. 192–93; emphasis in original). What Menger said of commodities, of course, is predicable of the counters of any interpersonal exchange, but it is perhaps worth remarking on the ease with which a mistake stemming from the formal properties of money was carried over into nonmonetary exchange.This is not the place to trace the recent history of the sociological conception of unequal exchange. It permeates the journals in which sociologists most commonly publish but it is seldom treated as the object of explicit discussion. During his rise to prominence within the ranks of sociological theoreticians, Alvin Gouldner stated matter-of-factly that objective value equivalence between “things exchanged” could be “measured by economists or other social scientists” (1960, p. 172). The absence of discussion supporting this remarkable assertion suggests that Gouldner simply accepted it as a portion of the received knowledge of social science. Speaking more generally, sociologists conceive the relative values of goods and services in a linear fashion which predates the concept of marginal utility.[10] They treat these relations as having been normatively established through a give and take of interpersonal exchanges between members of the sorts of definable groups characteristic of static agricultural or even preliterate societies. At bottom sociologists are suspicious of the notion that people exchange for mutual benefit. Evidently they languish in a mercantilist world where interpersonal exchange is a zero-sum affair that necessarily produces winners and losers at each encounter. Such a perspective creates “the need for a ‘privileged point of view on the world,’ of the intervention of an organ reckoned to be endowed with a ‘superior’ understanding, ‘not spoilt’ by interests” (Infantino 1998, p. 39).Against the constraints of this mercantilist backdrop, the sociological mainstream has never challenged the categories of force and fraud. While power is recognized as physical force, however, it has been said to differ only in degree “from the power that rests on the supply of needed benefits” (Blau 1964, p. 125). Lurking just behind the dubious formulation of needed benefits, of course, is the idea that some few individuals will be able to dominate the lives of the many by their control of resources. Contra Mises (1927, p. 100), employment is seen as a favor which the enterpriser may bestow or withhold, respectively to the workers’ salvation or ruin. The preoccupation of sociologists with public employment[11] has given rise to the idea that employers in general tend to pay wages which exceed their workers’ marginal product—and this for the express purpose of reducing them to dependency. As Blau put it, “The more employees prefer their own job to any possible alternative, the more dependent are they on their employer and the more power does he have over them” (Blau 1964, p. 120).[12]With formulations like these, exploitation is worked into the very essence of the employment relation, not because of anything having to do with dispositions of surplus value, but simply because the sociologist wills it. Wages which are too low constitute “an exchange of things unequal in value” which is a core meaning of exploitation (1960, p. 166),[13] Wages which are too high, however, become exploitative by enabling one individual to coerce another. Lester Thurow (1973, p. 70) at least had the courage to say that a factor which “is paid more than its marginal product is an exploiter.”The sociologist’s solution to this concocted dilemma of exploitation follows as if by logic and suffuses a vast literature which purports to quantify the inequities of market processes everywhere.[14] Implicitly or explicitly it calls forth a rigorous and unrelenting control of prices along with the qualities of goods and services which must ultimately reach into every corner of social existence.[15] In following this track sociology displays remarkable consonance with a Durkheimian impetus which has lasted now just over a century. Émile Durkheim’s antipathy for the market is well documented[16] and provides for measures of control which answer precisely every contemporary complaint concerning putative inequality in the momentary results of market transactions.[17]
Implications and SuggestionsBrushing aside all matters of paradigm and method, the problem for sociology is a plain inability to recognize coercion. If exchange is only a clever disguise for the credible threat of physical force we are left with the dismal task of finding the most congenial oppressor—with sociology to guide us in the quest, of course. At the point where sociology verges on one of the sundry varieties of twentieth-century Marxism, coercion is regarded as any stimulus or inducement to behave or act in a manner deemed inconsistent with “the objective laws of social development” (Weichert 1977, pp. 141–42). In this formulation, or course, whatever propaganda or physical compulsions are needed to insure compliance with objective laws cannot be viewed as coercive any more than we could describe the laws of physics as forces used against humanity at large or to benefit one individual, interest group, class, estate, caste, race, ethnicity, or gender over another.Robert Fogel and Stanley Engerman (1974) suggested that classical liberals and socialists both have indulged in a myth in expecting coercion, up to and of course including slavery, to give way automatically, as it were, in the face of the tremendous efficiencies, respectively of market systems for the liberals, and for the socialists, scientific methods of production and control.[18] Experiences of the present century have provided a plentitude of evidence for the persistence of coercion in its most grisly manifestations.An ideology which obscures the distinction between voluntary action and coercion is a dangerous instrument, and one which denies the distinction will ultimately prove deadly, irrespective of the original intentions of political leaders. In this specific regard there is nothing to choose between objective laws of social development and a collective conscience which stands “outside of and above individual locales and contingencies” (Durkheim 1915, p. 444) and forces “the individual to act in view of ends which are not strictly his own” (Durkheim 1893, p. 227). Both necessitate the emergence of a vanguard, a new class (Gouldner 1979), or other named privileged group “that is worth more than the rest of society” (Infantino 1998, p. 155)—to interpret the laws or the will of one metaphysical concoction or another.The two branches of sociological confusion lately reviewed grow directly from a single root that Hayek (1946) labeled French or Continental conceptions of individualism—but has more lately been described as methodological collectivism. The sociological inability to conceive the categorical significance of voluntary action is virtually entailed in its preference for positive method. As noted above an overarching commitment to methodological collectivism is adroitly masked by the device of a continuum which sets out the individual and the collective as points in a single dimension. So long as this illogical continuum can be protected from criticism, the contentions of action theorists will continue to appear to the sociologist as a congeries of self-serving claims mouthed by the propagandists of a propertied elite.Pragmatically speaking, however, it may be the zero-sum penumbra of social exchange which is most readily open to critical exposure. Sociologists do not assert the complete onesidedness of every exchange but they are confounded by what they take to be the objective fact of a common lopsidedness in the distribution of benefits. One party to the exchange gets more than the other, or more than he or she would have been willing to take.[19] As a group, sociologists have never accepted the impossibility of making interpersonal utility comparisons and some have defended the practice as methodologically unobjectionable.[20] Resting just beneath this cul-de-sac is the implicit notion that individuals should have—or, better yet are entitled to—the substance of their most fleeting desires. Parenthetically, at least, the matter of entitlement can be read as a demand to know why, in a world of such incredible abundance “unmeasured by a previously established yardstick” (Marx 1859, cited in Hobsbawm 1964, pp. 84–85), anyone’s wishes should go unfulfilled. Mises probably gave the clearest answer when he explained that “perfect satisfaction and its concomitant, the absence of any stimulus to change and actions, belong properly to the concept of a perfect being,” which, as he recounted “is beyond the power of the human mind to conceive” (1976, p. 24). “[M]otorcars, television sets and refrigerators do not make a man happy” as Mises said. “In the instant in which he acquires them, he may feel happier than he did before. But as soon as some of his wishes are satisfied, new wishes spring up” (Mises 1956, p. 4).Mises’s logic cuts right across the grain of predictions that envision the replacement of consumers by beings who seek only to enhance their abilities as socialist producers,[21] and the Durkheimian necessity for a collective conscience to act as a brake on “excited appetites” which would otherwise “tend to exceed all limits” (Durkheim 1897, p. 383). As the condition for action sans pareil, dissatisfaction is not the odious thing that commonsense musing seems to suggest. Irrespective of any conscious intention, sociologists have cast about either for perfect beings or perfected slaves in fruitless efforts to spare humanity the trouble and irritation of having to act at all.The obstacles which stand most immediately in the way of a thoroughgoing reorientation of sociological theory and the research it must animate and constrain were surmounted in economics during the seventy years or so which followed the marginalist revolution. Initially the concept of marginal utility has to be understood and embraced, not simply as the appurtenance of some fictional realm of the economic man, but as predicate of human action in all of its manifestations.[22] With this accomplished it would no longer be possible to look at exchange from the distorting perspective of winners versus losers and the door would at least stand open to a modern understanding of interpersonal utility comparisons. From this vantage point methodological collectivism itself could be quietly dismissed without ever becoming the focus of a Kuhnian revolution (Kuhn 1962).
The Malign Neglect of Social ChangeSome forty years ago G.L.S. Shackle (1958, p. 105) achieved a great economy of expression in describing predicted man as less than human and predicting man as more. Ludwig Lachmann (1977, p. 88) quoted Shackle’s proposition in a context of the market process but it applies with much greater urgency in the broader realm of praxeology. From time to time, in their exuberance to seize the mantle of predicting men and women, sociologists have claimed the capacity “to control man and his society” (e.g., Merton 1948, p. 210).[23] It would be a disservice to the discipline to suggest that these pretenses of the recent past have seriously intended the ramifications entailed therein.The action theory which has been proposed as an alternative to this foolish dream opens up the much more satisfying prospect of understanding, at least to some limited degree, “the unanticipated consequences of purposive social action” (Merton 1936). That, of course, is the other side of sociology, promised by Professor Merton a dozen years before his impulse to control. Merton’s efforts to bring this rich field of inquiry into the mainstream of sociological concern was gravely handicapped by his lack of attention to the seminal works of Menger, some fragments of which lay ready to hand in English translation (Menger 1892). Beyond that, however, his efforts, and those of his progeny, have been fundamentally thwarted by an imperfectly examined reliance on positive theory. Mandeville’s (1728) concept of the unintentional order has haunted the fringes of sociology for more than sixty years.[24] Allowed into the mainstream, it would propel sociology in new and challenging directions, but it will remain in waiting for as long as methodological collectivism retains its sway in the discipline.
ReferencesBecker, Gary. 1957. The Economics of Discrimination. Chicago: University of Chicago Press.Blau, Peter M. 1964. Exchange and Power in Social Life. New York: John Wiley and Sons.———. 1977. Inequality and Heterogeneity. New York: Free Press.Buchanan, James M., Robert D. Tollison, and Gordon Tullock, eds. 1980. Toward a Theory of the Rent-Seeking Society. College Station: Texas A&M University Press.Coleman, James S. 1990. Foundations of Social Theory. Cambridge, Mass.: Belknap Press.Durkheim, Émile. [1893] 1960. The Division of Labor in Society. George Simpson, trans. Glencoe, Ill.: Free Press.———. 1897. Suicide. Trans. by John A. Spaulding and George Simpson. Glencoe, Ill.: Free Press.———. [1915] 1954. The Elementary Forms of the Religious Life. Trans. by Joseph Ward Swain. Glencoe, Ill.: Free Press.Fogel, Robert W. 1989. Without Consent or Contract: The Rise and Fall of American Slavery. New York: W.W. Norton.Fogel, Robert W., and Stanley L. Engerman. 1974. Time of the Cross. 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Decision, Order, and Time in Human Affairs. Cambridge, U.K.: Cambridge University Press.———. 1965. A Scheme of Economic Theory. Cambridge, U.K.: Cambridge University Press.Stark, Rodney. 1996. Sociology. 6th ed. Belmont, Calif.: Wadsworth.Thurow, Lester C. 1973. “Toward a Definition of Economic Justice.” Public Interest 31, no. 1: 56–80.Weber, Max. [1921] 1968. Economy and Society: An Outline of Interpretive Sociology. Trans. by Guenther Roth and Claus Wittich. New York: Bedminister.Weichert, W. 1977. “Freedom and Property in Socialism.” In Equality and Freedom: Past, Present, and Future. C. Wellman, ed. Wiesbaden: Franz Steiner. Pp. 139–43.Kenneth H. Mackintosh† was professor of sociology at the University of Central Arkansas.[1] Discussion in Shackle (1965, pp. 184–96).[2] Defined by Mises (1976, p. xvi) as “the general theoretical science of human action.”[3] Most notably in history by Fogel (1989) and the “cliometricians,” and in political science by Olson (1965), Buchanan, Tollison, and Tullock (1980) and the large numbers of scholars they have attracted. Becker (1957) led a charge directly into the mainstream of traditional sociological concerns by addressing racial and other forms of “discrimination” in a manner which ran directly counter to the received Marxian protocol.[4] For a brief but nonetheless excellent nontechnical historical discussion of Western thinking on the vexed question of determinism versus free will, see Gardner (1983, pp. 100–15).[5] Discussion in Shackle (1961, pp. 42–43).[6] Because of its importance in human relations it would be well to append fraud to the category of physical force. It is undoubtedly correct to say that fraud which is not buttressed by force will eventually prove unsustainable, but over the shortterm it is coercive in and of itself.[7] Although the match is short of perfect, the sociologist’s designations of micro and macro correspond respectively to the aforementioned categories of logical and positive theory.[8] More than a generation past, it may be recalled, Lionel Robbins (1932, p. 114) complained that “not one single ‘law’ deserving of the name, not one quantitative generalization of permanent validity” had emerged from the efforts of the Historical and Institutional Schools over the course of a century. The most spectacular of recent failures may have been the quiet demise of the Samuelson and Solow (1960) version of the Phillips Curve which predicted well throughout the 1960s but reversed its slope as inflationary expectations spread through the population.[9] Discussion in Mises (1976, pp. 1–67).[10] See, for example, Peter Blau’s discussion (1964, pp. 174–75) of “exchange opportunity lines” which are said to represent a “fair rate of exchange.” Ironically, he reports that “it may be, and often is, to the advantage of both parties to depart from the fair rate of exchange.”[11] See Mises’s discussion of wages and public employment (1946, p. 79).[12] Blau’s core notion informs contemporary discussions of the “wage premium,” as found, for example in Halaby and Weakliem (1993).[13] At this juncture Gouldner attempts to free “exploitation” from its strong association with ideological claims. He half-seriously proposes “reciprocity imbalance” as a substitute for exploitation, which he says is synonymous with “unequal exchange” (1960, p. 167). There is deep confusion here in that exploitation is not ideological for any who hold that value can be objectively measured.[14] The American Sociological Review, which is the flagship journal of the American Sociological Association, has averaged better than one such publication per issue for many years. As long ago as 1982 the Association’s guide to publication outlets for sociologists listed at least fifty-six journals as suitable vehicles for these interests (ASA 1982). Efforts to quantify, of course, are restricted to a subset of the econometric techniques of partial analysis.[15] Discussion in Mises (1962, pp. 76–78).[16] Excellent recent discussion in Infantino (1998, pp. 57–82).[17] See, in particular, Durkheim (1960, pp. 111–27, 200–29; and 1897, pp. 361–92).[18] It should be noted that the action theorists cited herein have shown no susceptibility to this illusion. The point at issue is that full cognizance of coercion requires its clear separation from exchange, as such. The uncertainty of action virtually guarantees that individuals will enter into wholly voluntary transactions they live to regret, but no amount of ex post rationalization by injured parties or outside observers can derive coercion from the unforseen. The paradox is that outside observers who hold exchange to be coercive in and of itself will have little incentive to look for extraneous coercive elements in interactions which, at least superficially, give the appearance of exchange.[19] Sociologists who have been influenced by what is sometimes called a rational-choice or rational-action perspective tend to focus their attention on the latter of these. In a popular text written for introductory students Rodney Stark presents a variant of this idea as the sociological definition of exploitation, to wit, “All profits in an exchange in excess of the minimum amount needed to cause an exchange to occur” (1996, p. 699). Presently, this incomprehensible formulation is running in a seventh edition with no relief in sight.[20] The late James Coleman (1990, pp. 769–84), for example, defended his decision to assume the position of the Hindu Brahmin who Robbins (1938) described as holding his own enjoyments and pains to be of infinitely greater magnitude than those of lower caste members. Coleman points out quite correctly that people make these kinds of comparisons quite readily and claims he too should be given this latitude so long as he refrains from rendering any social-welfare prescriptions. As a citizen, of course, Coleman was entitled to his values but he was obliged to surrender them at the threshold of theory.[21] Richta, for example, encloses the word “consumption” in quotation marks while calling for scientifically based standards of nutrition, “the rational wardrobe,” models of transport, housing, etc., calculated “to divert a maximum amount of resources to the development of human creative powers” (1969, pp. 167–69).[22] Infantino, who is a sociologist, rendered valuable service by explaining that the term economic action merely asserts that individuals operate in a pragmatic field seeking advantages for the sake of which they are willing to incur a variety of costs (1998, p. 39).[23] This is a quotation from Robert Merton’s essay “The Self-Fulfilling Prophecy” which was included in every edition of his Social Theory and Social Structure. Recently this fabulously successful treatise has appeared in German and French language editions.[24] See Infantino (1998, pp. 83–99) for an excellent account of the narrow margin by which Durkheim himself failed to grasp the essential concept.
Volume 12, Number 1 (Fall 1990)Barry Smith discusses Aristotelian methodology and apriorism in Austrian Economics.
Volume 5, Number 2 (Fall 1984)Murray N. Rothbard discusses Ludwig von Mises's 1957 treatise on social and economic evolution, Theory and History.
One of my favorite economists in the history of economic thought is the great Austrian, Carl Menger (1840–1921). While the mainstream of the economics profession acknowledges Menger’s place due to his contribution to the Marginalist Revolution in the 1870s, it otherwise ignores him because his theoretical framework does not lend itself to policy prescriptions. In an era in which the economics profession largely views itself as a shadow branch of government which is itself charged with managing the economy, thinkers like Menger (and those who work in his tradition) are not going to be extolled or studied in the same way that thinkers like Irving Fisher, John Maynard Keynes, Milton Friedman, or Paul Krugman have been.
This is true if only because the government tends not to fund academics or economic schools of thought that do not promote its central role in the economy or provide economic justifications for its interventions in market forces. Absent this connection, the study of Chicago-School Monetarism or Ivy-League Keynesianism would have much less prominence in economic science today.
Menger’s theoretical framework differs from so many of the modern interpretations of economics because he represented the culmination of a pre-Progressive Era development of economic thinking that had occurred over centuries mostly in continental Europe by scholastic thinkers in the Middle Ages as well as French liberals such as Turgot, Cantillon, and Say. Such people may have studied economics as a form of what was known as the Moral Sciences in the nineteenth century, but their impetus for doing so was often due to the innate human desire to better understand the world and the natural laws that govern it. Their interest was in economics as economics, and not simply as a policy tool to make government appear more scientific, efficient, or benign. (It is actually the exact opposite of these things.)
So to study economics as a science, pure and simple, especially in an era in which it seems economic confusion reigns, it is not a bad choice to start with Carl Menger.
Menger was born in Galicia, a then-Austrian region that is now in Poland, to a wealthy family with roots in Bohemia. During breaks from the study of law at the Universities of Prague and Vienna, Menger worked as a financial journalist who developed some degree of prominence for writing novels and comedies that were serialized in newspapers.
It was during his time as a journalist that Menger first noticed the significance of the discrepancies between Classical economic doctrines on market phenomenon and the actual business market that he covered over the course of his profession. Soon after receiving his law degree from the University of Krakow in August 1867, Menger embarked on the formal study of political economy in an attempt to better understand and resolve these discrepancies — an effort that resulted in the 1871 publication of Principles of Economics.
While Menger recognized that the Classical economists had made significant contributions to the development of economic theory, he believed one of their primary shortcomings was in their analyses of the consumer, a shortcoming which was perhaps epitomized by the Classicals’ emphasis on the labor theory of value and their rudimentary and even shallow price theory that explained prices as phenomena resulting mostly from the economic calculation of businessmen. Menger’s primary contribution in Principles was to insert the primacy of the consumer in determining value and (by extension) price, not only in the marketplace but in all economic activity.
The Mengerian approach, which we today call the science of praxeology, emphasized the importance of individual human action resulting from the desire to satisfy felt needs and the relationship of those needs to the external world. Having a felt need and the knowledge that the external world possesses some characteristics that allow the individual to satisfy it provide the basis for logical human action and the subjective valuation of goods and services both within and apart from the market. Menger further noted that as our knowledge about the external world changes, so do individually-felt needs. Efforts to satisfy felt needs presuppose recognition of cause-and-effect relationships that provide the basis for all of human action.
Note how completely irrelevant such a framework is to modern adherents of the Keynesian or Chicago Schools. The major difference is that both schools view the individual person (or actor) as an object that needs to be manipulated in the name of policy success. For Chicagoans, this success is based on market outcomes that are closer to their pre-conceived ideals regarding market efficiency, while for Keynesians, this success is based on the achievement of arbitrary short-run employment levels that are achieved in practice by penalizing saving and rewarding consumption. To both schools, the human person is a cog in an economic machine that must be coerced to act in ways that make their systems work. Such a view is modern — its roots are in the Progressive Era — and contrasts with economics as it developed from Aristotle through Menger (and beyond through those who developed Menger’s system).
But in the 1870s, Menger boldly applied its implications to the determination of value. He noted that since goods are external to the human person and recognized subjectively as possessing qualities that allow for need satisfaction, they could be differentiated between goods of different order. In Principles, he described first-order goods as being goods that we consume to satisfy needs. These are consumption goods.
Second-order goods are goods required to produce the first-order good, so that while a car may be a first-order good satisfying a felt need for transportation, the second-order goods would include the glass, rubber, chrome, and all the other inputs which make up the car. The third-order goods are all of the goods that are required to produce the second-order goods, and so on, with more complex forms of production being characterized with more distant orders of production.
Nonetheless, the values of all of the goods of whatever order are derived from the initial subjective desire on the part of the individual to satisfy a felt need, so that rubber has value not in itself or in the work effort going into its production, but because of the initial human desire for transportation, leading to a human preference for cars. This understanding of goods contrasted greatly with the Classical economist’s notion that the value of economic inputs is based on their technical usefulness in production. Menger’s value theory represents an expansion of Say’s Law that supply creates its own demand, and is the proper theoretical response to the monetary and credit cranks (of Menger’s time as well as today) who see no difference between government-created and -directed capital and privately-created and -directed capital.
In truth, government-created capital satisfies the needs of the political classes and the special interests connected to it, whereas privately-directed capital is directed at the satisfaction of consumer wants.
Absent the state’s influence in the development of twentieth-century economic thought, it is likely Menger would be known today as an important Classical economist who corrected known shortcomings of the Classical School, and it would never have been deemed necessary for Classical economics to morph over time into various neoclassical schools characterized by tools appropriate for the hard sciences.
The bottle is now labeled libertarianism. But its content is nothing new; it is what in the nineteenth century, and up to the time of Franklin Roosevelt, was called liberalism — the advocacy of limited government and a free economy. (If you think of it, you will see that there is a redundancy in this formula, for a government of limited powers would have little chance of interfering with the economy.) The liberals were robbed of their time-honored name by the unprincipled socialists and near socialists, whose avidity for prestige words knows no bounds. So, forced to look for another and distinctive label for their philosophy, they came up with libertarianism — good enough but somewhat difficult for the tongue.
They might have done better by adopting the older and more meaningful name of individualism, but they bypassed it because it too had been more than sullied by its opponents ...
The mudslinging started long ago, but the more recent and best-known orgy occurred in the early part of the century when the heaven-by-way-of-government muckrakers attached to individualism a value-impregnated adjective — rugged. The word itself has no moral content; when applied to a mountain it is purely descriptive, when applied to an athlete it carries a favorable connotation. But, in the literary usage of the muckrakers, it designated what in plain language would be called skulduggery. It has no more to do with a philosophy than has any form of indecent behavior. Thus, the “rugged individualist” was the fellow who threatened to foreclose the mortgage on the old homestead if the fair damsel refused his hand in marriage; or he was the speculator who made use of the stock market to rob “widows and orphans”; or he was the fat and florid buccaneer who lavished diamonds on his ladylove. He was, in short, a fellow whose conscience presented no obstacle to his inclination to grab a dollar, and who recognized no code of ethics that might curb his appetites. If there is any difference between an ordinary thief and a rugged individualist, it is in the fact that the latter almost always keeps within the letter of the law, even if he has to rewrite the law to do so ...
Rugged individualism was a propaganda phrase of the first order. It was most useful in bringing the soak-the-rich urgency to a boiling point.
The phrase gained currency at the time when the leveling mania was fighting its way into the American tradition, before the government, making full use of the new power it had acquired under the income tax law, took hold of the individual by the scruff of the neck and made a mass-man out of him. It is an odd fact that the socialist is quite in agreement with the rugged individualist in advocating the use of political force to achieve one’s “good”; the difference between them is only in determining the incidence, or the recipient, of government-given “good.” It is doubtful whether the robber barons (a synonym for rugged individualists) ever used the government, before the income tax, with anything like the vigor and success of the socialists. At any rate, the stigma of ruggedness has stuck, so that the collectivist “intellectuals,” who ought to know better, are unaware of the difference between thievery and individualism.
Original Smear Words The besmirching of individualism, however, had a good start before the modern era. The original defamers were not socialists but solid proponents of status, the upholders of special privilege, the mercantilists of the nineteenth century. Their opposition stemmed in part from the fact that individualism leaned heavily on the burgeoning doctrine of the free market, of laissez-faire economics, and as such presented a challenge to their preferred position. So they dug into the age-old bag of semantics and came up with two smear words: selfish and materialistic. Just like the later socialists, they had no compunction about twisting the truth to suit their argument.
Laissez-faire — that is to say, an economy free of political interventions and subventions — holds that the instinct of self-interest is the motive power of productive effort. Nothing is produced except by human labor, and labor is something the human being is most parsimonious about; if he could satisfy his desires without effort, he would gladly dispense with it. That is why he invents labor-saving devices. But he is so constituted that every gratification gives rise to new desire, which he proceeds to satisfy by investing the labor he saved. He is insatiable. The log cabin that was palace enough in the wilderness seems quite inadequate as soon as the pioneer accumulates a surplus of necessaries, and then he begins to dream of curtains and pictures, inside plumbing, a school or a church, to say nothing of baseball or Beethoven. Self-interest overcomes his aversion to labor in his constant drive to improve his circumstances and widen his horizon ...
It is in the free market that self-interest finds its finest expression; that is a cardinal point in individualism. If the market is regularly raided, by robbers or the government, and the safety of property is impaired, the individual loses interest in production, and the abundance of things men live by shrinks. Hence, it is for the good of society that self-interest in the economic sphere be allowed to operate without hindrance.
But self-interest is not selfishness. Self-interest will impel the manufacturer to improve upon his output so as to attract trade, while selfishness will prompt him to seek the special privileges and state favor that in the end destroy the very system of economic freedom on which he depends. The worker who tries to improve his lot by rendering better service could hardly be called selfish; the description rather fits the worker who demands that he be paid for not working. The subsidy seeker is selfish, and so is every citizen who uses the law to enrich himself at the expense of other citizens.
The Free Market Then there is the charge of “materialism.” Laissez-faire, of course, rests its case on abundance; if people want lots of things, the way to get them is through freedom of production and exchange. In that respect, it could be called “materialistic.” But, the laissez-faire economist as economist does not question or evaluate men’s desires; he has no opinion on the “ought” or “should” of their aspirations. Whether they prefer culture to gadgets, or put a higher value on ostentation than on spiritual matters, is not his concern; the free market, he insists, is mechanistic and amoral. If one’s preference is leisure, for instance, it is through abundance that his desire can be best satisfied; for an abundance of things makes them cheaper, easier to get, and thus one is enabled to indulge a liking for vacations. And a concert is probably better enjoyed by a well-fed aesthete than by a hungry one. At any rate, the economist refuses to pass judgment on men’s preferences; whatever they want, they will get more of it out of a free market than one commandeered by policemen.
But the critics of the nineteenth century blithely passed over this point, even as modern socialists ignore it. They insisted on attaching moral content to the free economy ...
In point of fact — while the free market is itself a mechanism neutral to values expressing men’s desires, whatever they may be — the free market theory rests on the tacit acceptance of a purely spiritual concept, namely: that man is endowed with the capacity of making choices, with free will. If it were not for this purely human trait, there would be no marketplace, and human life would be akin to mat of the birds and the beasts. The economist of the laissez-faire school tries to skirt around this philosophical and theological point; yet if hard pressed he must admit that his entire argument is based on the axiom of free will, although he might call it something else. And that axiom certainly is not materialistic; any discussion of it leads ineluctably to a consideration of the soul.
By way of contrast, it is the socialist (whatever subspecies) who must begin his argument with a rejection of the idea of free will. His theory requires him to describe the individual as purely materialistic in composition. What is called free will, he must maintain, is a batch of reflexes to environmental conditioning ...
“Hedonism” Returning to the defamation of individualism, another value-laden word that was, and still is, hurled at it is hedonism. (At least one modern writer, who maintains that a Christian cannot be an individualist, seems to be championing this nineteenth-century criticism.) The label stems from the fact that a number of self-styled individualists and disciples of Adam Smith associated themselves with an ethical creed known as utilitarianism; the most famous are Jeremy Bentham, James Mill, and John Stuart Mill. The basic tenet of this creed is that man is constitutionally driven to avoid pain and to seek pleasure. Hence, in the nature of things, the only morally good conduct is that which favors this pursuit. But, a problem of definition arises, since what is pleasure for a philosopher might be pain for the moron. Bentham, founder of the school, who was more interested in legislation than in philosophy, solved the problem nicely by drawing up a coarse calculus of pleasure; and then he enunciated a principle of legislation based on it: that is morally good which promotes the greatest good for the greatest number.
Coming from an avowed opponent of privilege and an advocate of limited government, this do-gooding doctrine is a strange anomaly. If the moral measure of legislation is the greatest good for the greatest number, it follows that the good of the minority, even a minority of one, is immoral. That would hardly accord with the basic tenet of individualism that man is endowed with rights which the majority may not tamper with ...
Tenets of Individualism Metaphysically, individualism holds that the person is unique, not a sample of the mass, owing his peculiar composition and his allegiance to his Creator, not his environment. Because of his origin and existence, he is endowed with inalienable rights, which it is the duty of all others to respect, even as it is his duty to respect theirs; among these rights are life, liberty, and property. Following from this premise, society has no warrant for invading these rights, even under the pretext of improving his circumstances; and government can render him no service other than that of protecting him against his fellow man in the enjoyment of these rights. In the field of economics (with which libertarians are rightly concerned because it is there that government begins its infringement), the government has no competence; and the best it can do is to maintain a condition of order, so that the individual may carry on his business with the assurance that he will keep what he produces. That is all.
During the Second World War, over 120,000 American troops were stationed in Australia; hundreds of thousands more visited the country on furlough or passed through during transit to battle zones in the Southwest Pacific. In all, around one million American servicemen spent time in Australia during the war. Australia was garrisoned and transformed into a supply base when it became clear the Japanese were going to overrun the Philippines. As one army unit historian explains:By the end of February 1942 the whole strategic pattern in [the Southwest Pacific] had changed. In the Philippines, American troops under General MacArthur were fighting gallantly to hold their position on Bataan and Corregidor but by this time it was clear that their resistance could not last indefinitely and that as a base for operations the Philippines were virtually lost to the Allies. The Netherlands East Indies were almost entirely in Japanese hands; all U.S. troops that could withdraw had returned to Australia.“Establishment of Headquarters USAFIA at Melbourne, Australia,” [no date], National Archives and Records Administration II (NARA) (College Park), RG 496, Entry 47, Box 326, File: Establishment of Headquarters USAFIA at Melbourne, Australia, 13.
Douglas MacArthur also stressed Australia’s strategic significance in his plan to strike back at the Japanese in Papua, New Guinea. Operations against the Japanese “involved provision for supply and reinforcement of advanced areas from rear bases in Australia which were in large part merely ports for the reshipping of material from the distant West Coast of the United States.Douglas MacArthur, Reminiscences (New York: Da Capo Press, 1964), 154.
Although most Australians welcomed the Americans as saviors, and relations were generally amiable, the conduct of some American personnel was reprehensible. Specifically, GIs committed all manner of crimes during the war, from murder and rape to vandalism and motor theft. As the American presence increased, so too did the number of arrests. In June 1942, 140 military personnel were arrested in Brisbane alone. In July, the number of arrests increased to 796 and to 1,128 in October. When the number of American personnel stationed in Australia peaked in 1943, the U.S. provost marshal in Brisbane likened the number of stabbings, assaults, and violence to a “crime wave.Darryl McIntyre, “Paragons of Glamour: A Study of U.S. Military Forces in Australia” (PhD dissertation., University of Queensland, 1989), 249; Sunday Mail (Brisbane), 22 October 1944. The most notorious crimes were the three Jack-the-Ripper-like murders that took place in Melbourne in May 1942. In a 16-day period, three women were found strangled and half-naked in the city. The press dubbed the killings the “brownout murders.” After a brief investigation, Victoria police arrested U.S. Private Edward Joseph Leonski.E. Daniel Potts and Annette Potts, Yanks Down Under: The American Impact on Australia (Melbourne: Oxford University Press, 1985), 234. After being handed over to American military authorities, Leonski was court-martialled, found guilty, and hanged.
War, Time Preference, and CrimeWhilst reading through thousands of crime reports, I was often struck by the lack of discernible motives and the GIs’ indifference to the consequences of their actions. One reason for this insouciance might have been the knowledge that officers were instructed to mete out severe punishments in extreme cases only. A JAG memorandum circulated in 1943 reminded officers that “the War Department has repeatedly admonished military leaders to resort to court martial only as a last resort; even then to utilize the lowest type of punishment and as indicative of a policy that this punishment should be resorted to, and then maintained, only when absolutely necessary.”Ernest A. Burt to Staff Judge Advocates, 16 September 1943, NARA II (College Park), RG 495, Entry 179, Box 1269, File: Prisoners. There is also ample evidence that U.S. military authorities often spirited offenders out of the country rather than face pressure for a court martial from Australian authorities. It was much easier to send suspects to undisclosed “battle zones” and then refuse to divulge their locations to Australian police. Similarly, Queensland constables observed that when police made inquiries about American misconduct, GIs were transferred from their units and U.S. officials refused to provide their locations.Constable E.J. Breene to Inspector of Police, 21 April 1943, QSA, Police Files, A/12031. Knowing they would probably be protected, even if they committed crimes, surely emboldened GIs. Of course, military training that dehumanized the individual, encouraged barbarism, destruction of property, and killing was another likely cause of American crime in Australia. After all, if soldiers were told it was okay to kill other human beings, why would they care about rape, theft, vandalism, etc., even if these crimes were committed against allied civilians?
Still, as important as the above explanations are, high time preference offers another reason for the conduct of American soldiers. The importance of time preference in understanding human action is nothing new to those who have some awareness of the Austrian School. Yet, among mainstream historians, whose knowledge of praxeology is limited, time preference is virtually unknown. The correlation between high time preference and crime, barbarism, and de-civilization is even more alien. This is not surprising given that there are very few studies that explore this correlation in any detail. Edward C. Banfield paved the way in his book The Unheavenly City Revisited, where he observed that:
The threat of punishment at the hands of the law is unlikely to deter the present-oriented person. The gains that he expects from the illegal act are very near to the present, whereas the punishment that he would suffer — in the unlikely event of his being both caught and punished — lies in a future too distant for him to take into account.Edward C. Banfield, The Unheavenly City Revisited (Boston: Little Brown, 1974), 140-41.
Hans-Hermann Hoppe expanded on Banfield’s insights in Democracy, the God that Failed:
While high time preference is by no means equivalent with crime ... a systematic relationship between them still exists, for in order to earn a market income a certain minimum of planning, patience, and sacrifice is required: one must first work for a while before one gets paid. In contrast, specific criminal activities such as murder, assault, rape, robbery, theft, and burglary require no such discipline: the reward for the aggressor is tangible and immediate, but the sacrifice — possible punishment — lies in the future and is uncertain. Hans-Herman Hoppe, Democracy, the God that Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order (New Brunswick: New Jersey, Transaction Publishers, 2001), 31.
More importantly, Hoppe elsewhere explains how state policies (taxes, regulations, welfare benefits, money printing, etc.), once institutionalized, will increase the time preferences of everyone to the point that:
the natural tendency of humanity to build an expanding stock of capital and durable consumer goods and to become increasingly more farsighted and provide for ever more distant goals may not only come to a standstill, but may be reversed by a tendency toward de-civilization: formerly provident providers will be turned into drunks or daydreamers, adults into children, civilized men into barbarians, and producers into criminals.___, “Time Preference, Government, and the Process of De-civilization – from Monarchy to Democracy” Journal des Economistes et des Etudes Humaines 5:2/3 (Juin/Septembre 1994): 329.
As indispensable as Hoppe’s insights are in explaining how state actions will lead to de-civilization, there is one state function that is not included in his study, namely, war. In the context of the American presence in Australia, the real chance of being maimed or killed on the battlefield increased the time preferences of GIs because there was a good chance that there was little future left to enjoy. Hoppe makes a similar observation when discussing how biology plays a role in time preference:
Becoming old and approaching the end of life, one’s time preference rate tends to rise. The marginal utility of future goods falls because there is less of a future left.Ibid., 322.
Ultimately, the war increased the real possibility of death in the near-future and hence many offenders gave little thought to consequences of their actions; instead they lived for the thrill of the moment and instant gratification. How concerned could soldiers be about crime and punishment when they might be dead in a month’s time?
Australian police reports describe hundreds of crimes that illustrate the correlation between high time preference and crime. Instant gratification was the clear motive in many incidents, some of which are described below. In 1944, three U.S. sailors after being arrested for destroying a series of shop windows in Brisbane admitted to police that “they were leaving Port next morning, and after they had consumed a quantity of liquor, they decided that they would have some fun and so broke the windows.”“Three American Sailors, Jerome Marvin Leissner, Allen Hamed and Albert J. Black, Wilful Destruction of Property,” 19 March 1944, QSA, Police File, A/12035. In November 1943, an American private accosted a woman in the Brisbane suburbs, dragged her into a field and raped her. Queensland police and the American MPs found the suspect and confronted the American with his victim; after the woman gave a detailed account of the crime, the private confessed.H. Bischof and N.W. Bauer to Officer in Charge, 17 February 194[4], QSA, Police Files, A/12032. On 19 June 1944, Doris May Roberts was found beaten to death in a Brisbane laneway. That very night, Queensland police tracked down two Americans who were with Roberts before her murder. Upon interrogation, paratrooper Avelino Fernandez admitted to killing the woman. According to Fernandez, Roberts had willingly followed him to the laneway for sex but afterward demanded payment. This enraged Fernandez to the point that he punched the woman in the face and repeatedly kicked her in the head. Brisbane’s Courier Mail reported that the woman’s jaw had been broken, that she asphyxiated on her own blood, and that sex took place post-mortem.C. Risch to Officer in Charge, 01 July 1944, Queensland Police Museum, File: Murder of Doris May Roberts by Avelino Fernandez, 1944 ; C. Risch to Officer in Charge, 01 August 1944, Queensland Police Museum, File: Murder of Doris May Roberts by Avelino Fernandez, 1944; Courier Mail, 20 June 1944.
It was not just the increased chance of death that resulted in short-termism and de-civilisation. As Hoppe states above, institutionalized property rights violations will lead to higher time preference. Although taxation, wealth redistribution, etc., spring to mind when one thinks of institutionalized property rights violations, one must ask: is there any greater property rights violation than involuntary servitude? We must remember that the majority of GIs during the Second World War were conscripts, i.e., slaves. These young men, having been dragooned into the military, having been removed from civil society, having lost their right to direct their own lives and plan for the future, and having every aspect of their lives regulated and controlled, understandably became present orientated because they were neither masters of their present circumstances nor, indeed, their future ones.
Coupled with suffering under a state of involuntary servitude was the peculiar American practice of providing servicemen with relatively high pay and access to amenities at subsidised prices. This was the deliberate policy of the Army Chief of Staff, General George C. Marshall, who believed that high pay improved “morale problems of inactive but articulate troops who were far from home.”David Reynolds, Rich Relations: The American Occupation of Britain, 1942-45 (London: Phoenix Press, 1996), xxviii. Having every material need provided for could only mean an increase in time preference and a further diminution of personal responsibility. A sociological study conducted shortly after the war observed the connection between Marshall’s policy and the erosion of personal responsibility:
Over any period of time the dull, do-nothing routine stimulated escape reactions which, in decreasing order of frequency, were movies, gambling, liquor, and brothels. The complete exhaustion of the monthly paycheck within a few days was comparatively common. A soldier could squander his cash with equanimity, knowing that next month would see him “flush” again; while, in the meantime, there was always the assurance of food and shelter.Lawrence Ingraham and Frederick Manning, “American Military Psychiatry,” in Richard A. Gabriel, ed., Military Psychiatry: A Comparative Perspective (New York: Greenwood Press, 1986) 58-59, quoted in Reynolds, Rich Relations, 78.
Army life, with its boredom, monotony, risk of death, and “nanny state” trappings increased time preference and diminished personal responsibility. As the famous war correspondent Ernie Pyle observed, a “soldier loses his sense of property. Nothing is sacred to him. In civilian life you’d call it stealing, but over there it’s the way they do.Arthur Miller, Situation Normal (New York: Reynal & Hitchcock, 1944), 172, quoted in Reynolds, Rich Relations, 78.
Time Preference and Sexual RelationsHigh time preference was manifested in other ways during the war. Walter Luszki, an officer with the 738th Police Battalion, observed short-termism and instant gratification in the form of sexual relations. In his book, A Rape of Justice: MacArthur and the New Guinea Hangings, Luszki describes that once he reached Brisbane, all of his battalion’s officers, including a committed family man, began “shacking up” with Australian women. According to Luszki, “an important reason for this behavior was the ever present nearness of death and the feeling that one might as well live it up while he could because time was short.Walter A. Luszki, A Rape of Justice: MacArthur and the New Guinea Hangings (Madison Books: Lanham, Maryland, 1991), 90.
Luszki’s comrades were not the only ones who decided to live it up; sex was everywhere during the war. The archival material is littered with flings that should seemingly belong in the 1960s rather than the supposedly-restrained 1940s. Queensland state police arrested couples having sex in broad daylight in Brisbane’s Botanic Gardens. After being caught in the act with an American soldier, one young woman begged the arresting constable to give her another chance, as she had a young son at home, and her husband would kill her. In another case, a group of gawking children drew a constable’s attention to an Australian women and a GI having sex in the gardens.W.N. Henry to Inspector of Police, 29 February 1944, QSA, Police Files, A/12031; W.N. Henry to Inspector of Police, 23 June 1944, QSA, Police Files, A/12031; W.N. Henry to Inspector of Police, 17 October 1944, QSA, Police Files, A/12031.
There also exists dozens of reports describing American servicemen making cuckolds out of Australian husbands. Here again we see instant gratification at work with little thought of consequences. Below is but one example of these affairs that is representative of the whole. In May 1943, American authorities were forced to deal with the womanizing of one Lieutenant Boyd Herman who had been having sex with an Australian sergeant’s wife. When the husband learned of the affair, he invited Herman to his home for dinner, “discussed the situation with him, and an agreement was reached that while Lt. Herman would be welcome in the home at any time, he was not to see Mrs. Noss or communicate with her” without his knowledge.Thomas E. Rilea to Commanding General, USASOS, 21 May 1943, NARA II (College Park), RG 495, Entry 48, Box 985, File: 250.3. The American broke his promise shortly thereafter, for Noss came home late one night to find Herman in his home with his wife. Noss protested the American’s behavior and forcibly threw him out of his house at which point Boyd produced a concealed handgun and threatened to shoot the Australian. Fortunately for the American lieutenant, Noss asked that U.S. authorities not to press charges.Ibid.
Police woman Lillian Armfield’s wartime recollections provide more evidence of high time preference among GIs. She had the depressing job of “reclaiming” wayward girls in Sydney who were caught in flagrante delicto with American servicemen. As a part of her duties, Armfield often participated in vice squad raids against American Red Cross dormitories. The goal of the raids was eliminating statutory rape. However, it was impossible to stop because it was so widespread. Vince Kelly, Rugged Angel, The Amazing Career of Policewoman Lillian Armfield (Sydney: Angus & Roberts, Ltd., 1961), 182-84.
Given that the war increased time preference, it is no surprise that this translated into higher divorce rates. The Courier Mail reported that in 1943, 398 divorces were granted in Queensland. This was an all time high and there were over 100 more divorces recorded than in 1942.Courier Mail , 30 December 1943. It is no coincidence that the 398 divorces in 1943 corresponded with the highpoint of the American presence in the country. Indeed, in 1943, 173 divorces were granted on the grounds of adultery and of these, 71 Americans were named as co-respondents.Rosemary Campbell, Heroes and Lovers: A Question of National Identity (Sydney: Allen & Unwin, 1989), 77. It is worth remembering that divorce is a formal dissolution of marriage that state authorities recorded in Australia; the number of de facto divorces in the form of broken homes surely rose too. The above data and anecdotes are significant for they illustrate that war did not raise time preferences for soldiers alone. Indeed, the war increased the time preferences of Australian civilians as well. The fear of Japanese attack, or even invasion, increased time preference; Australians also chose to live for the day because the future was more uncertain than it would have been during peacetime.
Encouraging High Time Preference: Marriage vs. ProstitutionSexual encounters were often no more than business transactions, as prostitution, though technically illegal in Australia, was tolerated and given semi-official sanction during the war. Brisbane had over 20 brothels in the so-called “sin-centre” around Albert Street. Queensland police kept this area under surveillance and made sure the bordellos did not become a public nuisance. The Kings Cross area of Sydney was that city’s well-known red light district. Some brothels there catered solely to black or white GIs to avoid fights. Even smaller communities like Mt. Isa and Townsville had several brothels catering to American troops. There is even one story (probably apocryphal) that Prime Minister John Curtin sent a trainload of Sydney prostitutes to Brisbane to meet the American demand.“Brothels,” Vedette Magazine: The Journal of Queensland Police Service, October 1995, 9; Potts, Yanks Down Under, 147; John Hammond Moore, Over-sexed, Over-paid, and Over here: Americans in Australia, 1941-1945 (St. Lucia: University of 9Queensland Press, 1981), 216. Prostitutes likely had a good idea about regional demand and required no government train to get them to Brisbane.
It is not apocryphal, however, that American authorities encouraged short-term flings and discouraged marriages. The U.S. Army established prophylactic stations in several Australian cities and turned a blind eye to their men’s unseemly conduct.B.M Fitch to Commanding Officers, Camp Royal Park Victoria, Camp Darley Victoria, 19 February 1942, NARA II (College Park), RG 495, Entry 1799, Box 1266, File: Morals and Conduct. One result of promoting short-term sexual relations was an increase in venereal diseases. To help limit their spread, American authorities helped Australian police track down women who were thought infected. Australian women were kept under surveillance, confined to locked hospitals and forcibly treated for diseases.Michael Sturma, “Public Health and Sexual Morality, Venereal Disease in World War II Australia” Signs 3:4 (Summer 1988): 727; Campbell, Heroes and Lovers, 98.
At the root of discouraging marriages with Australian women was the desire to keep men focused on the war and fighting the Japanese. Realistically, however, military authorities had to accept that relations between the sexes were inevitable. David Reynolds makes this point in his book Rich Relations:
Sex was usually the preoccupation of unoccupied armies. ... Aside from the satisfaction of sexual drives, female company was an antidote to the all-male environment, an expression of personal freedom, and balm for the dehumanizing rituals of army life.Reynolds, Rich Relations, 64.
Historically army commanders have seen relationships between their soldiers and women as problematic:
On the one hand, most took an attitude of what they considered robust common sense, namely that “basic male urges” must be satisfied. On the other hand, they have usually regarded woman as a threat to military discipline and effectiveness.Ibid.
The need to keep morale up in a mass conscript army, coupled with the fear that certain relations could undermine the efficiency and fighting spirit of American soldiers, meant that Australian and American officials accepted and even encouraged some sexual relations (prostitution) while discouraging others (marriage). Ultimately, authorities promoted high time preference among their men at the expense of future orientation. After all, if G.I. Joe, fighting in New Guinea, was preoccupied with his new bride and prospective life, how effective a fighter would he be? How much better to instead satiate male urges via prostitution, encourage short-termism and keep soldiers focused on killing the enemy?
Marriage was, nevertheless, a sensitive issue for American officials, as it was a basic civilian right. Moreover, marriage emphasized the duality of American conscripts; they were concurrently soldiers and citizens. Reynolds argues that this duality has preoccupied army commanders historically:
In armies of occupation it is particularly difficult to prevent soldiers from reverting to civilians, because that is the nature of the surrounding society. Soldiers are being imposed on civilians, often quite directly as when they are billeted on a household ... and the unoccupied soldier’s propensity for female company has to be satisfied in some way.Ibid., 69.
Nothing could expose this duality more than wartime marriages. Because of this fear of soldiers reverting to civilians, armies in the past have “tried to prohibit or dissuade their men from contracting marital relationships especially while on duty abroad.”Ibid., 64. During the Depression, marriages in the U.S. Army were only allowed when a soldier-applicant obtained his commanding officer’s permission and demonstrated that he could support his dependents. This policy continued into the 1940s and was applied in Australia.
On 20 February 1942, Major General Julian C. Barnes sent a memorandum to all base section commanders specifying how they should handle marriage requests.In the chaos of early 1942, there were many changes in the command structure of the US forces in Australia until MacArthur’s arrival in March. Thus, General Barnes was initially in command of US forces in the country, only to be supplanted by Lieutenant General George Brett. MacArthur took over command on 11 March 1942 and became Supreme Commander of the Southwest Pacific Area a month later. See Joseph Bykofsky and Harold Larson, United States Army in World War II, The Technical Services, The Transportation Corps: Operations Overseas (Washington DC, Office of the Chief of Military History, 1957), 426-29. The memorandum stated that:
As a matter of policy to govern the action of troops on Australian soil, it is the desire of the Commanding General that all commanding officers, when presented with a request by men of their command for permission to marry, use their utmost influence to discourage any such plans on the part of American soldiers during the period of war.B.H. Fitch to Commanding Officers, All Base Sections, United States Forces in Australia, 20 February 1942, National Archives and Records Administration II (NARA II) (College Park), RG 495, Entry 45, Box, 185, File: 291.1.
The policy in Australia was no different from that in mainland America. Soldiers were not barred from marrying, only strongly discouraged. Barnes’s superiors in Washington had reasonable grounds for doing so. Foremost among these was the fact that they believed marriages undermined the war effort. It was further alleged that marriages were unfair to prospective brides:
Action on the part of any soldier to institute family life in the field, and thus create a moral obligation, is not only unfair to the wife but a burden to the soldier and all those concerned in his welfare — both Army and Civilian — at a time when the soldier is already under obligation to give his services without restriction and without family ties for the duration of the emergency.Ibid.
It is worth noting that despite these efforts to discourage marriages and the higher time preferences brought on by the war, perhaps as many as 12,000 GIs married Australian women. Some couples even made sure there was a baby on the way so to force the hand of authorities. Potts, Yanks Down Under, 362; M.J. Conway to Commanding Generals All Base Sections, 07 May 1943, NARA II (College Park), RG 495, Entry 45, Box, 184, File: 291.1.
ConclusionExamining how the brutality of war dehumanizes combatants is nothing new among historians. Using time preference theory to help explain the behavior of soldiers and civilians in wartime, however, is novel. Short-termism, reckless consumption, crime, and sexual flings are all symptomatic of higher time preferences brought on by war. Property rights violations (i.e., involuntary servitude) and the greater chance of death increased time preferences which in turn encouraged uncivilized behavior among GIs. Australian civilians (in the context of this study, women) were not immune to the effects of war. They too exhibited higher time preferences; this is best illustrated in infidelities and short term sexual flings with GIs. Not surprisingly, the American military encouraged high time preferences by promoting flings and prostitution at the expense of future-orientated relations (i.e., marriage). Uncle Sam wanted G.I. Joe focused on fighting the Japanese not on future plans with Mrs. Joe.
In his examination of time preference in Man, Economy and State, Murray Rothbard asks the reader:
Suppose, for example, that people were certain that the world would end on a definite date in the near future. What would happen to time preferences and to the rate of interest? Men would then stop providing for future needs and stop investing in all processes of production longer than the shortest. Future goods would become almost valueless compared to present goods, time preferences for present goods would zoom, and the pure interest rate would rise almost to infinity.Murray Rothbard, Man Economy and State with Power and Market, 2nd Edition (Auburn: Ludwig von Mises Institute, 2009), 444.
GIs were not certain the “world would end on a definitive date in the near future.” Nevertheless, the war in the Pacific did increase the likelihood of death and the fear of death in the near future. It is no surprise then that for many American soldiers “future goods would become almost valueless” and that “time preferences for present goods would zoom.”
Image source: iStockphoto
In a recent post, “Machlup and Mises,” on the blog Coordination Problem, Peter Boettke has called attention to and summarized an important paper, “The Epistemological Implications of Machlup’s Interpretation of Mises’s Methodology” written by Gabriel Zanotti and Nicolás Cachanosky. According to these authors, Murray Rothbard advanced an influential interpretation of Mises’s methodology that led mainstream economists to view Mises as an extremist.
Rothbard, Zanotti and Cachanosky claim, maintained “that Mises would have said that economic science is completely a priori, without any room for auxiliary hypotheses that are not directly deducible from praxeology” (p. 2).All page references in the text are to the posting of Zanotti and Cachanovsky’s paper on the SSRN website, available for download here. (The paper by Rothbard which they criticize is his “In Defense of ‘Extreme Apriorism,’” Southern Economic Journal, January 1957, pp. 314-320. http://mises.org/rothbard/extreme.pdf) Though the point does not affect their paper’s argument, it is worth noting that the authors here misapprehend what Mises means by “praxeology.” Hypotheses are not deduced from praxeology, which is the science of human action. Rather, praxeology consists of a set of truths, at least in part deduced from the concept of action. The place of auxiliary hypotheses will be discussed later. To understand this, we first need to consider what is meant by calling a propositiona priori . This is a proposition that can be known to be true just by thinking about it: you don’t need to examine the world to see whether it’s true. “2 + 2 = 4” is a priori true: once you understand what the proposition says, you can grasp that it’s true. You don’t need to keep counting objects to see whether the claimed equality holds true. By contrast, “Mises wrote Human Action” is not a priori true: just thinking about the proposition will not tell you whether it is true.This discussion is oversimplified. Not all philosophers accept the a priori status of “2 + 2= 4.” Some philosophers do not think there are any a priori truths, and some think that mathematical truths are empirical. The view that economics is an a priori science struck many economists as absurd, and as a result Mises did not receive from the mainstream the attention that his work merited. Things might have been different, Zanotti and Cachanosky argue, had an alternative interpretation of Mises’s methodology prevailed over Rothbard’s extreme position. They acknowledge that Rothbard’s interpretation is plausible; but so, they say, is the alternative.
The alternative interpretation was advanced by a former student of Mises, the eminent economist Fritz Machlup; and it was in opposition to Machlup’s view that Rothbard defended his “extreme apriorism.” Machlup’s interpretation envisioned a much more modest role for a priori propositions.I am concerned here only with the authors’ presentation of Machlup’s ideas. I do not address the issue of whether they correctly state his position.
According to Machlup, some parts of a scientific theory are not tested. These form the fundamental assumptions of the theory: without them, the theory would lose its identity. Newton’s physics offers a prime example “The whole system of physical mechanics rests on such fundamental assumptions: Newton’s three laws of motion are postulates or procedural rules for which no experimental verification is possible or required.” (p. 7, quoting Machlup)
In Machlup’s view, when Mises claims that economic theory is a priori, he has only this moderate position in mind. “The fundamental assumptions are neither logical nor factual.” (p. 16) (Later, Imre Lakatos called these assumptions the “hard core” of a theory.) In this interpretation, then, Mises did not make the extravagant claim that thinking without experimental verification discloses real truth about the world. Rather, to call a proposition a priori is simply to designate its place within a theory. We wind up with a domesticated Mises, fully in line with up-to-date “post-Lakatosian” philosophy of science. (When our authors say [p. 6] that Machlup makes a “Lakatosian turn” on the Duhem-Quine thesis, I trust they realize that most of Lakatos’s work was not published until the 1970s. Machup’s article was written in 1955.)
Zanotti and Cachanovsky’s analysis seems to me totally misguided. It proceeds through a false antithesis. Rothbard is alleged to claim that economics is completely a priori. The authors triumphantly cite passages from Mises that say he has introduced supplementary empirical postulates. “Mises says. E.g., The disutility of labor is not of a categorical and aprioristic character. We can without contradiction think of a world which labor does not cause uneasiness. ... But the real world is conditioned by the disutility of labor.” (p. 10, citing Mises) Have not our authors undermined Rothbard’s interpretation?
Not at all, and they know it. Later in their own article, they acknowledge that Rothbard was fully aware of the place of subsidiary postulates in Mises’s praxeology: “Rothbard (1957, p. 315) moves on to mention the role of empirical assumptions in praxeology: ‘Actually, despite the ‘extreme’ a priori’ label, praxeology contains one Fundamental Axiom — the axiom of action — which may be called a priori, and a few subsidiary postulates which are actually empirical.’” (p. 16) Why then do they say at the start that, according to Rothbard’s “extreme apriorism,” all of the subsidiary postulates are derived a priori?
Even if I am right that our authors present a distorted view of Rothbard’s interpretation of Mises, the decisive point in the controversy lies elsewhere. When Mises speaks of a priori knowledge in economics, what does he mean? To say that an a priori statement in a theory is one not subject to testing makes an incomplete claim. One needs also to ask, why is the statement immune from testing? One answer, that of Machlup, is that the statement is a mere convention: no claim is made for the truth of the statement in itself. Mises again and again makes clear that he does not look at matters in this way. He thinks that his a priori claims are incontrovertibly true, not just artifacts of a theory.
If our authors wish to dispute this, they need to cite passages from Mises which either state or imply that the a priori claims of praxeology are merely conventional. These passages would then have to be weighed against the many statements by Mises to the contrary. He says, e.g.,
The theorems attained by correct praxeological reasoning are not only perfectly certain and incontestable, like the correct mathematical theorems. They refer, moreover with the full rigidity of their apodictic certainty and incontestability to the reality of action as it appears in life and history. Praxeology conveys exact and precise knowledge of real things.Ludwig von Mises, Human Action, Scholar’s Edition Auburn, Ala.: Mises Institute 1998), p. 39.
As if he were writing in advance to refute Machlup’s later interpretation of his position, he next says:
The starting point of praxeology is not a choice of axioms and a decision about methods of procedure, but reflection about the essence of action. There is no action in which the praxeological categories do not appear fully and perfectly. ... No experience can ever be had which would contradict these statements. Such an experience would be impossible in the first place for the reason that all experience concerning human is conditioned by the praxeological categories and becomes possible only through their application.Ibid., pp. 39-40
What, then, have Zanotti and Cachanosky to set against this? Nothing at all. They offer a number of quotations from Mises that to them show support for Machlup’s interpretation, but none of these addresses the key point: are the a priori claims of praxeology mere conventions or more than this?
I do not propose to go through all of their citations from Mises, but a few examples will show how they completely fail to see what is at issue. They cite Mises to the effect that praxeology does not convey a full knowledge of reality. Indeed it does not; Mises never claims to be able to deduce particular facts from praxeological theorems. What relevance has this for the status of a priori propositions in praxeology?
They quote this passage from Machlup: “‘Aprioristic reasoning is purely conceptual and deductive.It cannot produce anything else but tautologies and analytical judgments.’ While its [sic-this?] sounds like an ‘empiricist’s’ criticism of the aprioristic position, it is in fact a statement by Mises.” (p. 8) Machlup, and our authors following him, have made an unwarranted assumption. An analytic statement is true by the meaning of the concepts it contains. It does not follow from this that analytic statements are true by convention, i.e., that their truth arises from decisions about how to use words. That is a theory about analytic statements, not itself part of the meaning of “analytic statement.” Some of the logical positivists, and evidently Machlup as well, accepted this theory; and if you accept it, Machlup’s interpretation of Mises would be right. The a priori judgments of praxeology would be the products of convention.
But Mises rejects this theory. In the same passage quoted a few paragraphs ago, Mises says:
It is customary in the treatment of the epistemological problems of economics to adopt one of the solutions suggested for the natural sciences. Some authors recommend [Henri] Poincaré’s conventionalism. They regard the premises of economic reasoning as a matter of linguistic or postulational convention. ... However, the sciences of human action differ radically from the natural sciences. All authors eager to construct an epistemological system of the sciences of human action according to the pattern of the natural sciences err lamentably.
Our authors cite this in support of Machlup’s interpretation:
Economics does not follow the procedure of logic and mathematics. It does not present an integrated system of pure aprioristic ratiocination severed from any reference to reality. Inintroducing assumptions into its reasoning, it satisfies itself that the treatment of the assumptions concerned can render useful services for the comprehension of reality. It does not strictly separate in its treatises and monographs pure science from the application of its theorems to the solution of concrete historical and political problems.It adopts for the organized presentation of its results [a] form in which aprioristic theory and the interpretation of historical phenomena are intertwined. (p.11, Z and C’s emphasis)
They ignore what Mises says almost immediately after this.
There are no such things as a historical method of economics or a discipline of institutional economics. There is economics and there is economic history. The two must never be confused. All theories of economics are necessarily valid in every instance in which all of the assumptions presupposed are given. Of course, they have no practical significance in situations where these conditions are not established. The theorems referring to indirect exchange are not applicable to conditions where there is no indirect exchange. But this does not impair their validity.Ibid., pp. 66-67.
Mises makes the essential point even clearer in a slightly earlier passage:
But the end of science is to know reality. It is not mental gymnastics or a logical pastime. Therefore praxeology restricts its inquiries to the study of acting under those conditions and presuppositions which are given in reality. It studies acting under unrealized and unrealizable conditions only from two points of view. It deals with states of affairs which, although not real in the present and past world, could possibly become real at some future date. And it examines unreal and unrealizable conditions if such an inquiry is needed for a satisfactory grasp of what is going on under the conditions present in reality.
However, this reference to experience does not impair the aprioristic character of praxeology and economics. Experience merely directs our curiosity toward certain problems and diverts it from other problems. It tells us what we should explore, but it does not tell us how we could proceed in our search for knowledge.
Amazingly, Zanotti and Cachanosky quote part of this very passage, as if it supported rather than refuted them.
Mises, contrary to the “post-Lakatosian” predilections of our authors, does not advocate an amalgam of theory and empirical inquiry in one discipline: he rejects this utterly. His point is rather that once we know empirically that a phenomenon is present, e.g., the existence of money, the deductive theorems about that phenomenon then apply. The fact that parts of praxeology apply only under certain conditions is irrelevant to the key issue between Rothbard and Machlup: the status of a priori knowledge in Mises’s economics.
Our authors fumble again when they say:
Disutility of labor is assumed to be present in either a barter or monetary economy. In turn, the presence of money is a more general assumption than the presence of either commodity money or fiat money. This puts Mises under the same methodological structure as Machlup. It should also be noted that Human Action is a treatise on economics and Machlup’s piece was a paper within a specific methodological debate with detailed examples. It is to be expected that the assumed conditions in a treatise of economics to be more general than the ones present in a paper like Machlup’s. The fact that none of this proves or disproves a general theory is consistent with Machlup’s philosophy of science, according to which there is no deductive proof but a humble non-disconfirmation — empirical data illustrates, rather than tests, a theory. (p. 14 [I have corrected a typographical error in the quotation])
They are right that empirical data illustrate rather than test a theory, but for Mises, deductive proof is available. Once we know money exists, then everything deduced from the concept of money is guaranteed to apply.
There is yet another suggestion in Zanotti and Cachanovsky’s paper that is seriously misleading. They regret that Mark Blaug and others adopted Rothbard’s interpretation of Mises over that of Machlup. Why do they think that these authors drew from Rothbard rather than from Mises himself? The strong view of a priori knowledge in economics that repelled Blaug is clearly present in Mises, not a mere controversial “interpretation” advanced by Rothbard. Mises’s claim that we have a priori knowledge of the actual world is a stumbling block to the positivists and a scandal to Lakatos; but an unsupported reinterpretation of this claim will not make it go away.
Defenders of liberty are often challenged to supply exhaustive descriptions of what would happen if some aspect of our increasingly government-dictated lives were returned to people’s free choices. What would happen if government didn’t educate our children? What would happen if Social Security didn’t force people to “save” for retirement or Medicare and Medicaid didn’t provide health care? What would happen if the Fed didn’t control the money supply and the FDIC didn’t insure bank deposits? What would happen if the FDA didn’t ensure that food was safe and the EPA didn’t protect us from pollution? What would happen if the SEC didn’t rein in Wall Street and the FTC and antitrust laws didn’t protect us from monopolies and collusion? These questions, and many more like them, make up an almost unending list.In the face of such questions, it is nonetheless important to recognize that such questions are rhetorical traps designed to put an unachievable burden of proof on voluntary arrangements, short-circuiting the need to deal with the many valid criticisms of coercive policies.
The trap works because answers to such questions are beyond our competence. But that does not mean statism wins by default. It only means that detailed prediction of what would happen in a future where some government-imposed constraints on freedom are eased is beyond anyone’s knowledge.
Therefore, an accurate answer to “What, precisely, would freedom produce?” is “I don’t know; no one knows.” But failure to satisfactorily answer the unanswerable in no way detracts from justified confidence that voluntary arrangements will do things better. In fact, the inability to answer helps explain why freedom works so well — it allows previously undiscovered beneficial arrangements that serve people more effectively to develop, even though no one knows exactly what will happen in advance.
To see this, simply reflect on what freedom has produced in the past. The miracles that freedom has produced, unknown in advance, offer overwhelming testimony for faith in freedom.
For example, compare the Post Office with any other form of communication. Its snail’s pace changes contrast with advances in digital communication possibilities beyond even recent fantasies. In fact, freedom has produced miracles all around us whose nature we fail to understand, because we now take them for granted and forget their genesis (e.g., in a world of digital copying, few remember the lost “joys” of carbon paper and its purple progeny).
We need only revisit the revolutions involved to see that no one ever knew exactly what would happen beforehand. If people had only pursued what could be clearly foreseen, none of those miracles would have happened and we would be immeasurably poorer.
But how do we know that freedom’s results will be improvements when “anything could happen?” First, self-interest — the desire to improve the circumstances we currently face — means that improvements are sought. Second, when people’s rights are protected, the need to get others’ voluntary agreement means no one can force worse results on others, but leaves plenty of room for results to be not only better, but unimaginably better. Neither is assured under government’s heavy hand.
As Leonard Read’s famous “I, Pencil,” illustrated, market miracles are everyday occurrences. Pencils are cheap and plentiful, even though no one knows everything involved in making them. And so are staggering arrays of other things.
In addition, no politician who oversees, or bureaucrat who administers, one of the many government enterprises that have grown to surround us could have met the same burden of proof when the government overrides voluntary arrangements with their dictates. Moreover, questions posed to the government of “what would happen” in the face of some new proposed government program, such as Obamacare, are often tossed aside with impunity.
The initial promises made with such conviction for new government “solutions” have been unrealized pipedreams. And unlike self-ownership and the jointly beneficial market arrangements it allows, which has produced uncountable successes without theft, there are no such “success stories” that demonstrate miraculous improvement from the intrusion of government that can match the historical successes of the market. In fact, the only real examples of government-produced miracles, those produced by stringently restricting its reach, as with the “thou shalt nots” of our Constitution’s Bill of Rights, only reinforce a legitimate belief in freedom and corollary distrust of government.
One of my professors once said that “I have been an economist long enough to realize ‘I don’t know’ is an intellectually respectable answer.” In fact, when predicting the future, that is virtually always an important part of the answer. But when people are free, the results of their voluntary arrangements will be as good as they can discover, even if they are unknown in advance. In contrast, public policies based on what Friedrich Hayek called the “pretense of knowledge,” backed by coercion, are neither intellectually respectable nor a guarantee of improvement, however frequently or adamantly such promises are made. In fact, if the burden of proving its effectiveness was put on government, rather than liberty, vanishingly little of government would survive, and the shackles binding the miracles that are possible would be loosed.
Jason Brennan has in posts at Bleeding Heart Libertarians rendered a great service to supporters of a priori economics in the style of Mises and Rothbard, though this is far from his aim.Brennan, Jason, “Extreme Austrian Apriorism as the No True Scotsman Fallacy.” BleedingHeartsLibertarians.com, On October 23, 2013. To the contrary, he endeavors to show that a priori economics is untenable.
He recounts a conversation with someone he calls “Austrian Dude.” Brennan asked Austrian Dude how he, as a supporter of a priori Austrian economics, would deal with irrational actions of the sort studied by behavioral economics. (Examples include “confirmation bias” and “framing effects.”) In response, the Dude said that these are examples of behavior and not action: true action is rational. Brennan rightly comments that the Dude has committed the No True Scotsman Fallacy. He purported to be talking about actions, as this notion is ordinarily understood. Confronted with a counterinstance to his claim, the Dude shifted to a question-begging claim about “true” action.
Brennan makes short work of Austrian Dude, but the Dude made a false claim about Austrian economics. Mises explicitly rejects the view that actors never make mistakes in reasoning. When he says that all action is rational, he intends something much less controversial. He has in mind only that an actor regards the means he selects as suitable to attain the end he wants. The actor may well be wrong in thinking that he has chosen a suitable means; but he thinks he has.
Mises says, “It is a fact that human reason is not infallible and that man very often errs in selecting and applying means. An action unsuited to the end falls short of expectation. It is contrary to purpose, but it is rational, i.e., the outcome of a reasonable — although faulty — deliberation and an attempt — although an ineffectual attempt — to attain a definite goal.”Human Action, Scholar’s Edition (Auburn, Ala.: Mises Institute, 1998), p. 20. Many neoclassical economists have stricter criteria for rationality than Mises does. The stricter criteria are sometimes used to show that consumers and producers in the free market act irrationally, and the state is called in to remedy these alleged problems.
Brennan would, if I am not mistaken, answer that I have missed his point. He intended the story about the Austrian Dude to be an example of a general thesis. Even if the example misses the mark, the general thesis remains good. If Mises makes a claim about action, the claim can be taken in two ways. If it is a claim about actions in the world, according to our ordinary concept of action, then it is an empirical claim. We can only find out if the claim is true by observation. We cannot know it to be true a priori. We can build into our concept of action that a particular claim about action is true, but then we will be committing the No True Scotsman Fallacy. We cannot find out the nature of the real world just by thinking about it.
Is this so? Brennan has given us no reason to think that it is. Mises intends to be talking, not about some contrived concept of “action,” constructed to make his assertions about action true by stipulation, but rather about actions in the world, as we ordinarily understand them. Precisely his thesis is that we can gain knowledge of actions, understood this way, by thinking. We have a priori knowledge that applies to the world.
What has Brennan to say against this? So far as I can see, he advances no argument. He merely states his own contrasting position. Mises says that we have a priori knowledge of action; and Brennan responds, in effect, “No, we don’t.”
Many philosophers would agree with Brennan about the a priori. Indeed, some philosophers, e.g., W.V.O. Quine and Michael Devitt, go further and reject the a priori altogether. But the status of the a priori, among those who accept its existence, is a controversial topic, and the view that Brennan has of it by no means is the only one in the field. Just to mention a few well-known thinkers, Tyler Burge, Christopher Peacocke, Laurence BonJour, Alvin Plantinga, and David Chalmers hold much more robust views of the scope of a priori knowledge than Brennan does.
Of course, to mention these philosophers does not begin to suffice to show that Brennan is wrong, and I do not intend here to defend a view of the a priori of my own. Just to give a very preliminary reason for thinking that it is not nonsensical to believe that we have a priori knowledge not confined to defining concepts, though, here are a few examples of statements that appear to be both a priori and to give us knowledge of the actual world: (1) Something exists; (2) I now exist [said by me now]; (3) I now know that 2+2 = 4 [said by me now].
Rather, my aim is a more limited one. It is to point out that if Brennan wishes to reject the a priori character of economics, he needs to do more than just state a view that denies that such knowledge is possible. He must argue that this view of the a priori ought to be adopted; and this, so far as I can see, he has not done.
I said at the outset that Brennan has rendered a great service to supporters of a priori economics, and the service I have in mind is this. He has suggested a very good way of evaluating a priori claims about action. If there are apparent counterinstances to such claims, and the person advancing the claim then responds by committing the No True Scotsman Fallacy, one has good reason to think that the claim has failed. This test is in no way dependent on accepting Brennan’s views about a priori knowledge.
Judged by this test, what can we say about the a priori status of Austrian economics? Do Austrian economists respond to counterexamples by resort to the No True Scotsman Fallacy? When Austrian economists say, e.g., that the parties to an exchange would not engage in it unless each expected to benefit from it, is it the case that “exchange” and “benefit” are being used in special senses, to immunize the statement from counterexamples? I do not think so. Rather, these words are being used in a perfectly ordinary way, and the Austrian claim is that, understood this way, the statement about exchange is known a priori to be true. What is supposed to be wrong with this Austrian claim? Again, when Mises says, “There is no ratiocinative operation which could lead from the valuation of a definite quantity or number of things to the determination of the value of a greater or smaller number,”Ibid., p. 122. he is making neither an empirical claim nor using words in special senses. He is stating an a priori truth about valuation, a process in the real world.
Brennan has given us no reason to think that Austrian economists commit the No True Scotsman Fallacy. Much less has he justified the broader thesis that pursuit of a priori knowledge of the actual world is a futile quest.
Archived from the live Mises.tv broadcast, this lecture was presented by David Gordon at the 2013 Mises University, hosted by the Mises Institute in Auburn, Alabama, on 22 July 2013. Includes an introduction by Mark Thornton.
Language is a variety of action. Linguists have recognized this fact in its contemporary understanding since at least the 1960s, when J. L. Austin coined the terms “speech acts” and “performative utterances” to refer to the non-declarative functions of language.See especially J. L. Austin, How to Do Things with Words (William James Lectures), 2nd ed. (Cambridge, Mass.: Harvard University Press, 1975). Various other scholars had also written on the performative nature of language as far back as the Greeks, and the power of speech as an act even features prominently in early Christian texts (e.g., the creative power of God’s speech as he shapes the world with merely an utterance, “Let there be light,” or the concept of the biblical Word). But in the years prior to Austin, philosophers of language, influenced by analytic philosophy and logical positivism, were mainly interested in what sentences mean, i.e., their semantic, declarative, or propositional content, and especially their truth values. Austin, however, pointed out that people do more than just communicate with language — they use it to do things as well. Speaking is often an act in itself, such as when we say “I promise” or “I hereby declare.” Today many linguists acknowledge that all language is performative. Even the innocuous declarative sentence “I went to the store” constitutes an act, i.e., the act of informing. Just like any other action, we speak and write in order to bring about effects on the world, or in the mental states of others. Language, therefore, is a species of action, and thus subject to the laws of praxeology.
Language is just one of the many under-explored areas in the broader field of what might be called “praxeology of culture.” Mike Reid, for example, has written a number of excellent articles in the Austrian tradition from an anthropological perspective, and Paul Cantor has successfully applied Austrian insights to both literary and cultural analysis. If praxeology is really to be taken as the science of human action, then these fields deserve their place as a new branch in the Rothbardian taxonomy of the fields of praxeology.Murray N. Rothbard, “Praxeology: Reply to Mr. Schuller,” American Economic Review, December 1951, pp. 943-946. Moreover, sociology, anthropology, and cultural studies are those fields most in need of the insights of praxeology and methodological individualism, since they have become notoriously collectivist in their ideologies. As Mike Reid once wrote to me,
In my experience, the hard-core collectivists have fled the field of economics, meaning that we can’t reach them there. They’ve backed themselves into anthropology, sociology, literature, linguistics, and the omnipresent grievance studies. Our work can reach out to the mountainous strongholds of error and hold up a candle of truth at the entrances to their caves. Come out! Come out! There’s truth and hope out here!
Yet as an area of praxeology language has garnered almost no recognition among Austrians. One notable exception comes from Ludwig von Mises, the father of praxeology himself. He concisely illustrates the performative nature of language in Human Action:
Action means the employment of means for the attainment of ends. As a rule one of the means employed is the acting man’s labor. But this is not always the case. Under special conditions a word is all that is needed. He who gives orders or interdictions may act without any expenditure of labor. To talk or not to talk, to smile or to remain serious, may be action.Ludwig von Mises, Human Action: A Treatise on Economics. Scholar’s Edition / Kindle Edition (Auburn, Ala.: Ludwig von Mises Institute, 2008 [1949, 1998]), pp. 931-934.
And although Mises also writes extensively on the relationship between language and nation, and the politics of language, in his book Nation, State, and Economy, these comments are perhaps more political commentary than praxeological insights per se.
Many prominent Austrian economists (Menger, Hayek, Mises, Rothbard) also point to language as an example of spontaneous order in society. Hayek’s comments are the best-known in this regard:
The basic tools of civilization — language, morals, law and money — are all the result of spontaneous growth and not of design.Friedrich A. Hayek, The Constitution of Liberty: The Definitive Edition, vol. 17, The Collected Works of F. A. Hayek (Chicago: University of Chicago Press, 2011 [1960]), p. 495.
Being a type of spontaneous order, it is no surprise that language is subject to the same kinds of centrally-planned disruptions as economic systems, as noted by Rothbard:
The system of compulsory state education has been used as a terrible weapon in the hands of governments to impose certain languages and to destroy the languages of various national and linguistic groups within their borders. This was a particular problem in central and eastern Europe. The ruling State imposes its official language and culture on subject peoples with languages and cultures of their own, and the result has been incalculable bitterness. If the education were voluntary, such a problem would not have arisen.Murray N. Rothbard, Education: Free and Compulsory. Kindle Edition. (Auburn, Ala.: Ludwig von Mises Institute, 1999 [1971, 1979]), pp. 577-581.
These themes constitute the only real contributions to the praxeology of language in the Austrian tradition, other than the frequent but ill-informed assertion that language is decaying and that this is a symptom of a decaying society (a well-known fallacy in linguistics). Yet significant insights can be had from even a cursory application of the lessons of praxeology.
Take the single most important principle of economics, for example — opportunity cost. Or, in the words of Bastiat, “that which is unseen.” As Mises puts it,
But acting man chooses, determines, and tries to reach an end. Of two things both of which he cannot have together he selects one and gives up the other. Action therefore always involves both taking and renunciation. ... Wherever the conditions for human interference are present, man acts no matter whether he interferes or refrains from interfering. ... Action is not only doing but no less omitting to do what possibly could be done.Ludwig von Mises, Human Action: A Treatise on Economics. Scholar’s Edition/ Kindle Edition (Auburn, Ala.: Ludwig von Mises Institute, 2008 [1949, 1998]), pp 926-940.
This is no less true for language. Isn’t that which is left unsaid just as important as that which is said? For every utterance one speaks, there are an infinite number of other utterances left unspoken. Often, the ones left unsaid are so salient that they actually contribute to our interpretation of the utterance. If one says, I have five dollars, this is because they opted not to say I have six dollars. Assuming that the goal of the utterance is to convey the amount of money the speaker possess, the listener can infer that the speaker has five and no more than five dollars, even though it is logically possible that the speaker has six or six thousand. The same goes for utterances such as, Well, I don’t not like him. No native speaker of English would deny that what is unsaid here is far more important than what is said.
Yet in other situations, such inferences are unjustified. If asked, Does anybody have five dollars for the tip?, and you reply, I have five dollars and hand over the money, nobody is justified assuming that your wallet is now empty (at least not on the basis of your utterance alone). What makes the inference justified in one case but not another? How do listeners navigate these inconsistencies? At other times, questions can be dodged entirely, and it gives nobody the slightest pause. Consider:
A: Do you want to go to the movies with me at 6:00?
B: Is there a 7:30 showing?
A: Sure is.
B: Great! Let’s do that.
B isn’t even answering A’s original question, and yet B hardly comes across as uncooperative or hard to understand. Much of our everyday speech is like this — riddled with implications and things left unsaid. What makes it possible for listeners to pierce this linguistic fog is the simple fact that we interpret other people’s utterances as targeted actions on the part of conscious actors aiming at a certain communicative or social goals. Every utterance is interpreted through this lens. It is the implicit recognition on the part of every listener that we are all actors aiming at ends that makes communication possible at all.
In a way, this makes language a wonderful testament to the worth of the individual. For every time I listen to what you have to say and attempt to understand it, I acknowledge your status as an autonomous individual with aims of your own. We are all budding praxeologists thanks to language.
From the session on "Austrian Theory and Method," presented at the Austrian Economics Research Conference. Recorded 23 March 2013 at the Ludwig von Mises Institute in Auburn, Alabama.
From the session on "New Frontiers in Austrian Economics," presented at the Austrian Economics Research Conference. Recorded 23 March 2013 at the Ludwig von Mises Institute in Auburn, Alabama.
From the session on "Monetary Theory and Policy," presented at the Austrian Economics Research Conference. Recorded 21 March 2013 at the Ludwig von Mises Institute in Auburn, Alabama.
[Man, Economy, and State, with Power and Market]
The analysis in chapter 1 was based on the logical implications of the assumption of action, and its results hold true for all human action. The application of these principles was confined, however, to "Crusoe economics," where the actions of isolated individuals are considered by themselves. In these situations, there are no interactions between persons. Thus, the analysis could easily and directly be applied to n number of isolated Crusoes on n islands or other isolated areas. The next task is to apply and extend the analysis to consider interactions between individual human beings.
Let us suppose that Crusoe eventually finds that another individual, say Jackson, has also been living an isolated existence at the other end of the island. What types of interaction may now take place between them? One type of action is violence. Thus, Crusoe may entertain a vigorous hatred toward Jackson and decide to murder or otherwise injure him. In that case, Crusoe would gain his end — murder of Jackson — by committing violence. Or Crusoe may decide that he would like to expropriate Jackson's house and collection of furs and murder Jackson as a means to that end. In either case, the result is that Crusoe gains in satisfaction at the expense of Jackson, who, to say the least, suffers great psychic loss. Fundamentally similar is action based on a threat of violence, or intimidation. Thus, Crusoe may hold up Jackson at the point of a knife and rob him of his accumulated furs and provisions. Both examples are cases of violent action and involve gain for one at the expense of another.
The following factors, singly or in combination, might work to induce Crusoe (or Jackson) to refrain from any violent action against the other:
He may feel that the use of violence against any other human being is immoral, i.e., that refraining from violence against another person is an end in itself, whose rank in his value scale is higher than that of any advantages in the form of capital or consumers' goods that he might gain from such action.
He may decide that instituting violent action might well establish an unwelcome precedent, causing the other person to take up arms against him, so that he may end by being the victim instead of the victor. If he begins a type of action where one must gain at the expense of another, then he must face the fact that he might turn out to be the loser as a result of the action.
Even if he feels that his violent action eventually will result in victory over the other, he may conclude that the "costs of the war" would exceed his net gain from the victory. Thus, the disutility of time and labor-energy spent in fighting the war (war may be defined as violent action used by two or more opponents), in accumulating weapons for the war (capital goods for war uses), etc., might, in prospect, outweigh the spoils of conquest.
Even if Crusoe feels reasonably certain of victory and believes that the costs of fighting will be far less than the utility of his spoils of victory, this short-run gain may well be outweighed in his decision by long-run losses. Thus, his conquest of Jackson's furs and house may add to his satisfaction for a while after the "period of production" (= preparing for the war + the length of time of the war itself), but, after a time, his house will decay and his furs will become worthless. He may then conclude that, by his murder of Jackson, he has lost permanently many services which Jackson's continued existence might have furnished. This might be companionship or other types of consumers' or capital goods. How Jackson might have served Crusoe without resort to violence will be indicated below, but, at any rate, Crusoe may be detained from using violence by estimating the disutility of the long-run consequences more highly than the utility of the expected short-run gains. On the other hand, his time preference may be so high as to cause his short-run gains to override the long-run losses in his decision.
It is possible that Crusoe may institute violent action without taking into consideration the costs of the war or the long-run consequences, in which case his actions will turn out to be erroneous, i.e., the means he used were not the appropriate ones to maximize his psychic revenue.
Instead of murdering his opponent, Crusoe might find it more useful to enslave him, and, under continual threat of violence, to force Jackson to agree to expend his labor for the satisfaction of Crusoe's wants rather than his own.For a discussion of the transformation from murder to slavery, cf. Franz Oppenheimer, The State (New York: Vanguard Press, 1914, reprinted 1928), pp. 55–70 and passim. Under slavery, the master treats the slaves as he does his livestock, horses, and other animals, using them as factors of production to gratify his wants, and feeding, housing them, etc., just enough to enable them to continue in the master's service. It is true that the slave agrees to this arrangement, but this agreement is the result of a choice between working for the master and injury through violence. Labor under these conditions is qualitatively different from labor not under the threat of violence, and may be called compulsory labor as compared to free labor or voluntary labor. If Jackson agrees to continue working as a slave under Crusoe's dictates, it does not mean that Jackson is an enthusiastic advocate of his own slavery. It simply means that Jackson does not believe that revolt against his master will better his condition, because of the costs of the revolt in terms of possible violence inflicted on him, the labor of preparing and fighting, etc.
The argument that the slave might be an enthusiastic supporter of the system because of the food, etc., provided by his master ignores the fact that, in that case, violence and the threat of violence by the master would not be necessary. Jackson would simply voluntarily place himself in Crusoe's service, and this arrangement would not be slavery, but another type considered in the next section.It is true that man, being what he is, cannot absolutely guarantee lifelong service to another under a voluntary arrangement. Thus, Jackson, at present, might agree to labor under Crusoe's direction for life, in return for food, clothing, etc., but he cannot guarantee that he will not change his mind at some point in the future and decide to leave. In this sense, a man's own person and will is "inalienable," i.e., cannot be given up to someone else for any future period.,Such an arrangement is not a guarantee of "security" of provisions, since no one can guarantee a steady supply of such goods. It simply means that A believes that B is better able to furnish a supply of these goods than he is himself. It is clear that the slave is always worse off than he would be without the threat of violence by the master, and therefore, that the master always gains at the expense of the slave.
The interpersonal relation under slavery is known as hegemonic.Cf. Mises, Human Action, pp. 196–99, and, for a comparison of slaves and animals, ibid., pp. 624–30. The relationship is one of command and obedience, the commands being enforced by threats of violence. The master uses the slaves as instruments, as factors of production, for gratifying his wants. Thus, slavery, or hegemony, is defined as a system in which one must labor under the orders of another under the threat of violence. Under hegemony, the man who does the obeying — the "slave," "serf," "ward," or "subject" — makes only one choice among two alternatives:
to subject himself to the master or "dictator"; orto revolt against the regime of violence by use of his own violence or by refusing to obey orders.If he chooses the first course, he submits himself to the hegemonic ruler, and all the other decisions and actions are made by that ruler. The subject chooses once in choosing to obey the ruler; the other choices are made by the ruler. The subject acts as a passive factor of production for use by the master. After that one act of (continual) choice made by the slave, he engages in coerced or compulsory labor, and the dictator alone is free to choose and act.
Violent action may result in the following developments:
inconclusive fighting, with neither opponent the victor, in which case the war may continue intermittently for a long period of time, or violent action may cease and peace be established (the absence of war);the victor may kill the victim, in which case there is no further interpersonal action between the two;the victor may simply rob the victim and leave, to return to isolation, or perhaps with intermittent violent forays; orthe victor may establish a continuing hegemonic tyranny over the victim by threats of violence.In course a, the violent action has proved abortive and erroneous; in b, there is no further interpersonal interaction; in c, there is an alternation between robbery and isolation; and in d, a continuing hegemonic bond is established.
Of these results, only in d has a continuing pattern of interpersonal relationship been constituted. These relations are compulsory, involving the following coerced "exchanges": the slaves are treated as factors of production in exchange for food and other provisions; the masters acquire factors of production in exchange for supplying the provisions. Any continuing pattern of interpersonal exchanges is called a society, and it is clear that a society has been established only in case d.There is, of course, no judgment at this point concerning whether the establishment of a society or such a society is a good, bad, or indifferent development. In the case of Crusoe's enslavement of Jackson, the society established is a totally hegemonic one.
The term "society," then, denotes a pattern of interpersonal exchanges among human beings. It is obviously absurd to treat "society" as "real," with some independent force of its own. There is no reality to society apart from the individuals who compose it and whose actions determine the type of social pattern that will be established.
We have seen in chapter 1 that all action is an exchange, and we may now divide exchanges into two categories. One is autistic exchange. Autistic exchange consists of any exchange that does not involve some form of interpersonal exchange of services. Thus, all of isolated Crusoe's exchanges were autistic. On the other hand, the case of slavery did involve interpersonal exchange, in which each gives up some goods in order to acquire other goods from the other. In this form of compulsory exchange, however, only the ruler benefits from the exchange, since he is the only one who makes it of his own free choice. Since he must impose the threat of violence in order to induce the subject to make the exchange, it is clear that the latter loses by the exchange. The master uses the subject as a factor of production for his own profit at the latter's expense, and this hegemonic relationship may be called exploitation. Under hegemonic exchange, the ruler exploits the subject for the ruler's benefit.This system has sometimes been called "compulsory co-operation," but we prefer to limit the term "co-operation" to the result of voluntary choices.
The wellspring of all economic theory is the reality of the human condition. As a finite being, man makes a distinction between ends and means. He cannot attain his ends by an act of will alone, but must apply means to attain his ends. Man lives in an orderly but finite world. Using means produces only limited effects in attaining ends. Endowed with reason, man is able to perceive the causal connection between the use of means and the attainment of ends. Any action toward the attainment of an end requires surrendering the attainment of another end with the same means. And any action using a set of means requires foregoing using another set of means to attain the same end. Action, therefore, requires choice.
As a purposeful being, man selects what he perceives to be higher-valued ends to pursue and what he perceives to be lower-valued sets of means to employ. Choice, therefore, requires a judgment of the mind. Since attaining the end is the purpose of an action, the value a person attaches to the attainment of the end is primary. A person attaches only derivative value to the means used in action since they are merely aids to the attainment of the end. Means have no value independent of the value a person attaches to the end they help attain. The human mind imputes value to the means according to the aid they render in attaining a valuable end. The technical properties of each of the means that combine to attain an end can be valued differently by different persons or by the same person at different times and, therefore, have no causal impact on choice and action independent of the judgment of the mind.
As a temporal being, man distinguishes between sooner and later. He can, therefore, judge the value of attaining an end sooner differently than attaining it later. Just as the principle of preference is implied by man's finitude, time preference is implied by his temporality. Temporal beings prefer the satisfaction of an end sooner to the same satisfaction later. Man places a premium on present satisfaction over future satisfaction. Since time preference refers only to the difference in value of the satisfaction of an end sooner instead of the same satisfaction later, the discount a person places on the future will be uniform across all actions with the same intertemporal structure. Moreover, the discount applies to all actions regardless of when a person chooses to undertake any one of them. In choosing to take an action later, a person is demonstrating that the value of the action in the future exceeds its value in the present, even when the discount of the future is applied. His temporal choice, then, conforms to the general principle of action, that he chooses a more-highly valued alternative and forgoes a less-highly valued one. He economizes his actions across all aspects of action subject to choice: ends, means, place, and time.
In short, the human mind integrates all the factors affecting human action into a systematic whole, reconciling the objective, technical features of the world, including time, through judgments of value in a way that renders the highest satisfaction of ends.
The market economy performs this integration for society. Prices are determined by the underlying preferences of buyers and sellers. Objective factors have no independent effect on prices, but influence prices only through preferences. Prices of consumer goods are directly determined by the preferences consumers have for them as expressed in their demands for the goods. Prices of producer goods used to produce each consumer good are indirectly determined by consumer preferences as they generate revenue for entrepreneurs to justify the demand entrepreneurs express for them. Entrepreneurs pay each factor of production the monetary value of its contribution to production.
If the factor payment is made sooner than the revenue is received from the sale of the output produced, then the payment is discounted because of time preference. This discount of future money relative to present money is interest and determines the pure, or time-preference, rate of interest. Because all exchange of present money for future money of the same time structure involves time preference, the pure rate of interest is uniform across all such intertemporal exchange. It follows that all present goods that generate future money will have their prices determined by discounting the future money by the rate of interest to obtain the equivalent amount of present money. This process of capitalization results in a uniform rate of interest as the difference between the present money spent to acquire factors of production and the future money obtained from selling the output produced. Prices, so determined, are the basis for economic calculation, which permits entrepreneurs to appraise the lines of production and investment that people find most valuable.
One of the most important factors that inhibited the study of praxeology for the last 60 years was Friedrich Hayek's argument that praxeology is inapplicable to the study of market phenomena. His argument against praxeology (which he called the "Pure Logic of Choice") is relatively simple. The pure logic of choice, as Hayek understood it, entails an analytical relationship between (1) the object of an actor's action, and (2) the actor's action. Here is the key passage from Hayek's essay "The Facts of the Social Sciences":
From the fact that whenever we interpret human action as in any sense purposive or meaningful, whether we do so in ordinary life or for the purposes of the social sciences, we have to define both the objects of human activity and the different kinds of actions themselves, not in physical terms but in terms of the opinions or intentions of the acting persons, there follow some very important consequences; namely, nothing less than that we can, from the concepts of the objects, analytically conclude something about what the actions will be. If we define an object in terms of a person's attitude toward it, it follows, of course, that the definition of the object implies a statement about the attitude of the person toward the thing. When we say that a person possesses food or money, or that he utters a word, we imply that he knows that the first can be eaten, that the second can be used to buy something with, and that the third can be understood — and perhaps many other things.
Hayek's conception of praxeology or the pure logic of choice is a kind of conceptual analysis. If we say the object confronting the actor is food, we can analytically conclude that the action associated with that object will be eating. If the object confronting the actor is money, we can analytically conclude that the action associated with that object will be buying or selling, etc. Thus, Hayek conceives an analytic or logically necessary relationship between (1) the object that we, as social scientists, assume confronts an actor, and (2) the action the actor will perform based on the assumption of the object that confronts that actor. We can see that the analytic relationship Hayek conceives is between an object appearing to an observed or studied actor, and the action that must, by conceptual analysis, "accompany" that object.
Hayek then makes the following point. The market is comprised of the interactions of a number of people. When we study the market, we study the relationship between of a number of people, not an individual actor and the relationship between his action and the object of his action.
Here are the relevant passages from Hayek's essay "Economics and Knowledge":
I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of different individuals.…
The sense in which we use the concept of equilibrium to describe the interdependence of the different actions of one person does not immediately admit of application to the relations between actions of different people.
To get a clear idea of Hayek's point, let us consider ourselves social scientists looking at a local marketplace from the top of a nearby building. We see many people in the marketplace interacting: buying, selling, talking, eating, etc. To each of these individual actors, the pure logic of choice, as described above, applies. If one actor has food, the action analytically associated with this is eating; if one actor has money, the action analytically associated with this is buying, etc.
But this method of analysis does not apply to the relationship between actors. If one actor has food, this doesn't say anything about the action of a second, different actor.
Thus, the pure logic of choice (praxeology) does not apply to study of the market.
This argument of Hayek's constitutes the fundamental difference between the Misesian and the Hayekian conception of economics. The fundamental proposition of Hayekian economics is that market study can only be empirical, not a priori. In other words, praxeology is inapplicable to market study:
What I see only now clearly is the problem of my relationship to Mises, which began with my 1937 article on the economics of knowledge, which was an attempt to persuade Mises himself that when he asserted that the market theory was a priori, he was wrong; that what was a priori was only the logic of individual action, but the moment that you passed from this to the interaction of many people, you entered into the empirical field. (Hayek on Hayek, p. 72)
As Hayek's argument against praxeology is relatively simple, so is it simple to see the flaw in Hayek's argument. We may ask, when a marketplace is the object of the actor's action (when the actor observes a market, or when he walks in a market, or when he buys in a market) why can't we draw an analytical conclusion from this object of the actor's action? Or, when a price is the object of the actor's action (when the actor observes a price, or asks a price, or pays a price), why can't we draw an analytical conclusion from this object of the actor's action? In short, why can't we arrive at analytical conclusions regarding any social object or social phenomenon or any market object or market phenomenon, by understanding them to be objects of an actor's action, and drawing analytical conclusions from these objects as Hayek indicates?
If we say an actor possess food, and from this we may analytically arrive at the action eating, then when the actor visits a market, why may we not analytically arrive at the action shopping? And when the actor considers a price, why may we not analytically arrive at the action purchasing?
By the terms of Hayek's own conception of praxeology it would seem this analytical method should be applicable to the objects or phenomena of the market, and this would constitute "a priori" analysis of the market.
Furthermore, this same procedure should be applicable to other social objects and social phenomena such as languages, laws, families, etc.
One other important aspect of Hayek's critique should be noted. Recall that when Hayek describes the procedure of the pure logic of choice, he does so in terms of a third-person narrative. Hayek writes,
When we say that a person possesses food or money, or that he utters a word, we imply that he knows that the first can be eaten, that the second can be used to buy something with, and that the third can be understood — and perhaps many other things. (emphasis added)
Hayek here refers to a hypothetical actor whom the scientist observes or studies. The question is, what about the case when it is the social scientist himself who interacts with the object or phenomenon in question? Let's say that the social scientist visits a farmer's market or pays a price for something in this same market, or pays interest on a loan. Because the market, the price, the loan, and the interest, appear to the scientist as objects of his own action, what prevents the scientist from drawing analytical conclusions about action from these objects that appear to him? Is there something that obligates the social scientist to study only the relationship between the objects and actions of other people? What prevents the scientist from studying the relationship between his own actions and the objects of his actions?
Thus, there are two problems with Hayek's critique of praxeology:
Hayek doesn't explain why the pure logic of choice can't be applied to study of the market, by considering market phenomena as objects of action (visiting a market, paying a price, etc.) and then drawing analytical conclusions from the concepts of those objects.
Hayek doesn't explain why the social scientist can't draw analytical conclusions about the relationship between his own actions and the objects of his actions.
As should be clear, these are problems in the application and understanding of Hayek's own conception of praxeology. Above, we assume that Hayek's conception of praxeology is valid and is the same as Mises's, and we simply ask "if praxeology applies to objects a, b, and c, why doesn't praxeology apply to objects x, y, and z?" And we ask "if praxeology applies to the objects of A's action, why doesn't praxeology apply to the objects of B's action?" Hayek agrees that it is possible to draw analytical conclusions from objects a, b, and c by considering them objects of the action of actor A. We simply ask why we can't draw analytical conclusions from objects x, y, and z by considering them objects of the action of actor B? We're asking why Hayek's principles don't apply to objects and persons besides the specific ones Hayek uses to illustrate his principles.
It should be noted though that Hayek's conception of the pure logic of choice is not identical to Mises's conception of praxeology. Hayek's pure logic of choice is a kind of conceptual analysis. Misesian praxeology is not concerned with conceptual analysis per se; it is concerned with the formal structure of action. These two things are not necessarily the same. As Mises conceives things,
Praxeology is not concerned with the changing content of acting, but with its pure form and its categorial structure. (Human Action)
Thus, as soon as we differentiate the object of action "food" from the object of action "money" (as Hayek does in the pure logic of choice), we are, according to Mises, referring to the changing content of action, and have therefore left praxeology proper.
This shows that Hayek conceives praxeology differently from Mises.
Aside from the questions about the application of Hayek's pure logic of choice, there are serious questions about the knowledge that it could possibly attain.
Recall, for example, that Hayek claims,
We can, from the concepts of the objects, analytically conclude something about what the actions will be.
Is this simple proposition necessarily true? Can we analytically conclude the action of the individual based on the concept of the object that confronts him?
If we say that an actor possesses food, does this mean that the actor will perform the action of eating? Can't an actor possess food but not eat the food? Let's say an actor possesses a ball. Must he throw the ball? If an actor possesses a ball, may we "analytically conclude something about what the actions will be"? The answer seems clearly to be no. Perhaps we can analytically conclude that if an actor possesses a ball, then he also possesses a sphere and an object having an internal volume, etc. Here we have conceptual or tautological analysis, but we have not thereby established a necessary relationship between a particular object and a particular action that an actor possessing that object must perform. The study of concepts is not necessarily identical to the study of action.
ConclusionOne of the fundamental pillars of Hayekian social thought is Hayek's contention that study of the market cannot be a priori. But Hayek seems not to have realized the implications of his own conception of the pure logic of choice. He didn't realize that the method of logical analysis he envisioned could easily be applied to the market and its various objects and phenomena (prices, interest, etc.).
In conceiving that formal exact science is inapplicable to the study of market phenomena, Hayek's thinking diverges not only from Mises's, but from Menger's as well. Menger's Investigations into the Method of the Social Sciences is largely devoted to the proposition that formal exact science is valid in all realms of the world of phenomena, "economy" being but one realm of human phenomena. Thus, Mises's insight that economics is only one branch of praxeology can be traced back to Menger's vision of the "exact approach to cognition." In his Investigations, Menger provided a definition of formal exact science, a science that Mises later termed praxeology:
The aim of this orientation, which in the future we will call the exact one, an aim which research pursues in the same way in all realms of the world of phenomena, is the determination of strict laws of phenomena, of regularities in the succession of phenomena which do not present themselves to us as absolute, but which in respect to the approaches to cognition by which we attain to them simply bear within themselves the guarantee of absoluteness. It is the determination of laws of phenomena which commonly are called "laws of nature," but more correctly should be designated by the expression "exact laws."
[Human Action (1949)]
Liberalism, in its 19th-century sense, is a political doctrine. It is not a theory, but an application of the theories developed by praxeology and especially by economics to definite problems of human action within society.
As a political doctrine liberalism is not neutral with regard to values and the ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to these valuational principles.
While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, nourishment to starvation, abundance to poverty. It teaches man how to act in accordance with these valuations.
It is customary to call these concerns materialistic and to charge liberalism with an alleged crude materialism and a neglect of the "higher" and "nobler" pursuits of mankind. Man does not live by bread alone, say the critics, and they disparage the meanness and despicable baseness of the utilitarian philosophy. However, these passionate diatribes are wrong because they badly distort the teachings of liberalism.
First: The liberals do not assert that men ought to strive after the goals mentioned above. What they maintain is that the immense majority prefer a life of health and abundance to misery, starvation, and death. The correctness of this statement cannot be challenged. It is proved by the fact that all antiliberal doctrines — the theocratic tenets of the various religious, statist, nationalist, and socialist parties — adopt the same attitude with regard to these issues. They all promise their followers a life of plenty. They have never ventured to tell people that the realization of their program will impair their material well-being. They insist — on the contrary — that while the realization of the plans of their rival parties will result in indigence for the majority, they themselves want to provide their supporters with abundance. The Christian parties are no less eager in promising the masses a higher standard of living than the nationalists and the socialists. Present-day churches often speak more about raising wage rates and farm incomes than about the dogmas of the Christian doctrine.
Secondly: The liberals do not disdain the intellectual and spiritual aspirations of man. On the contrary. They are prompted by a passionate ardor for intellectual and moral perfection, for wisdom and for aesthetic excellence. But their view of these high and noble things is far from the crude representations of their adversaries. They do not share the naïve opinion that any system of social organization can directly succeed in encouraging philosophical or scientific thinking, in producing masterpieces of art and literature and in rendering the masses more enlightened.
They realize that all that society can achieve in these fields is to provide an environment which does not put insurmountable obstacles in the way of the genius and makes the common man free enough from material concerns to become interested in things other than mere breadwinning. In their opinion the foremost social means of making man more human is to fight poverty. Wisdom and science and the arts thrive better in a world of affluence than among needy peoples.
It is a distortion of facts to blame the age of liberalism for an alleged materialism. The 19th century was not only a century of unprecedented improvement in technical methods of production and in the material well-being of the masses. It did much more than extend the average length of human life. Its scientific and artistic accomplishments are imperishable.
It was an age of immortal musicians, writers, poets, painters, and sculptors; it revolutionized philosophy, economics, mathematics, physics, chemistry, and biology. And, for the first time in history, it made the great works and the great thoughts accessible to the common man.
[This article is excerpted from chapter 39 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach.An MP3 audio file of this article, narrated by Jeff Riggenbach, is available for download.]
- Science and LifeIt is customary to find fault with modern science because it abstains from expressing judgments of value. Living and acting man, we are told, has no use for Wertfreiheit; he needs to know what he should aim at. If science does not answer this question, it is sterile. However, the objection is unfounded. Science does not value, but it provides acting man with all the information he may need with regard to his valuations. It keeps silence only when the question is raised whether life itself is worth living.
This question, of course, has been raised too and will always be raised. What is the meaning of all these human endeavors and activities if in the end nobody can escape death and decomposition? Man lives in the shadow of death. Whatever he may have achieved in the course of his pilgrimage, he must one day pass away and abandon all that he has built. Each instant can become his last. There is only one thing that is certain about the individual's future — death. Seen from the point of view of this ultimate and inescapable outcome, all human striving appears vain and futile.
Moreover, human action must be called inane even when judged merely with regard to its immediate goals. It can never bring full satisfaction; it merely gives for an evanescent instant a partial removal of uneasiness. As soon as one want is satisfied, new wants spring up and ask for satisfaction. Civilization, it is said, makes people poorer, because it multiplies their wishes and does not soothe, but kindles, desires. All the busy doings and dealings of hard-working men, their hurrying, pushing, and bustling are nonsensical, for they provide neither happiness nor quiet. Peace of mind and serenity cannot be won by action and secular ambition, but only by renunciation and resignation. The only kind of conduct proper to the sage is escape into the inactivity of a purely contemplative existence.
Yet all such qualms, doubts, and scruples are subdued by the irresistible force of man's vital energy. True, man cannot escape death. But for the present he is alive; and life, not death, takes hold of him. Whatever the future may have in store for him, he cannot withdraw from the necessities of the actual hour. As long as a man lives, he cannot help obeying the cardinal impulse, the élan vital. It is man's innate nature that he seeks to preserve and to strengthen his life, that he is discontented and aims at removing uneasiness, that he is in search of what may be called happiness. In every living being there works an inexplicable and nonanalyzable Id. This Id is the impulsion of all impulses, the force that drives man into life and action, the original and ineradicable craving for a fuller and happier existence. It works as long as man lives and stops only with the extinction of life.
Human reason serves this vital impulse. Reason's biological function is to preserve and to promote life and to postpone its extinction as long as possible. Thinking and acting are not contrary to nature; they are, rather, the foremost features of man's nature. The most appropriate description of man as differentiated from nonhuman beings is: a being purposively struggling against the forces adverse to his life.
Hence all talk about the primacy of irrational elements is vain. Within the universe the existence of which our reason cannot explain, analyze, or conceive, there is a narrow field left within which man is capable of removing uneasiness to some extent. This is the realm of reason and rationality, of science and purposive action. Neither its narrowness nor the scantiness of the results man can obtain within it suggest the idea of radical resignation and lethargy. No philosophical subtleties can ever restrain a healthy individual from resorting to actions which — as he thinks — can satisfy his needs. It may be true that in the deepest recesses of man's soul there is a longing for the undisturbed peace and inactivity of a merely vegetative existence. But in living man these desires, whatever they may be, are outweighed by the urge to act and to improve his own condition. Once the forces of resignation get the upper hand, man dies; he does not turn into a plant.
It is true, praxeology and economics do not tell a man whether he should preserve or abandon life. Life itself and the unknown forces that originate it and keep it burning are an ultimate given, and as such beyond the pale of human science. The subject matter of praxeology is merely the essential manifestation of human life, viz., action.
- Economics and Judgments of ValueWhile many people blame economics for its neutrality with regard to value judgments, other people blame it for its alleged indulgence in them. Some contend that economics must necessarily express judgments of value and is therefore not really scientific, as the criterion of science is its valuational indifference. Others maintain that good economics should be and could be impartial, and that only bad economists sin against this postulate.
The semantic confusion in the discussion of the problems concerned is due to an inaccurate use of terms on the part of many economists. An economist investigates whether a measure a can bring about the result p for the attainment of which it is recommended, and finds that a does not result in p but in g, an effect which even the supporters of the measure a consider undesirable. If this economist states the outcome of his investigation by saying that a is a bad measure, he does not pronounce a judgment of value. He merely says that from the point of view of those aiming at the goal p, the measure a is inappropriate. In this sense the free-trade economists attacked protection. They demonstrated that protection does not, as its champions believe, increase but, on the contrary, decreases the total amount of products, and is therefore bad from the point of view of those who prefer an ampler supply of products to a smaller. It is in this sense that economists criticize policies from the point of view of the ends aimed at. If an economist calls minimum wage rates a bad policy, what he means is that its effects are contrary to the purpose of those who recommend their application.
From the same point of view praxeology and economics look upon the fundamental principle of human existence and social evolution, viz., that cooperation under the social division of labor is a more efficient way of acting than is the autarkic isolation of individuals. Praxeology and economics do not say that men should peacefully cooperate within the frame of societal bonds; they merely say that men must act this way if they want to make their actions more successful than otherwise. Compliance with the moral rules which the establishment, preservation, and intensification of social cooperation require is not seen as a sacrifice made to a mythical entity, but as the recourse to the most efficient methods of action, as a price expended for the attainment of more highly valued returns.
It is against this substitution of an autonomous, rationalistic and voluntaristic ethics for the heteronomous doctrines both of intuitionism and of revealed commandments that the united forces of all antiliberal schools and dogmatisms direct the most furious attacks They all blame the utilitarian philosophy for the pitiless austerity of its description and analysis of human nature and of the ultimate springs of human action. It is not necessary to add anything more to the refutation of these criticisms which every page of this book provides. Only one point should be mentioned again, because on the one hand it is the acme of the doctrine of all contemporary pied pipers and on the other hand it offers to the average intellectual a welcome excuse to shun the painstaking discipline of economic studies.
Economics, it is said, in its rationalistic prepossessions assumes that men aim only or first of all at material well-being. But in reality men prefer irrational objectives to rational ones. They are guided more by the urge to realize myths and ideals than by the urge to enjoy a higher standard of living.
What economics has to answer is this:
Economics does not assume or postulate that men aim only or first of all at what is called material well-being. Economics, as a branch of the more general theory of human action, deals with all human action, i.e., with man's purposive aiming at the attainment of ends chosen, whatever these ends may be. To apply the concept rational or irrational to the ultimate ends chosen is nonsensical. We may call irrational the ultimate given, viz., those things that our thinking can neither analyze nor reduce to other ultimately given things. Then every ultimate end chosen by any man is irrational. It is neither more nor less rational to aim at riches like Croesus than to aim at poverty like a Buddhist monk.
What these critics have in mind when employing the term rational ends is the desire for material well-being and a higher standard of living. It is a question of fact whether or not their statement is true that men in general and our contemporaries especially are driven more by the wish to realize myths and dreams than by the wish to improve their material well-being. Although no intelligent being could fail to give the correct answer, we may disregard the issue. For economics does not say anything either in favor of or against myths. It is perfectly neutral with regard to the labor-union doctrine, the credit-expansion doctrine and all such doctrines as far as these may present themselves as myths and are supported as myths by their partisans. It deals with these doctrines only as far as they are considered doctrines about the means fit for the attainment of definite ends. Economics does not say labor unionism is a bad myth. It merely says it is an inappropriate means of raising wage rates for all those eager to earn wages. It leaves it to every man to decide whether the realization of the labor-union myth is more important than the avoidance of the inevitable consequences of labor-union policies.
In this sense we may say that economics is apolitical or nonpolitical, although it is the foundation of politics and of every kind of political action. We may furthermore say that it is perfectly neutral with regard to all judgments of value, as it refers always to means and never to the choice of ultimate ends.
- Economic Cognition and Human ActionMan's freedom to choose and to act is restricted in a threefold way. There are first the physical laws to whose unfeeling absoluteness man must adjust his conduct if he wants to live. There are second the individual's innate constitutional characteristics and dispositions and the operation of environmental factors; we know that they influence both the choice of the ends and that of the means, although our cognizance of the mode of their operation is rather vague. There is finally the regularity of phenomena with regard to the interconnectedness of means and ends, viz., the praxeological law as distinct from the physical and the physiological law.
The elucidation and the categorial and formal examination of this third class of the laws of the universe is the subject matter of praxeology and its hitherto best-developed branch, economics. The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.
This article is excerpted from chapter 39 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach. An MP3 audio file of this article, narrated by Jeff Riggenbach, is available for download.
Steven Horwitz has an essay up at Cato protesting that, contrary to common perception, "modern" Austrian economics is actually very empirical. Much of his argument stems from his treatment of economic history as being a subset of economics, in stark contrast to Mises's position that
There is economics and there is economic history. The two must never be confused.
For example, Horwitz points to several instances of Austrian-influenced scholars working in economic history (which of course is empirical) as evidence that "modern" Austrian economists resort to empiricism a great deal (as if there were ever a time when Austrian scholars did not use empirical evidence in their efforts to study economic history).
In his discussion of the history of thought, Horwitz does make one rather good point:
Despite the impression that one might get from reading some Austrians, Mises's term "praxeology" was not intended to be a "method" for economists.
I agree with this. Also, I brought this up with David Gordon at Mises University, and he agrees too. "Praxeology" itself should not be confused with the distinctive "praxeological method." Praxeology is a science with a distinctive method; it is not itself a method or methodology. Moreover, it is not an approach to economics; it is a science that includes economics.
But unfortunately, right after accurately clarifying what Mises did not intend with the term "praxeology," he gets entirely wrong what he claims that Mises did intend:
Instead, that term, which has roots in the Greek for "action," described a field of study. That field comprised all the "sciences of human action."
This is simply incorrect. Mises wrote, "There are two main branches of the sciences of human action: praxeology and history." For Mises, praxeology is one of the sciences of human action, and history is another science of human action. Praxeology does not include "all" of the sciences of human action.
Horwitz then writes,
So what today we would call economics, political science, anthropology, and sociology would all fall in this group.
This too is incorrect. Of those, only economics is classed by Mises as a branch of praxeology. Mises wrote,
History is the collection and systematic arrangement of all the data of experience concerning human action.… It is on the one hand general history and on the other hand the history of various narrower fields. There is the history of political and military action, of ideas and philosophy, of economic activities, of technology, of literature, art, and science, of religion, of mores and customs, and of many other realms of human life. There is ethnology and anthropology, as far as they are not a part of biology, and there is psychology as far as it is neither physiology nor epistemology nor philosophy. There is linguistics as far as it is neither logic nor the physiology of speech.Emphasis added throughout.
And then in a footnote:
Economic history, descriptive economics, and economic statistics are, of course, history. The term sociology is used in two different meanings. Descriptive sociology deals with those historical phenomena of human action which are not viewed in descriptive economics; it overlaps to some extent the field claimed by ethnology and anthropology. General sociology, on the other hand, approaches historical experience from a more nearly universal point of view than that of the other branches of history. History proper, for instance, deals with people or with a certain geographical area. Max Weber in his main treatise deals with the town in general, i.e., with the whole historical experience concerning towns without any limitation to historical periods, geographical areas, or individual peoples, nations, races, and civilizations.
Horwitz also writes,
Some Austrians argue as if one can deduce all of economics in one's armchair, but Mises was pretty clear that this core of economics was fairly limited.
This, again, is wrong. Mises wrote that "All the concepts and theorems of praxeology are implied in the category of human action." Not just a "limited core," but all of praxeology, which includes all of economics, is "implied in the category of human action." This would explain why, according to Percy Greaves, one of Mises's closest friends,
Mises used to say that all a good economist needed was some sound ideas, writing materials, an armchair, and a waste basket.
Horwitz tries to support his characterization of Mises's position:
He points out that even the notion that labor is unpleasant is not part of that core, but rather an auxiliary assumption we make based on observation. So too is the existence of things like money. When the economist goes to analyze the world, the core toolkit that comes only from reflection on action is a rather small set of basic propositions. Most of the interesting work in economics is institutionally contingent. For example, even if we recognize the importance of being able to engage in economic calculation, our ability to do so effectively depends upon the set of institutions in the economy under analysis. Moving from what Carl Menger called "exact laws" or pure theory, to applied theory means we must include the human beliefs and social institutions of the empirical world.
This would seem to imply that, for example, the theory of indirect exchange is not part of the "core toolkit" of pure theory but is rather applied theory. This, of course, is incorrect. Horwitz's error is to think that, if you introduce assumptions to your theorizing because of experience, that makes the result "empirical" or "applied theory." But that is not the case. For the truth of a theory, it makes no difference why it was constructed the way it was (that is to say, why it includes the assumptions it does). A self-contained theorem is true or false based on its logical structure, regardless of whether the assumptions are introduced because of experience, because of pure fancy, or for any other reason.
The theory of indirect exchange is pure, aprioristic theory, not applied theory. We choose to formulate it, because we observe that indirect exchange is part of the world around us. We take the effort to formulate it, because we want to later apply it to economic history. But the theory itself is true independent of experience. Whether it is applicable to any given experience is another question. It only becomes "applied theory" when it is applied to particular historical episodes.
Again, Mises:
But the end of science is to know reality. It is not mental gymnastics or a logical pastime. Therefore praxeology restricts its inquiries to the study of acting under those conditions and presuppositions which are given in reality. It studies acting under unrealized and unrealizable conditions only from two points of view. It deals with states of affairs which, although not real in the present and past world, could possibly become real at some future date. And it examines unreal and unrealizable conditions if such an inquiry is needed for a satisfactory grasp of what is going on under the conditions present in reality.
However, this reference to experience does not impair the aprioristic character of praxeology and economics. Experience merely directs our curiosity toward certain problems and diverts it from other problems. It tells us what we should explore, but it does not tell us how we could proceed in our search for knowledge.
Comment from Joseph SalernoNot only does Danny's excellent article straighten out the profoundly confused essay by Steve Horwitz on Mises's approach to economic theory; it also highlights a strange phenomenon that is unique to modern Austrian economics as an intellectual movement. One would be hard-pressed to find another eminent economist besides Ludwig von Mises who has regularly had positions attributed to him that blatantly contradict positions that he has clearly, emphatically, and repeatedly expressed in his writings. (Karl Marx does not count because he wrote in an obscure and convoluted style and expressed contradictory positions on various issues when it suited him throughout his career.)
It is certainly true that Friedman's, Samuelson's, Keynes's, Ricardo's, etc., economic doctrines have been subject to alternative interpretations and debates over their precise meaning. But rarely does it occur that someone attributes to these economists views that are flagrantly at odds with what they have plainly written, as Danny has shown Horwitz has done with Mises. I do not mean to imply that Steve deliberately or consistently misrepresents Mises's views or that he is the only one to have grossly misrepresented them on occasion. In fact in the last several decades, views have been imputed to Mises — especially regarding the nature of entrepreneurship, the essence of the problem with socialist calculation, and the optimality of "monetary equilibrium" — that he has clearly rejected in his writings.
One can only speculate on the sociological reasons for this peculiar episode in intellectual history.
[Understanding the Dollar Crisis (1973)]
There was once a Russian school child whose cat had a family of kittens. When asked to write a paper for her class, the child wrote about the mother cat and the kittens. The next day she read her paper to the class. In it she told about how these kittens were born. There were five of them and they were all good little Communists. The teacher liked the paper, and when, a week later, one of the Moscow inspectors visited the school, the teacher, proud of her pupil, asked the child to read it again. The child read the paper. When she came to the part about the kittens she said there were five kittens and two of them were Communists. The teacher was quite surprised. The child had previously said all five were Communists; so the teacher asked the child why she had changed it. "Well," the little girl said, "three of them have opened their eyes."
One of the things we are trying to do in these lectures presented by the Centro de Estudios sobre la Libertad is to open the eyes of people who have heard so much about the promises of socialists and government interventionists to use political power to improve the economic situation of the poor, the sick, the young, the aged, and all others with whom they seek popularity. Actually, the only way for governments to improve the economic condition of their citizens is to provide equal protection of life, property, and the marketplace for everyone, while peacefully adjudicating disputes which might otherwise lead to frictions and infractions of the peace. Using the force of government to take from some to provide special privileges for favored groups will never improve the general welfare. Governments that play favorites sow the seeds of their own destruction and reduce the production of both the poor and the rich.
For each of us, life is a problem of how to use our limited means to produce more of the things that provide us and our loved ones with the greatest possible satisfaction. We daily strive to satisfy our most important wants before we try to satisfy those we consider less important. In short, we constantly seek to improve our situation by exchanging something we have for something we prefer. The prime function of government is to provide an atmosphere in which more and more mutually beneficial exchanges can take place.
Division of LaborAs individuals we cannot produce all the things we want. So we tend to specialize, and produce things that other people want. We then exchange the products of our efforts in the marketplace for the things that we want. This involves what economists call the division of labor.
In his great book, The Wealth of Nations, Adam Smith, the founder of English classical economics, tells how we can all have more if we specialize and trade. As mentioned in our previous lectures, it is our value scales that direct us in making our choices of how to use our limited means to attain more of the things we want most.
If man finds it easier to get what he wants by specializing his contributions and trading his specialties with those who produce what he wants, he will do so. He will take the easiest way he knows to improve his situation. Consequently, civilized men have resorted to specialization in production and the subsequent trading of the specialties they have produced. Such trading necessitates the use of a medium of exchange, or money. In our fifth lecture, we shall be dealing with that very serious part of the market problem. But it is money prices that we are talking about now. Most people are confused about prices. They seem to think that prices are set by producers and sellers, that they add up their costs and then add something more for their profit. This is how most people think prices are set.
Actually, the successful businessman looks for something that the people want, something he thinks he can produce for less than people will pay for it. So in the final analysis it is the values businessmen believe people have in their minds that determine what goods they will make, and how much they will make of each particular scarce good.
This question of what to make is one of the important problems that the socialists neglect. Marx thought there was no such problem. So did Lenin. They thought the only businessmen you needed were bookkeepers to keep the accounts. Nobody had to decide what needed to be produced. This was supposedly evident to everyone. The masses needed more food, more clothing, and more housing. For Marx and other socialists, the choice of what to make was no problem at all.
But this, of course, is not so. We cannot make everything people want. The most important decisions in this world are those that determine what should be made and what should not be made. These decisions seek to determine what things give the greatest human satisfactions, so that our scarce means of production are not wasted making things that people do not want as much as other things that could have been made with the available supplies of labor and raw materials.
In a market society, individual subjective values allocate the available supply of every scarce good so as to satisfy human wants in the descending order of their importance, whereby the particular want last satisfied is the one with the marginal utility. From beginning to end, price, and thus economic calculation, is the product of subjective valuations. Price is the result of the reciprocal impact of the subjective values placed on the good and on money by all interested parties. The resulting market prices must benefit all who exchange.
As we have said before, but should never forget, all life is a series of choices whereby we try to exchange something we have for something else that we prefer. The fewer the obstacles placed in our way in the form of higher costs, taxes, or other governmental interventions, the more exchanges we can make for the mutual advantage of all the participants.
The Economic ProblemWe are constantly faced with the economic problem. The economic problem is, of course, the problem of human beings, the problem of life. This problem is how to employ our available means in such a way that no important want is left unsatisfied because the means for attaining it were used to satisfy a less important want. Such a misuse of scarce means would provide less human satisfaction. It would be wasting valuable wealth. Acting man wants to know how to use what he has to provide the greatest attainable human satisfactions. This is the problem that concerns all of us. This is the problem that the market solves.
In trying to get what we want, we are directed by our ideologies. Ideologies are our ideas about how we think society operates. Sometimes we are influenced directly by an ideology. If we believe certain actions will produce the results we want, we take those actions. Ideas, as we stressed in the first lecture, are very important. But sometimes in our social activities, an ideology influences us indirectly. We follow certain procedures which by themselves we do not consider very helpful, because we do not want to offend those around us. We go along with certain widely held myths, certain popular prejudices, or certain accepted folkways, rather than take the actions we consider most efficient. We do this because we have to live with our fellow men and cannot always do things that we ourselves might consider best.
For a good to have value it must assure the satisfaction of a need or want of some human being. Thus, if that good did not exist, there would be some human want that would have to go unsatisfied. Every loss of an economic good means that there is one less human satisfaction attained. Goods can have a direct value, that is a use value, to us. Or they can have an indirect value, that is an exchange value, which means they have a use value to someone else. In that case, we can exchange them for something which has a use value to us.
In the marketplace it is the use value or the exchange value, whichever is greater, that determines our choice of actions. When we see something that is more valuable to us than its market price, we buy. When we have something that is more valuable in the market than it is to us, we sell. We do not trade for the fun of it. Otherwise we might trade back and forth all day long. We consider every exchange, every transaction, beforehand, and we continue exchanging up to the point or limit beyond which we do not expect to gain any further.
Trade Increases WealthSince all men are eager to satisfy their more important wants, those which are higher on their value scales, before they satisfy their less important wants, those which are lower on their value scales, they trade whenever they can find anyone who has opposite or contrary views on the relative values of two goods or services. By an exchange transaction, each good or service moves to that person who places the higher value on it. The wealth of each party is thus increased. They have both gotten a psychic profit, that is, a gain that they themselves consider a profit. This psychic profit cannot be measured, but it is a very real increase in satisfaction in the minds of the parties participating in the exchange. Market exchanges are not equal exchanges. They are unequal exchanges, from which both parties expect to gain.
So trade is productive of value. In a market economy goods are constantly moving from those who place a lower value on them to those who place a higher value on them. This is a fact of economic life that is not taken into consideration by mathematical economists. They seem to think that economic goods have a certain fixed value, usually based on the cost of production. They calculate this value as an unchanging fact, not realizing that when a good shifts from one person or place to another its value has been increased. The physical goods have greater value when they are owned by people for whom they can provide greater satisfaction.
It is the unequalness of the use and exchange values of different people that leads to exchange. These differences cannot be measured, only compared. They are in the mind. They are psychic. It is always a matter of greater or less. If the value of what you expect to receive is not greater for you than the value of what you will have to give up, then there is no trade. The differing use and exchange values of different individuals result in the emergence of prices — market prices. There are no other kinds of prices, only market prices.
Most scarce goods have many uses, or a use value for many people. The economic problem is to allocate them so as to give more human satisfaction to all concerned. Voluntary exchange is the only possible way in which all can benefit. It is the only system that allocates each scarce item to that use or person where it has the highest relative value. It is the only system that tends to minimize waste and maximize human satisfaction.
How Men Act in the MarketIn life we are faced with two questions as we go to the marketplace. These questions are whether or not to exchange, and if so, on what terms. The answers can be simple. There are three rules or postulates for answering these questions:
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Man will exchange only if he can exchange for an advantage.
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Man will exchange for a greater advantage, in preference to an exchange for a lesser advantage. If you can buy something for 250 pesos, you are not going to pay 275 pesos. You will always take that price which gives you the greatest advantage. Of course, sometimes it is not merely a matter of money. It may be primarily a matter of convenience. You may pay a slightly higher price for something in your neighborhood rather than take the time to go downtown, where you might get it for a few pesos less. Or you might pay a little more to a person or group you wanted to help, considering the difference a charitable contribution.
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Man will exchange for a small advantage in preference to not exchanging at all.
These three rules or postulates provide all the answers we need to solve the problems we face in the marketplace. Can you get an advantage? You can. Okay, you exchange. If you can get a greater advantage, you take it in preference to a lesser one, but you will take a small advantage in preference to no advantage at all. You are trying to improve your situation as best you can from your point of view.
Now here are a number of rather simple problems to show how prices evolve and how our value scales contribute to their emergence. Here we are going to assume that you have a use value for several objects you do not own, and that this value scale is:
1st — A
2nd — B
3rd — C
4th — D
Then you learn that you can exchange a "D" for an "A." This is new information, information you did not have when you had this original value scale. This new information changes your value scale and it becomes now:
1st — A
2nd — D
3rd — B
4th — C
5th .….… a second D
A "D" has gone up to second place, not because of its use value but because of its exchange value. You can exchange it for an "A." The fact that you have to take the trouble to exchange it to get the "A" places it below the "A." The second "D" would be valued for the use value of a "D."
So your value scales change as you get new information. You find out that you can buy something cheaper at another place, or you find that something unexpected has happened, or you learn that something new has been invented. You then have a new situation and it calls for a new value scale.
Simple BarterTable 5 presents a slightly more complicated, but still very simple, situation. These problems illustrate the principles that determine how prices are formed and how they are constantly being changed. We start here with an assumption that Smith has four horses. They appear in the first column. In the second column we have his value scales for horses and cows. If he had only four animals he would prefer first a horse, second a cow, third a second horse, and fourth a second cow.
Señor Black, in the third column, has four cows, and his value scale for horses and cows, in the last column, is in this order: first he would like a cow, second a horse, third a second cow, and fourth a second horse.
These two men meet. What happens? One owns four horses. The other owns four cows. When they come together, they soon find out that Smith will gladly trade his fourth horse for a cow. And Black will gladly trade his fourth cow for a horse. They make the exchange. They have both improved their holdings of these two kinds of animals.
In fact, they will go further, in a second step — Step B. Smith will gladly trade his third horse for a second cow, while Black will gladly trade his third cow for a second horse.
Table 5. SIMPLE BARTERMr. SMITH Mr. BLACKhas 4horses:his valuescale forhorses &cows: has 4cows:his valuescale forhorses &cows:1st H1st H 1st C1st C2nd H2nd C 2nd C2nd H3rd H3rd H 3rd C3rd C4th H4th C 4th C4th HSTEP A: Smith will gladly trade 4th horse for a cow.Black will gladly trade 4th cow for a horse.
STEP B: Smith will gladly trade 3rd horse for a 2nd cow.Black will gladly trade 3rd cow for a 2nd horse.
STEP C: No further trades of mutual advantage possible.
Then, they both have improved their situations and satisfied their value scales so far as this problem goes. Under these assumptions, no further trades are possible, because there is no advantage to be gained from any other transaction. They have each satisfied their value scales. If their value scales changed, you would have another problem, another situation. So much for that.
Satisfying a Value ScaleNow we go into another more complicated problem, shown in table 6. We assume here that Smith has six horses and Black six cows. In the column on the left we assume that they both have the same value scales. First they would like a horse, second a second horse, third a first cow, fourth a second cow, fifth a third horse, sixth a fourth horse, and down on to the bottom of the column, as you can see.
These two gentlemen come together. What happens? Now looking at these value scales we find that, in the existing situation, Smith has his 1st, 2nd, 5th, 6th, 7th, and 8th preferences, while Black has his 3rd, 4th, 9th, 10th, 11th, and 12th preferences. Under those circumstances, these two gentlemen meet. What happens?
Table 6. MORE COMPLEX BARTERValue Scaleof bothMr. Smith (S) has 6 horses (H)Mr. Black (B) has 6 cows (C)1st1st HS has his 1st, 2nd, 5th, 6th, 7th and 8th preferences;2nd2nd HB has his 3rd, 4th, 9th, 10th, 11th and 12th.3rd1st C Smith trades 6th H for Black's 6th C.4th2nd C 5th3rd HThen Smith has 5 horses and 1 cow:6th4th Hhis 1st, 2nd, 3rd, 5th, 6th and 7th preferences. Black has 5 cows and 1 horse:7th5th Hhis 1st, 3rd, 4th, 9th, 10th and 11th preferences.8th6th HSmith trades 5th H for Black's 5th C.9th3rd C 10th4th CThen Smith has 4 horses and 2 cows:his 1st, 2nd, 3rd, 4th, 5th and 6th preferences.Black has 4 cows and 2 horses:his 1st, 2nd, 3rd, 4th, 9th and 10th preferences.11th5th C12th6th CSmith would not gain, so no further trades with this value scale.
If the 5th preference on the value scale were a cow, one more trade would give each his first 6 preferences.
They certainly will be happy to make an exchange. So Smith trades his sixth horse for Black's sixth cow. Then we have a situation in which Smith has five horses and one cow. Now he has advanced his situation to the point that he has his 1st, 2nd, and 3rd (thanks to the trade), as well as his 5th, 6th, and 7th preferences. He has given up his eighth preference to obtain his third preference. He has improved his situation by getting the third item on his value scale in exchange for one that was lower down, in eighth place.
On the other hand, Black now has five cows and one horse. He has gotten his first preference and continues to have his 3rd, 4th, 9th, 10th, and 11th preferences. He has exchanged his 12th preference for his first preference. He, too, has certainly improved his situation from his own point of view.
Under these given conditions, it is also profitable for both of them to make another trade. Smith gladly trades his fifth horse for Black's fifth cow. Then Smith has four horses and two cows. He now has his 1st, 2nd, 3rd, 4th, 5th, and 6th preferences. He has exchanged his 7th preference for his 4th preference. He now has all of his first six preferences. He cannot improve his satisfaction with only six animals.
On the other hand, Black has four cows and two horses. He has his 1st, 2nd, 3rd, 4th, 9th, and 10th preferences. He has exchanged his 11th preference for his 2nd preference. He has his first four preferences, but he does not have his 5th, 6th, 7th, or 8th preferences. He would like to improve his situation further, but in the market you cannot improve your situation, you cannot have a transaction, unless both parties expect to gain. Since Smith could not gain from another trade, there will be no further trades with this value scale. Under these assumptions we have reached the end of the trading.
However, if the 5th or 6th preference on this value scale shifts to a cow, one more trade would give each of them their first six preferences. So this shows that as Value scales change, the possible trades change. Value scales affect everything that can occur in the marketplace. Each person tends to trade up to the point beyond which he cannot gain any more. But he has to find somebody else who will also gain, or there will be no transaction.
We have been talking about barter, the exchange of goods for goods. In a market economy we usually exchange goods for money or vice versa. Now we want to consider exchanges with the use of money, getting into what we call prices. A price can be defined as a quantity of money.
A Böhm-Bawerk ContributionMuch of the material for this lecture has been adapted from the works of Böhm-Bawerk. He was not only one of the greatest economists ever, but he was also a teacher of my great teacher, Mises. Böhm-Bawerk found it useful to compare the formation of prices to the breaking of waves and surf on the sea coast. Both are complex phenomena that seem to be completely "without rule or regularity," yet they are both subject to the strict operation of immutable laws.
When waves break on a rockbound coast, the path every drop of water follows may seem haphazard, but, given the essential data, the laws of physics can explain where every particle goes. Given the force of each wave, given the exact shape and resilience of the coast, and given the velocity and the direction of each gust of wind, there could only be one possible result. The laws of physics could then tell us where every drop of water must fall.
Likewise in economics, if we could know the ever-shifting value scales of every individual, and the available supplies of goods and services in the marketplace, then economic laws, the laws of human action, could tell us where every price would have to fall. Of course, in real life we cannot know the ever-changing value scales of all people. We can find them out in part, but only by reference to market exchanges.
When you go into a store, you do not usually tell the shopkeeper how much you might be willing to pay for a desired good. You try to find out the lowest price for which you can buy it. So when we participate in market transactions we seldom reveal how high we might go for the goods on our value scale. Therefore these values are seldom evident. But value scales determine all actions in the marketplace.
In developing man's understanding of economics, the British classical economists reduced everything to supply and demand. They took supply and demand as given. When they talked about supply and demand, they advocated that the businessman should strive to buy low and sell high. That is good business. But they did not go back to what creates supply and demand. This is a contribution of the Austrian School of economics.
Consumers Determine PricesAs I mentioned in my first lecture, science traces cause and effect by going back and back and back until one cannot go back any further. The Austrian economists demonstrated that you can go back behind supply and demand, and find out what it is that leads to both of them. Demand is determined by the value scales of consumers, while supply is determined by businessmen seeking to foresee, as accurately as they can, the future value scales of consumers. In the end, it is the value scales of consumers that determine both demand and supply and thus the prices of all goods and services sold in the marketplace.
Supply and demand are vague shibboleths that do not provide enough information. The central factor that explains price is found entirely in the subjective values of men. Market competition forces the pricing process into a zone between the subjective values of the border or marginal pairs, where the quantity offered for sale exactly equals the quantity there is a desire to buy at the market price. At that price, supply and demand are bound to be equal. You cannot buy more than are sold, but the price has to be one that benefits all who buy or sell.
Isolated ExchangeNow I'm going to present a few problems using money. You will pardon me if I use dollars here. It makes little difference which monetary unit is used. The first is a case of isolated exchange. (See table 7.) There are just two men involved. Farmer Brown needs a horse. A horse is worth more to him than $300 — that is, he will pay for a horse up to, but not more than, $300. If he has to pay more, it will not be worthwhile for him to buy it. Neighbor Smith has a horse with a use value to him of only $100.
These two men meet. What happens? Naturally it is to the advantage of both of them to make an exchange. We posed the essential questions earlier: whether or not they should exchange, and if so, at what terms. We have determined that these men should exchange. The question then becomes, at what price will the horse be sold.
Given this situation, will they trade? If so, at what terms? Every price from $100 to $300 is possible. The actual price within that range will depend upon the bargaining abilities of the two men. But a price below $100 is impossible. Smith would not sell for less, because the horse is worth that much to him. At a lower price he would use the horse rather than sell it. A price over $300 would not lead to a transaction because the horse is not worth sufficiently more than $300 for Farmer Brown to pay the higher price. So the price must fall between $100 and $300.
There is a rule that applies. It is not my opinion. It is not what I think it should be. It is a fact. It is an economic law. It is how men operate. The rule is that the price must fall between the buyer's subjective value and the seller's subjective value. Any other price is impossible. This seems simple and I hope it is understood. The price must benefit both parties.
Table 7ISOLATED EXCHANGE
Farmer Brown needs a horse. A horse is worth more than $300 to him, but not enough more for him to pay more than $300.
Neighbor Smith has a horse with a use value to him of $100.
Will they trade? If so, at what terms?
Every price between $100 and $300 is possible. The actual price, within that range, will depend on the bargaining abilities of the two men.
RULE: The price must be between the buyer's Subjective Value and the seller's Subjective Value.
One-Sided Competition among BuyersWe move on to a little bit more complicated problem. We take now an example of one-sided competition among buyers. And the question is: Who will buy and within what price range? (See table 8.) Smith has a horse, as before, with a use value to him of $100. As before, a horse is worth more than $300 to Brown. But this time we also have a Mr. Carey for whom a horse is worth just a bit over $200. Who buys Smith's horse? And what will be the price range?
Given this situation, Brown will buy at a price between $200 and $300. Any other price is unthinkable. If the price were below $200, Brown would have competition from Carey. If the price were over $300 the horse would not be worth it to him. So the only sale that can take place, given these assumptions, is between the prices of $200 and $300.
Table 8ONE — SIDED COMPETITION AMONG BUYERS
QUESTION: Who will buy and within what price range?
ASSUME: Smith has a horse with a use value to him of $ 100.
A horse is worth just over $300 to Brown.
A horse is worth just over $200 to Carey.
Brown will buy at a price between $200 and $300.
ASSUME FURTHER: A horse is worth more than $260 to Dell.
Brown will buy between $260 and $300.
ASSUME FURTHER: A horse is worth more than $320 to Ely.
Ely will buy at a price between $300 and $320.
RULE: The potential buyer who places the highest value on the good gets it at a price below his own valuation and above the highest value of all his competitors.
Now assume another man, Señor Dell, comes along. He wants to buy a horse, and a horse is worth more than $260 to him. What does this do to the situation? Who will buy the horse, and what price will he pay?
Mr. Brown will buy the horse, but he will have to pay more than $200 under these circumstances. He will have to outbid Mr. Dell. He will have to pay a higher price than $260, but of course he will still not pay more than $300.
Now assume further that another gentleman, Mr. Ely, comes along. For him a horse is worth more than $320. Now what happens? What is the answer to the question of who will buy and within what price range? It should be obvious by now that Mr. Ely will buy the horse. What price will he pay? He has to outbid our friend Mr. Brown. So he will have to pay more than $300, but he will not pay more than $320.
Now, these are not my opinions. This is not how I say it should be. But this is how men act. They try to get what they want at the best price they can, and they do not pay more than the good is worth to them. The rule for this type of exchange is that the potential buyer who places the highest value on the good gets it at a price below his own valuation and above the highest value placed on the good by any of his competitors.
What we are saying is simply that the market allocates scarce goods to those who place the highest values on them, to those prepared to make the greatest sacrifice to attain them. Here we have had competition on one side, competition among multiple buyers for one horse.
One-Sided Competition among SellersNow, we move to the very opposite situation, one-sided competition among sellers. (See table 9.) There is one buyer and there are many potential sellers. The question here is, who will sell and within what price range? Potential buyer Brown places a subjective use value of $300 on a horse. Potential seller Fort places a subjective value of $140 on his horse, while Green places a subjective use value of $200 on his, and another potential seller, Mr. Hall, has a subjective use value of $250 for his horse. Who will sell the horse to Mr. Brown, and within what price range?
It should now become obvious that it is not a question of my opinion. Every one of us should come to the same conclusion, because this is a matter of how all men act. It is an application of economic law.
Mr. Brown will buy the horse as cheaply as he can. He will not pay $200 if he can get a horse for less than $200. So, based on these assumptions, he will pay less than Mr. Green is asking. Mr. Fort will sell his horse to Mr. Brown at a price between $140 and $200. Any other price is unthinkable.
Moving on, we assume further that another gentleman, a Mr. Jate, wants to sell a horse. He places a subjective value of $180 on his horse. What does this do to the situation? It reduces the price that Mr. Fort will be able to ask. He will still sell his horse to Mr. Brown. But now it will NOT be between $140 and $200, but, according to his bargaining ability, between $140 and $180.
Table 9ONE-SIDED COMPETITION AMONG SELLERS
QUESTION: Who will sell and within what price range?
ASSUME: Potential Buyer Brown places a subjective value (S/V) of $300 on a horse.
Potential Seller Fort with a Subjective Value of $140.
Potential Seller Green with a Subjective Value of $200.
Potential Seller Hall with a Subjective Value of $250.
Fort will sell at a price between $140 and $200.
ASSUME FURTHER: Potential Seller Jate with a S/V of $180.
Fort will sell at a price between $140 and $180.
ASSUME FURTHER: Potential Seller Korn with a S/V of $120.
Korn will sell at a price between $120 and $140.
RULE: The potential seller who places the lowest subjective value on the good sells it at a price above his own valuation and below the lowest subjective value of all his competitors.
We assume another gentleman comes along, a seller, Mr. Korn, who places a subjective use value of $120 on his horse. Applying the same reasoning, Mr. Brown wants a horse, which is worth more than $300 to him, but he still doesn't want to pay any more than he has to. He puts these men into competition bidding against each other. The bidding goes down below the previous high price of $180. Mr. Brown can now buy a horse at a price between $120 and $140.
The rule here is that the potential seller who places the lowest subjective value on the good sells it at a price above his own subjective valuation and below the lowest subjective value placed on the good by any of his competitors. And so a horse moves from the potential seller who places the lowest value on a horse to the man who places the highest value on one. That is how the market works.
These problems have been relatively simple. The value of money is a factor in all of these. This too is not constant. The value of money is always shifting. As the values of horses and money shift, the value scales of people shift. They get different ideas about what is to their advantage. But they only trade when they expect to gain. In these examples we have assumed that their value judgments remain constant until the transactions are completed. The prices that resulted were formed under the impact of the entire quantity of horses on the value scales of all present at the market. All the competing suppliers and buyers had a chance to act to improve their situation according to their value scales as the market conditions permitted. Competition forced every successful buyer and seller to set his price with full regard to the relative subjective values of all concerned.
Bilateral CompetitionNow we come to an example of bilateral competition, as I call it. (See table 10.) This is a more complex situation, in which there is competition between both multiple buyers and multiple sellers for a limited quantity of goods, in this case, 13 taxi cabs.
Table 10. BILATERAL COMPETITION(Problem posed)
Assumed subjective valuation of similar taxis
Owners of 13 taxis Potential BuyersAce's1st$4,000 Law's3rd$2,750Bag's1st3,800 Moon's2nd2,920Cod's1st3,750 Nid's2nd3,080 Ace's2nd3,600 Law's2nd3,130Dove's1st3,500 Ott's1st3,400Eby's1st3,450 Pry's2nd3,550 Bag's2nd3,380 Moon's1st3,680Ace's3rd3,360 Law's1st3,780Fork's1st3,330 Pry's1st4,100 Gay's1st3,250 Nid's1st4,250Ace's4th3,050 Bag's3rd2,800 Dove's2nd2,600 Part 1 — How many sold? Within what price range?
Part 2 — Assume (a) sales tax of $50; (b) 10% tax.
In the column on the left-hand side are the owners of 13 taxicabs or taxis. Seven men own these 13 taxis; four of them are owned by Mr. Ace. In the next column we have the assumed subjective values these owners place on their taxis, that is, the figures below which they would not sell the taxis. If they can get a higher price for any one of the taxis than the figure shown in this column, they will sell that cab. On the right-hand side, we have some potential buyers and the highest prices they would pay, the subjective valuations they place on owning a taxicab. If they can get taxicabs for these figures, they will buy. If they cannot, they will not buy.
There are 13 cabs. We shall assume they are identical cabs with no material differences that need to be taken into account. The potential buyers and potential sellers all come together at one time and place. There are potential bidders here, ten, I believe. The questions are: How many of the cabs will be sold? How many will not be sold? And within what price range will the sales be made?
The answer is rather simple. There are many ways you can go about getting it. You can be quite complex and start the bidding low. Of course, no one will offer to sell a taxi for $2,600. If Mr. Dove tries to get, say, $2,700 for his second one, he will have every one of these ten potential buyers bidding for it. They are not going to let it be sold for $2,700. They are going to bid it up. As they bid it up, Mr. Bag comes in when it gets to a price above $2,800. Before then, Mr. Law's demand has dropped out. As the bidding goes higher, other cabs become available, and other potential cab buyers drop out. This goes on until you get into a price range where the number of cabs offered for sale and the number of potential buyers who will buy become equal.
Or you can start with the top. Mr. Ace would be glad to sell his top cab for $4,150 to Mr. Nid. But he is not going to get $4,150 because Mr. Nid is not going to pay $4,150, when all these other cab owners are competing to sell one for less. Competitive bidding will bring the price down, making fewer cars available for sale as it drops below the points in the left-hand column. At the same time, competition will increase the number of the potential buyers as it drops below points in the right-hand column. This will go on until the price reaches the price range where again the number offered for sale equals the number potential buyers will buy.
In this marketplace, we assume all these cabs are similar. There are no known differences, no dents in the fenders as in real life. There will be one price at which the owners will exchange all the cabs that are exchanged. The question is: How many will be exchanged and at what price? The answer is simple.
The best and easiest way to find the answer is to apply what I have already said about the market. This is the fact that the market allocates all scarce goods to those who place the highest values on them. You have 13 taxicabs. You have 23 desires for the taxicabs. Who ends up with the taxicabs? Those who place the 13 highest values on them.
So all you have to do is to find out quickly which are the 13 highest values. The answer to this problem is that six taxicabs will be sold, and the price will be between $3,360 and $3,380. All three methods reach the same result. No other answer or price is thinkable. (See table 11.)
At a lower price, Mr. Ace would not sell his third cab. At a higher price, Mr. Bag would try to sell his second cab. There would be seven potential sellers, but there would not be seven potential buyers. There would thus not be equality between the number offered for sale and the number that would be bought. The bidding would go on until that number was equal, because would-be sellers can never sell more than potential buyers will buy.
Table 11.So the subjective values of the market participants limit the price range, and the market allocates the scarce taxis to those who place the highest values on them. The 13 who place the highest values on them are those above the line on the left side and those below the line on the right side. When the transactions are completed, these parties are the ones who are going to own cabs. Given this assumed state of the market, the people on the left below the line do not value cabs enough to keep them, while the people on the right above the line do not value cabs enough to buy them.
If there were a 14th cab, one more desire for a cab could be satisfied. If there were 15 cabs, two more desires could be satisfied. But the reality of life on this earth is that there is a scarcity of the things men want, and the economic problem is to decide who gets these scarce goods and who must go without.
Law of PriceIn the market economy, this decision as to who gets the limited number of taxicabs, who goes without, and what the price will be, is determined by the Law of Price. The Law of Price is not opinion. It is not what I think it should be. Nor is it a law I would like the government to pass. It describes how men act, in a market situation, each man trying to improve his situation as best he can from his point of view. It is, however, just as immutable as any law of physics.
Under bilateral competition, market prices must fall within a range between upper and lower limits that are determined by the available supply and the subjective values of the interested parties. The upper limit is set by the subjective valuations of the lowest successful bidder and the lowest excluded potential seller, whichever is lower. The lower limit is set by the subjective valuations of the highest successful offerer and the highest excluded potential buyer, whichever is higher.
Prices are determined by the subjective valuations of the two marginal pairs, and must fall within the range between the middle two of these four valuations. Valuations above and below these middle two marginal pair valuations have no effect on the market price.
Now let us look at table 11 again and run through this Law of Price with the figures before us. According to the Law of Price, under bilateral competition, market prices must fall within a range between an upper limit and a lower limit. The upper limit is set by the lower of the pair with the X in the squares. Of those two, the lower one is the $3,380 figure. That is the upper limit.
The lower limit is set by the higher of the pair with the X in the circles. In this case, the higher is the $3,360. So the price has to fall between these middle two, $3,360 and $3,380.
At any other price, there would not be equal numbers willing to buy and willing to sell. This is not my opinion. It is how all men act. They will not buy unless they expect to improve their situation by getting something they value higher than they value the sum of money they pay for it. They will not sell unless they value the money received higher than they value the good they offer for sale. Every participant expects to gain from every transaction, and there must be a buyer for each unit sold. Likewise, men will not pay more than market conditions demand; nor will they sell for less than competitive market conditions compel potential buyers to pay.
Effect of TaxesNow we shall try to show what happens when the government places a tax on the transaction. First we shall assume a sales tax of $50 on every sale of a taxicab. That means you have to add $50 to the subjective value each potential seller places on his taxicab. He will have to get at least that much before he improves his situation by selling. What happens with this problem?
Under the assumed conditions, only five cabs would be sold, and the price would be in the range from $3,350 to $3,360. With the tax included, this price range would be from $3,400 to $3,410. (See table 12.)
Table 12. BILATERAL COMPETITION(Second part of problem answered)
Effect of Taxes
Assume sales tax added to sales price of each taxi in table 11.
If a flat rate of $50 per taxi: If a 10% sales tax rate:5 taxis will be sold at aprice of $3,350–3,360;with tax included,$3,400–3,410.
4 taxis will be sold at$3,250–3,330;with tax included,$3,575–3,663.
If the tax were 10 percent of the sales price, only four cabs would be sold, and the price range, with the tax included, would be between $3,575 and $3,663.
Now we have seen what would happen to the price. It goes up. We have also seen what would happen to the number of transactions. Fewer cabs are sold. This means that under the first assumption, the $50 tax, one taxicab has to remain with a man who places a lower value on it than another man, a potential buyer, does. Because of the tax, the taxicab cannot be transferred to the potential buyer who places a higher value on it, but for whom it is not worth the extra $50 he must now pay.
When the tax goes up as high as 10 percent of the sales price, two taxicabs have to remain with men who place a lower value on them than would be the case in a market where the taxes did not exist. So sales taxes stand in the way of transactions that would increase the satisfactions of both potential buyers and potential sellers.
Of course, those taxes might be necessary for the market to operate. In that case they are a necessary cost of doing business. But when they are just an interference with the market, or a tax to provide a subsidy for some privileged group, rather than an expense for the equal protection of all, they must diminish the satisfactions of the people operating in the marketplace. Every transaction prevented reduces the satisfaction of a potential buyer and a potential seller. In addition, it results in a rearrangement of market conditions in a manner that must reduce the highest potential satisfaction of human beings.
This is how prices come about. They emerge from the concatenation of the subjective values of all the people participating in the marketplace, each one trying to improve his situation as best he can from his own point of view. Except for the valuations of the middle marginal pair, changes in the valuations of the other parties have no influence, as long as they do not cross the price range of the middle marginal pair. If one of the potential buyers below the line was willing to pay up to $10,000 for a cab, it would have absolutely no influence on this particular situation, because he will not in fact pay more than he needs to pay, that is, the market price.
Remember that price must benefit all who trade. You do not trade unless you expect to benefit. Price must also allocate the available units to those who place the highest value on them. And every interference with free-market prices is an interference that must diminish the human satisfaction of moral persons. It leaves things where they are worth less than they would have been worth if the market had been free to transfer them to those placing the highest value on them.
The same is true of laws that do not directly affect price, but do directly affect what you can trade, the hours during which you can trade, or where you can trade. All such laws reduce transactions and must therefore reduce human satisfactions.
Economic CalculationWe have been talking about consumers' goods, or things that people seek for their own use satisfactions. Let us go into the more complicated part of the market — producers' goods, or goods that are eventually used to make consumers' goods. When valuing producers' or capital goods, men transfer values of consumers' goods to their factors of production, that is, to the various things that are needed to make the consumer goods. It is thus the market value of consumers' goods that determines the value of labor, machines, and raw materials. For this, economic calculation is necessary.
Under socialism, economic calculation is not possible. Without a market, socialists cannot calculate what goods will give the most satisfaction, or the most efficient way to make whatever they decide to make. Since the government owns and controls all the factors of production, there can be no competitive market bidding for scarce materials to decide how they should be allocated. This is a function of prices in a market economy. But there is no market for raw materials or other factors of production in a socialist or communist society.
In a socialist or communist society, those who want to find out whether steel is more expensive than aluminum or some other metal have to buy a newspaper from a country that has a market. Even then, the prices in that paper will reflect the relative values of that country's market and not those within the borders of the socialist area, where supply and demand conditions may be very different. Socialists have no other way of knowing relative values. They must rely on the opinion of some bureaucrat, someone with authority. Without competitive prices, planning production is like trying to solve a puzzle without an answer. Because it monopolizes raw materials, the government receives no help from competitors in determining relative values.
In our market calculations we grade, prefer, and set aside. Values are ordinal and comparative. Now let's take an example of what happens in the market with one of the factors of production. Take iron, for example.
The price of iron originates in the businessmen's appraisal of the consumers' subjective valuations of iron products, products of which iron is a part. After all, businessmen cannot sell their products unless consumers consider them a bargain. So their ideas of consumers' valuations determine how high they will go in bidding for iron and the other factors needed to make their product.
The available supply of iron, like that of taxicabs, always goes to the highest bidders, those who expect their use of the iron will bring the highest price from consumers. Of course, the larger the quantity offered for sale, the fewer the potential buyers who are disappointed. Money is the common denominator for calculating the most profitable uses of the limited supply, that is, the best-paid uses, the highest prices on the market.
The available iron is sold to the highest bidders, with the marginal buyer determining its price and thus the cost to all buyers, even those who might have been willing to pay more. The competition of sellers drives prices down on all iron products. If there are high profits, there will soon be more suppliers competing. General market bidding thus allocates all the available supplies of all factors of production so as to satisfy the highest not yet satisfied consumer wants. High market prices for a product induce businessmen to increase production of that product, while low market prices cause businessmen to use the factors of production to make other consumers' goods for which they expect prices to be higher.
Market Effect of SavingsWhenever additional savings are available, these new savings start a bidding for the factors of production needed to supply the highest not yet satisfied wants on consumers' value scales. This bidding raises costs, including wages, and ultimately results in more production, which tends to lower prices and squeeze or eliminate profits.
If the cost of some factor of production is too high for businessmen, it means there is another use for it for which consumers are expected to pay a higher price. Prices are expressions of relative scarcity in relation to demand. Values are not quantities but arrangements in order of importance in satisfying human wants. Adding values, like adding love, is crazy. We can only compare them.
As consumers' value scales change, the kinds of wealth produced must change. Market prices are the indicators that direct businessmen to change their production. Businessmen tend to produce units of every article up to the point at which they expect consumers to pay all costs of production, including interest. A profitable industry tends to expand to that point; an unprofitable one tends to shrink to that point. Thus consumers, by their buying or non-buying at or above the cost of production, determine how much should be produced in every branch of industry.
There prevails upon the unhampered market a tendency for consumers to encourage production in every industry up to that point at which the marginal producer or producers make neither a profit nor a loss. Flexible market prices are the means for revealing that point to producers. Any outside interference with freely flexible prices must misdirect production and lead to diminished satisfaction of consumers.
Subjective Values Determine PricesAs stated in the beginning, it is the subjective values of individuals which allocate the available supply of every good, so as to satisfy human wants in the descending order of their importance, whereby the particular want last satisfied is the one with the marginal utility. From beginning to end, prices, and thus economic calculations, are the products of subjective valuations. They are the results of the reciprocal impact of the subjective values placed on the goods and those placed on a quantity of money by all interested parties. Every price must benefit all who exchange.
There is nothing automatic or mysterious in the operation of the market. The only forces determining the continually fluctuating up-and-down state of the market are the value judgments of interested individuals, and their actions as directed by their value judgments. The ultimate factor in the market is the striving of each man to satisfy his needs and wants in the most economical way possible or known to him. The supremacy of the market is in fact a supremacy of the consumers. Interfering with the market interferes with the satisfactions of consumers.
QUESTIONS AND ANSWERSEffect of Consumers' Values on ProducersQ. What you have explained is all right for products which already exist. But does it apply to those that don't exist — to new ones?
A. Certainly it does! As I have said, people's wants are never fully satisfied. There are always some things they want that they do not have. When there are new savings in a market society, the saver becomes an investor. He tries to invest his savings in a way that will produce more goods. What goods? Those goods next lower on consumers' value scales, for which their needs have not yet been satisfied. These are the goods that businessmen expect consumers will pay more for in the future than their current cost of production. When he produces these new goods, he has got to bid for labor. He has got to bid for raw materials. Thus he pushes those wages and prices up to take the labor and raw materials away from other uses. Then he produces goods that have to be sold in competition with all existing goods. With more goods and no change in the quantity of money, prices are lower than they would have been, and everyone gets more for his own limited amounts of money. To answer the question more specifically, every businessman must pay attention to consumers' values — to what consumers want and will pay. This may mean producing larger quantities of presently available goods or entirely new items not previously available. In either case, more human wants are satisfied. If a businessman does not pay attention to consumers' wants, he will soon be out of business.
Morality of SpeculationQ. The majority of people consider speculation immoral. What do you have to say about that?
A. Calling speculation "immoral" is saying that all men are immoral, because we are all speculators. It is even a speculation to cross the streets in Buenos Aires — or New York. No one knows the future. We have to speculate. All of our choices and actions are speculations.
It is true that many consider immoral those "terrible" people who make money speculating. Do you know that you cannot make money speculating unless you serve society? If you speculate on the future and do not serve society, you lose. The normal process for successful speculation is to buy something cheap at one period and sell it high at a later period. Speculators make a profit when they can do this. But when they buy, they have no assurance that it is going to be higher later. It could be lower and then they lose. Try it in the stock market sometime and you will find out.
If the speculators buy something when its price is low, they are buying it when it is in relatively large supply and, because the price is low, people are using it as a cheap good. If they sell it later at a higher price, it is because it is then scarcer in relation to the demand for it. It is, therefore, worth more and serves human uses that are more valuable. So what the speculator does to earn his money is to buy the good when it is cheap and store it for when he hopes it may be more expensive. If this is something that is needed for life, like the grain in the story of Joseph in the Bible, when the seven plenteous years were followed by seven years of famine, the service to society becomes evident. Those who save goods when there is a plentiful supply and make it available when there is a famine, or no other supply, are speculators who make money by serving society. If, on the other hand, there is, later on, a larger supply, the speculator has to sell his stored supply at a cheaper price, pay for the warehouse, pay interest on his investment, and thus he loses. A speculator can make money only when he serves society. A speculator is a person who tries to foresee the future situation and prepare for it. Only if he sees and acts relatively more effectively than other people in satisfying human wants, does he make a market profit from his speculation. Serving society is never immoral.
On Effects of Intrinsic Value and QualityQ. What do you have to say about the influence of intrinsic value? And about the influence of quality?
A. Those are really two different questions. In economics, there is no such thing as intrinsic value. This is a very common error, particularly concerning the precious metals, including gold. Nothing has value in the market unless it satisfies some human want or need. The value of something is in a person's mind. It is not in the product. Of course, the physical qualities of a good contribute to its usefulness to men. However, it is only when men can see a use for a scarce good that it has value.
Now, of course, the quality of a good is an essence of its value. Rotten eggs have little value. There are people who will pay more for a higher quality. But the seller can charge a higher price for a higher quality only if people want the higher quality. Most of us, of course, prefer higher quality. We do not go around in rags. We buy suits that are made to fit us. We buy suits that look better on us than simple lengths of cloth that we could wind around us to keep us warm, and we pay more for them. It is the consumers who determine both the values and the qualities that are found in the market.
Competition and MonopolyQ. What happens to the Golden Rule when there is no perfect competition, that is to say, under oligopoly and monopoly?
A. First, about this "perfect competition," we could spend a whole evening on the fallacies embraced by that idea. There is no such thing as perfect competition. But in a market society there is always competition. In one sense everything in the market is in competition with everything else for the consumers' dollars.
We could spend another couple of evenings on the question of competition and monopoly. Actually, the only monopolies we have to fear are those that are monopolies because they have a special privilege from a government. If there is freedom to compete in the marketplace, you can maintain a monopoly only as long as you are superior to every prospective competitor. In a free-market society, you do not have a monopoly unless you are doing something better than any other person or group of persons could do it.
In one sense, we are all monopolists. We each have a monopoly on our own services. The man who is the best prize fighter, the champion of the world, has a monopoly on that title. The opera singer who can sing the highest note has a monopoly and gets the highest price. The man who owns the only gasoline station in a community has a monopoly. In a free-market society, if anyone can do better, he is free to compete.
The problems of monopoly get down to the question of monopoly prices. No one has to pay a monopoly price unless he is satisfied that doing so improves his situation. In a free market anyone should be able to compete, if he thinks he can compete.
Most of our monopoly problems come from special privileges granted by law. The answer there is always to take away the special privilege. With equality before the law, which was mentioned in one question following the first lecture, there is no significant monopoly problem. Everybody should have an equal right to compete. Then those who give consumers the greatest satisfaction will be the ones who succeed. If they get fat, lazy, and rich from their success, then somebody else will come along, compete, and knock them down. In a free market, newcomers are constantly trying to replace the giant firms on the top.
One of the worst effects of the New Deal in my country and of welfare state processes in other countries is that they keep at the top those who are already there. Interventionism tends to protect them from the competition of those at the bottom who would like to replace them.
For example, it is now impossible in my country to do what Henry Ford did forty years ago. What Henry Ford did was to employ men to make more automobiles for more people, who bought them all at prices that they considered bargains. He paid the workers higher wages than they could get anywhere else. He made these automobiles for the masses and became rich. What did he do with his wealth? He plowed it back into more or bigger factories, hiring still more men to make still more cars.
Today, with present tax rates, the government takes a good part of all profits, including more than half of the profits made by corporations. As a result a businessman in the United States can no longer expand as fast as Henry Ford could. He therefore cannot compete as easily against the giants already at the top. So these laws, supposedly directed against the top people, are more against the new, smaller, struggling competitors. They prevent newcomers from competing with those already on the top as efficiently as they could if they were permitted to keep and plow back into the business more of their early profits.
Calculation under CommunismQ. Considering the actual value scales existing in Communist Russia, must not the Communists calculate economic values on the basis of the cost of production?
A. They have no cost of production, or rather, their cost of production is the sweat and blood of their people. It is an order: You do this, or you do that, or you do something else. They cannot calculate market costs because they have no market to tell them costs. Their calculations have to be based on the judgments of a czar, the czar of each particular industry.
Some ten years ago, I put together an article that was largely quotations from Russian papers, Pravda and others. It related several interesting incidents, which indicated that these papers were not entirely happy with the operation of their own Russian Soviet system. It seems there was one industry that had to move goods from the north to the south on the Volga River. So they built a fleet of boats to move these goods from the north to the south, and the boats returned north empty. There was also another industry that had to move goods from the south to the north. So this industry built another fleet of boats that returned south empty.
Now in a market economy, there would be common carriers, or advertising that would bring the two industries together. In either case, the market economy would not waste its scarce labor and its scarce materials by building two fleets of ships to do what one could do.
Another interesting article was about the Soviet railroad organization. It was paid to carry things on the railroads. The railroads had some tank cars. If they moved oil in one direction, they got paid for it. If they came back empty, they did not get paid for it. So on the return trips they would fill up the tank cars with water. That way they got paid for the return trip. How can you calculate costs under such a system? There are many examples of such uneconomic actions. I shall cite one in a later talk. It concerns a trade agreement arranged between East Germany and the Soviet Union that resulted in a suicide.
The communists have no means of calculation unless they look outside the country to market economies. Then they have the relationship of supply and demand that exists within the other country. The communist system, because it has no economic calculation, has to be inefficient. Communists can never be forerunners. They must always be followers. When people understand this, they will no longer be afraid of them as an economic power. If communism were a good and strong economic system, we should adopt it. But the communists are not strong. They are weak. They are now trying to copy capitalistic production methods, but they cannot do so while the government controls and allocates all the factors of production. Without markets, they are blind as to real costs.
Christianity and CapitalismQ. Do you think that Protestantism has helped free-market principles?
A. Well, I am a very staunch believer that free-market principles are in full harmony with Christian principles and that the free market is the only economic system that is consistent with Christian or Judeo-Christian principles. I must say that in recent years the organized churches, both the Protestant and the Roman Catholic, have not been in harmony with free-market teachings, nor have they been in harmony with what I must hold are the principles taught in the Bible. The organized churches have largely accepted the welfare state ideology so popular today. This ideology has changed the original meaning of the Ten Commandments. I could give you quite a speech on that. However, I want to make just this one point. There is the Commandment which in English is only four words: "Thou shalt not steal." Today, most of our people think that it has been expanded to eight words. They think it is: "Thou shalt not steal except by majority vote." They seem to think that any stealing done by majority vote is all right.
Except when necessary for defense, neither capitalism nor Christianity approves of the use of force or coercion. The fundamental principle of the free market, voluntary social cooperation for mutual advantage, is in full conformity with Judeo-Christian teachings.
Antitrust Law InterventionsQ. What do you think about the antitrust laws?
A. How many weeks can we have to answer that? Antitrust laws are like all other interventions. They help certain interests and they hurt others. They always hurt the consumers. In my country the antitrust laws originated because the government had given privileges to certain industries, and the companies, particularly the railroads, used these privileges to enrich themselves at the expense of the consumers. By law, the railroads were handed monopoly privileges that protected them from competition. Once they had this monopoly, they raised rates above those that would have attracted competition; but no competitor could come in to lower them. Then the people and the government said, "We have to control these greedy monopolies!" This led to the creation of the so-called antitrust laws.
Most of the antitrust laws are aimed at trying to undo the damage created by earlier government laws. I have written an article on this subject, particularly with relation to labor unions. It is entitled, "Is Further Intervention a Cure for Prior Intervention?"First published in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, ed. by Mary Sennholz. (Princeton, New Jersey, D. Van Nostrand Co., Inc., 1956. Reprinted separately by the Foundation for Economic Education, Inc., Irvington-on-Hudson, N.Y.). My answer is "No." Marx wanted such interventions because, as he correctly stated in the Communist Manifesto, they will make matters worse, create a demand for more and more intervention, until they result in overturning the capitalistic system. This is what is happening in many countries today. When people think the remedy for anything they do not like is another law, you get more and more laws until there is no freedom left. Every one of these governmental interventions makes matters worse from the point of view of those who advocate them. Try and think of one that does not.
Are High Prices Helpful?Q. Do you think that the producer who sells his product at high prices benefits the community?
A. Yes, if he can get them. If the high prices mean a high profit, he is soon going to have competitors who will gradually bring the price down pretty close to the actual costs of production. Let me cite an example that has been before the world just recently, the case of the few doctors who are able to transplant human hearts. Suppose you only allowed them to charge $100 per operation, and they could only perform one operation a week, and there was need for many more. Who would be selected, and how many young doctors would train to learn that operation, if $ 100 once a week were all they could make? On the other hand, if they were allowed to charge the highest price they could get, the market would select their customers. If that price were really high, many young doctors would want to learn to perform that very intricate operation. In a short period of time, more doctors would be able to perform the operation; the price would come down and more people could benefit from that type of operation, if it could help them.
The remedy for high prices is prices high enough to attract competition. When you lower prices by law, you not only fail to attract new producers, but you also make it unprofitable for marginal producers to continue in business. So production goes down, and consumers are provided with less satisfaction.
We have seen that in my country in connection with the question of rent control. During World War II, they said we had to take care of the poor people and keep rents low. So they froze rents then in effect across the nation. Wartime inflation raised the costs of construction. What happened? Nobody built any houses for rent, not even after the war, when construction materials were again available for peacetime uses. Did that help the boys who came back from the war, married, and started new families? No. It only created a still greater shortage of rental housing.
What was the political solution? Another law — public housing. First, there was public housing for politically selected low-income families. Now it is public housing for politically selected middle-income families. Like the public schools a century earlier, it may be public housing for all incomes before long. In Russia, you take the housing the government assigns you. In Sweden, married couples sign up for space on a waiting list. By the time they get something they are ready for divorce.
On Politics and PovertyQ. How do you explain the fact that today, although we live in a free-market economy, every day there are fewer rich and every day more and more poor?
A. I do not know where the questioner lives! In my country and other countries of the Western civilization, we have had more and more wealth under relatively free-market economies. It is only where government intervention results in capital consumption that there is less wealth produced. Marx certainly never envisioned the automobiles you have running around the streets here. He thought that before the end of the 19th century people were going to be starving, and that then they would rise up, throw off their chains, and create a dictatorship of the proletariat.
Now the automobiles that you have in Buenos Aires are not for the rich only. Those who are really poor today are poor largely because government intervention keeps them from competing for jobs. I, of course, am no authority on your economy, but I do know that in my country the poor, and particularly the Negroes, are kept poor because the labor unions can legally keep them out of jobs. We shall be saying more on this subject in the next lecture. It is the interventionist laws that prevent the poor from getting on the bottom rung of the ladder so that they can start the climb up. The stress of poverty is greatest when production goes down, and this usually occurs as a result of government interferences with a market economy.
We may not have a free-market economy but we do have a market economy. We have what my great teacher calls a hampered market economy. It is hampered. Its operations are hindered by governmental interferences. Under this situation we all have less. Both the rich and the poor have less, but the poor suffer more. The rich can get along comfortably with a little less, but many of the poor cannot take that less. Most government intervention is intended to help the poor at the expense of the rich, but, short of a dictatorship, it is always at the expense of everyone, including the poor.
Speculators and ScarcityQ. Do you agree that a speculator can artificially create scarcity so as to sell at a high price?
A. No, I would not agree that he can artificially create scarcity except in a very, very temporary local situation. We had a case in New York. Some of you may remember that a couple of years ago our electricity went off late one afternoon, and remained off for some 15 hours. People were caught in elevators. Everything was dark. Radios and TVs were silent. No one knew why. The only news I could hear was the radio in my automobile, and the local stations were going off the air. All of our electricity had gone off. There was a scarcity of electricity, to put it mildly. Those people who had flashlights and candles to sell were in a position to make a nice little profit. But if those flashlights and candles had not been there, the people could not have had them. People can make these profits only when they foresee the future better than their competitors. In a free society everybody has the right to be a speculator. If you think the price of cotton is going to double by next year, buy it now. Sell it next year. You have as much right to do it as anybody else. But what if you do, and the price goes down? This is the chance the speculator takes. If someone destroys his own property to raise prices, he is going to invite competition, so that any gain will be short-lived.
Price ControlsQ. What are the consequences of imposing maximum and minimum prices?
A. Imposing a maximum price — that is, holding prices below those of the market — means that the marginal producer will not cover his costs and will go out of business. Imposing a minimum price — that is, holding prices above those of the market — has the opposite effect. It means that more will be produced than can be sold at the minimum price.
Mises tells the story of how they like to introduce these maximum prices by putting them on something that is very much needed, say milk for babies. The poor people need cheap milk. So we lower the price of milk by law. And what do the people who have the cows do? They use the milk to make cheese and ice cream, which are not under price control. So to keep the price of milk down you have to apply the price controls to cheese and ice cream. The controls then must be applied to the expenses of the dairy industry, and eventually from one product to another, until you get to the point that Hitler reached in Nazi Germany.
Establishing minimum prices, by which the government guarantees a higher-than-free-market minimum price to producers, as we have done in our farm programs in my country, means that you soon have surpluses piling up in warehouses. The taxpayers then have to pay subsidies to the farmers, storage, and higher interest charges, as well as higher prices for their food and cotton goods. In fact, all over the world new areas are now growing cotton and taking our former markets away from us. The free market would direct those now producing the surpluses to make something else that consumers prefer rather than more of the goods for which prices are held artificially high.
The maximum prices reduce production and the availability of the goods. The minimum prices increase production beyond what people want at prices that cover the marginal cost of production. Then the product has to be warehoused or destroyed. In your neighboring country, Brazil, they simply burned their surpluses of coffee.
Existence of a Free-Market EconomyQ. In the United States, do you have a free-market economy, and if so, tell us since when?
A. The free-market economy is like Christianity. It is a goal to move toward but human beings never quite attain it. We have never had a completely free economy in the United States. It was only relatively freer than any that had ever existed in the world before. It protected private property and brought us great capital accumulation, on which we are now living. The nearer you approach to the free-market economy, the higher the standard of living will be.
Product Durability vs. Higher SalesQ. Would you be so kind as to discuss briefly the soundness of a policy of manufacturing goods that do not last too long, thus insuring a continuing demand, creating manufacturing volume, and thereby reducing both costs and selling prices?
A. Well, a manufacturer's purpose is, of course, to maximize his profits. He has to compete with businessmen who may have different ideas of production. It is always the consumers who will decide which manufacturer gets the profits. I am the son of a Britisher and this question led to debates I used to have with my father about automobiles. As a Britisher, he defended the Rolls Royce, which did not change its models every year, had higher quality, and lasted almost a lifetime. In the United States, we change our automobile models almost every year in some way. The consumers then decide which of the two they will buy, the one that will wear out quickly, or the one that lasts a longer time.
[product:0]
The same thing is true of styles. In my country, as in other countries, the women's wear industry has persuaded women to change their styles almost every year so the industry will have more sales. They are now trying to do it with the men. Clothing manufacturers would like us to throw our clothes away because they are out of style rather than because they are worn out. Any business can attempt this, but the final decision is always made by the consumers as they spend their money. So in the long run, the manufacturer has no choice; he must provide what the consumers will buy.
Right to Destroy WealthQ. Has the producer the right to destroy the products he produces?
A. The question is: Does he own them? If he has paid for them, he has the right to do that; and I suppose he has the right to commit suicide too. If you have something of value and want to destroy it without harming anyone else, that is your right. But if it has a market value, there is no inducement to destroy it.
This article is excerpted from Understanding the Dollar Crisis (1973).
Although Leland Yeager calls himself a fellow traveler of the Austrian School (p. 100), rather than a full-fledged member of it — he is a fellow traveler of the Chicago School as well — no reader of his essays can fail to note one respect in which he resembles two quintessential Austrian economists, Ludwig von Mises and Murray Rothbard. Like them, Yeager is a scholar of enormous learning, a fact in evidence in each of the 28 essays of his collected here. As an example, few of his colleagues, one suspects, would know that "Thomas Hobbes … suggested that one might test whether a piece of abstract philosophizing means anything by seeing how readily it could be translated from the original language into another" (p. 267, n. 2).
Often, his own views emerge from the critical comments he makes on other writers. Yeager insists, against Robert Clower and Axel Leijonhufvud, that Keynes was a Keynesian. The writers whom Yeager opposes take Keynes to be an advocate of monetary-disequilibrium theory, stressing especially the difficulties in adjusting prices to changes in the demand to hold money.
Yeager mordantly comments,
Clower and Leijonhufvud admit that Keynes did not explicitly state what they suppose he meant. They offer excuses for him. In trying to break free from orthodoxy, he was handicapped by unavailability of the required concepts. The orthodox doctrine he was attacking had not yet been spelled out explicitly enough. Still, ample excuses for not having done or said something are not, after all, the same as actually having done or said it. (pp. 159–60)
Instead, Keynes supported the crude doctrine from which his sophisticated defenders are anxious to extricate him. "I [Yeager] blame the Keynesians for lingering notions that government budget deficits, apart from how they are financed, unequivocally 'stimulate' the economy" (p. 165). It is this false doctrine that has had undeserved influence. The tale is best continued in Yeager's inimitable way:
While a visiting professor at George Mason University in the fall of 1983, I not only had to clean the blackboard after my classes, as a professor should; I also had to clear away what the inconsiderate professor before me had left on the board. Through the entire semester, more often than not, it seemed to me, what was left was the Keynesian cross-diagram illustrating the simple-minded Keynesian multiplier. (p. 165. I have reversed the order of the two quotations from this page.)
Much more to Yeager's liking are the views of W.H. Hutt, who criticized Keynes from a standpoint that stressed price discoordination in depressions; in this he resembled Clower and Leijonhufvud, although he did not work out the monetary implications to the extent these later theorists did. These economists argued that sticky prices arise from rational behavior under the circumstances, but
Hutt blames government for not suppressing the basic reason — villainy — why prices and wages do not clear markets and assure continuous coordination. He perceives villainy — but the word is mine, not his — on the part of labour unions, business monopolists, and government itself. Villainy includes such things as union control over wages, minimum-wage laws, overgenerous unemployment compensation, and monopoly and collusion. (p. 178)
I shall not resist the temptation to quote Yeager again. Hutt has not had the influence he deserves, Yeager thinks, owing to his wretched style:
Hutt's exposition is a collection of discursive and often cryptic remarks … in no readily intelligible order, we find bits of positive analysis, jabs at Keynesianism, historical allusions, policy proposals, and autobiographical asides.… Strewn through Hutt's writings are echoes of long-standing obsessions, including, of course, his obsession with labour unions.… Hutt often covered himself against challenge by qualifying apparently egregious propositions with cryptic phrases that are hardly understandable unless the reader is already familiar with his terminology and allusions. (pp. 184–86)
In "Tautologies in Economics and the Natural Sciences," Yeager makes an outstanding contribution to understanding praxeology, although the essay does not have that as its purpose. The theorems of praxeology are a priori true: how, then can they give us new knowledge about the actual world? Are not such propositions mere tautologies, empty of empirical content? So, at any rate, said Mises's logical-positivist critics.
Yeager's comments on tautologies take exactly the line followed by Mises in Human Action, though this has not won favor among many of Mises's followers. Yeager contends that tautologies are more useful than their detractors suppose:
Tautologies are analytic or logically necessary propositions.… Analytic propositions can give us new knowledge (or aid us in its pursuit).… Logic and mathematics, although apodictically certain, can sometimes yield surprising results.… Concepts may legitimately be formulated so that certain propositions about relations among them are not merely true but necessarily true. Many propositions of science are true as a matter of convention, yet conventions are not arbitrary. (pp. 263–64, 277)
Not content with this contribution, Yeager in another essay, directly devoted to Mises, offers another line of defense for praxeology. He says that Mises took a priori propositions in economics to be common-sense truths: they are empirical, but of a character whose truth is immediately apparent without testing.
The Austrians' concern for facts of reality is often overlooked because of their supposed insistence on a purely a priori method. The term, notably as used by Ludwig von Mises, unfortunately invites misinterpretation. So used, a priori suggests an unintended sharp contrast with empirical. Mises did not mean that all important propositions of economic theory can be spun out of factually empty logical truisms. He relied, rather, on axioms for which factual evidence constantly presses itself on us so abundantly that we can hardly imagine a world to which those axioms did not apply. (p. 138)
Readers no doubt have noted that these two defenses are not the same, but I do not think that we have here a genuine inconsistency. Perhaps some theorems of praxeology are better defended in one of these ways, and others in the other way.I am not sure there is even the appearance of inconsistency in Yeager's own presentation. His examples of analytic tautologies in economics, such as Walras's Law and the equation of exchange, do not come from Mises. Perhaps he did not intend his account to apply to praxeology at all. But it manifestly does apply; and, in any case, Yeager cites the law of comparative advantage as a tautology (pp. 273–74) and this is part of Mises's economics.
Given Yeager's resolute defense of a priori truth in economics, it is surprising that he also endorses W.W. Bartley's misguided assault on "justificationism." Yeager, following Bartley, says,
An often unrecognized trait running through the history of philosophy, justificationism is the expectation that all proposition be justified (demonstrated, proved, warranted) by appeal to some authority, whether reason in the style of Descartes, empirical observation, divine revelation, or some other definitive source. But no interesting proposition can be justified in such a way.… It is reasonable to accept, tentatively, laws and theories not yet rejected on logical or empirical grounds and not yet displaced by more attractive alternatives. Accepting them in that way is not the same, however, as holding them to be justified or proved, for positive justification is downright impossible. (p. 235)
Is it really open to doubt, e.g., that the law of diminishing marginal utility is true or that an exchange will take place only if the parties to it expect to benefit from it? I cannot see why, against Yeager's own apt remarks in support of the a priori quoted above, we should reject such apodictic truths because of some antijustificationist dogma. Most philosophers seek to avoid skepticism: Popper, Bartley, and their followers embrace it, holding, e.g., that there is no good reason to believe anything. Why join them?
Yeager's wide interests extend to ethics, and here he forcefully defends the utilitarianism of Mises and Henry Hazlitt against other views. To him, ethics rests on the ultimate value judgment that happiness is better than unhappiness. Given this judgment, which nearly everyone shares, we can say further that the best way to achieve happiness is through social cooperation in the free market. Promotion of such social cooperation thus becomes the proximate goal of ethics.
He sharply criticizes Rothbard's defense of natural rights. What is the point of natural rights, if they do not advance human happiness? Rothbard grounds natural rights in natural law. "Each entity, including the species man, has its own distinct nature." After a quotation from Rothbard, Yeager says, "To appeal to what is necessary for man's life and prosperity, given his nature, sounds like a utilitarian argument" (p. 430).
In the broad sense in which Yeager uses the term "utilitarian," no supporter of Rothbard need quarrel with what Yeager says. He is right that utilitarianism as he has characterized it is not vacuous: clearly there are some views of ethics that do not accord primacy to human happiness. Samuel Hopkins, e.g., an 18th-century Congregationalist theologian, said that people should be willing to be damned to hell, if necessary, for the greater glory of God.
Hopkins would not qualify as a utilitarian in Yeager's sense, so his utilitarianism has content; but it is nevertheless not fully specified. Whose happiness counts? Everyone's? Only that of a certain group? These and many other questions remain open. We may I think regard Rothbard's account of rights as a way of specifying Yeager's utilitarianism, rather than as a rejection of it. Yeager is free to disavow it, but if so, he needs to put in the field a competing theory. Merely to announce a preference for happiness and the market does not suffice as an ethical theory: Yeager has as it stands done no more than give us a criterion that such a theory must satisfy.
Yeager is a forceful and effective critic of numerous theories of ethics; his penetrating discussion of Buchanan's contractarianism, e.g., deserves careful study. In a few places, though, his remarks about various writers seem to me mistaken. He surprisingly treats Brand Blanshard's account of the "rational will" with favor. He says of it, "Briefly interpreted, Blanshard's rational-will doctrine says that the obligation to support government is binding because — and to the extent that — it serves social cooperation" (p. 502).
The doctrine does say this, but it also says much more. The rational-will doctrine holds that if support for the government in fact serves social cooperation then people actually do support it, even though they imagine they do not. Their conscious will need not reflect their real or rational will.
This position opens the door to the denial of freedom: the government, in restricting people, has only to say that it is enforcing the people's rational will. Indeed, the view closely resembles one which Yeager in another essay condemns. He notes the claim of Father Bernard Häring that liberty is the power to do what is good, and says of it, "On this interpretation, when the state prevents an individual from acting in a way considered bad, it is not infringing his liberty (or his true liberty). What equivocation!" (p. 312).I have translated this, I hope correctly, from the original Interlingua. This is an artificial language Yeager has long championed. Fortunately for me, all of the other essays are written in English. The essay slightly misspells Father Häring's name.
Yeager remarks about John Harsanyi's defense of utilitarianism,
If Harsanyi's method resembles Rawls's 1971 notion of choice behind a veil of ignorance, the similarity goes to show that such a conception of impartiality need not be a distinctively contractarian one, as Rawls seems to think. (p. 499)
I do not see why Yeager says this. Harsanyi's project is precisely a contractarian argument for utilitarianism.
Also, his criticism of Nozick's use of the Lockean proviso seems to me wrong. He says, "Nozick misapplies the Lockean proviso anyway, since it concerns original acquisition of property, not its retention in the face of changed circumstances of other persons" (p. 507). But Nozick is endeavoring to construct his own theory, rather than to interpret Locke. If his theory differs from Locke's, it is not by that fact alone shown to be mistaken.
These are minor matters. One leaves Yeager's outstanding book with admiration for the author's learning, incisive arguments, and love of liberty. Yeager mentions more than once Ayn Rand's criticism of "second-hand" thinkers. He is no second-hander but rather a proudly original thinker and scholar.
I.The saying that things may work nicely in theory, but do not necessarily work in practice is well known."The term theory is ordinarily understood to signify that the suggested explanation is held to have been satisfactorily proved, and to be no longer open to questions." Joyce, G. H. (1908), Principles of Logic, Longmans, Green & Co, London et al., p. 362. It is typically meant to disparage the importance of theory, suggesting it would be too far removed from practical matters to help in solving the issue at hand.
The Prussian philosopher Immanuel Kant (1724–1804), in his 1793 essay "On the Popular Judgment: 'This May Be True in Theory, But It Does Not Apply in Practice,'" responded to such criticism; in fact, he responded with his essay to criticism leveled against his ethical theory by the philosopher Christian Garve (1742–1798).
Therein, Kant made the point that theory provides "principles of a fairly general nature," or general rules. However, theory does not tell man how to apply it, says Kant. For this, the act of judgment is required:
For a concept of the understanding, which contains the general rule, must be supplemented by an act of judgment whereby the practitioner distinguishes instances where the rule applies from those where it does not.Kant, I. (1992 ), Über den Gemeinspruch: Das mag in der Theorie richtig sein, taugt aber nicht für die Praxis, Zum ewigen Frieden, H. F. Klemme, ed., Felix Meiner Verlag Hamburg, p. 3 [A 202], my translation.
The Prussian philosopher effectively called for respecting the role theory has for acting man:
No one can pretend to be practically versed in a branch of knowledge and yet treat theory with scorn, without exposing the fact that he is an ignoramus in his subject.Ibid, p. 4 [276], own translation.
In this methodological work Ludwig von Mises (1881–1973) emphasized the importance of theory for acting man at the most fundamental level, noting that theory and human action are in fact inseparable. Mises writes,
Action is preceded by thinking. Thinking is to deliberate beforehand over future action and to reflect afterwards upon past action. Thinking and acting are inseparable. Every action is always based on a definite idea about causal relations. He who thinks a causal relation thinks a theorem. Action without thinking, practice without theory are unimaginable. The reasoning may be faulty and the theory incorrect; but thinking and theorizing are not lacking in any action. On the other hand thinking is always thinking of a potential action. Even he who thinks of a pure theory assumes that the theory is correct, i.e., that action complying with its content would result in an effect to be expected from its teachings. It is of no relevance for logic whether such action is feasible or not.
With theory being inseparable from human action, the crucial question is this: What is the correct theory? For obvious reason, acting man will be interested in correct theory: "No matter how one looks at it, there is no way in which a false theory can serve a man or a class or the whole of mankind better than a correct theory."Mises, L. v. (1957), Theory & History, p. 124.
II.In today's mainstream economics the truth value of a theory is typically tested along the lines of an "if-then hypothesis." For instance, economists test whether a rise in the money supply leads to higher prices, or whether a rise in the money supply causes rising prices — or whether the reverse holds true.
Such a procedure is typical of positivism-empiricism-falsificationism — a methodological approach in economics that must not only be rejected as intellectual confusion;See in this context Hoppe, H. H. Hoppe, H. H. "Austrian Rationalism in the Age of the Decline of Positivism." In The Economics and Ethics of Private Property, Studies in Political Economy and Philosophy, 347–379. 2nd ed. Auburn AL: Mises Institute, 2006. it can also be criticized as being prone to demagogic abuse.
For if one holds the view that nothing can be known (for sure) without testing it (which, by the way, is a contradiction in itself, but this finding shall not be of no further concern here), one must try it to find out.
Once a theory sounds good, or benevolent, enough — such as the theory that a rise in the money supply brings prosperity for all, or the theory that government deficit spending creates new jobs — people will love to see it put into practice.
What is more, under the reign of positivism-empiricism-falsification there is even an economic incentive for spreading theories just for the sake of their political efficacy — even if these theories are false: those who provide credible scientific legitimization to actions pursued by government can typically expect high rewards.
To provide a metaphorical illustration, to make robbery socially accepted, the robber will be willing to share some of his loot with those helping to make his crime acceptable from the viewpoint of his victims.
When it comes to benevolent-sounding economic theories, consider the following examples:
The state is indispensable for peace and prosperity; without the state, social chaos, relentless aggression, and misery would result.Murray Rothbard defines the state as "that institution which possesses one or both (almost always both) of the following properties: (1) it acquires its income by the physical coercion known as 'taxation'; and (2) it asserts and usually obtains a coerced monopoly of the provision of defense service (police and courts) over a given territorial area." Rothbard gives a positive definition of the state: Iit says what the state really is, not what it ought to be (normative definition).
Rothbard gives a positive definition of the state: it says what the state really is, not what it ought to be (normative definition).
Money production must be monopolized by the state, for there is no other way to obtain reliable money.
Commodity money (gold and silver) is better replaced by fiat money, as only fiat money allows for an adequate increase in the money supply — which, in turn, is necessary for output and employment growth.
Capitalism exploits the working class and leads to widespread poverty, war, and imperialism; socialism will maintain peace and raise the standards of living for all.
Democracy (majority voting) is the form of political organization respecting individual freedom and property rights, necessary for peaceful cooperation and prosperity.
These examples may suffice to make the point: once theories are considered to be benevolent theories, they can be expected to be put into action; the more benevolent the theory is, the more likely social experimentation gets under way.
However, engaging in social experimentation for alleged truth-finding purposes comes at a high price — at times at a prohibitively high price, as the experimentation with socialism in many countries has made all too clear.
III.In the field of economics, however, it is possible to decide whether or not theories are correct without having to take recourse to experimenting and testing.
Mises reconstructed the science of economics as the logic of human action, which he termed praxeology. As a priori theory, praxeology allows deducing irrefutable — or apodictic — truths from the irrefutably true axiom of human action.
In Mises's words,
Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts.
Praxeology provides a methodology that allows separating correct economic theories from false economic theories on a priori grounds — that is, without having to engage in social experimentation.
In view of the illustrations given above (without developing the argument at length), we know for sure that the state is not the solution but the root cause of the most severe social conflicts.
From praxeology we also know with certainty that money is a free-market phenomenon; that commodity money, the logical choice of free market action, is sound money; and that the state monopolization of money production brings unsound money.
We also know for sure that an increase in the money supply doesn't make an economy richer; it merely benefits the early receivers of the new money (who are those issuing it) at the expense of those receiving the new money late or not at all.
It can also be deduced from praxeology that socialism leads to great misery, as it is a form of social organization that cannot work; it is bound to fail, and capitalism is the only economically viable form of societal organization.
Finally, it can be shown on the basis of praxeology that democracy is actually — and this may be surprising to the many — incompatible with preserving individual freedom and property rights and thus peaceful cooperation and prosperity.
The power of unmasking and demystifying false economic theories on a priori grounds, that is without having to engage in social experimentation, is certainly one of the most fascinating aspects of the Misesian-oriented Austrian School of economics.
In his introduction to Critique of Pure Reason (1787), Kant title chapter 3, "Philosophy stands in need of a Science which shall Determine the Possibility, Principles, and Extent of Human Knowledge 'a priori.'" For the science of economics, Mises has done just that.
[Understanding the Dollar Crisis (1973)]
It is indeed a great honor to be brought so many miles to speak to you here this week and next. I owe my thanks to Sr. Alberto Benegas Lynch and to the Centro de Estudios sobre la Libertad.As he has said, I am a student of Ludwig von Mises. I consider him the greatest man of our century. If our civilization, the whole of Western Civilization, is to be saved, it will only be because his ideas come to be more generally accepted than they are today.
In this first lecture I have been asked to talk about the science of economics.
Economics: A Science of MeansEconomics is sometimes thought of as a very dry and dismal subject dealing with dusty tomes of statistics about material goods and services. Economics is not a dry subject. It is not a dismal subject. It is not about statistics. It is about human life. It is about the ideas that motivate human beings. It is about how men act from birth until death. It is about the most important and interesting drama of all — human action.
Since we must all be economists in one way or another, we all face the problem of how to become better economists in our daily work, in our family life, and as good citizens of our nation and of the world. The top educational problem of today is how to provide people with a better understanding of economics. All of our fundamental political problems, about which we have so many disagreements, are basically economic problems. Our prime problem is how to solve these economic problems. The best answers can be found only by resorting to the study of sound economic principles.
Many people think that economics is a matter of opinions. Economics is not a study of opinions. Economics is a science, and as a science it deals with eternal laws — laws that men are not able to change — laws that remain constant. If we want to improve our own satisfactions in life, we must improve our ability to know and use these laws of economics so as to attain more of the things we want. So, if the civilized world is to survive, people must learn more about this science of human action.
My great teacher, Ludwig Mises, called his great book Human Action. He reduces economic science to two words: men act. From these two words he builds the whole science of economics. He points out that purposes direct all conscious human actions. We are not dealing here with the functions of the body that are performed without conscious guidance. We are dealing with the attempts of men to achieve the things they seek in life. This is what we are assembled here to learn a little bit more about.
In every act throughout our whole lifetime, we are always exchanging something we have for something we prefer. We may be exchanging our time, our energy, our money, or some other scarce good for what we want, but every one of our actions is an exchange — an exchange of something we have for something we prefer. We must learn to improve our actions if we are to get more of the things that we want in life.
The things we really want in life, both material and immaterial, our ultimate goals, are not chosen with the help of economics. Our ultimate aims and goals in life we choose ourselves. They are our decisions. We get our ideas of what we want in life from our parents, from our teachers, from our priests, from our philosophers, from our own thoughts and those of others who are in a position to help us make our own decisions on what we want. But we, each of us, know what is really important to us. No other man is capable of telling us what it is that we want or prefer. No dictator, no bureaucrat is able to tell us what we want. This is something we all decide for ourselves and which we alone know.
If we disagree among ourselves about what we want, we may come to blows. If the disagreement is important enough to us, we may attempt to settle the issue by combat. But most people agree on what is wanted. Our great differences are disagreements about how to go about getting what we all want. These are differences about means rather than ends. For such disagreements, economics provides the intelligent solutions.
Most of the people in the world want peace and prosperity. We want them, of course, for ourselves, our family, our country, and our world. Most of us realize that if we are to have peace for ourselves, our family, and our country, there must be peace for other people, for other families, for other countries. But when it comes to prosperity, there are great disagreements. Many people want it at the expense of others. There is, unfortunately, very little realization that if we are to have prosperity for ourselves, there must also be prosperity for others. Prosperity, like peace, is something that must be general — something that must be shared by all peoples.
So, we now get to the reason for studying economics.
Good Intentions Are Not EnoughThe main objective of economics is to substitute consistently correct ideas and actions for the contradictory ideas and actions inherent in popular fallacies. Most people accept many of the popular fallacies that have come down over the years. In my next lecture I shall be dealing with one of the most important fallacies, if not the key fallacy — one that goes back to the days of Aristotle, and to which we owe many of our great difficulties. I shall then elaborate on the idea that many people have had, that the only fair exchange is an equal exchange.
Now the common man, the average man, any man, will change his ideas and actions whenever he is convinced that the change will better serve his interests. No man aims at failure. He always wants to use his available means in a manner that will bring him success in attaining whatever he wants most in life. This is true of all of us. There is no way we can avoid it.
Our job, and my job in particular, is to show that the science of economics, that is, the free market, rather than political intervention or socialism, will help all of us achieve more of the things that we want in life. So the better we understand the laws of the free market, and the better our fellow men understand them, the more successful we shall all be in attaining more of those things that each of us wants most in life.
However good our intentions may be, they can never make unsuitable means any more suitable for attaining desired ends. The world is full of people with good intentions. It is not only the people with bad intentions that we have to worry about. There are a few of them, to be sure, seeking power, seeking things which do not belong to them. Our great problem is the many people who have the best of intentions but who have been taken in by some popular fallacies.
Sometimes I tell a story to illustrate this point. It is about two American sailors in uniform who were spending a weekend in Stockholm. They had been brought up like most good American boys to go to church on Sunday. So they found a large Swedish church and went in. They found, of course, that the service was in Swedish, which neither of them understood. They took seats up front, behind a certain gentleman. They agreed between themselves that when this gentleman rose they would rise and when he knelt they would kneel. They would then worship God in their own way. This was all with the best of intentions.
Midway through the service, the gentleman in front of them stood up. So the two sailor boys in their American uniforms also stood up. The congregation then slowly broke into laughter. The boys were embarrassed and sat down. After the service was over, they spoke with the minister at the door. They found that he knew English. One of the sailors then asked him why the people had laughed when they stood up. The minister smiled, scratched his head a bit, and said, "I was announcing a baptism and I asked the father to stand." The boys had stood up with the best of intentions.
Many of us, like the sailors, do things when we do not know what we are doing. We do not know the results our actions will produce. We do not know how ridiculous they may make us look to somebody else.
So, good intentions are not enough, whether we are going to church, helping a neighbor, engaging in business, or even helping at home. The little child, trying to help her mother in the kitchen, puts her hand on a hot stove, and is burned. She is hurt just as badly no matter how good her intentions were. And so it is in life. It is not good intentions that count. It is reality. It is the fact that only correctly selected actions produce the results that you seek. What matters is not whether a doctrine is new, but whether it is sound.
The Future Can Be ChangedMen will neither seek nor support a free society until they are convinced that the voluntary cooperation of a free market can provide them with more of whatever they want than any other possible system of the division of labor.
This is the situation we face today. Many people throughout the world do not understand the operation of the free market society. They therefore ask for governmental intervention; they resort to force, rather than to the free and voluntary cooperation of the market place. They think they can get more from governmental intervention than from the free market.
Economics, as I have said, is about human action, and all life is human action. So what we are discussing is all life. Let me speak further here about these two words: human action.
To live implies action. Action implies choosing, that is, selection and rejection. Every time you select one action, you are rejecting all the other possible actions that you could take. When you decided to come to this lecture, you rejected the possibility of being in other places at this time. All of our actions imply a choice. We always take that action which we think is going to give us the greatest satisfaction. All action also implies change. It implies that the future can be changed. What we are constantly trying to do is to exchange something we have for something we prefer. We seek to change the future to the way we would prefer it to be. All human life is an attempt to change the future.
Some people sometimes say that they would like to know the future. For example, they would like to know what the prices are going to be in the stock market next week. Actually, we do not want to know the future. If you, or I, or anyone could know the future, this would mean it was set and we could no longer act to change it. All human activity is an attempt to change the future. We have a wide choice of actions that permit us to change the future. If we select the right actions for our purpose, we will produce the future conditions we desire.
All human action also implies imperfection. If we had perfection, there would be no reason to act — no reason to change the future. This means that if we had everything we wanted, there would be no reason to live. When the day comes that you have everything you want, let me know. I shall make arrangements to come to your funeral, because you will then be dead. So do not ever think that we can have perfection, or that we can have everything we want. Life is a series of choices of actions trying to improve the future, and the future always needs improvement from our point of view. Life is never perfect, but it is subject to change, and it is our hope that our actions will produce changes for the better rather than for the worse.
Human Actions Are Usually UniqueEvery human action also implies a self-selected purpose. Every time you act, you have a goal, an end, in mind. This is implied whenever you act. You have chosen a goal and you are acting in an attempt to attain that goal. Every human action is an attempt to exchange something we have for something we prefer. I have said this before and I shall say it a number of times during the course of these lectures to try to drive home the point that that is what we are doing every time we act.
Now to go on with my definition of economics. Having stated that all life is human action, I state further that economics is a science of purposeful human actions. It is a science of means for attaining desired ends. It reveals the human actions that moral and intelligent men may take to attain their self-selected goals with the least use of their available time, energy, and scarce goods. My great teacher would say that, when I say "with the least use of their available time, energy, and scarce goods," I am being redundant, repeating myself, in that this is already implied in what has already been said.
As there is in this world no discernible regularity in the emergence and concatenation of ideas and judgments of value, and therefore also none in the succession and concatenation of human actions, the role that experience plays in the study of human action is radically different from the role it plays in the natural sciences. Experience in human action is history and only history. It is not like the natural sciences. It is never a situation that we can repeat with any assurance that we can always produce the same results. With new information, new facts, new associates, new knowledge, we react differently to the same situation; and, of course, it is impossible for us to duplicate exactly the same social situation.
Reason and experience show us that there are two separate realms: the external world of physical, chemical, and physiological phenomena, and the internal world, in our minds, of our thoughts, feelings, valuations, and purposes in life. There is no bridge connecting these two spheres. They are not connected automatically. We always have the right to choose our actions. Identical external events often produce different human reactions, and different external events sometimes produce identical human actions. We do not know why.
So, the science of human action is different from the physical sciences. We cannot experiment with human beings except in a physiological, medical, or biological sense. In the realm of ideas, we cannot experiment as we can in the physical sciences. We cannot duplicate situations in which all things are maintained the same as before. We cannot change one condition and always get the same consequences. We cannot experiment with human actions, because the world, its population, its knowledge, its resources are all constantly changing and cannot be held still.
In economics we must use our minds to deduce our conclusions. We have to say, Other things being equal, other things being the same, this change will produce such and such an effect. We have to trace in our minds the inevitable results of contemplated changes. We are dealing with changeable human beings. We cannot perform actual experiments, because the human conditions cannot be duplicated, controlled, or completely manipulated in real life like chemical experiments in a laboratory. Therefore, there are great differences between economics and the physical sciences. We cannot experiment and we cannot measure. There are no constants with which to measure the actions and the forces which determine the actions and the choices of men. In order to measure you must have a constant standard, and there is no constant standard for measuring the minds, the values, or the ideas of men.
Since we have great differences from the physical sciences, we have to use a different methodology. Economics cannot be empirical, because there are no constants and no measurements. For many years, people used to think that money or a monetary unit was a unit of measurement. I do not think that today, here in Argentina, you have to be told that the value of a monetary unit is not constant. So we do not have to deal with that problem. But there are people who do think it is constant. There are also people who think they can change the situation so that they can construct a constant, or some index number, which they think will measure the changes in the value of a monetary unit.
Science: A Search for TruthHaving spoken of some of the differences between economics and the other sciences, I now want to speak about the characteristics that the science of economics, the science of human actions, purposeful human actions, has in common with all other sciences. Science always is and must be rational. It is the endeavor to attain a mental grasp of the phenomena of the universe by a systematic arrangement of the whole body of available knowledge. Science does not value. Economic science does not value. Science is always neutral with regard to values. Economic science is neutral with regard to values, but it provides acting man with all the information he may need with regard to forming his valuations.
Science is intent only upon discovering truth. It seeks to know reality. It is not dealing with opinions or value judgments. All science aims at tracing back every phenomenon to its cause. There will always be some irreducible and unanalyzable phenomena, some ultimate given, some a priori postulate beyond which you cannot go back any further. In all science, if it is "D" that you want and "C" produces "D," then you strive for "C." If you learn that "B" produces "C," you seek "B,"and if "A" produces "B," you seek "A." You go back to "A." So that "A" gives you "B," which gives you "C," which gives you "D," which is what you want.
In science we go back regressus in infinitum. We go back to a point beyond which we cannot go back any further. This is true in economics as it is in every other science. In economics, human action is an ultimate given, and is one of the agencies capable of bringing about change. There are only two ways to bring about change. One is the automatic way of the physical sciences. We get in a car. We turn the key and it starts certain things moving automatically that can bring changes that we hope will make the car go. And if the car is in good working order, it will go. In human actions you have another agency for change, the purpose in the mind of the acting person. This purpose brings actions that produce changes, which the actor hopes will improve the future situation from his point of view.
Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses. Economics is a striving for efficiency in the use of means to attain selected ends and is essentially the theory of free enterprise.
A Priori PostulatesAs I said, we go back as far as we can. Mises goes back to the two words "men act." Everything in economics is contained in those two words. Because it is difficult for us to understand this, I have expanded these two words to what I call the three a priori postulates of economics, the science of human actions for attaining desired ends.
The first postulate is that all men seek to improve their situation from their viewpoint. This is what all of us are trying to do at all times. We constantly strive to attain something that improves our situation from our viewpoint. This postulate has been attacked by some who think it too materialistic. It includes, of course, the actions of men with materialistic purposes, but it does not apply solely to them. It also includes the actions of pure egoists, pure altruists, pure ascetics, pure sensualists, or — what is more likely — the actions of men whose purposes are a mixture of all of these motives. We all have some goals that may be ultra-selfish or ultra-altruist. What I am speaking of here is not actions seeking a maximization of monetary gains only, but actions seeking a maximization of those satisfactions we have selected from all the alternatives that were open to us.
Many of the things we want in life are not utterly selfish. Only a few months ago a brave young boy in Czechoslovakia laid down his life for a cause in which he believed. He thought he was giving it for freedom. His action was certainly not selfish or materialistic.
Many of us do many things for other than purely selfish purposes, but we always seek to improve the future situation from our viewpoint. Who gets the most satisfaction on Christmas morning, the children or the parents? These things you cannot measure. Is a man selfish when he buys life insurance to take care of his loved ones after he is gone? No! We do many things by which we seek to improve the future situation in many ways that are not purely or overly selfish.
Let us remember that the human satisfaction that we seek is the most immaterial thing there is in the world. Nonetheless, we always have ultimate goals in all our acting. We are always seeking something that we want.
Even the criminal, when he commits a crime, is choosing an action which he thinks is best for him from his point of view. Let us remember that so-called materialism includes the wages of priests and musicians, the prices of art, concerts, and books on philosophy. The human satisfaction that all men seek is the most intangible thing in the world. It is not necessarily materialistic, although, of course, the material is included in the scope of this first postulate. I am not saying how I want it to be, nor how I think it should be. I am discussing a science, a search for the truth, reality. This is the way men are. This is what men do. This is why men act — to improve the future situation from their point of view.
Now the second of these postulates, which I hold are a priori and therefore evident to all men, is that the factors available for improving men's situations are scarce. This is a fact in the world. Long before Adam Smith wrote his great book, The Wealth of Nations, in 1776, it was known by all that nature, unassisted by man, is niggardly. There are not enough desirable things in this world to provide all of us with all we want. This poses the economic problem. Men have unsatisfied wants, and there are not enough of the things they want available for satisfying all their wants. So some of us have to go without many of the things we want, and all of us have to go without some of the things we want.
When I say things are scarce, I mean they are scarce in relation to men's wants. There is no quality in things that makes them economic goods except their relationship to the satisfaction of some human want. We say good eggs are scarce. There are not enough to satisfy the human demand for eggs. Eggs are economic goods and we have to pay for them. Some must go without all the eggs they want. There may be even fewer bad eggs, but we do not say that bad eggs are scarce. One bad egg is usually more than we want. Economic scarcity is always in relation to human wants. This is the important thing.
Before I go on with the third and last a priori postulate, let me give you this economic fact: TANSTAAFL. This is a series of letters that was popular in the United States during the New Deal days when everything was represented by alphabet letters. In English these letters stand for the words "There ain't no such thing as a free lunch." This is a fact of life. If someone gets a free lunch, somebody else pays for it.
Going on to the third postulate: men make mistakes. What we are all trying to do is to reduce our mistakes. Our aim here in studying economics is to replace the fallacies that we hold, many of which are popular, with economic truths — that is, we seek to reduce our very human errors.
All economics gets down to these three postulates. We seek to improve our situation with our limited means for doing so, and in our actions we make mistakes. I shall be dwelling on applications of these three postulates all through these lectures.
Men Seek SatisfactionThe burden of our time is that we do not know or realize what we are doing. Just like those two sailor boys in the Swedish church, we do things which produce consequences that we do not intend to produce. This is true of all of us. Our problem is how best to improve our situation. Perhaps the most general inconsistency of our time is the conflict in our market actions. As consumers, "we" buy the things we want at the lowest price we can find. By so acting we reward those who are most efficient in producing the things that we want. As producers, as sellers, and particularly as members of labor unions, "we" choose security and high prices and strive to protect inefficiency. These contradictory policies frustrate each other. They lead to split situations and split personalities. Economics brings the answers, the knowledge of means which are consistent with the desired ends. Actually, today, if we continue pursuing the policies we are now pursuing throughout the Western world, we shall bring an end to peace, and, if we do not change our present policies for better ones, we shall bring an end to the lives of millions of people now on earth.
Now, the vital question is: are these assumed postulates right, or are they wrong? I hold that they are right. I hold that every man has to agree that in choosing his purposeful actions he seeks to improve the future situation in a way he expects will provide him a better future than if he chose any other actions open to him at that time. He has scarce goods. He has scarce time. He has scarce energy. He uses these scarce factors to produce more of those things high on his scale of values, and he makes mistakes.
Now, for this study of economics you do not need an expensive apparatus. All you need is to use that small space which is subject to the greatest unemployment in the world today: the short space between your two ears. Economics, like logic and mathematics, is a display of abstract reasoning. What we need is to use our minds intelligently and to think clearly in facing our problems. We need to look at them without bias. We need to know whether the actions and policies we choose are fit to accomplish what we seek. The first thing necessary to correct an error is to discover it, the next is to admit it, and the last is to avoid it.
Economics is concerned with the simple law of human nature that man strives to attain the maximum of satisfaction with the minimum of sacrifice. Human action is purposive. It always intends to increase human satisfaction. A free and unhampered market economy tends to produce or provide us with the highest possible human satisfactions. This is what I hope to show during the lectures which follow.
The purposefulness of human action is a category to which nothing in the physical sciences corresponds. The actions of nature have no purpose, except when men direct them. If there is a purpose in the actions of a tree growing, it is a purpose of the Deity. It is God who determines the purpose, if any, of the actions of nature. We learn the innate actions of nature by studying the physical sciences. Then, we can use them intelligently for our own purposes.
The Deduced PostulatesGoing on from the three a priori postulates, we come to the deduced postulates. These flow from or are deduced from the a priori postulates. The first one, as stated here, is that all men are rational beings. That is, we use our God-given minds to attain our objectives. We always aim at success.
It is very popular to call someone else "irrational." Scientifically, the only people who are irrational are people who are out of their minds, people who are crazy. People make mistakes. Yes, but they always choose the means which they think are most likely to attain the ends they seek. They never aim at failure. Their reasoning may be wrong, but it is their best reasoning. If we want to call somebody else's reasoning irrational because it is mistaken, we had better be careful, because that means that anyone who makes a mistake is irrational. We all make mistakes, and therefore, by this line of reasoning, we are all irrational.
Our first great President of the United States, George Washington, when he was on his death bed, was surrounded by some of the best medical doctors obtainable. These doctors decided that to prolong his life the best thing they could do was to let out some of his blood. They did so, and he died promptly. Today, if a doctor did that, we would call him a murderer. But would you have called those doctors irrational then? No. They were using their best reasoning. The best reasoning of the most intelligent men is often faulty. We are all always acting to attain success in whatever we are trying to do. In this sense, all men are rational. We are all attempting to improve our situation from our point of view, and we are using our minds to our best ability with what we know at the time.
The second deduced postulate here is that all human actions take time. This seems perfectly obvious, that everything we do takes a certain amount of time, and our time is capable of alternative uses. I shall not dwell on this at great length now. I'll speak more about it in the next lecture. I do, however, want to mention that the socialists forget to take this fact into consideration. They do not take time into their consideration of costs. The payment for time is interest, and they ignore interest. In fact, many tax officials in the United States consider interest to be "unearned income." There are people, including the socialists, who want to abolish what they call "unearned incomes." They do not realize that they are suggesting an end to the payment for time, which is a necessary factor in every human effort.
Next, all human actions have consequences. We, of course, would not act unless we thought we were going to produce a consequence that we preferred over the consequences that we could produce by any other action or non-action that we could choose. This involves means and ends. It involves cause and effect. Men's minds hold this idea of cause and effect. If we did not expect our actions to have consequences, there would be no reason to act.
There is a prime cause that we cannot ever know, because no man can conceive of something being created out of nothing. We know that everything we create has to come from some preceding good or action. We are always acting with this in mind. As mentioned earlier, there are only two ways to produce change: the purposeful actions of men and the mechanical actions of the physical sciences — physics, biology, chemistry, and other sciences that we call the natural or physical sciences. All human actions have consequences. It is not good intentions that decide the consequences. It is whether the doctrine is sound, whether it works. It is not whether I like it, nor whether I say it should be so, nor whether Mises says it should be so. It is solely a question of whether or not the chosen action will produce the desired consequences.
Choices Have PricesEconomics attempts to deal with reality and provide the means to help us attain the consequences that we desire. If we are going to attain them, we have to learn the actions that will produce the desired results. This always involves the sacrifice of something. There is a cost for everything we do. This means that every human action has its economic aspect. When we choose one thing, we have to do without certain other things that we cannot have simultaneously. This is the economic aspect of choice: using our scarce means in the best way we know to produce the results we want most. This is the economic problem.
A technical problem exists when you have only one end and you want to know the best means to attain it. An economic problem exists when you have more than one end and must choose one or another from those that are open to you, recognizing that if you choose one you must go without certain others. It is not intelligent to want something without realizing and being willing to pay the cost. One of the great problems in the world today is that so many people want something for nothing, or something at the expense of others. We do not really want anything until we are willing to pay the full cost, or accept the consequences.
Going on to the next deduced postulate: men choose those actions they believe will best improve their situation. Like the other postulates, this is, of course, a truism. It is not how I want it to be, nor how I say it should be. It is how men act. They choose actions which they believe will best improve their situation from their viewpoint. Now, their actions may try to improve somebody else's situation. They may get a satisfaction out of helping others or advancing a cause, as our friend Señor Benegas Lynch gets satisfaction from bringing speakers to you who strive to advance the cause of la libertad (liberty).
Importance of TheoryWe all want things that are not necessarily essential, but we always choose those actions which we think will best improve the situation from our viewpoint. This means that the ideas that men hold determine their choice of actions. This means that the most important thing in the world is ideas. John Locke, the philosopher, once said, "I have always thought that the actions of men were the best interpreters of their thoughts." Böhm Bawerk, the teacher of Mises, said, "I cannot profitably discuss the 'practical' side of the subject until there is a complete clarity with respect to the theoretical side."
We hear a lot of disparaging remarks about theory or about something being theoretical. This is unfortunately so, because so many of the economic theories that have guided people in recent years have been bad theories — theories that do not work. Consequently, we seem to look down on theory and seek what is "practical." Actually, it is not a question of theory versus practice. It is good theory versus bad theory. The disparagement of theory is unfortunate, because it is theory that motivates us all. It is ideas that guide all our actions. Let us remember that you cannot shoot ideas. The only way you can stop bad ideas is by satisfying their holders that other ideas are better — that is, more effective for attaining their objectives. What we need in the field of economics more than anything else is better ideas, ideas that stand up, ideas that work, ideas that cannot be successfully challenged.
The conclusion to be drawn from these additional postulates is that the ideas men hold determine their actions. The great problem, then, is to hold the right ideas. Sound theory is most important. We never act without a theory. We never act without an idea that the selected action will improve our situation from our point of view. This is what economics is all about, the freedom to choose our actions. The essence of freedom is that people be free, not only to select their actions, but also to deviate from traditional ways of thinking and acting, so that they may plan for themselves rather than have an established authority plan for them and prevent them from planning in their own way.
We all gain from the planning and the freedom of others. Many of us are using things that we ourselves could not invent or produce. I flew down here in a jet airplane. I have no way of knowing how to make a jet, and yet I benefit from the freedom of the people who made it. We all benefit from the freedom of the people who made the earphones that most of you have on today.These lectures were simultaneously translated into Spanish for those who did not understand English. We all benefit from the freedom others have enjoyed. Many inventors in days past had their difficulties. We benefit from Mr. Gutenberg's freedom, which produced the invaluable printing press, so misused by national treasuries today.
So freedom is important to us not only for our own use, but also for our use of the products of the freedom of others who can improve our situation. Those of us who live in today's age have the highest standard of living that men have ever had in life on this earth. I was last down here in Argentina in 1925 as a young man. I have seen a great many changes in the forty-four years that have passed. Many of these changes have been brought about by people in your country and many by people outside your country. We have all advanced our standard of living because those people had the freedom to invent and to produce in new ways and did not have to stay with the ways of yesteryear.
The problem in economics is one of feeding into the human mind the right ideas, the applicable assumptions, and then thinking straight, thinking soundly with the data we have. The job of the economist is to recognize the decisive causal chains within the tangles of given data. As there are changes in the data, changes in the means available, changes in the things we want, we have to have new ideas, new thoughts, new solutions.
Applied economics consists of propositions such as, "If you want this, then you must do that — if such and such is the ultimate good, then this is clearly incompatible with it and you must drop it out."
Keynes on IdeasNow I shall quote from a gentleman with whom I do not always agree. In fact, I disagree with him rather basically in many ways. However, I am in agreement with this statement that the late Lord Keynes wrote on the last page of his General Theory:
The ideas of the economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.John Maynard Keynes, The General Theory of Employment, Interest and Money (Macmillan & Co., Ltd., London, 1936).
Going out of the quote, early this year, the London Economist reported that Lord Keynes is now a "defunct economist."
Continuing the quotation:
Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
Many of the ideas that people practice today are the ideas of Karl Marx, although very few of the people who practice them realize it. They do not understand that the problem is one of getting the right ideas, ideas that work, and that good intentions are not enough.
Logical thinking and real life are not two separate orbits. Logic is for man the only means he has to master the problems of reality. What is contradictory in theory is also contradictory in reality. Man must fight error by exposing spurious doctrines, by expounding the truth. The problems involved are purely intellectual. We have to repeat the truth again and again and again, because those who expound fallacies are repeating them again and again and again.
Human ActionWe always aim at success. The logic with which we think is the logic with which we act. Reason and action are two aspects of the same thing. Action is an offshoot of reason. We start with an end in mind and eliminate all possible actions not consistent with it. What remains, if anything, is the action we take, and we hope that this will produce the situation that we prefer.
In closing, I repeat what I said earlier, that however good our intentions may be, they can never make unsuitable means more suitable for obtaining our desired ends. What matters is not whether a doctrine is new, but whether it is sound. Bad ideas can be killed only by showing men that new and better ideas will advance them further toward whatever it is they want. Those who are interested in having a free society and a free world have to realize that men will not seek and support a free society until they are convinced that the voluntary cooperation of a free market can provide them with more of whatever they want than any other possible system of the division of labor.
The main reason for studying economics is to substitute consistent, correct ideas for the inconsistent, fallacious ideas so popular among the uninformed. As Henry Hazlitt says in his great little book, Economics In One Lesson, before acting we should consider all of the inevitable results of the proposed action. What we need more than anything else in this world is sound economic thinking. If we start with a correct assumption, and proceed with sound logic, we will attain the results at which we aim with a minimum sacrifice of our limited and therefore valuable time, energy, money, and other scarce goods.
Questions and AnswersWe have some time for questions. We ask that you stay within the subject of the lecture. The question and answer period following the last lecture will be open to any question that I may be able to answer.
What I have tried to say in this lecture, of course, is that we all aim at success. Our problem is learning how to attain that success. In the next lecture I will be speaking on "value," the great errors that exist in that field, as well as the best ideas known to man.
Henry Hazlitt, who has spoken here, has written a great book, Economics in One Lesson, which I believe is available in Spanish. That one great lesson is that we should look at all of the inevitable effects that must flow from any proposed action. Too many of our people look only at the short-run effects, or the effects on one group, and not at the effects on other groups or the effects on the long run. I hope I have made myself clear and that you understand me. I have tried to state the situation, as far as I have gone, in a way with which I do not think honest men can disagree.
Why A Free Market?Q. Why must we be convinced that a free market is the best way to obtain more of what we want?
A. If we believe in freedom and we want to persuade others to believe in freedom, we have to show them that freedom will get them more of the things they want. How long could any of us live on what we ourselves produce? We have a high standard of living because of the division of labor, because we cooperate in helping each other. We are not like animals in a forest, fighting each other. We cooperate. It is because other men want the same things we do that we can have mass production at low cost, and mass production means mass consumption.
What would it cost us if each of us had to produce his own automobile? It is social cooperation that increases the production of the things that consumers want. Most people do not understand that it is only under freedom that they can have more of these things. It is the job of those of us who understand this, those of us who want freedom, those of us who want more things, to convince others that this is the best way. The benefits of freedom cannot be enjoyed without general agreement. Now in the physical sciences, one person can make something by himself that is better than what was previously available and gradually convince a few people that it is better. But in the field of human action, we have to have majority agreement before we can change our system or improve our laws. We must have agreement. So, if we are going to get agreement, if we are going to move toward freedom, if we are going to move toward peace, if we are going to move toward prosperity, we must convince the majority of people of the best way to attain these things they want. They do not disagree on the ends. They disagree on the means. They think that they can get more of the things they want by taking them from someone else. We shall discuss this further in the next lecture.
Is Keynesianism Defunct?Q. What is the present status of Keynesianism and why did you say it was defunct?
A. First, let me make a correction. I did not say it was defunct. It is not defunct. I said that the London Economist said Keynes is now a "defunct economist," that is, he is dead. But his ideas are still alive. The quotation was, "Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist." My aside remark was more to the effect that many of us today, and many unfortunately in positions of political power, are the slaves of Mr. Keynes. Some of us are also slaves of the thinking of Marx, who is certainly defunct physically. What this says is that their ideas live on when the men have passed away. The ideas of Marx live today and the ideas of Keynes live today. We will be dealing with Keynes in future lectures, particularly when we get into the monetary phase.
Is Freedom the Same?Q. Is the freedom of the inventor who invents the plane the same as the freedom of the man who produces the plane, and the same as the freedom of the person who uses the plane?
A. First, let me say that freedom is indivisible. You cannot lose a part of your freedom, the freedom of speech, the freedom to buy, the freedom to print, without eventually losing all of your freedom. Of course, all freedom is based on economic freedom. Freedom is indivisible. No one man invented the airplane. It took many, many men to invent today's jet. It took a lot of history, a lot of just minor improvements.
My great teacher, Mises, asks, "What is the automobile of 1969?" He answers his own question: "It is just the automobile of 1909 with thousands upon thousands of minor improvements." Everyone who suggested an improvement did it with the hope that he would make a profit. Many made suggestions that fell by the wayside. But it was the freedom of those men to work on improving the automobile that has given us the automobile that we have today. No one man invented it, neither did one man produce it.
It takes a roomful of plans or specifications to make a jet airplane. It takes men of many different talents. As one of the speakers brought here before you many years ago, Leonard Read, has said, no one man can make even such a simple thing as a pencil. There is not a man alive who can take it all the way from the original raw materials to the finished pencil with its eraser. There isn't a man alive who could make a jet plane. It takes the cooperation of hundreds, possibly thousands. We who want to use the jet need freedom for them, so that we may use our freedom to use the production of their minds, while they are striving to help themselves by helping us. Some of this we will get into in our next lecture.
On Defining EconomicsQ. Isn't it better to define economics as a means of voluntary peaceful cooperation? Isn't that better than defining it as maximizing benefits and minimizing costs?
A. I do not see any conflict. What I have tried to do is to explain the same thing in different words. The free market is a peaceful voluntary cooperation. We shall be discussing that in the next two lectures. The free market economy is the actual application of the Golden Rule; we help others as we help ourselves. As we help others more, we help ourselves more. As we help ourselves more, we help others more. This will come out rather clearly, I think, in the third lecture.
How Is Freedom Spread?Q. What is the best way to extend the ideas of freedom?
A. You have had Leonard Read here. One of his great contributions is on this matter of methodology. As I have tried to stress tonight, the most important thing is ideas. As I have said, you cannot shoot ideas and you cannot jam them into another person's mind. Men have to be ready for ideas. They have to want them. They have to know where they can get them. We have a great responsibility for ourselves, our loved ones and our own families. Our problem is to learn more about freedom ourselves, to the extent that others will come and ask us. In that way we can spread the word.
We cannot go around using force to impose our ideas on others. It has to be done by education. Education is possible only when the people to be educated are willing, when their minds are open. Then, they have to see, hear, or read the right things. We have to make these materials available for the people who want them. This, I believe, is one of the great services that our friends here at the Centro de Estudios sobre la Libertad are providing to you by sponsoring these lectures. I am sure they have publications that will help you to obtain a better understanding, and help other people when they want to know more about la libertad.
Do Ideas Always Precede Action?Q. Do ideas always precede action?
A. I said that ideas precede action. We do not always have time to study a problem before action is required. Of course, ideas are formed in advance. We must get our education beforehand. We shouldn't wait until there is a fire in our house to know how to get out of it in a hurry. We have to be prepared in advance. Our problem is getting the ideas before we need to act on them. You cannot spend two days studying when you've got to act tomorrow. You have to know these things a certain time in advance. You have to have certain basic ideas. Of course, you cannot afford to spend too much time in making minor decisions, such as whether to cross the street at one point or another. You have to judge each problem as to how important the decision is and how much time you can take before making the decision. Frequently you don't have any time. Something comes at you quickly. You have to make a quick decision and you have to make it on the basis of the intelligence you have at that moment.
Is Too Much Freedom Harmful?Q. Cannot excessive freedom in certain aspects of economic activity — such as advertising — lead to a waste of resources, human effort, money lavishly spent, etc.?
A. It's hard for me to see what excessive freedom is. I speak of freedom that is equal for all men, but not freedom for one man to harm another. I would admit that freedom means that men are going to make mistakes; but men will make mistakes with or without freedom. However, in a free society you have competition. If one person makes a mistake, perhaps in a suggestion he thinks will improve the automobile, and the suggestion is not accepted by others, he will not make a profit. It is only that one man who loses. Others are still free to advance society. Without freedom, only the dictator can try out his ideas. As I have said, men make mistakes, and they make mistakes in advertising as they do in other occupations, but once you permit the censoring of advertising for reasons other than fraud or misrepresentation, you are going to censor the freedom of speech. Who is to decide what is truth? As John Stuart Mill said, freedom for one man's ideas is often important. Who is to decide whose ideas are to be printed and whose are not? There is no one who can decide this, except the consumer. When men advertise, they advertise with the hope that they are going to sell a product. If there is fraud, if their advertising misrepresents, they may make a few sales, but they will soon go out of business. In my great country, and I suppose it is true down here too, many of the large companies making products which are sold over and over again, give away free samples just to get people to try their products. What makes a business successful is having a good product and getting repeat orders for it from satisfied consumers. Consequently, a company that misrepresents its product is not going to stay in business long. We don't have to worry about it much. Of course, I do not approve of fraud, nor do free market principles sanction misrepresentation.
This article is excerpted from Understanding the Dollar Crisis (1973).
[Living Economics: Yesterday, Today, and Tomorrow. By Peter J. Boettke. Independent Institute — Universidad Francisco Marroquin. xx + 435 pages]
This notable book collects 22 articles by Peter Boettke; 8 of these have been written in collaboration with others, including Peter Leeson, Christopher Coyne, Steve Horwitz, David Prychitko, and Frederic Sautet. (Boettke is a renowned teacher of economics, and Coyne and Leeson are former students of his.) Boettke is probably best known as an economist for his studies of Soviet socialism and for his work on development economics; but his interests range much wider than this. He displays a remarkable ability to portray sympathetically scholars of widely varying views; the book includes, e.g., valuable discussions of Warren Samuels, Peter Berger, Gordon Tullock, and Kenneth Boulding.
It is not too much to say, though, that two schools of economic thought have principally shaped his own outlook. These are the Austrian School and the Virginia Public Choice School. These two schools of thought provide Boettke with his main ammunition in a battle he wages through much of the book. As he sees matters, a great deal of contemporary economic theory is dominated by a mechanical, scientistic doctrine. This false doctrine ignores the realities of action, time, and ignorance, in a futile quest for the false god of static perfection.
No one could read this book without being impressed by Boettke's wide knowledge, but I do not always agree with his interpretations. I propose in what follows to examine three important elements of the book: the account of Austrian methodology, especially as found in the work of Mises; the use made of James Buchanan's appeal to the status quo as the starting point for policy proposals; and the criticisms of contemporary neoclassical economics.
Boettke rightly points out that Mises thought the propositions of economic theory were a priori true. "Mises pointed out that the aprioristic character of the pure logic of choice implies that economic theory can never be empirically validated or invalidated" (p. 207). So far, so good; but now the question arises, how did Mises regard the character of the a priori?
Boettke again is accurate when he says. "According to Mises, it is true that like the laws of geometry, the pure logic of choice is entirely tautological" (p. 209). But why does he also say, just before this, "Although Mises can be understood as building upon Kant, he ultimately goes beyond Kant by rejecting the traditional analytic/synthetic distinction altogether" (p. 209). Tautologies are analytic truths: how can someone who believes that the pure logic of choice consists of tautologies also deny altogether the analytic-synthetic distinction?Mises did not think that the laws of economics are substitution instances of the laws of logic, so Boettke could not appeal to Quine in order to reconcile accepting tautologies with rejecting the analytic-synthetic distinction. I thank Terrance Tomkow for reminding me of Quine's view on tautologies.
If the principles of praxeology are tautologies, how can Boettke also think that
there is a [Barry] Smith-like "fallibilistic" element to Mises's conception of a priori knowledge, which though "true" for acting man at the present may ultimately be revealed to be mistaken (i.e., inconsistent with objective reality) with further developments in the evolution of the human mind. (pp. 205–06)
How can a tautology become false at some time in the future?
Boettke's account seems difficult to reconcile with this passage of Human Action:
The problem of whether there are or whether there are not a priori elements of thought — i.e., necessary and ineluctable intellectual conditions of thinking, anterior to any actual instance of conception and experience — must not be confused with the genetic problem of how man acquired his characteristically human mental ability. Man is descended from nonhuman ancestors who lacked this ability.… Hence the empiricist concludes that the foundational principles of reasoning are an outcome of experience and represent an adaptation of man to the conditions of his environment.… Reason, intellect, and logic are historical phenomena.… Nothing suggests that logic as we know it is the last and final stage of intellectual evolution. Human logic is a historical phase between prehuman nonlogic on the one hand and superhuman logic on the other.… But the problem of the a priori is of a different character. It does not deal with the problem of how consciousness and reason have emerged. It refers to the essential and necessary character of the logical structure of the human mind. (Human Action, Scholar's Edition, pp.33–34, emphasis added.)
Boettke has ascribed to Mises the exact empiricist position against which Mises argues.Mises's position does not exclude Darwinian accounts of the origin of the human mind. To the contrary, in Ultimate Foundation of Economic Science, he advances one himself, as Boettke notes (p. 204). But a genetic account of this kind does not, in Mises's view, make the validity of a priori knowledge something subject to change. This is the key issue that I think Boettke misses.
Unfortunately, this is not the only instance in which Boettke makes inaccurate remarks about Mises. He says,
Deployed as an ideal type, equilibrium analysis allowed economics to describe what the world would be like in the absence of imperfections such as uncertainty and change.… Equilibrium was used as an ideal type by such Austrian economists as Mises and Hayek. (p. 281)
Boettke's central point here is correct: Mises did not intend the evenly rotating economy (ERE) to be either a description of reality or a standard by which the world should be judged. Rather, it was an imaginary construction useful to the economist in developing economic theory.
The problem lies rather in Boettke's use of the phrase "ideal type." Mises expressly says that the abstractions of economics are not ideal types.
Ideal types are the specific notions employed in historical research and in the representation of its results. They are concepts of understanding. As such they are entirely different from praxeological categories and concepts and from the concepts of the natural sciences. An ideal type is not a class concept, because its description does not indicate the marks whose presence definitely and unambiguously determines class membership. An ideal type cannot be defined. (Human Action, pp. 59–60)
The ERE, of course, can be defined. The issue is not a mere matter of terms: by calling the ERE an ideal type, Boettke has elided a key distinction in Mises's epistemology.
Boettke's articles on James Buchanan convey very well his enthusiasm for that eminent economist; but I think that he has too readily agreed with Buchanan's embrace of the status quo as the necessary starting point for proposed changes in policy. In Buchanan's view, proposed changes must command a consensus among the interested parties. Starting with the existing situation, we may be able to arrive at proposals that everyone will accept as improvements.
But is there not an obvious problem with this view? What if we begin from a situation in which rights are being violated? Must slaves negotiate with their masters to secure their freedom? No doubt, it will often be prudentially rational for them to do so. But why are we debarred from saying that they ought not to be enslaved and that the masters deserve no compensation? People do not lose their rights because in the existing situation they are violated.
Boettke is aware of the problem:
[Warren] Samuels … correctly points out that while Buchanan's approach does not have any propriety save its existence, the unanimity criterion does privilege the existing situation.… It seems to me [Boettke] that Samuels is right; there is "conservatism" built into the analysis as Buchanan develops the approach. But what is the alternative?… A mutual-consent-driven model does not have to deny Samuels's points about either the nonneutrality of affairs … but it does suggest that we can strive to minimize the impact of nonneutrality. (pp. 119–120)
To see matters in this way, though, makes an undue concession to Buchanan. He is an ethical skeptic: for him, claims that something is "right" merely express personal preferences. One can attempt to impose these preferences on others; but if one wishes to avoid this, one must take people's preferences as they stand. Buchanan says in a letter to Samuels,
But my defense of the status quo stems from my unwillingness, indeed inability, to discuss changes other than those that are contractual in status. I can, of course, lay down my own notions and think about how God might listen to me and impose these changes on you, me, and everyone else. (p. 119)
The idea of an objectively true ethics is alien to Buchanan. If Boettke wishes to embrace ethical skepticism of this sort, he ought to have offered some considerations in its favor.I do not think it would be a good response to say that Buchanan is speaking strictly as a descriptive social scientist, who cannot introduce his own value judgments. Clearly, he is engaged in making normative judgments.
As mentioned earlier, there is a central theme that unifies Boettke's book. Sound economics must take seriously time and change, and to do so the sterile models of the neoclassicals must be replaced. In his famous inaugural lecture at the London School of Economics in 1933, Hayek suggested that the main danger to economics came from the opposition to theory of the German Historical School and similar groups. Now the situation is entirely different. "Seven decades of disastrous formalization" must be abandoned and "the realities of economic life … [be] re-engaged" (p. 315).
This is an ambitious claim, and sometimes Boettke succeeds in striking decisive blows against neoclassical formalism. In the chapter that I found most impressive, "The Forgotten Contribution: Murray Rothbard on Socialism in Theory and Practice," Boettke aptly shows how the neoclassicals' models of socialism vastly overrated the ability of planners to cope with the concrete data of the economy. Here his thesis is exactly right: arid formalism occluded the need for realistic appraisal.
The equilibrium economics of Taylor-Lange-Lerner was unable to grasp the nature of economic calculation because it solves the problem by assumption, which in fact is no solution at all.… It is this real world of heterogeneous capital goods with multiple specificity where the ability to engage in rational economic calculation is vital to the success or failure of the economic system. Without the guideposts of market prices and profit and loss accounting, economic planners would be set adrift on the sea of possibilities. (p. 83)
That is well said indeed. But one wonders why, in the course of an insightful tribute to Rothbard's contributions to the socialist-calculation debate, he omits an important fact. He rightly says that "Rothbard's presentation in 1962 already implied the failure of equilibrium economics to adequately address the issues in the socialist calculation debate that was stressed in later contributions" (p. 82). He fails to note that Mises in 1949 already fully recognized the irrelevance of general-equilibrium solutions to the debate. The section "The Differential Equations of Mathematical Economics" in Human Action is here of decisive significance.
Although Boettke seems to me to be right in his protests against the excesses of formalism, at times his assault rests on assertion unsupported by argument. He says that Chicago School economists held that "real markets come breathtakingly close to approximating the efficiency properties of general competitive equilibrium" (p. 280), but he fails to show that all of these economists had been beguiled by their mathematical models into ignoring reality. Was this true, e.g., of Milton Freidman and Yale Brozen? These economists seemed rather to argue that many important markets consisted of large numbers of small firms and that claims that monopolies engage in predatory pricing are exaggerated. His case seems stronger for Robert Lucas; but even here, Boettke does not show exactly where Lucas's models fail. He acts rather as if it were enough to state Lucas's view to show its absurdity: the New Classical view is "obviously contrary to reality" (p. 301). Perhaps it is, but Boettke needs to prove it and not just say it.
Despite these criticisms, Boettke's book merits the attention of all students of Austrian economics. Boettke's enthusiasm and devotion to a free economy are everywhere apparent. He says that he often tells students
that humankind has demonstrated two natural propensities — to truck, barter, and exchange (as Adam Smith taught); and to rape, pillage, and plunder (as Thomas Hobbes taught us) — and which propensity is pursued is a function of the institutional framework within which individuals find themselves living and interacting. (p. 385)
There can be no doubt which of these propensities Boettke wishes to encourage.It would be churlish to point out that the quotation gives a misleading account of Hobbes.
This lecture by David Gordon was presented at the 2012 Mises University in Auburn, Alabama. Includes an introduction my Mark Thornton.
[This article is chapter 4 from Economic Controversies (2011).It originally appeared in The Foundations of Modern Austrian Economics (1976).]
Praxeology is the distinctive methodology of the Austrian School. The term was first applied to the Austrian method by Ludwig von Mises, who was not only the major architect and elaborator of this methodology but also the economist who most fully and successfully applied it to the construction of economic theory.See in particular Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949); also see Mises, Epistemological Problems of Economics, George Reisman, trans. (Princeton, NJ: Van Nostrand, 1960). While the praxeological method is, to say the least, out of fashion in contemporary economics as well as in social science generally and in the philosophy of science, it was the basic method of the earlier Austrian School and also of a considerable segment of the older classical school, in particular of J.B. Say and Nassau W. Senior.See Murray N. Rothbard, "Praxeology as the Method of the Social Sciences," in Phenomenology and the Social Sciences, Maurice Natanson, ed., 2 vols. (Evanston: Northwestern University Press, 1973), 2 pp. 323–35 [reprinted in Logic of Action One, pp. 29–58]; also see Marian Bowley, Nassau Senior and Classical Economics (New York: Augustus M. Kelley, 1949), pp. 27–65; and Terence W. Hutchinson, "Some Themes from Investigations into Method," in Carl Menger and the Austrian School of Economics, J.R. Hicks and Wilhelm Weber, eds. (Oxford: Clarendon Press, 1973), pp. 15–31.
Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that individuals vary and that human beings regard leisure as a valuable good. Any skeptic about deducing from such a simple base an entire system of economics, I refer to Mises's Human Action. Furthermore, since praxeology begins with a true axiom, A, all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must also be true.
Let us consider some of the immediate implications of the action axiom. Action implies that the individual's behavior is purposive, in short, that it is directed toward goals. Furthermore, the fact of his action implies that he has consciously chosen certain means to reach his goals. Since he wishes to attain these goals, they must be valuable to him; accordingly he must have values that govern his choices. That he employs means implies that he believes he has the technological knowledge that certain means will achieve his desired ends. Let us note that praxeology does not assume that a person's choice of values or goals is wise or proper or that he has chosen the technologically correct method of reaching them. All that praxeology asserts is that the individual actor adopts goals and believes, whether erroneously or correctly, that he can arrive at them by the employment of certain means.
All action in the real world, furthermore, must take place through time; all action takes place in some present and is directed toward the future (immediate or remote) attainment of an end. If all of a person's desires could be instantaneously realized, there would be no reason for him to act at all.In answer to the criticism that not all action is directed to some future point of time, see Walter Block, "A Comment on 'The Extraordinary Claim of Praxeology' by Professor Gutierrez," Theory and Decision 3 (1973): 381–82. Furthermore, that a man acts implies that he believes action will make a difference; in other words, that he will prefer the state of affairs resulting from action to that from no action. Action therefore implies that man does not have omniscient knowledge of the future; for if he had such knowledge, no action of his would make any difference. Hence, action implies that we live in a world of an uncertain, or not fully certain, future. Accordingly, we may amend our analysis of action to say that a man chooses to employ means according to a technological plan in the present because he expects to arrive at his goals at some future time.
The fact that people act necessarily implies that the means employed are scarce in relation to the desired ends; for, if all means were not scarce but superabundant, the ends would already have been attained, and there would be no need for action. Stated another way, resources that are superabundant no longer function as means, because they are no longer objects of action. Thus, air is indispensable to life and hence to the attainment of goals; however, air being superabundant is not an object of action and therefore cannot be considered a means, but rather what Mises called a "general condition of human welfare." Where air is not superabundant, it may become an object of action, for example, where cool air is desired and warm air is transformed through air conditioning. Even with the absurdly unlikely advent of Eden (or what a few years ago was considered in some quarters to be an imminent "postscarcity" world), in which all desires could be fulfilled instantaneously, there would still be at least one scarce means: the individual's time, each unit of which if allocated to one purpose is necessarily not allocated to some other goal.See Mises, Human Action, pp. 101–2; and esp., Block, "Comment," p. 383.
Such are some of the immediate implications of the axiom of action. We arrived at them by deducing the logical implications of the existing fact of human action, and hence deduced true conclusions from a true axiom. Apart from the fact that these conclusions cannot be "tested" by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case. Thus, for Crusoe and Friday on their desert island, the praxeological theory of money is only of academic, rather than of currently applicable, interest. A fuller analysis of the relationship between theory and history in the praxeological framework will be considered below.
There are, then, two parts of this axiomatic-deductive method: the process of deduction and the epistemological status of the axioms themselves. First, there is the process of deduction; why are the means verbal rather than mathematical logic?For a typical criticism of praxeology for not using mathematical logic, see George. J. Schuller, "Rejoinder," American Economic Review 41 (March 1951): 188. Without setting forth the comprehensive Austrian case against mathematical economics, one point can immediately be made: let the reader take the implications of the concept of action as developed so far in this paper and try to place them in mathematical form. And even if that could be done, what would have been accomplished except a drastic loss in meaning at each step of the deductive process? Mathematical logic is appropriate to physics — the science that has become the model science, which modern positivists and empiricists believe all other social and physical sciences should emulate. In physics the axioms and therefore the deductions are in themselves purely formal and only acquire meaning "operationally" insofar as they can explain and predict given facts. On the contrary, in praxeology, in the analysis of human action, the axioms themselves are known to be true and meaningful. As a result, each verbal step-by-step deduction is also true and meaningful; for it is the great quality of verbal propositions that each one is meaningful, whereas mathematical symbols are not meaningful in themselves. Thus Lord Keynes, scarcely an Austrian and himself a mathematician of note, leveled the following critique at mathematical symbolism in economics:
It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed: whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep "at the back of our heads" the necessary reserves and qualifications and the adjustments which we have to make later on, in a way in which we cannot keep complicated partial differentials "at the back" of several pages of algebra which assume that they all vanish. Too large a proportion of recent "mathematical" economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York Harcourt, Brace, 1936), pp. 297–98.
Moreover, even if verbal economics could be successfully translated into mathematical symbols and then retranslated into English so as to explain the conclusions, the process makes no sense and violates the great scientific principle of Occam's Razor: avoiding unnecessary multiplication of entities.See Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics," in On Freedom and Free Enterprise, Mary Sennhoz, ed. (Princeton, NJ: D. Van Nostrand, 1956), p. 227 [and reprinted in Logic of Action One]; Rothbard, Man, Economy, and State, 2 vols. (Princeton: D Van Nostrand, 1962), 1:65–66. On mathematical logic as being subordinate to verbal logic, see Rene Poirier, "Logique," in Vocabulaire technique et critique de la philosophie, Andre Lalande, ed., 6th ed. Rev. (Paris: Presses Universitaires de France, 1951), pp. 574–75.
Furthermore, as political scientist Bruno Leoni and mathematician Eugenio Frola pointed out,
It is often claimed that translation of such a concept as the maximum from ordinary into mathematical language, involves an improvement in the logical accuracy of the concept, as well as wider opportunities for its use. But the lack of mathematical precision in ordinary language reflects precisely the behavior of individual human beings in the real world.… We might suspect that translation into mathematical language by itself implies a suggested transformation of human economic operators into virtual robots.Bruno Leoni and Eugenio Frola, "On Mathematical Thinking in Economics" (unpublished manuscript privately distributed), pp. 23–24; the Italian version of this articles is "Possibilita di applicazione della matematiche alle discipline economiche," Il Politico 20 (1995).
Similarly, one of the first methodologists in economics, Jean-Baptiste Say, charged that the mathematical economists
have not been able to enunciate these questions into analytical language, without divesting them of their natural complication, by means of simplifications, and arbitrary suppressions, of which the consequences, not properly estimated, always essentially change the condition of the problem, and pervert all its results.Jean-Baptiste Say, A Treatise on Political Economy (New York: Augustus M. Kelley, 1964), p. xxvi n.
More recently, Boris Ischboldin has emphasized the difference between verbal, or "language," logic ("the actual analysis of thought stated in language expressive of reality as grasped in common experience") and "construct" logic, which is "the application of quantitative (economic) data of the constructs of mathematics and symbolic logic which constructs may or may not have real equivalents."Boris Ischboldin, "a Critique of Econometrics," Review of Social Economy 18, no. 2 (September 1960): 11 N; Ischboldin's discussion is based on the construction of I.M. Bochenski, "Scholastic and Aristotelian Logic," Proceedings of the American Catholic Philosophical Association 30 (1956): 112–17.
Although himself a mathematical economist, the mathematician son of Carl Menger wrote a trenchant critique of the idea that mathematical presentation in economics is necessarily more precise than ordinary language:
Consider, for example, the statements (2) To a higher price of a good, there corresponds a lower (or at any rate not a higher) demand.
(2') If p denotes the price of, and q the demand for, a good, then
q = f(p) and dq/dp = f' (p) ≤ 0
Those who regard the formula (2') as more precise or "more mathematical" than the sentence (2) are under a complete misapprehension … the only difference between (2) and (2') is this: since (2') is limited to functions which are differentiable and whose graphs, therefore, have tangents (which from an economic point of view are not more plausible than curvature), the sentence (2) is more general, but it is by no means less precise: it is of the same mathematical precision as (2').Karl Menger, "Austrian Marginalism and Mathematical Economics," in Carl Menger, p. 41.
Turning from the deduction process to the axioms themselves, what is their epistemological status? Here the problems are obscured by a difference of opinion within the praxeological camp, particularly on the nature of the fundamental axiom of action. Ludwig von Mises, as an adherent of Kantian epistemology, asserted that the concept of action is a priori to all experience, because it is, like the law of cause and effect, part of "the essential and necessary character of the logical structure of the human mind."Mises, Human Action, p. 34. Without delving too deeply into the murky waters of epistemology, I would deny, as an Aristotelian and neo-Thomist, any such alleged "laws of logical structure" that the human mind necessarily imposes on the chaotic structure of reality. Instead, I would call all such laws "laws of reality," which the mind apprehends from investigating and collating the facts of the real world. My view is that the fundamental axiom and subsidiary axioms are derived from the experience of reality and are therefore in the broadest sense empirical. I would agree with the Aristotelian realist view that its doctrine is radically empirical, far more so than the post-Humean empiricism which is dominant in modern philosophy. Thus, John Wild wrote:
It is impossible to reduce experience to a set of isolated impressions and atomic units. Relational structure is also given with equal evidence and certainty. The immediate data are full of determinate structure, which is easily abstracted by the mind and grasped as universal essences or possibilities.John Wild, "Phenomenology and Metaphysics," in The Return to Reason: Essays in Realistic Philosophy, John Wild, ed. (Chicago: Henrey Regnery, 1953), pp. 48, 37–57.
Furthermore, one of the pervasive data of all human experience is existence; another is consciousness, or awareness. In contrast to the Kantian view, Harmon Chapman wrote that
conception is a kind of awareness, a way of apprehending things or comprehending them and not an alleged subjective manipulation of so-called generalities or universals solely "mental" or "logical" in their provenience and non-cognitive in nature.
That in thus penetrating the data of sense, conception also synthesizes these data is evident. But the synthesis here involved, unlike the synthesis of Kant, is not a prior condition of perception, an anterior process of constituting both perception and its object, but rather a cognitive synthesis in apprehension, that is, a uniting or "comprehending" which is one with the apprehending itself. In other words, perception and experience are not the results or end products of a synthetic process a priori, but are themselves synthetic or comprehensive apprehension whose structured unity is prescribed solely by the nature of the real, that is, by the intended objects in their togetherness and not by consciousness itself whose (cognitive) nature is to apprehend the real — as it is.Harmon M. Chapman, "Realism and Phenomenology," in Return to Reason, p. 29. On the interrelated functions of sense and reason and their respective roles in human cognition of reality, see Francis H. Parker, "Realistic Epistemology," ibid., pp. 167–69.
If, in the broad sense, the axioms of praxeology are radically empirical, they are far from the post-Humean empiricism that pervades the modern methodology of social science. In addition to the foregoing considerations, (1) they are so broadly based in common human experience that once enunciated they become self-evident and hence do not meet the fashionable criterion of "falsifiability"; (2) they rest, particularly the action axiom, on universal inner experience, as well as on external experience, that is, the evidence is reflective rather than purely physical; and (3) they are therefore a priori to the complex historical events to which modern empiricism confines the concept of "experience."See Murray N. Rothbard, "In Defense of 'Extreme Apriorism,'" Southern Economic Journal 23 (January 1957): 315–18 [reprinted as Volume 1, Chapter 6]. It should be clear from the current paper that the term extreme apriorism is a misnomer for praxeology.
Say, perhaps the first praxeologist, explained the derivation of the axioms of economic theory as follows:
Hence the advantage enjoyed by everyone who, from distinct and accurate observation, can establish the existence of these general facts, demonstrate their connection and deduce their consequences. They as certainly proceed from the nature of things as the laws of the material world. We do not imagine them; they are results disclosed to us by judicious observation and analysis.…
Political economy … is composed of a few fundamental principles, and of a great number of corollaries or conclusions, drawn from these principles … that can be admitted by every reflecting mind.Say, A Treatise on Political Economy, pp. xxv–xxvi, xlv.
Friedrich A. Hayek trenchantly described the praxeological method in contrast to the methodology of the physical sciences and also underlined the broadly empirical nature of the praxeological axioms:
The position of man … brings it about that the essential basic facts which we need for the explanation of social phenomena are part of common experience, part of the stuff of our thinking. In the social sciences it is the elements of the complex phenomena which are known beyond the possibility of dispute. In the natural sciences they can only be at best surmised. The existence of these elements is so much more certain than any regularities in the complex phenomena to which they give rise, that it is they which constitute the truly empirical factor in the social sciences. There can be little doubt that it is this different position of the empirical factor in the process of reasoning in the two groups of disciplines which is at the root of much of the confusion with regard to their logical character. The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established.Friedrich A. Hayek, "The Nature and History of the Problem," in Collectivist Economic Planning, F.A. Hayek, ed. (London: George Routledge and Sons, 1935), p 11.
Similarly, J.E. Cairnes wrote:
The economist starts with a knowledge of ultimate causes. He is already, at the outset of his enterprise in the position which the physicist only attains after ages of laborious research.… For the discovery of such premises no elaborate process of induction is needed … for this reason, that we have, or may have if we choose to turn our attention to the subject, direct knowledge of these causes in our consciousness of what passes in our own minds, and in the information which our senses convey … to us of external facts.John Elliott Cairnes, The Character and Logical Method of Political Economy, 2nd ed. (London: Macmillan, 1875), pp. 87–88; italics in the original.
Nassau W. Senior phrased it thus:
The physical sciences, being only secondarily conversant with mind, draw their premises almost exclusively from observation or hypothesis.… On the other hand, the mental sciences and the mental arts draw their premises principally from consciousness. The subjects with which they are chiefly conversant are the workings of the human mind. [These premises are] a very few general propositions, which are the result of observation, or consciousness, and which almost every man, as soon as he hears them, admits, as familiar to his thought, or at least, included in his previous knowledge.Bowley, Nassau Senior, pp. 43, 56.
Commenting on his complete agreement with this passage, Mises wrote that these "immediately evident propositions" are "of aprioristic derivation … unless one wishes to call aprioristic cognition inner experience."Mises, Epistemological Problems, p. 19.
To which Marian Bowley, the biographer of Senior, justly comments:
The only fundamental difference between Mises's general attitude and Senior's lies in Mises's apparent denial of the possibility of using any general empirical data, i.e., facts of general observation, as initial premises. This difference, however, turns upon Mises's basic ideas of the nature of thought, and though of general philosophic importance, has little special relevance to economic method as such.Bowley, Nassau Senior, pp. 64–65.
It should be noted that for Mises it is only the fundamental axiom of action that is a priori; he conceded that the subsidiary axioms of the diversity of mankind and nature, and of leisure as a consumers' good, are broadly empirical.
Modern post-Kantian philosophy has had a great deal of trouble encompassing self-evident propositions, which are marked precisely by their strong and evident truth rather than by being testable hypotheses that are in the current fashion, considered to be "falsifiable." Sometimes it seems that the empiricists use the fashionable analytic-synthetic dichotomy, as the philosopher Hao Wang charged, to dispose of theories they find difficult to refute by dismissing them as necessarily either disguised definitions or debatable and uncertain hypotheses.Hao Wang, "Notes on the Analytic-Synthetic Distinction," Theoria 21 (1995); 158; see also John Wild and J.L. Cobitz, "On the Distinction between the Analytic and Synthetic," Philosophy and Phenomenological Research 8 (June 1948): 651–67.
But what if we subject the vaunted "evidence" of modern positivists and empiricists to analysis? What is it? We find that there are two types of such evidence to either confirm or refute a proposition: (1) if it violates the laws of logic, for example, implies that A = -A; or (2) if it is confirmed by empirical facts (as in a laboratory) that can be checked by many persons. But what is the nature of such "evidence" but the bringing, by various means, of propositions hitherto cloudy and obscure into clear and evident view, that is, evident to the scientific observers? In short, logical or laboratory processes serve to make it evident to the "selves" of the various observers that the propositions are either confirmed or refuted, or, to use unfashionable terminology, either true or false. But in that case propositions that are immediately evident to the selves of the observers have at least as good scientific status as the other and currently more acceptable forms of evidence. Or, as the Thomist philosopher John J. Toohey put it,
Proving means making evident something which is not evident. If a truth or proposition is self-evident, it is useless to attempt to prove it; to attempt to prove it would be to attempt to make evident something which is already evident.John J. Toohey, Notes on Epistemology, rev. ed. (Washington D.C.: Georgetown University, 1937), p. 36.; italics in the original.
The action axiom, in particular, should be, according to Aristotelian philosophy, unchallengeable and self-evident since the critic who attempts to refute it finds that he must use it in the process of alleged refutation. Thus, the axiom of the existence of human consciousness is demonstrated as being self-evident by the fact that the very act of denying the existence of consciousness must itself be performed by a conscious being. The philosopher R.P. Phillips called this attribute of a self-evident axiom a "boomerang principle," since "even though we cast it away from us, it returns to us again."R.P. Phillips, Modern Thomistic Philosophy (Westminster, Maryland: Newman Bookshop, 1934–35), 2, pp. 36–37; see also Murray N. Rothbard, "The Mantle of Science," in Scientism and Values, Helmut Schoeck and James W. Wiggins, ed., (Princeton, NJ: D Van Nostrand, 1960), pp. 162–65. A similar self-contradiction faces the man who attempts to refute the axiom of human action. For in doing so, he is ipso facto a person making a conscious choice of means in attempting to arrive at an adopted end: in this case the end, or goal, of trying to refute the axiom of action. He employs action in trying to refute the notion of action.
Of course, a person may say that he denies the existence of self-evident principles or other established truths of the real world, but this mere saying has no epistemological validity. As Toohey pointed out,
A man may say anything he pleases, but he cannot think or do anything he pleases. He may say he saw a round square, but he cannot think he saw a round square. He may say, if he likes, that he saw a horse riding astride its own back, but we shall know what to think of him if he says it.Toohey, Notes on Epistemology, p. 10. Italics in the original.
The methodology of modern positivism and empiricism comes a cropper even in the physical sciences, to which it is much better suited than to the sciences of human action; indeed, it particularly fails where the two types of disciplines interconnect. Thus, the phenomenologist Alfred Schütz, a student of Mises at Vienna, who pioneered in applying phenomenology to the social sciences, pointed out the contradiction in the empiricists' insistence on the principle of empirical verifiability in science, while at the same time denying the existence of "other minds" as unverifiable. But who is supposed to be doing the laboratory verification if not these selfsame "other minds" of the assembled scientists? Schütz wrote:
It is … not understandable that the same authors who are convinced that no verification is possible for the intelligence of other human beings have such confidence in the principle of verifiability itself, which can be realized only through cooperation with others.Alfred Schütz, Collected Papers of Alfred Schütz, vol. 2, Studies in Social Theory, A. Brodersen, ed. (The Hague: Nijhoff, 1964), p. 4; see also Mises, Human Action, p. 24.
In this way, the modern empiricists ignore the necessary presuppositions of the very scientific method they champion. For Schütz, knowledge of such presuppositions is "empirical" in the broadest sense,
provided that we do not restrict this term to sensory perceptions of objects and events in the outer world but include the experiential form, by which common-sense thinking in everyday life understands human actions and their outcome in terms of their underlying motives and goals.Alfred Schütz, Collected Papers of Alfred Schütz, vol. 1, The Problem of Social Reality, A. Brodersen, ed. (the Hague, Nijhoff), 1964, p. 65. On the philosophical presuppositions of science, see Andrew G. Van Melsen, The Philosophy of Nature (Pittsburgh: Duquesne University Press, 1953), pp. 6–29. On common sense as the groundwork of philosophy, see Toohey, Notes on Epistemology, pp. 74, 106–13. On the application of a similar point of view to the methodology of economics, see Frank H Knight, "'What is Truth' in Economics," in On the History and Method of Economics (Chicago: University of Chicago Press, 1956), pp. 151–78.
Having dealt with the nature of praxeology, its procedures and axioms and its philosophical groundwork, let us now consider what the relationship is between praxeology and the other disciplines that study human action. In particular, what are the differences between praxeology and technology, psychology, history, and ethics — all of which are in some way concerned with human action?
In brief, praxeology consists of the logical implications of the universal formal fact that people act, that they employ means to try to attain chosen ends. Technology deals with the contentual problem of how to achieve ends by adoption of means. Psychology deals with the question of why people adopt various ends and how they go about adopting them. Ethics deals with the question of what ends, or values, people should adopt. And history deals with ends adopted in the past, what means were used to try to achieve them — and what the consequences of these actions were.
Praxeology, or economic theory in particular, is thus a unique discipline within the social sciences; for, in contrast to the others, it deals not with the content of men's values, goals, and actions — not with what they have done or how they have acted or how they should act — but purely with the fact that they do have goals and act to attain them. The laws of utility, demand, supply, and price apply regardless of the type of goods and services desired or produced. As Joseph Dorfman wrote of Herbert J. Davenport's Outlines of Economic Theory (1896):
The ethical character of the desires was not a fundamental part of his inquiry. Men labored and underwent privation for "whiskey, cigars, and burglars' jimmies," he said, "as well as for food, or statuary or harvest machinery." As long as men were willing to buy and sell "foolishness and evil," the former commodities would be economic factors with market standing, for utility, as an economic term, meant merely adaptability to human desires. So long as men desired them, they satisfied a need and were motives to production. Therefore economics did not need to investigate the origin of choices.Joseph Dorfman, The Economic Mind in American Civilization, 5 vols. (New York: Viking Press, 1949), 3, p. 376.
Praxeology, as well as the sound aspects of the other social sciences, rests on methodological individualism, on the fact that only individuals feel, value, think, and act. Individualism has always been charged by its critics — and always incorrectly — with the assumption that each individual is a hermetically sealed "atom," cut off from, and uninfluenced by, other persons. This absurd misreading of methodological individualism is at the root of J.K. Galbraith's triumphant demonstration in The Affluent Society (Boston: Houghton Mifflin, 1958) that the values and choices of individuals are influenced by other persons, and therefore supposedly that economic theory is invalid. Galbraith also concluded from his demonstration that these choices, because influenced, are artificial and illegitimate. The fact that praxeological economic theory rests on the universal fact of individual values and choices means, to repeat Dorfman's summary of Davenport's thought, that economic theory does "not need to investigate the origin of choices." Economic theory is not based on the absurd assumption that each individual arrives at his values and choices in a vacuum, sealed off from human influence. Obviously, individuals are continually learning from and influencing each other. As F.A. Hayek wrote in his justly famous critique of Galbraith, "The Non Sequitur of the 'Dependence Effect'":
Professor Galbraith's argument could be easily employed, without any change of the essential terms, to demonstrate the worthlessness of literature or any other form of art. Surely an individual's want for literature is not original with himself in the sense that he would experience it if literature were not produced. Does this then mean that the production of literature cannot be defended as satisfying a want because it is only the production which provokes the demand?Friedrich A. Hayek, "The Non Sequitur of the 'Dependence Effect,'" in Friedrich A. Hayek, Studies in Philosophy, Politics, and Economics (Chicago: University of Chicago Press, 1967), pp. 314–15.
That Austrian School economics rests firmly from the beginning on an analysis of the fact of individual subjective values and choices unfortunately led the early Austrians to adopt the term psychological school. The result was a series of misdirected criticisms that the latest findings of psychology had not been incorporated into economic theory. It also led to misconceptions such as that the law of diminishing marginal utility rests on some psychological law of the satiety of wants. Actually, as Mises firmly pointed out, that law is praxeological rather than psychological and has nothing to do with the content of wants, for example, that the tenth spoonful of ice cream may taste less pleasurable than the ninth spoonful. Instead, it is a praxeological truth, derived from the nature of action, that the first unit of a good will be allocated to its most valuable use, the next unit to the next most valuable, and so on.Mises, Human Action, p. 124. On one point, and on one point alone, however, praxeology and the related sciences of human action take a stand in philosophical psychology: on the proposition that the human mind, consciousness, and subjectivity exist, and therefore action exists. In this it is opposed to the philosophical base of behaviorism and related doctrines and joined with all branches of classical philosophy and with phenomenology. On all other questions, however, praxeology and psychology are distinct and separate disciplines.See Rothbard, "Toward a Reconstruction," pp. 230–31.
A particularly vital question is the relationship between economic theory and history. Here again, as in so many other areas of Austrian economics, Ludwig von Mises made the outstanding contribution, particularly in his Theory and History.Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957). It is especially curious that Mises and other praxeologists, as alleged "a priorists," have commonly been accused of being "opposed" to history. Mises indeed held not only that economic theory does not need to be "tested" by historical fact but also that it cannot be so tested. For a fact to be usable for testing theories, it must be a simple fact, homogeneous with other facts in accessible and repeatable classes. In short, the theory that one atom of copper, one atom of sulfur, and four atoms of oxygen will combine to form a recognizable entity called copper sulfate, with known properties, is easily tested in the laboratory. Each of these atoms is homogeneous, and therefore the test is repeatable indefinitely. But each historical event, as Mises pointed out, is not simple and repeatable; each event is a complex resultant of a shifting variety of multiple causes, none of which ever remains in constant relationships with the others. Every historical event, therefore, is heterogeneous, and therefore historical events cannot be used either to test or to construct laws of history, quantitative or otherwise. We can place every atom of copper into a homogeneous class of copper atoms; we cannot do so with the events of human history.
This is not to say, of course, that there are no similarities among historical events. There are many similarities, but no homogeneity. Thus, there were many similarities between the presidential election of 1968 and that of 1972, but they were scarcely homogeneous events, since they were marked by important and inescapable differences. Nor will the next election be a repeatable event to place in a homogeneous class of "elections." Hence no scientific, and certainly no quantitative, laws can be derived from these events.
Mises's radically fundamental opposition to econometrics now becomes clear. Econometrics not only attempts to ape the natural sciences by using complex heterogeneous historical facts as if they were repeatable homogeneous laboratory facts; it also squeezes the qualitative complexity of each event into a quantitative number and then compounds the fallacy by acting as if these quantitative relations remain constant in human history. In striking contrast to the physical sciences, which rest on the empirical discovery of quantitative constants, econometrics, as Mises repeatedly emphasized, has failed to discover a single constant in human history. And given the ever-changing conditions of human will, knowledge, and values and the differences among men, it is inconceivable that econometrics can ever do so.
Far from being opposed to history, the praxeologist, and not the supposed admirers of history, has profound respect for the irreducible and unique facts of human history. Furthermore, it is the praxeologist who acknowledges that individual human beings cannot legitimately be treated by the social scientist as if they were not men who have minds and act upon their values and expectations, but stones or molecules whose course can be scientifically tracked in alleged constants or quantitative laws. Moreover, as the crowning irony, it is the praxeologist who is truly empirical because he recognizes the unique and heterogeneous nature of historical facts; it is the self-proclaimed "empiricist" who grossly violates the facts of history by attempting to reduce them to quantitative laws. Mises wrote thus about econometricians and other forms of "quantitative economists":
There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 percent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or in another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions.…
The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations.… Economics is not, as … positivists repeat again and again, backward because it is not "quantitative." It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case. Physical events can be interpreted on the ground of our knowledge concerning constant relations established by experiments. Historical events are not open to such an interpretation.…
Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts.… The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history.… Nobody is so bold as to maintain that a rise of A percent in the supply of any commodity must always — in every country and at any time — result in a fall of B percent in price. But as no quantitative economist ever ventured to define precisely on the ground of statistical experience the special conditions producing a definite deviation from the ratio A:B, the futility of his endeavors is manifest.Mises, Human Action, pp. 55–56, 348.
Elaborating on his critique of constants Mises added:
The quantities we observe in the field of human action … are manifestly variable. Changes occurring in them plainly affect the result of our actions. Every quantity that we can observe is a historical event, a fact which cannot be fully described without specifying the time and geographical point.
The econometrician is unable to disprove this fact, which cuts the ground from under his reasoning. He cannot help admitting that there are no "behavior constants." Nonetheless, he wants to introduce some numbers, arbitrarily chosen on the basis of historical fact, as "unknown behavior constants." The sole excuse he advances is that his hypotheses are "saying only that these unknown numbers remain reasonably constant through a period of years."Cowles Commission for Research in Economics, Report for the Period, January 1, 1948–June 30, 1949 (Chicago: University of Chicago Press, 1949), p. 7, quoted in Mises, Theory and History, pp. 10–11. Now whether such a period of supposed constancy of a definite number is still lasting or whether a change in the number has already occurred can only be established later on. In retrospect it may be possible, although in rare cases only, to declare that over a (probably rather short) period an approximately stable ratio which the econometrician chooses to call a "reasonably" constant ratio prevailed between the numerical values of two factors. But this is something fundamentally different from the constants of physics. It is the assertion of a historical fact, not of a constant that can be resorted to in attempts to predict future events.Ibid., pp. 10–11. The highly praised equations are, insofar as they apply to the future, merely equations in which all quantities are unknown.Ludwig von Mises, "Comments about the Mathematical Treatment of Economic Problems" (Cited as "unpublished manuscript"; published as "The Equations of Mathematical Economics" in the Quarterly Journal of Austrian Economics, vol. 3, no. 1 (Spring 2000), 27–32.
In the mathematical treatment of physics the distinction between constants and variables makes sense; it is essential in every instance of technological computation. In economics there are no constant relations between various magnitudes. Consequently all ascertainable data are variables, or what amounts to the same thing, historical data. The mathematical economists reiterate that the plight of mathematical economics consists in the fact that there are a great number of variables. The truth is that there are only variables and no constants. It is pointless to talk of variables where there are no invariables.Mises, Theory and History, pp. 11–12; see also Leoni and Frola, "On Mathematical Thinking," pp. 1–8; and Leland B. Yeager, "Measurement as Scientific Method in Economics," American Journal of Economics and Sociology 16 (July 1957): 337–46.
What, then, is the proper relationship between economic theory and economic history or, more precisely, history in general? The historian's function is to try to explain the unique historical facts that are his province; to do so adequately he must employ all the relevant theories from all the various disciplines that impinge on his problem. For historical facts are complex resultants of a myriad of causes stemming from different aspects of the human condition. Thus, the historian must be prepared to use not only praxeological economic theory but also insights from physics, psychology, technology, and military strategy along with an interpretive understanding of the motives and goals of individuals. He must employ these tools in understanding both the goals of the various actions of history and the consequences of such actions. Because understanding diverse individuals and their interactions is involved, as well as the historical context, the historian using the tools of natural and social science is in the last analysis an "artist," and hence there is no guarantee or even likelihood that any two historians will judge a situation in precisely the same way. While they may agree on an array of factors to explain the genesis and consequences of an event, they are unlikely to agree on the precise weight to be given each causal factor. In employing various scientific theories, they have to make judgments of relevance on which theories applied in any given case; to refer to an example used earlier in this paper, a historian of Robinson Crusoe would hardly employ the theory of money in a historical explanation of his actions on a desert island. To the economic historian, economic law is neither confirmed nor tested by historical facts; instead, the law, where relevant, is applied to help explain the facts. The facts thereby illustrate the workings of the law. The relationship between praxeological economic theory and the understanding of economic history was subtly summed up by Alfred Schütz:
No economic act is conceivable without some reference to an economic actor, but the latter is absolutely anonymous; it is not you, nor I nor an entrepreneur, nor even an "economic man," as such, but a pure universal "one." This is the reason why the propositions of theoretical economics have just that "universal validity" which gives them the ideality of the "and so forth" and "I can do it again." However, one can study the economic actor as such and try to find out what is going on in his mind; of course, one is not then engaged in theoretical economics but in economic history or economic sociology.… However, the statements of these sciences can claim no universal validity, for they deal either with the economic sentiments of particular historical individuals or with types of economic activity for which the economic acts in question are evidence.…
In our view, pure economics is a perfect example of an objective meaning-complex about subjective meaning-complexes, in other words, of an objective meaning-configuration stipulating the typical and invariant subjective experiences of anyone who acts within an economic framework.… Excluded from such a scheme would have to be any consideration of the uses to which the "goods" are to be put after they are acquired. But once we do turn our attention to the subjective meaning of a real individual person, leaving the anonymous "anyone" behind, then of course it makes sense to speak of behavior that is atypical.… To be sure, such behavior is irrelevant from the point of view of economics, and it is in this sense that economic principles are, in Mises's words, "not a statement of what usually happens, but of what necessarily must happen."Alfred Schütz, The Phenomenology of the Social World (Evanston, Ill.: Northwestern University Press, 1967), pp. 137, 245; also see Ludwig M. Lachmann, The Legacy of Max Weber (Berkeley, California: Clendessary Press, 1971), pp. 17–48.
[This article is excerpted from Human Action (1949), chapter 37, "The Nondescript Character of Economics." ]
The Singularity of Economics What assigns economics its peculiar and unique position in the orbit both of pure knowledge and of the practical utilization of knowledge is the fact that its particular theorems are not open to any verification or falsification on the ground of experience. Of course, a measure suggested by sound economic reasoning results in producing the effects aimed at, and a measure suggested by faulty economic reasoning fails to produce the ends sought. But such experience is always still historical experience, i.e., the experience of complex phenomena. It can never, as has been pointed out, prove or disprove any particular theorem. The application of spurious economic theorems results in undesired consequences. But these effects never have that undisputable power of conviction which the experimental facts in the field of the natural sciences provide. The ultimate yardstick of an economic theorem's correctness or incorrectness is solely reason unaided by experience.
The ominous import of this state of affairs is that it prevents the naïve mind from recognizing the reality of the things economics deals with. "Real" is, in the eyes of man, all that he cannot alter and to whose existence he must adjust his actions if he wants to attain his ends. The cognizance of reality is a sad experience. It teaches the limits on the satisfaction of one's wishes. Only reluctantly does man resign himself to the insight that there are things, viz., the whole complex of all causal relations between events, which wishful thinking cannot alter. Yet sense experience speaks an easily perceptible language. There is no use arguing about experiments. The reality of experimentally established facts cannot be contested.
But in the field of praxeological knowledge neither success nor failure speaks a distinct language audible to everybody. The experience derived exclusively from complex phenomena does not bar escape into interpretations based on wishful thinking. The naïve man's propensity to ascribe omnipotence to his thoughts, however confused and contradictory, is never manifestly and unambiguously falsified by experience. The economist can never refute the economic cranks and quacks in the way in which the doctor refutes the medicine man and the charlatan. History speaks only to those people who know how to interpret it on the ground of correct theories.
Economics and Public Opinion The significance of this fundamental epistemological difference becomes clear if we realize that the practical utilization of the teachings of economics presupposes their endorsement by public opinion. In the market economy the realization of technological innovations does not require anything more than the cognizance of their reasonableness by one or a few enlightened spirits. No dullness and clumsiness on the part of the masses can stop the pioneers of improvement. There is no need for them to win the approval of inert people beforehand. They are free to embark upon their projects even if everyone else laughs at them. Later, when the new, better, and cheaper products appear on the market, these scoffers will scramble for them. However dull a man may be, he knows how to tell the difference between a cheaper shoe and a more expensive one, and to appreciate the usefulness of new products.
But it is different in the field of social organization and economic policies. Here the best theories are useless if not supported by public opinion. They cannot work if not accepted by a majority of the people. Whatever the system of government may be, there cannot be any question of ruling a nation lastingly on the ground of doctrines at variance with public opinion. In the end the philosophy of the majority prevails. In the long run there cannot be any such thing as an unpopular system of government. The difference between democracy and despotism does not affect the final outcome. It refers only to the method by which the adjustment of the system of government to the ideology held by public opinion is brought about. Unpopular autocrats can only be dethroned by revolutionary upheavals, while unpopular democratic rulers are peacefully ousted in the next election.
The supremacy of public opinion determines not only the singular role that economics occupies in the complex of thought and knowledge. It determines the whole process of human history.
The customary discussions concerning the role the individual plays in history miss the point. Everything that is thought, done and accomplished is a performance of individuals. New ideas and innovations are always an achievement of uncommon men. But these great men cannot succeed in adjusting social conditions to their plans if they do not convince public opinion.
The flowering of human society depends on two factors: the intellectual power of outstanding men to conceive sound social and economic theories, and the ability of these or other men to make these ideologies palatable to the majority.
This article is excerpted from Human Action (1949), chapter 37, "The Nondescript Character of Economics." An MP3 audio file of this chapter, narrated by Jeff Riggenbach, is available for download.
[Day 13 of Robert Wenzel's 30-day reading list that will lead you to become a knowledgeable libertarian, this article is excerpted from The Logic of Action One: Method, Money, and the Austrian School (Cheltenham, UK: Edward Elgar, 1997), pp. 58–77. It appeared on LewRockwell.com
Praxeology is the distinctive methodology of the Austrian School. The term was first applied to the Austrian method by Ludwig von Mises, who was not only the major architect and elaborator of this methodology but also the economist who most fully and successfully applied it to the construction of economic theory.See in particular Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949); also see Mises, Epistemological Problems of Economics, George Reisman, trans. (Princeton, NJ: Van Nostrand, 1960). While the praxeological method is, to say the least, out of fashion in contemporary economics as well as in social science generally and in the philosophy of science it was the basic method of the earlier Austrian school and also of a considerable segment of the older classical school, in particular of J.B. Say and Nassau W. Senior.See Murray N. Rothbard, "Praxeology as the Method of the Social Sciences," in Phenomenology and the Social Sciences, Maurice Natanson, ed., 2 vols. (Evanston: Northwestern University Press, 1973), 2 pp. 323–35 [reprinted in Logic of Action One, pp. 29–58]; also see Marian Bowley, Nassau Senior and Classical Economics (New York: Augustus M. Kelley, 1949), pp. 27–65; and Terence W. Hutchinson, "Some Themes from Investigations into Method," in Carl Menger and the Austrian School of Economics, J.R. Hicks and Wilhelm Weber, eds. (Oxford: Clarendon Press, 1973), pp. 15–31.
Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that individuals vary and that human beings regard leisure as a valuable good. Any skeptic about deducing from such a simple base an entire system of economics, I refer to Mises's Human Action. Furthermore, since praxeology begins with a true axiom, A, all the propositions that can be deduced from this axiom must also be true. For if A implies B, and A is true, then B must also be true.
Let us consider some of the immediate implications of the action axiom. Action implies that the individual's behavior is purposive, in short, that it is directed toward goals. Furthermore, the fact of his action implies that he has consciously chosen certain means to reach his goals. Since he wishes to attain these goals, they must be valuable to him; accordingly he must have values that govern his choices. That he employs means implies that he believes he has the technological knowledge that certain means will achieve his desired ends. Let us note that praxeology does not assume that a person's choice of values or goals is wise or proper or that he has chosen the technologically correct method of reaching them. All that praxeology asserts is that the individual actor adopts goals and believes, whether erroneously or correctly, that he can arrive at them by the employment of certain means.
All action in the real world, furthermore, must take place through time; all action takes place in some present and is directed toward the future (immediate or remote) attainment of an end. If all of a person's desires could be instantaneously realized, there would be no reason for him to act at all.In answer to the criticism that not all action is directed to some future point of time, see Walter Block, "A Comment on 'The Extraordinary Claim of Praxeology' by Professor Gutierrez," Theory and Decision 3 (1973): 381–82. Furthermore, that a man acts implies that he believes action will make a difference; in other words, that he will prefer the state of affairs resulting from action to that from no action. Action therefore implies that man does not have omniscient knowledge of the future; for if he had such knowledge, no action of his would make any difference. Hence, action implies that we live in a world of an uncertain, or not fully certain, future. Accordingly, we may amend our analysis of action to say that a man chooses to employ means according to a technological plan in the present because he expects to arrive at his goals at some future time.
The fact that people act necessarily implies that the means employed are scarce in relation to the desired ends; for, if all means were not scarce but superabundant, the ends would already have been attained, and there would be no need for action. Stated another way, resources that are superabundant no longer function as means, because they are no longer objects of action. Thus, air is indispensable to life and hence to the attainment of goals; however, air being superabundant is not an object of action and therefore cannot be considered a means, but rather what Mises called a "general condition of human welfare." Where air is not superabundant, it may become an object of action, for example, where cool air is desired and warm air is transformed through air conditioning. Even with the absurdly unlikely advent of Eden (or what a few years ago was considered in some quarters to be an imminent "postscarcity" world), in which all desires could be fulfilled instantaneously, there would still be at least one scarce means: the individual's time, each unit of which if allocated to one purpose is necessarily not allocated to some other goal.See Mises, Human Action, pp. 101–2; and esp., Block, "Comment," p. 383.
Such are some of the immediate implications of the axiom of action. We arrived at them by deducing the logical implications of the existing fact of human action, and hence deduced true conclusions from a true axiom. Apart from the fact that these conclusions cannot be "tested" by historical or statistical means, there is no need to test them since their truth has already been established. Historical fact enters into these conclusions only by determining which branch of the theory is applicable in any particular case. Thus, for Crusoe and Friday on their desert island, the praxeological theory of money is only of academic, rather than of currently applicable, interest. A fuller analysis of the relationship between theory and history in the praxeological framework will be considered below.
There are, then, two parts of this axiomatic-deductive method: the process of deduction and the epistemological status of the axioms themselves. First, there is the process of deduction; why are the means verbal rather than mathematical logic?For a typical criticism of praxeology for not using mathematical logic, see George. J. Schuller, "Rejoinder," American Economic Review 41 (March 1951): 188. Without setting forth the comprehensive Austrian case against mathematical economics, one point can immediately be made: let the reader take the implications of the concept of action as developed so far in this paper and try to place them in mathematical form. And even if that could be done, what would have been accomplished except a drastic loss in meaning at each step of the deductive process? Mathematical logic is appropriate to physics – the science that has become the model science, which modern positivists and empiricists believe all other social and physical sciences should emulate. In physics the axioms and therefore the deductions are in themselves purely formal and only acquire meaning "operationally" insofar as they can explain and predict given facts. On the contrary, in praxeology, in the analysis of human action, the axioms themselves are known to be true and meaningful. As a result, each verbal step-by-step deduction is also true and meaningful; for it is the great quality of verbal propositions that each one is meaningful, whereas mathematical symbols are not meaningful in themselves. Thus Lord Keynes, scarcely an Austrian and himself a mathematician of note, leveled the following critique at mathematical symbolism in economics:
It is a great fault of symbolic pseudo-mathematical methods of formalizing a system of economic analysis, that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed: whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep "at the back of our heads" the necessary reserves and qualifications and the adjustments which we have to make later on, in a way in which we cannot keep complicated partial differentials "at the back" of several pages of algebra which assume that they all vanish. Too large a proportion of recent "mathematical" economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York Harcourt, Brace, 1936), pp. 297–98.
Moreover, even if verbal economics could be successfully translated into mathematical symbols and then retranslated into English so as to explain the conclusions, the process makes no sense and violates the great scientific principle of Occam's Razor: avoiding unnecessary multiplication of entities.See Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics," in On Freedom and Free Enterprise, Mary Sennhoz, ed. (Princeton, NJ: D. Van Nostrand, 1956), p. 227 [and reprinted in Logic of Action One]; Rothbard, Man, Economy, and State, 2 vols. (Princeton: D Van Nostrand, 1962), 1:65–66. On mathematical logic as being subordinate to verbal logic, see Rene Poirier, "Logique," in Vocabulaire technique et critique de la philosophie, Andre Lalande, ed., 6th ed. Rev. (Paris: Presses Universitaires de France, 1951), pp. 574–75.
Furthermore, as political scientist Bruno Leoni and mathematician Eugenio Frola pointed out,
It is often claimed that translation of such a concept as the maximum from ordinary into mathematical language, involves an improvement in the logical accuracy of the concept, as well as wider opportunities for its use. But the lack of mathematical precision in ordinary language reflects precisely the behavior of individual human beings in the real world…. We might suspect that translation into mathematical language by itself implies a suggested transformation of human economic operators into virtual robots.Bruno Leoni and Eugenio Frola, "On Mathematical Thinking in Economics" (unpublished manuscript privately distributed), pp. 23–24; the Italian version of this articles is "Possibilita di applicazione della matematiche alle discipline economiche," Il Politico 20 (1995).
Similarly, one of the first methodologists in economics, Jean-Baptiste Say, charged that the mathematical economists
have not been able to enunciate these questions into analytical language, without divesting them of their natural complication, by means of simplifications, and arbitrary suppressions, of which the consequences, not properly estimated, always essentially change the condition of the problem, and pervert all its results.Jean-Baptiste Say, A Treatise on Political Economy (New York: Augustus M. Kelley, 1964), p. xxvi n.
More recently, Boris Ischboldin has emphasized the difference between verbal, or "language," logic ("the actual analysis of thought stated in language expressive of reality as grasped in common experience") and "construct" logic, which is "the application of quantitative (economic) data of the constructs of mathematics and symbolic logic which constructs may or may not have real equivalents."Boris Ischboldin, "a Critique of Econometrics," Review of Social Economy 18, no. 2 (September 1960): 11 N; Ischboldin's discussion is based on the construction of I.M. Bochenski, "Scholastic and Aristotelian Logic," Proceedings of the American Catholic Philosophical Association 30 (1956): 112–17.
Although himself a mathematical economist, the mathematician son of Carl Menger wrote a trenchant critique of the idea that mathematical presentation in economics is necessarily more precise than ordinary language:
Consider, for example, the statements (2) To a higher price of a good, there corresponds a lower (or at any rate not a higher) demand.
(2') If p denotes the price of, and q the demand for, a good, then
q = f(p) and dq/dp = f' (p) ≤ 0
Those who regard the formula (2') as more precise or "more mathematical" than the sentence (2) are under a complete misapprehension… the only difference between (2) and (2') is this: since (2') is limited to functions which are differentiable and whose graphs, therefore, have tangents (which from an economic point of view are not more plausible than curvature), the sentence (2) is more general, but it is by no means less precise: it is of the same mathematical precision as (2'). Karl Menger, "Austrian Marginalism and Mathematical Economics," in Carl Menger, p. 41.
Turning from the deduction process to the axioms themselves, what is their epistemological status? Here the problems are obscured by a difference of opinion within the praxeological camp, particularly on the nature of the fundamental axiom of action. Ludwig von Mises, as an adherent of Kantian epistemology, asserted that the concept of action is a priori to all experience, because it is, like the law of cause and effect, part of "the essential and necessary character of the logical structure of the human mind."Mises, Human Action, p. 34. Without delving too deeply into the murky waters of epistemology, I would deny, as an Aristotelian and neo-Thomist, any such alleged "laws of logical structure" that the human mind necessarily imposes on the chaotic structure of reality. Instead, I would call all such laws "laws of reality," which the mind apprehends from investigating and collating the facts of the real world. My view is that the fundamental axiom and subsidiary axioms are derived from the experience of reality and are therefore in the broadest sense empirical. I would agree with the Aristotelian realist view that its doctrine is radically empirical, far more so than the post-Humean empiricism which is dominant in modern philosophy. Thus, John Wild wrote:
It is impossible to reduce experience to a set of isolated impressions and atomic units. Relational structure is also given with equal evidence and certainty. The immediate data are full of determinate structure, which is easily abstracted by the mind and grasped as universal essences or possibilities.John Wild, "Phenomenology and Metaphysics," in The Return to Reason: Essays in Realistic Philosophy, John Wild, ed. (Chicago: Henrey Regnery, 1953), pp. 48, 37–57.
Furthermore, one of the pervasive data of all human experience is existence; another is consciousness, or awareness. In contrast to the Kantian view, Harmon Chapman wrote that
conception is a kind of awareness, a way of apprehending things or comprehending them and not an alleged subjective manipulation of so-called generalities or universals solely "mental" or "logical" in their provenience and non-cognitive in nature.
That in thus penetrating the data of sense, conception also synthesizes these data is evident. But the synthesis here involved, unlike the synthesis of Kant, is not a prior condition of perception, an anterior process of constituting both perception and its object, but rather a cognitive synthesis in apprehension, that is, a uniting or "comprehending" which is one with the apprehending itself. In other words, perception and experience are not the results or end products of a synthetic process a priori, but are themselves synthetic or comprehensive apprehension whose structured unity is prescribed solely by the nature of the real, that is, by the intended objects in their togetherness and not by consciousness itself whose (cognitive) nature is to apprehend the real – as it is.Harmon M. Chapman, "Realism and Phenomenology," in Return to Reason, p. 29. On the interrelated functions of sense and reason and their respective roles in human cognition of reality, see Francis H. Parker, "Realistic Epistemology," ibid., pp. 167–69. If, in the broad sense, the axioms of praxeology are radically empirical, they are far from the post-Humean empiricism that pervades the modern methodology of social science. In addition to the foregoing considerations, (1) they are so broadly based in common human experience that once enunciated they become self-evident and hence do not meet the fashionable criterion of "falsifiability"; (2) they rest, particularly the action axiom, on universal inner experience, as well as on external experience, that is, the evidence is reflective rather than purely physical; and (3) they are therefore a priori to the complex historical events to which modern empiricism confines the concept of "experience."See Murray N. Rothbard, "In Defense of 'Extreme Apriorism,'" Southern Economic Journal 23 (January 1957): 315–18 [reprinted as Volume 1, Chapter 6]. It should be clear from the current paper that the term extreme apriorism is a misnomer for praxeology.
Say, perhaps the first praxeologist, explained the derivation of the axioms of economic theory as follows:
Hence the advantage enjoyed by everyone who, from distinct and accurate observation, can establish the existence of these general facts, demonstrate their connection and deduce their consequences. They as certainly proceed from the nature of things as the laws of the material world. We do not imagine them; they are results disclosed to us by judicious observation and analysis....
Political economy...is composed of a few fundamental principles, and of a great number of corollaries or conclusions, drawn from these principles...that can be admitted by every reflecting mind.Say, A Treatise on Political Economy, pp. xxv–xxvi, xlv.
Friedrich A. Hayek trenchantly described the praxeological method in contrast to the methodology of the physical sciences and also underlined the broadly empirical nature of the praxeological axioms:
The position of man...brings it about that the essential basic facts which we need for the explanation of social phenomena are part of common experience, part of the stuff of our thinking. In the social sciences it is the elements of the complex phenomena which are known beyond the possibility of dispute. In the natural sciences they can only be at best surmised. The existence of these elements is so much more certain than any regularities in the complex phenomena to which they give rise, that it is they which constitute the truly empirical factor in the social sciences. There can be little doubt that it is this different position of the empirical factor in the process of reasoning in the two groups of disciplines which is at the root of much of the confusion with regard to their logical character. The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established.Friedrich A. Hayek, "The Nature and History of the Problem," in Collectivist Economic Planning, F.A. Hayek, ed. (London: George Routledge and Sons, 1935), p 11.
Similarly, J.E. Cairnes wrote:
The economist starts with a knowledge of ultimate causes. He is already, at the outset of his enterprise in the position which the physicist only attains after ages of laborious research.... For the discovery of such premises no elaborate process of induction is needed... for this reason, that we have, or may have if we choose to turn our attention to the subject, direct knowledge of these causes in our consciousness of what passes in our own minds, and in the information which our senses convey...to us of external facts.John Elliott Cairnes, The Character and Logical Method of Political Economy, 2nd ed. (London: Macmillan, 1875), pp. 87–88; italics in the original.
Nassau W. Senior phrased it thus:
The physical sciences, being only secondarily conversant with mind, draw their premises almost exclusively from observation or hypothesis.... On the other hand, the mental sciences and the mental arts draw their premises principally from consciousness. The subjects with which they are chiefly conversant are the workings of the human mind. [These premises are] a very few general propositions, which are the result of observation, or consciousness, and which almost every man, as soon as he hears them, admits, as familiar to his thought, or at least, included in his previous knowledge.Bowley, Nassau Senior, pp. 43, 56.
Commenting on his complete agreement with this passage, Mises wrote that these "immediately evident propositions" are "of aprioristic derivation...unless one wishes to call aprioristic cognition inner experience."Mises, Epistemological Problems, p. 19.
To which Marian Bowley, the biographer of Senior, justly comments:
The only fundamental difference between Mises's general attitude and Senior's lies in Mises's apparent denial of the possibility of using any general empirical data, i.e., facts of general observation, as initial premises. This difference, however, turns upon Mises's basic ideas of the nature of thought, and though of general philosophic importance, has little special relevance to economic method as such.Bowley, Nassau Senior, pp. 64–65.
It should be noted that for Mises it is only the fundamental axiom of action that is a priori; he conceded that the subsidiary axioms of the diversity of mankind and nature, and of leisure as a consumers' good, are broadly empirical.
Modern post-Kantian philosophy has had a great deal of trouble encompassing self-evident propositions, which are marked precisely by their strong and evident truth rather than by being testable hypotheses, that are, in the current fashion, considered to be "falsifiable." Sometimes it seems that the empiricists use the fashionable analytic-synthetic dichotomy, as the philosopher Hao Wang charged, to dispose of theories they find difficult to refute by dismissing them as necessarily either disguised definitions or debatable and uncertain hypotheses.Hao Wang, "Notes on the Analytic-Synthetic Distinction," Theoria 21 (1995); 158; see also John Wild and J.L. Cobitz, "On the Distinction between the Analytic and Synthetic," Philosophy and Phenomenological Research 8 (June 1948): 651–67.
But what if we subject the vaunted "evidence" of modern positivists and empiricists to analysis? What is it? We find that there are two types of such evidence to either confirm or refute a proposition: (1) if it violates the laws of logic, for example, implies that A = -A; or (2) if it is confirmed by empirical facts (as in a laboratory) that can be checked by many persons. But what is the nature of such "evidence" but the bringing, by various means, of propositions hitherto cloudy and obscure into clear and evident view, that is, evident to the scientific observers? In short, logical or laboratory processes serve to make it evident to the "selves" of the various observers that the propositions are either confirmed or refuted, or, to use unfashionable terminology, either true or false. But in that case propositions that are immediately evident to the selves of the observers have at least as good scientific status as the other and currently more acceptable forms of evidence. Or, as the Thomist philosopher John J. Toohey put it,
Proving means making evident something which is not evident. If a truth or proposition is self-evident, it is useless to attempt to prove it; to attempt to prove it would be to attempt to make evident something which is already evident.John J. Toohey, Notes on Epistemology, rev. ed. (Washington D.C.: Georgetown University, 1937), p. 36.; italics in the original.
The action axiom, in particular, should be, according to Aristotelian philosophy, unchallengeable and self-evident since the critic who attempts to refute it finds that he must use it in the process of alleged refutation. Thus, the axiom of the existence of human consciousness is demonstrated as being self-evident by the fact that the very act of denying the existence of consciousness must itself be performed by a conscious being. The philosopher R.P. Phillips called this attribute of a self-evident axiom a "boomerang principle," since "even though we cast it away from us, it returns to us again."R.P. Phillips, Modern Thomistic Philosophy (Westminster, Maryland: Newman Bookshop, 1934–35), 2, pp. 36–37; see also Murray N. Rothbard, "The Mantle of Science," in Scientism and Values, Helmut Schoeck and James W. Wiggins, ed., (Princeton, NJ: D Van Nostrand, 1960), pp. 162–65. A similar self-contradiction faces the man who attempts to refute the axiom of human action. For in doing so, he is ipso facto a person making a conscious choice of means in attempting to arrive at an adopted end: in this case the end, or goal, of trying to refute the axiom of action. He employs action in trying to refute the notion of action.
Of course, a person may say that he denies the existence of self-evident principles or other established truths of the real world, but this mere saying has no epistemological validity. As Toohey pointed out,
A man may say anything he pleases, but he cannot think or do anything he pleases. He may say he saw a round square, but he cannot think he saw a round square. He may say, if he likes, that he saw a horse riding astride its own back, but we shall know what to think of him if he says it.Toohey, Notes on Epistemology, p. 10. Italics in the original.
The methodology of modern positivism and empiricism comes a cropper even in the physical sciences, to which it is much better suited than to the sciences of human action; indeed, it particularly fails where the two types of disciplines interconnect. Thus, the phenomenologist Alfred Schütz, a student of Mises at Vienna, who pioneered in applying phenomenology to the social sciences, pointed out the contradiction in the empiricists' insistence on the principle of empirical verifiability in science, while at the same time denying the existence of "other minds" as unverifiable. But who is supposed to be doing the laboratory verification if not these selfsame "other minds" of the assembled scientists? Schütz wrote:
It is...not understandable that the same authors who are convinced that no verification is possible for the intelligence of other human beings have such confidence in the principle of verifiability itself, which can be realized only through cooperation with others.Alfred Schütz, Collected Papers of Alfred Schütz, vol. 2, Studies in Social Theory, A. Brodersen, ed. (The Hague: Nijhoff, 1964), p. 4; see also Mises, Human Action, p. 24.
In this way, the modern empiricists ignore the necessary presuppositions of the very scientific method they champion. For Schütz, knowledge of such presuppositions is "empirical" in the broadest sense,
provided that we do not restrict this term to sensory perceptions of objects and events in the outer world but include the experiential form, by which common-sense thinking in everyday life understands human actions and their outcome in terms of their underlying motives and goals.Alfred Schütz, Collected Papers of Alfred Schütz, vol. 1, The Problem of Social Reality, A. Brodersen, ed. (the Hague, Nijhoff), 1964, p. 65. On the philosophical presuppositions of science, see Andrew G. Van Melsen, The Philosophy of Nature (Pittsburgh: Duquesne University Press, 1953), pp. 6–29. On common sense as the groundwork of philosophy, see Toohey, Notes on Epistemology, pp. 74, 106–13. On the application of a similar point of view to the methodology of economics, see Frank H Knight, "'What is Truth' in Economics," in On the History and Method of Economics (Chicago: University of Chicago Press, 1956), pp. 151–78.
Having dealt with the nature of praxeology, its procedures and axioms and its philosophical groundwork, let us now consider what the relationship is between praxeology and the other disciplines that study human action. In particular, what are the differences between praxeology and technology, psychology, history, and ethics – all of which are in some way concerned with human action?
In brief, praxeology consists of the logical implications of the universal formal fact that people act, that they employ means to try to attain chosen ends. Technology deals with the contentual problem of how to achieve ends by adoption of means. Psychology deals with the question of why people adopt various ends and how they go about adopting them. Ethics deals with the question of what ends, or values, people should adopt. And history deals with ends adopted in the past, what means were used to try to achieve them – and what the consequences of these actions were.
Praxeology, or economic theory in particular, is thus a unique discipline within the social sciences; for, in contrast to the others, it deals not with the content of men's values, goals, and actions – not with what they have done or how they have acted or how they should act – but purely with the fact that they do have goals and act to attain them. The laws of utility, demand, supply, and price apply regardless of the type of goods and services desired or produced. As Joseph Dorfman wrote of Herbert J. Davenport's Outlines of Economic Theory (1896):
The ethical character of the desires was not a fundamental part of his inquiry. Men labored and underwent privation for "whiskey, cigars, and burglars' jimmies," he said, "as well as for food, or statuary or harvest machinery." As long as men were willing to buy and sell "foolishness and evil," the former commodities would be economic factors with market standing, for utility, as an economic term, meant merely adaptability to human desires. So long as men desired them, they satisfied a need and were motives to production. Therefore economics did not need to investigate the origin of choices.Joseph Dorfman, The Economic Mind in American Civilization 5 vols. (New York: Viking Press, 1949), 3, p. 376.
Praxeology, as well as the sound aspects of the other social sciences, rests on methodological individualism, on the fact that only individuals feel, value, think, and act. Individualism has always been charged by its critics – and always incorrectly – with the assumption that each individual is a hermetically sealed "atom," cut off from, and uninfluenced by, other persons. This absurd misreading of methodological individualism is at the root of J.K. Galbraith's triumphant demonstration in The Affluent Society (Boston: Houghton Mifflin, 1958) that the values and choices of individuals are influenced by other persons, and therefore supposedly that economic theory is invalid. Galbraith also concluded from his demonstration that these choices, because influenced, are artificial and illegitimate. The fact that praxeological economic theory rests on the universal fact of individual values and choices means, to repeat Dorfman's summary of Davenport's thought, that economic theory does "not need to investigate the origin of choices." Economic theory is not based on the absurd assumption that each individual arrives at his values and choices in a vacuum, sealed off from human influence. Obviously, individuals are continually learning from and influencing each other. As F.A. Hayek wrote in his justly famous critique of Galbraith, "The Non Sequitur of the 'Dependence Effect'":
Professor Galbraith's argument could be easily employed, without any change of the essential terms, to demonstrate the worthlessness of literature or any other form of art. Surely an individual's want for literature is not original with himself in the sense that he would experience it if literature were not produced. Does this then mean that the production of literature cannot be defended as satisfying a want because it is only the production which provokes the demand?Friedrich A. Hayek, "The Non Sequitur of the 'Dependence Effect,'" in Friedrich A. Hayek, Studies in Philosophy, Politics, and Economics (Chicago: University of Chicago Press, 1967), pp. 314–15.
That Austrian-school economics rests firmly from the beginning on an analysis of the fact of individual subjective values and choices unfortunately led the early Austrians to adopt the term psychological school. The result was a series of misdirected criticisms that the latest findings of psychology had not been incorporated into economic theory. It also led to misconceptions such as that the law of diminishing marginal utility rests on some psychological law of the satiety of wants. Actually, as Mises firmly pointed out, that law is praxeological rather than psychological and has nothing to do with the content of wants, for example, that the tenth spoonful of ice cream may taste less pleasurable than the ninth spoonful. Instead, it is a praxeological truth, derived from the nature of action, that the first unit of a good will be allocated to its most valuable use, the next unit to the next most valuable, and so on.Mises, Human Action, p. 124. On one point, and on one point alone, however, praxeology and the related sciences of human action take a stand in philosophical psychology: on the proposition that the human mind, consciousness, and subjectivity exist, and therefore action exists. In this it is opposed to the philosophical base of behaviorism and related doctrines and joined with all branches of classical philosophy and with phenomenology. On all other questions, however, praxeology and psychology are distinct and separate disciplines.See Rothbard, "Toward a Reconstruction," pp. 230–31.
A particularly vital question is the relationship between economic theory and history. Here again, as in so many other areas of Austrian economics, Ludwig von Mises made the outstanding contribution, particularly in his Theory and History.Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957). It is especially curious that Mises and other praxeologists, as alleged "a priorists," have commonly been accused of being "opposed" to history. Mises indeed held not only that economic theory does not need to be "tested" by historical fact but also that it cannot be so tested. For a fact to be usable for testing theories, it must be a simple fact, homogeneous with other facts in accessible and repeatable classes. In short, the theory that one atom of copper, one atom of sulfur, and four atoms of oxygen will combine to form a recognizable entity called copper sulfate, with known properties, is easily tested in the laboratory. Each of these atoms is homogeneous, and therefore the test is repeatable indefinitely. But each historical event, as Mises pointed out, is not simple and repeatable; each event is a complex resultant of a shifting variety of multiple causes, none of which ever remains in constant relationships with the others. Every historical event, therefore, is heterogeneous, and therefore historical events cannot be used either to test or to construct laws of history, quantitative or otherwise. We can place every atom of copper into a homogeneous class of copper atoms; we cannot do so with the events of human history.
This is not to say, of course, that there are no similarities among historical events. There are many similarities, but no homogeneity. Thus, there were many similarities between the presidential election of 1968 and that of 1972, but they were scarcely homogeneous events, since they were marked by important and inescapable differences. Nor will the next election be a repeatable event to place in a homogeneous class of "elections." Hence no scientific, and certainly no quantitative, laws can be derived from these events.
Mises's radically fundamental opposition to econometrics now becomes clear. Econometrics not only attempts to ape the natural sciences by using complex heterogeneous historical facts as if they were repeatable homogeneous laboratory facts; it also squeezes the qualitative complexity of each event into a quantitative number and then compounds the fallacy by acting as if these quantitative relations remain constant in human history. In striking contrast to the physical sciences, which rest on the empirical discovery of quantitative constants, econometrics, as Mises repeatedly emphasized, has failed to discover a single constant in human history. And given the ever-changing conditions of human will, knowledge, and values and the differences among men, it is inconceivable that econometrics can ever do so.
Far from being opposed to history, the praxeologist, and not the supposed admirers of history, has profound respect for the irreducible and unique facts of human history. Furthermore, it is the praxeologist who acknowledges that individual human beings cannot legitimately be treated by the social scientist as if they were not men who have minds and act upon their values and expectations, but stones or molecules whose course can be scientifically tracked in alleged constants or quantitative laws. Moreover, as the crowning irony, it is the praxeologist who is truly empirical because he recognizes the unique and heterogeneous nature of historical facts; it is the self-proclaimed "empiricist" who grossly violates the facts of history by attempting to reduce them to quantitative laws. Mises wrote thus about econometricians and other forms of "quantitative economists":
There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 percent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or in another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions.…
The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations.… Economics is not, as … positivists repeat again and again, backward because it is not "quantitative." It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case. Physical events can be interpreted on the ground of our knowledge concerning constant relations established by experiments. Historical events are not open to such an interpretation. …
Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts.… The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history.… Nobody is so bold as to maintain that a rise of A percent in the supply of any commodity must always – in every country and at any time – result in a fall of B percent in price. But as no quantitative economist ever ventured to define precisely on the ground of statistical experience the special conditions producing a definite deviation from the ratio A:B, the futility of his endeavors is manifest.Mises, Human Action, pp. 55–56, 348.
Elaborating on his critique of constants Mises added:
The quantities we observe in the field of human action … are manifestly variable. Changes occurring in them plainly affect the result of our actions. Every quantity that we can observe is a historical event, a fact which cannot be fully described without specifying the time and geographical point.
The econometrician is unable to disprove this fact, which cuts the ground from under his reasoning. He cannot help admitting that there are no "behavior constants." Nonetheless, he wants to introduce some numbers, arbitrarily chosen on the basis of historical fact, as "unknown behavior constants." The sole excuse he advances is that his hypotheses are "saying only that these unknown numbers remain reasonably constant through a period of years."Cowles Commission for Research in Economics, Report for the Period, January 1, 1948–June 30, 1949 (Chicago: University of Chicago Press, 1949), p. 7, quoted in Mises, Theory and History, pp. 10–11. Now whether such a period of supposed constancy of a definite number is still lasting or whether a change in the number has already occurred can only be established later on. In retrospect it may be possible, although in rare cases only, to declare that over a (probably rather short) period an approximately stable ratio which the econometrician chooses to call a "reasonably" constant ratio prevailed between the numerical values of two factors. But this is something fundamentally different from the constants of physics. It is the assertion of a historical fact, not of a constant that can be resorted to in attempts to predict future events.Ibid., pp. 10–11.The highly praised equations are, insofar as they apply to the future, merely equations in which all quantities are unknown.Ludwig von Mises, "Comments about the Mathematical Treatment of Economic Problems" (Cited as "unpublished manuscript"; published as " The Equations of Mathematical Economics" in the Quarterly Journal of Austrian Economics, vol. 3, no. 1 (Spring 2000), 27–32.In the mathematical treatment of physics the distinction between constants and variables makes sense; it is essential in every instance of technological computation. In economics there are no constant relations between various magnitudes. Consequently all ascertainable data are variables, or what amounts to the same thing, historical data. The mathematical economists reiterate that the plight of mathematical economics consists in the fact that there are a great number of variables. The truth is that there are only variables and no constants. It is pointless to talk of variables where there are no invariables.Mises, Theory and History, pp. 11–12; see also Leoni and Frola, "On Mathematical Thinking," pp. 1–8; and Leland B. Yeager, "Measurement as Scientific Method in Economics," American Journal of Economics and Sociology 16 (July 1957): 337–46. What, then, is the proper relationship between economic theory and economic history or, more precisely, history in general? The historian's function is to try to explain the unique historical facts that are his province; to do so adequately he must employ all the relevant theories from all the various disciplines that impinge on his problem. For historical facts are complex resultants of a myriad of causes stemming from different aspects of the human condition. Thus, the historian must be prepared to use not only praxeological economic theory but also insights from physics, psychology, technology, and military strategy along with an interpretive understanding of the motives and goals of individuals. He must employ these tools in understanding both the goals of the various actions of history and the consequences of such actions. Because understanding diverse individuals and their interactions is involved, as well as the historical context, the historian using the tools of natural and social science is in the last analysis an "artist," and hence there is no guarantee or even likelihood that any two historians will judge a situation in precisely the same way. While they may agree on an array of factors to explain the genesis and consequences of an event, they are unlikely to agree on the precise weight to be given each causal factor. In employing various scientific theories, they have to make judgments of relevance on which theories applied in any given case; to refer to an example used earlier in this paper, a historian of Robinson Crusoe would hardly employ the theory of money in a historical explanation of his actions on a desert island. To the economic historian, economic law is neither confirmed nor tested by historical facts; instead, the law, where relevant, is applied to help explain the facts. The facts thereby illustrate the workings of the law. The relationship between praxeological economic theory and the understanding of economic history was subtly summed up by Alfred Schütz:
No economic act is conceivable without some reference to an economic actor, but the latter is absolutely anonymous; it is not you, nor I nor an entrepreneur, nor even an "economic man," as such, but a pure universal "one." This is the reason why the propositions of theoretical economics have just that "universal validity" which gives them the ideality of the "and so forth" and "I can do it again." However, one can study the economic actor as such and try to find out what is going on in his mind; of course, one is not then engaged in theoretical economics but in economic history or economic sociology.… However, the statements of these sciences can claim no universal validity, for they deal either with the economic sentiments of particular historical individuals or with types of economic activity for which the economic acts in question are evidence.…
In our view, pure economics is a perfect example of an objective meaning-complex about subjective meaning-complexes, in other words, of an objective meaning-configuration stipulating the typical and invariant subjective experiences of anyone who acts within an economic framework.… Excluded from such a scheme would have to be any consideration of the uses to which the "goods" are to be put after they are acquired. But once we do turn our attention to the subjective meaning of a real individual person, leaving the anonymous "anyone" behind, then of course it makes sense to speak of behavior that is atypical.… To be sure, such behavior is irrelevant from the point of view of economics, and it is in this sense that economic principles are, in Mises's words, "not a statement of what usually happens, but of what necessarily must happen."Alfred Schütz, The Phenomenology of the Social World (Evanston, Ill.: Northwestern University Press, 1967), pp. 137, 245; also see Ludwig M. Lachmann, The Legacy of Max Weber (Berkeley, California: Clendessary Press, 1971), pp. 17–48.
[An Austrian Perspective on the History of Economic Thought (1995)]
A particularly outstanding feature of J.B. Say's treatise is that he was the first economist to think deeply about the proper methodology of his discipline, and to base his work, as far as he could, upon that methodology. From previous economists and from his own study, he arrived at the unique method of economic theory, what Ludwig von Mises was, over a century later, to call "praxeology." Economics, Say realized, was not based on a mass of inchoate particular statistical facts. It was based, instead, on very general facts (fait généraux), facts so general and universal and so deeply rooted in the nature of man and his world that everyone, upon learning or reading of them, would give his assent. These facts were based, then, on the nature of things (la nature des choses), and on the deductive implications of these facts so broadly rooted in human nature and in natural law. Since these broad facts were true, their logical implications must be true as well.
In his introduction to the Treatise, which sets forth the methodological nature and implications of his work, Say begins by being critical of the physiocrats and of Dugald Stewart for confounding the sciences of politics and of political economy. Say saw that if economics, or political economy, was to progress, it must stand on its own feet as a discipline without being intimately mixed from the start with political science — or the science which sets forth the correct principles of the political order. Political economy, wrote Say, is the science of wealth, its production, distribution and consumption.
Say goes on to mention the popularity of the Baconian method of induction from a mass of facts in the formation of a science, but then adds that there are two kinds of facts, "objects that exist" and "events that take place." Clearly, objects that exist are primary, since events that take place are only movements or interactions of existing objects. Both classes of facts, noted Say, constitute the "nature of things," and "a careful observation of the nature of things is the sole foundation of all truth."
Facts may also be grouped into two kinds: general or constant, and particular or variable. About the same time as Stewart, but far more comprehensively, Say then launched into a brilliant critique of the statistical method, and of the difference between it and political economy. Political economy deals with general facts or laws:
Political economy, from facts always carefully observed, makes known to us the nature of wealth; from the knowledge of its nature deduces the means of its creation, unfolds the order of its distribution, and the phenomena attending its destruction. It is, in other words, an exposition of the general facts observed in relation to this subject. With respect to wealth, it is a knowledge of effects and of their causes. It shows what facts are constantly conjoined with; so that one is always the sequence of the other.
Say then added an important point, that economics "does not resort for any further explanation to hypothesis." In short, unlike the physical sciences, the assumptions of economics are not tentative hypotheses which, or the deductions from which, must be tested by fact; on the contrary, each step of the logical chain rests on definitely true, not "hypothetical," general facts. (It might be added that it is precisely this crucial difference between the method of economics and of physical sciences that has brought so much contumely on the head of praxeology during the 20th century.) Instead of framing hypotheses, economic science must perceive connections and regularities "from the nature of particular events," and "must conduct us from one line to another, so that every intelligent understanding may clearly comprehend in what manner the chain is united." "It is this," Say concludes, "which constitutes the excellence of the modern method of philosophizing."
In contrast, statistics exhibit particular facts, "of a particular country, at a designated period." They are "a description in detail." Statistics, Say added, "may gratify curiosity," but they can "never be productive of advantage" if they do not indicate the "origin and consequences" of the collected facts and this can only be accomplished by the separate discipline of political economy. It is precisely the confounding of these two disciplines that made Smith's Wealth of Nations, in Say's perceptive words, an "immethodical" and "irregular mass of curious and original speculations, and of known demonstrated truths."
A crucial difference between statistics and political economy, Say goes on, is that the latter's general principles or "general facts" may be discovered, and therefore may be known with certainty. The principles of political economy, wherever they rest on "the rigorous deductions of undeniable general facts," "rest upon an immovable foundation." They are what von Mises would later call "apodictic." Political economy, indeed, "is composed of a few fundamental principles, and of a great number of corollaries or conclusions, drawn from these principles." The particular facts of statistics, on the other hand, are necessarily uncertain, incomplete, inaccurate and imperfect. And even when true, Say correctly notes, they "are only true for an instant." Again, on statistics, "how small a number of particular facts are completely examined, and how few among them are observed under all their aspects? And in supposing them well examined, well observed, and well described, how many of them either prove nothing, or directly the reverse of what is intended to be established by them[?]" And yet the gullible public is often dazzled by "a display of figures and calculations … as if numerical calculations alone could prove anything, and as if any rule could be laid down, from which an inference could be drawn without the aid of sound reasoning."
Say goes on to a blistering critique of the use of statistics without theory:
Hence, there is not an absurd theory, or an extravagant opinion that has not been supported by an appeal to facts; and it is by facts also that public authorities have been so often misled. But a knowledge of facts, without a knowledge of their mutual relations, without being able to show why the one is a cause and the other a consequence, is really no better than the crude information of an office-clerk …
Say then denounces the idea that a good theory is not "practical," and that the "practical" is somehow superior to the theoretical:
Nothing can be more idle than the opposition of theory to practice1. What is theory, if it be not a knowledge of the laws which connect effects with their causes, facts with facts? And who can be better acquainted with facts than the theorist who surveys them under all their aspects, and comprehends their relation to each other? And what is practice without theory, but the employment of means without knowing how or why they act?
Say then brilliantly points out why it is impossible for peoples or nations to "learn from experience" and to adopt or discard theories correctly on that basis. Since the early modern era, he notes, wealth and prosperity have increased in western Europe, while at the same time nation-states have compounded restrictions of trade and multiplied the interference of taxation. Most people then superficially conclude that the latter caused the former, that trade and production increased as a result of the interference of government. On the other hand, Say and the political economists argue the reverse, that "the prosperity of the same countries would have been much greater, had they been governed by a more liberal and enlightened policy." How can facts or experience decide between these two clashing interpretations? The answer is that they cannot; that only correct theory, theory deducible from a few universal general facts or principles, can do so. And that is why, notes Say, "nations seldom derive any benefit from the lessons of experience." To do so, "the community at large must be enabled to seize the connexion between causes and their consequences; which at once supposes a very high degree of intelligence and a rare capacity for reflection." Thus, to arrive at the truth, only the complete knowledge of a few essential general facts is important; "every other knowledge of facts, like the erudition of an almanac, is a mere compilation, from which nothing results."
Furthermore, in arguments about public policies, when "facts" are allegedly set against the "system" of economic theory, it is actually one theoretical "system" poised against another, and, again, only theoretical refutation can prevail. Thus, said Say, if you talk about how free trade between nations is advantageous to all the participants, this is accused of being a "system," to which is opposed worry about deficits in the balance of trade — itself a system, but a fallacious one. Those who assert (as had the physiocrats) that luxury fuels trade whereas thrift is ruinous, are setting forth a "system," and then, in an exact prefiguring of the Keynesian multiplier, "some will assert that circulation enriches a state, and that a sum of money, by passing through twenty different hands, is equivalent to twenty times its own value" — also a system.
In a surprising and perceptive prefigurement of modern controversies, Say goes on to explain why the logical deductions of economic theory should be verbal rather than mathematical. The intangible values of individuals, with which political economy is concerned, are subject to continuing and unpredictable change: "subject to the influence of the faculties, the wants and the desires of mankind, they are not susceptible of any rigorous appreciation, and cannot, therefore, furnish any data for absolute calculations." The phenomena of the moral world, noted Say, are not "subject to strict arithmetical computation."
Thus we may know absolutely that, in any given year, the price of wine will depend on the interaction of its supply, or stock to be sold, with the demand. But to calculate the two mathematically, these two elements would have to be decomposed precisely into the separate influence of each of their elements, and this would be so complex as to be impossible. Thus:
it is not only necessary to determine what will be the product of the succeeding vintage, while yet exposed to the vicissitudes of the weather, but the quality it will possess, the quantity remaining on hand of the preceding vintage, the amount of capital that will be at the disposal of the dealers, and require them, more or less expeditiously, to get back their advances. We must also ascertain the opinion that may be entertained as to the possibility of exporting the article, which will altogether depend upon our impressions as to the stability of the laws and government, that vary from day to day, and respecting which no two individuals exactly agree. All these data, and probably many others besides, must be accurately appreciated, solely to determine the quantity to be put in circulation; itself but one of the elements of price. To determine the quantity to be demanded, the price at which the commodity can be sold must already be known, as the demand for it will increase in proportion to its cheapness; we must also know the former stock on hand, and the tastes and means of the consumers, as various as their persons. Their ability to purchase will vary according to the more or less prosperous condition of industry in general, and of their own in particular; their wants will vary also in the ratio of the additional means at their command of substituting one liquor for another, such as beer, cider, etc. I suppress an infinite number of less important considerations, more or less affecting the solution of the problem …
In short, the enormous number of imprecise, changing and quantitatively unknown determinants make the application of the mathematical method in economics impossible. And therefore those who
have pretended to do it, have not been able to enunciate these questions into analytical language, without divesting them of their natural complication, by means of simplifications, and arbitrary suppressions, of which the consequences, not properly estimated, always essentially change the condition of the problem and pervert all its results; so that no other inference can be deduced from such calculations than from formula arbitrarily assumed.
Mathematics, seemingly so precise, inevitably ends in reducing economics from the complete knowledge of general principles to arbitrary formulas which alter and distort the principles and hence corrupt the conclusions.
But how then is the political economist, knowing the general principles with certainty, to apply these principles to specific problems such as the condition of the wine market? Here, too, Say anticipated the brilliant conclusions of Ludwig von Mises on the proper relationship between theory and history, theory and specific application. Such applied theory in economics, Say indicated, is an art rather than a strict science:
What course is then to be pursued by a judicious inquirer in the elucidation of a subject so much involved? The same which would be pursued by him, under circumstances equally difficult, which decide the greater part of the actions of his life. He will examine the immediate elements of the proposed problem, and after having ascertained them with certainty (which in political economy can be effected), will approximately value their mutual influences with the intuitive quickness of an enlightened understanding, itself only an instrument by means of which the mean result of a crowd of probabilities can be estimated, but never calculated with exactness.This distinction between certain theory and its application by an "enlightened understanding" approximates von Mises's later distinction between conceptual theory ("Begreiffen") and understanding ("Verstehen").
J.B. Say then relates the fallacies of the mathematical method in economics to the teachings of his great mentor, the physiologist Cabanis. He quotes Cabanis on how writers on mechanics grievously distort matters when they deal with the problems of biology and medicine. Citing Cabanis:
The terms they employed were correct, the process of reasoning strictly logical, and, nevertheless, all the results were erroneous … it is by the application of this method of investigation to subjects to which it is altogether inapplicable, that systems the most whimsical, fallacious, and contradictory, have been maintained.
Say then adds that whatever has thus been pointed out about the fallacies of the mechanistic method in biology is a fortiori applicable to the moral sciences, which is why we are "always being misled in political economy, whenever we have subjected its phenomena to mathematical calculation. In such case it becomes the most dangerous of all abstractions."
Finally, Say perceptively points to another problem that, then as now, leads learned people to dismiss the principles and conclusions of economics. For they
are too apt to suppose that absolute truth is confined to the mathematical and to the results of careful observation and experiment in the physical sciences; imagining that the moral and political sciences contain no invariable facts or indisputable truths, and therefore cannot be considered as genuine sciences, but merely hypothetical systems, more or less ingenious, but purely arbitrary.
To bolster this view, the critics of economics point to a great many differences of opinion in that discipline. But so what? Say asks. After all, the physical sciences have always been rent by controversy, sometimes clashing "with as much violence and asperity as in political economy."
The mathematical method was not the only system of abstraction to suffer a trenchant demolition by J.B. Say. For Say was also sharply critical of verbal methods of logic that took off into the empyrean without continuing groundwork in, and repeated checking by, reference to general and universal facts. This was Say's main methodological stricture against the physiocrats. "Instead of first observing the nature of things, or the manner in which they take place, of classifying these observations, and deducing from them general propositions" — that is, instead of being praxeologists, the physiocrats
commenced by laying down certain abstract general propositions, which they styled axioms, from supposing them to contain inherent evidence of their own truth. They then endeavoured to accommodate the particular facts to them and to infer from them their laws; thus involving themselves in the defence of maxims evidently at variance with common sense and universal experience …
In short, a system of economic theory must not only be axiomatic-deductive; it must always make sure to ground those axioms in "common sense and universal experience."
In his Introduction to the fourth edition, Say leveled similar strictures against David Ricardo and the Ricardian system. Ricardo, too, "sometimes reasons upon abstract principles to which he gives too great a generalization." Ricardo, he charged, begins with observations founded on facts, but then "pushes his reasonings to their remotest consequences, without comparing their results with those of actual experience." After a certain point in the reasoning, "the facts differ very far from our calculation" and "from that instant nothing in the author's work is represented as it really occurs in nature." "It is not sufficient," Say concludes, "to set out from facts; they must be brought together, steadily pursued, the consequences drawn from them constantly compared with the effects observed," so that
the science of political economy … must show, in what manner that which in reality does take place, is the consequence of other facts equally certain. It must discover the chain which binds them together, and always, from observation, establish the existence of the two links at their point of connexion.
[On Freedom and Free Enterprise (1956)]
When, in 1783, Immanuel Kant published his Prolegomena in order to dispel the confusion caused in the philosophical world by his revolutionary Critique of Pure Reason, he headed the chapters with a number of questions that could be condensed as follows: "How Is Metaphysics Possible?" If we, in turn, had to condense Ludwig von Mises's methodological position, we would have to phrase the question as follows: "How is economics possible?"
As Manuel Reventós points out in his prologue to the Catalan translation of Chapman's Economy, the science of economics, toward the end of the 19th century, found itself in the stage in which metaphysics had been at the end of the 18th century: floating between dogmatism and empiricism. Dogmatism was born with the physiocrats, developed by the classicists, and left its mark on the mathematical economists. It postulated inescapable economic laws to which man had to conform under penalty of failure. Empiricism was born with mercantilism and, through List and the historical school, arrived at "state socialism," neomercantilism, and other forms of etatism. It considered economic events only as social data, the study of which could be profitably employed by politicians to give order to economic life, thus freeing it from anarchy.
Both these trends gradually declined and their failure stimulated inquiring minds to reflect. The discredit into which economic laws had fallen seemed to justify empiricism. But neither did the control of economic life by political means prove practical. For whenever the state applied an economic measure to attain certain results, the final results proved to be quite different. Something always intervened. If it was not the discredited economic laws, what then could it be? If the economic activities of man were not ruled by "natural laws," nor could be regulated at will, then they had to have a sense of their own. And this sense was to be searched for neither by observation nor by experimentation, but by reflection. The data on economic life were available; only its sense was missing. And this could only be searched for by methodical reflection. Economic life did exist. It disobeyed natural laws and also resisted social laws. How was this possible?
The economic problem is exposed in a critical manner. In our opinion, herein lies the great contribution of Ludwig von Mises to the science of economics.
Economic life, unlike natural life, is not subject to the law of causality. In natural life the same causes always produce the same effects. In economic life the same causes may produce different effects. Why? Because man's volition interferes between causes and effects. And man's volition is not ruled by causes (past), but by aims (future). Events in human life are not ruled by the law of causality, but by that of finality. We can judge natural events starting from the two fundamental categories of Kant: time and place. In human events a third category intervenes: action. García Morente, who in our belief is the most lucid interpreter of Kant, stated that the 19th century further developed Kantism by discovering a third fundamental category explaining human evolution and progress. Action is the product of man's elective faculty. Confronted with facts, which in nature would be causes, man chooses and consequently acts. He acts whether he is confronted by an economic or any other human problem.
The study of human action is called praxeology. Economics is a part of praxeology. But what part? How do we categorize it within the praxeological group?
In economics the category of exchange which plays no role in other praxeological phenomena is added to the category of elective action. In economic life man acts to obtain what he wants. This is possible only in a bilateral way: do ut des. You give me something in exchange for what I give you; or I give you something in exchange for what you give me. Thus economics is catalactical praxeology. But the act of exchange must take place somewhere. This place (material or ideal) is the market. Everybody is always present and acting in the market, even if only in a negative way, i.e., not exchanging. Not to exchange is also to act in the market, just as the gambler at a gambling table may momentarily abstain from placing a bet.
We categorize a science on grounds of its essential, general, and permanent characteristics. Economics is human action employing the elective faculty in market exchange. Thus its fundamental categories are the elective faculty, the exchange of goods, and the market. Only in the recognition of these categories is economic thinking possible. Economics is oikos nemo, i.e., running of the home or caring for one's well-being. From the interplay of choosing between goods and services for the well-being of oneself and one's family, and choosing leisure, indifference, or sacrifice, economic life is born. Its driving force is the autonomous action of individuals. Its means is choice; its stage, the market.
Therefore, economics is neither pursuit of wealth, nor the production or distribution of commodities and services, nor their consumption. These are results, purely external manifestations which also appear outside the scope of economics. As Mises has repeatedly stated, production, distribution, consumption, and the satisfaction of the urge to amass wealth are also feasible by means not freely elective, such as politics or, more concretely, totalitarianism in any of its forms. But this is not economics. These actions only concern economics when they originate from the autonomous action of man exercising his elective faculty in the market. Only under this condition could the following characteristic phenomena, which always were considered to comprise economics, be brought about: supply and demand, mechanism of prices, money and credit, etc.
What we have just set forth constitutes the fundamental basis of economic theory. As Rudolf Stammler very accurately asserted, a theory is a doctrine of general validity. It is the exposition of the pure form of a certain scientific matter by means of a special focus or method. In our case it is the praxeological-catalactical focus of human action. The concrete and changing matters of human activity lack unity, order, and individuality. They receive these characteristics only from the method. Thus human action resulting from reflection on goods to be desired and to be offered in exchange may be an economic case or one of a different nature, depending upon the method applied. If we inquire why a man acts in a certain way today, instead of yesterday or tomorrow, why he selects one commodity or service instead of others, and why he offers in exchange one good or medium of exchange instead of others, then we apply psychology and not economics. We are dealing with economics when we regard the individual act as an elective act in the market. We are not interested in motives or "causes" that may have brought about a definite action at a definite time and place. This is the field of the psychologist. For the economist the elective-catalactical action of man is the ultimate given. It is the point of departure for our science and provides unity for an organic theory, that is to say, an explanation of the phenomena and problems resulting from man's use of his elective faculty in the market. If we start from this point of view we can logically explain and relate all economic phenomena.
In short, no event in itself is economic. Only the methodical focus makes it so. Thus we cannot study an economic event until we know the meaning of an "economic event." Economics, like any other science, necessarily starts from an a priori synthetical assertion. For economics it is the following: economic activity is elective-catalactic action. This a priori synthetical assertion has its raison d'être, for it allows us to understand and explain economic phenomena. It makes economics possible. Through its form it gives individuality and organic unity to material events which we used to consider intuitively as economic events. It also enables us to discard those concepts which, despite their economic appearance (monopolies, for example), are not economic events although they may influence economic life.
Starting from the synthetic assertion that defines economics, the science of economics proceeds in an analytical way, searching for fundamental elements, in order to construct the theory of economic life. First it searches for the primary categories of economic thought. According to Mises, human action is the fundamental element; but not every action is economic — only catalactic action is. It necessarily concerns commodities and services, even in the case of elective rejection. Being directed to future uses it necessarily entails insecurity, risks, etc.
According to Mises, the foregoing reasoning explains how the categories of economic thought flow from the primary category of action and from reflection on the circumstances in which action takes place. As he repeatedly points out, the science of economics does not study an imaginary economy but the real economic life which it endeavors to comprehend systematically through its general elements or essential forms. The primary categories then produce the secondary categories: value, price, cost, calculation, etc. Economics thus proceeds from fundamental to secondary and tertiary categories until the building of economic theory is completed.
However, there is one problem to which an answer has not yet been given by economists, not even by Mises who in his Human Action did not give us a theory but a treatise on economics. Even a theory is not the whole of a science, but merely the unitarian, organic, and exhaustive explanation of its object at which we arrive by the method implicit in the a priori synthetic assertion, establishing its definition. That is to say, theory furnishes us with the explanation of the object in question. Then the method of realization, which is a technical problem, must be searched for. This does not imply that man is to receive advice on the use of his elective faculty in catalactic action. Mises stated correctly that economics is not an axiological science and does not solve problems of justice or morals. Our task is to search for the most adequate means to attain the end that man has chosen.
Economics encounters many modus faciendi problems in its path, especially in the fields of money, economic calculation, etc. In treatises on economics these problems usually are intermingled with purely theoretical problems, which is not only antimethodical but also dangerous. For sometimes this is the reason a technical solution is given too great an importance insofar as the fundamental theoretical problem is subordinated to it. We all remember the confusion created in economic theory by the feud between monometalists and bimetalists. In jurisprudence we are now witnessing a similar aberration. The state is a juridical person. Now, the juridical person is a fiction of the technique of law. But notwithstanding, the state has lately been invested with ontological reality. People talk of the interests of the state, of state sovereignty, etc. And so we arrive at the omnipotent government, so justly attacked by Mises. We believe that in this area important work is to be done by the economist. Careful distinction must be made in economics between theoretical problems of principle and technical problems of application. Both must be presented distinctly separated in treatises on economics, especially those for students.
But economics is not only theory and technique; it is also practice, i.e., the solution of concrete cases. Mises does not expressly mention it, but he does so implicitly when he speaks of "history."Ludwig von Mises, Human Action, Yale University Press, New Haven, Conn., pp. 47–58. According to him, the method of history is understanding, not comprehension which characterizes theory. He speaks of history as the understanding of past events. But man not only understands or endeavors to understand history, he makes it. He makes it by acting in concrete cases, by exercising his faculty of election — that is, he solves praxeological problems. As Mises repeats so insistently, he solves them through reasoning, classifying the data, the pros and cons that cause him to elect and act in order to attain a panoramic view which enables him to choose the proper road. It is not enough for him theoretically to comprehend the kind of action to be taken (in this case an economic action), nor to master the technical instruments which were not invented for his specific case, but for a larger group of cases. He must also take into consideration the individual circumstances of the concrete case he is facing, estimating the relevancy of each circumstance in itself, its relation to others, its relation to the precedents of similar cases in the past, and to the desired end. In short, he must judge the case in perspective and in relief. To a certain degree he must consider it as if he were confronting a minor premise (Untersatz) searching for the major premise (Obersatz) to which he can submit the case and thus reach the conclusion which will determine his elective action.
We repeat, neither a theoretical comprehension nor the mastery of the technical means is sufficient for this. He must go deeper and exercise what Mises calls specific understanding, and which may also be called criterion, discretion, or savoir faire. In a word, he must interpret the case. His situation is like that of an historian who endeavors to understand an historical case, but he not only has to understand; he must also act. Mises advances a number of rules of understanding for the interpretation of past events. We believe that economists should also endeavor to find interpreting rules that serve as guides for the solution of practical cases and the discovery of the major premise, even if such guides are not exact or infallible. Indeed, it is deplorable to err in the interpretation of past historical cases as, for example, in the interpretation of the last depression. But it is fatal to err in actions affecting the future, especially if they concern not only an individual, but also a collective body. The examples of the revaluation of the pound sterling after the First World War and its devaluation by the last Labour government clearly demonstrate this. The fatal effects of both measures for British citizens and even for non-Britishers can only be attributed to a lack of understanding of the measures to be taken. We, therefore, believe that economists should not neglect the practical problems, that they should endeavor to find exact rules for the interpretation of economic phenomena. Books should be written and courses be organized to help all those who, in some way or other, endeavor to solve practical eases, to avoid the pitfalls that may divert them from the true path of realizing economics in practice.
Let us conclude by returning to the beginning. We believe that Professor von Mises has done in economics what Kant did in metaphysics. He has demonstrated how economics is possible. But it is one thing to know "what is possible," and another to know reality. Today nobody can philosophize ignoring Kant. In the future nobody will be able to deal with economics ignoring Mises. But we are still only in the beginning. As he has put it so well, economics is a young science. It must be made to grow, and we have endeavored to make a few suggestions to stimulate this growth. Of course, we do not hope to achieve its perfection because
there is no such thing as perfection in human knowledge, nor for that matter in any other human achievement. Omniscience is denied to man.… Science does not give us absolute and final certainty.… A scientific system is but one station in an endlessly progressing search for knowledge.… But to acknowledge these facts does not mean that present day economics is backward. It merely means that economics is a living thing — and to live implies both imperfection and change.Ibid., p. 7.
In a new book titled Models. Behaving. Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life, physicist Emanuel Derman argues that today's economists are relying too heavily on quantitative models, leading to some disastrous results. The relation that economics as a discipline bears to mathematics or physics, Derman contends, is not as close as the prevailing mainstream would have us believe, preoccupied as it is with intricate metrics and charts.
Derman cites Friedrich Hayek for the proposition that the economic establishment actually has things precisely backwards, incorrectly treating the macroscopic economy as less abstract than the acting agents who make it up. "If the correct way to proceed is from concrete to abstract," then it is the Austrian methodology, praxeology, that approaches economic questions aright. Murray Rothbard often observed this distinction between economics and, for instance, physics. In Praxeology as the Method of the Social Sciences, he noted that "the economist is in the opposite position" from that of the physicist, that the former may proceed deductively from axiomatic premises that can be known with certainty. The approach or methodology of the Austrian School thus proves to be among its distinctive, defining characteristics, central to its superiority over neoclassical systems.
The mistake of the positivistic, empirical method is decidedly not that it overemphasizes the importance of concrete aspects of physical reality, but rather that it vastly overestimates the inferences about reality that can be drawn from discrete data sets. It is true enough that studies and statistics, situated within a proper context, are capable of revealing or throwing into relief general principles and truths. Too often, however, there is flagrant oversight with respect to that more general and universal context, disposing economists to make far too much of the empirical data on hand. Building predictions based on these piecemeal, incomplete data — representing at best snapshots or fragments of the unbounded totality of economic relationships — is a parlous venture, culminating in the kinds of economic crises we observe today.
For all of its appeals to "hard science" and observation, the empiricism of mainstream economics ultimately appears more like junk science, its conclusions far outpacing the facts. As Murray Rothbard shrewdly explained, linking the Austrian methodology to "the method of most of the older classical economists," "there cannot be controlled experiments when we confront the real world of human activity." At any given time, then, the conclusions that may be gleaned from real-world figures must be significantly qualified by any and all information that hasn't been accounted for — and that happens to be vast.
In an earlier time, before economics coalesced into a distinct academic field of study, with its own separate canons and doctrines, it emerged as part of the tradition of political and moral philosophy. It would not necessarily have occurred to classicists like Adam Smith and David Ricardo that they were "economists" — indeed, that they were anything other than moral philosophers, treating broad questions of social theory. While the deductive method was of course fully embraced and perfected later, after Menger's founding of the Austrian School, the classical theorists laid much of the necessary foundation for praxeology proper. Among the tasks remaining was to entirely sever economics from the error — characterized by the words of Vilfredo Pareto — that "we [can] hold nothing as final or absolute," that all economists can properly undertake is the testing of hypotheses against real-world experiment. It is no coincidence that the Austrian School was born of an intellectual tradition that wove legal education tightly into the training of economists. Adopting a broadly humanistic approach, Austrian universities in the years before the rise of Austrian economics coached students "above all in analytical thinking, linguistic precision, and logic." [1] This contrasted sharply with the training of economists at German universities, where coursework "was based on a predominantly descriptive-empirical approach … closely associated, both institutionally and methodologically, with the natural sciences." [2]
Through their instruction and background, economists in Austria were already inclined to appreciate the ability of pure reasoning, independent from observation and the review of data, to unveil economic principles. Indeed, Menger's groundbreaking insight was that the experiential approach, driven by a fixation on conclusive testing, served more often to obscure underlying truths than to reveal them. In a noteworthy passage in his Investigations into the Method of the Social Sciences, Menger cogently drew upon an analogy to demonstrate the fallacy inhering in the overly empirical method. The desire to subject theory to templates provided by existing, material economic phenomena — to hypothesize and then test — would be akin to a "mathematician who wants to correct the principles of geometry by measuring real objects." Menger's was the argument Rothbard's echoed when he noted the practical impossibility of a control group that could satisfy the implied demands of the experimentalists. Given what the current aggrandizement of economic positivism presupposes about the relationship between observable reality and knowledge, it is interesting that it is praxeology that is thought to romanticize mere theoretics at the expense of "hard science." All economic facts that we gather must be analyzed within some framework of theory. [3] It is the atrophy of contemporary economic sciences that theory and the deductive approach have been all but discarded as quackery, even while the models of the establishment fail all around us.
Few would have the temerity to suggest to an academic logician that the use of deductive reasoning is somehow unscientific, yet that is the assumption embedded in many of the most common criticisms of praxeology. The praxeological method, contrary to the claims of its critiques, actually entails a more measured, cautious approach to the question of what we can really know about economics, making assertions only within a narrowly delimited area. As philosopher Roderick Long noted in a defense of praxeology, its conclusions attempt to predict only "how people will behave so long as they are buying and selling." Long further explains that, as "an abstract structure, like mathematics," praxeology furnishes the prism through which factual data must be evaluated; it doesn't attempt to replace empirical findings, but instead equips the economist with the tools necessary for engaging in another layer of analysis altogether.
For students of logic, the likening of praxeology to mathematics will appear intuitive enough. Logicians employ symbols to represent arguments and their component parts, yielding results that appear very similar to mathematical proofs or formulas. The philosopher Gottlob Frege — whose work may have informed Mises's ideas about the constancy of logic across languages and cultures [4] — wrote of mathematics' "close connexion with logic" that he "agree[d] with those who hold that it is impossible to effect any sharp separation of the two."
The efforts of today's court economists, forever enjoining still more state intervention in economic life, to abstract data away from any conceptual context are perfectly consistent with "the fatal conceit" Hayek warned of. There is a singular arrogance immanent in the notion that the right data (of course culled and interpreted by the right technocrats) is all that is necessary to properly modulate the economy through public policy. It should therefore come as no surprise that the advocates of totalitarian societal planning favor empiricism in economics; it ends up providing the rationales and justifications for what Hayek labeled "Cartesian constructivism," the idea that society and its institutions should or must be deliberately and purposively plotted, as against simply emerging from the interactions of free people. To the totalitarian mind, the idea that anything rational or valuable to society as a whole could materialize absent a deliberate design is as laughable as the idea that economics ought to be examined using axiomatic principles that can be known a priori.
[product:10733] By now the failures of establishment economic theories have effectively reiterated the old truth that numbers, like words, can be made to say anything; statistics can be made to lie. For all of the empiricists' supposed faithfulness to the scientific method, it has been the Austrian methodology that has produced the most accurate predictions, that has grasped the true nature of the economic malady that is blighting the world today. As champions of praxeology, we must continue to ventilate its practical applications to contemporary problems, demonstrating that Mises's apriorism is not supernatural or unscientific, but firmly grounded in reason and principle.
Professional economists' certainty with regard to models crafted out of fragmentary data is misguided and has hastened the expansion of the total state. The methodological individualism of praxeology is the sound alternative to the shallow nostrums of the willing shills of the state. As Mises himself wrote, "It is no longer enough to deal with the economic problems within the traditional framework. It is necessary to build the theory of catallactics upon the solid foundation of a general theory of human action, praxeology."
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Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.
Notes [1] Eugen Maria Schulak and Herbert Unterköfler, The Austrian School of Economics: A History of its Ideas, Ambassadors, & Institutions (Ludwig von Mises Institute 2011).
[2] Ibid.
[3] Karen I. Vaughn, Austrian Economics in America: The Migration of a Tradition (Cambridge University Press 1994).
[4] Roderick T. Long, Anti-Psychologism in Economics: Wittgenstein and Mises (Kluwer Academic Publishers 2004).
The central problem of political economy is how to organize society so as to promote the production of wealth. The central problem of political philosophy is how to arrange society so as to make it a just social order.
The first question regards matters of efficiency: What means are appropriate for achieving a specific result, in this case, wealth?
The second question falls outside the realm of the so-called positive sciences. It asks whether or not the goal political economy assumes to be given can be justified as a goal, and whether or not, then, the means which political economy recommends can be regarded as efficient means for just ends.
In the following I present an a priori justification for the thesis that those means recommended by political economy are indeed efficient means for just ends.
I begin by describing the means recommended by political economy and explain the systematic reasons the production of wealth attained by adopting them is greater than that produced by choosing any other means. Since my main task is to demonstrate the justice of these means of producing wealth, my description and explanation of economic efficiency will be brief.
Political economy begins with the recognition of scarcity. It is only because we do not live in the Garden of Eden that we are concerned about the problem of economic efficiency. According to political economy, the most efficient means of alleviating, if not overcoming, scarcity is the institution of private property. The rules underlying this institution have been correctly identified for the most part by John Locke. They are as follows:
Every person owns his own body as well as all scarce goods which he puts to use with the help of his body before anyone else does. This ownership implies the right to employ these scarce goods however one sees fit so long as in so doing one does not aggress against anyone else's property, i.e., so long as one does not uninvitedly change the physical integrity of another's property or delimit another's control over it without his consent. In particular, once a good has first been appropriated or homesteaded by mixing one's labor with it (Locke's phrase) then ownership in it can only be acquired by means of a contractual transfer of property title from a previous to a later owner.
The reason this institution leads to the greatest possible production of wealth is straightforward. Any deviation from this set of rules implies, by definition, a redistribution of property titles (and hence of income) away from user-producers and contractors of goods and onto non-user-producers and noncontractors. As a consequence, any such deviation implies that there will be relatively less original appropriation of resources whose scarcity is realized, there will be less production of new goods, less maintenance of existing goods, and less mutually beneficial contracting and trading. This naturally implies a lower standard of living in terms of exchangeable goods and services.
Further, the provision that only the first user (not a later one) of a good acquires ownership assures that productive efforts will be as high as possible at all times. Further, the provision that only the physical integrity of property (not property values) be protected guarantees that every owner will undertake the greatest possible value-productive efforts, i.e., efforts to promote favorable changes in property values and to prevent or counter any unfavorable changes in property values (as they might result from another person's actions regarding his property). Thus, any deviation from these rules also implies reduced levels of value productive efforts at all times.
Now on to my main task of demonstrating that the institution of private property as just characterized is just — in fact, that only this institution is just and that any deviation from it is not only economically inefficient but unethical as well.
First, however, let me clarify an essential similarity between the problem facing political economy and that facing political philosophy — a similarity that political philosophers in their widespread ignorance of economics generally overlook only to wind up in endless ad hoceries. The recognition of scarcity is not only the starting point for political economy; it is the starting point of political philosophy as well. Obviously, if there were a superabundance of goods, no economic problem whatsoever would exist. With a superabundance of goods such that my present use of them would neither reduce my own future supply nor the present or future supply of them for any other person, ethical problems of right or wrong, just or unjust would not emerge either since no conflict over the use of such goods could possibly arise. Only insofar as goods are scarce are economics and ethics required.
In the same way, just as the answer to the problem of political economy must be formulated in terms of rules constraining the possible uses of resources qua scarce resources, political philosophy too must answer in terms of property rights. In order to avoid inescapable conflicts, it must formulate a set of rules assigning rights of exclusive control over scarce goods. (Note that even in the Garden of Eden, a person's body, the space occupied by that body, and time would still be scarce and to that extent political economy and philosophy would still have a task, however limited, to fulfill.)
Now to the actual proof of the thesis that out of the infinitely conceivable ways of assigning rights of exclusive ownership to people, only the previously described rules of private property are actually justifiable. I will present my argument in a step-by-step fashion.
First, while scarcity is a necessary condition for the emergence of the problem of political philosophy, it is not sufficient. For obviously we could have conflicts regarding the use of scarce resources with, let us say, an elephant or a mosquito, yet we would not consider it possible to resolve these conflicts by means of proposing property norms. In such cases, the avoidance of possible conflicts is merely a technological, not an ethical, problem. For it to become an ethical problem, it is also necessary that the conflicting actors be capable, in principle, of argumentation. In fact, this is undeniably so because we are also engaged in argumentation here. Denying that political philosophy presupposes argumentation is contradictory, as the very denial would itself be an argument.
Only with argumentation does the idea of validity and truth emerge and by no means only the idea of truth in ethical matters but of truth in general. Only within argumentation are truth claims of any kind made, and it is only in the course of argumentation that truth claims are decided. This proposition, it turns out, is itself undeniably true: one cannot argue that one cannot argue, and one cannot dispute knowing what it means to make a truth claim without implicitly claiming at least the very negation of this proposition to be true. My very first step in the following chain of reasoning, then, has been called "the a priori of argumentation" by such philosophers as Jürgen Habermas and K.O. Apel. K.O. Apel, "Das Apriori der Kommunikationsgemeinschaft und die Grundlagen der Ethik," in idem, Transformation der Philosophie (Frankfurt/M., 1973), vol. II; Jürgen Habermas, Moralbewusstsein und kommunikatives Handeln (Frankfurt/M. 1983).
In the same way as it is undeniably true that ethics requires argumentation, it is also undeniably true that any argument requires an arguing person. Arguing does not consist of free-floating propositions. It is an activity. If aside from whatever is said in its course, however, argumentation is also a practical affair and if argumentation is the presupposition of truth-claiming and possibly true propositions, then it follows that intersubjectively meaningful norms must exist — namely those which make an action argumentation — which must have a special cognitive status in that they are the practical preconditions of truth. Once more, this is true a priori, so that anyone, such as an empiricist-positivist-emotivist who denied the possibility of a rational ethics and who declared the acceptance or rejection of norms an arbitrary affair would invariably get caught in a practical contradiction. For contrary to what he would say, he would in fact have to presuppose the norms which underlie any argumentation whatsoever as valid simply in order to say anything at all.
With this step I lose, once and for all, the company of philosophers like Habermas and Apel. Apel and Habermas are essentially silent on the all-decisive question of what ethical prescription actually follows from the recognition of the "a priori of argumentation." However, there are remarks indicating that they both seem to believe some sort of participatory social democracy is implied in this a priori. The following explains why nothing could be further from the truth. Yet, as will become clear immediately, it is directly implied in the previous step. That Habermas and Apel are unable to take this step is, I submit, due to the fact that they, too, suffer, as do many other philosophers, from a complete ignorance of economics, and a corresponding blindness towards the fact of scarcity. The step is simply this: To recognize that argumentation is a form of action and does not consist of free-floating sounds implies the recognition of the fact that all argumentation requires that a person have exclusive control over the scarce resource of his body. As long as there is argumentation, there is mutual recognition of each other's property right in his own body. It is this recognition of each other's exclusive control over one's own body, presupposed by all argumentation, which explains the unique feature of verbal communication that while one may disagree about what has been said, it is still possible to agree at least on the fact that there is such disagreement.
Again, such a property right in one's own body must be said to be justified a priori, for anyone who would try to justify any norm whatsoever would already have to presuppose the exclusive right to control over his body as a valid norm simply in order to say, "I propose such and such." Further, any person who tried to dispute the property right in his body would become caught up in a practical contradiction since arguing in this way would already imply acceptance of the very norm which he was disputing. He would not even open his mouth if he were right.
The final argument extends the idea of private property as justified, and justified a priori, from the very prototype of a scarce good (a person's body) to other goods. It consists of two parts. I first demonstrate that argumentation, and argumentative justification of anything, presupposes not only the right to exclusively control one's body but the right to control other scarce goods as well, for if no one had the right to control anything except his own body, then we would all cease to exist and the problem of justifying norms — as well as all other human problems — simply would not exist. We do not live on air alone; hence, simply by virtue of the fact of being alive, property rights to other things must be presupposed to be valid, too. No one who is alive could argue otherwise.
The second part of the argument demonstrates that only the Lockean idea of establishing property claims through homesteading is a just principle of property acquisition. The proof employs a simple argumentum e contrario: If a person did not acquire the right of exclusive control over other, nature-given goods by his own work, that is, if other people, who had not previously used such goods, had the right to dispute the homesteader's ownership claim, then this would only be possible if one would acquire property titles not through labor, i.e., by establishing some objective link between a particular person and a particular scarce resource, but simply by means of verbal declaration.
This solution — apart from the obvious fact that it would not even qualify as a solution in a purely technical sense in that it would not provide a basis for deciding between rivaling declarative claims — is incompatible with the already justified ownership of a person over his body. For if one could indeed appropriate property by decree, this would imply that it would also be possible for one to simply declare another person's body to be one's own. However, as we have seen, to say that property is acquired not through homesteading action but through declaration involves a practical contradiction: nobody can say and declare anything, unless his right to use his body is already assumed to be valid simply because of the very fact that regardless of what he says, it is he, and nobody else, who has homesteaded it as his instrument of saying anything.
With this, my a priori justification of the institution of private property is essentially complete. Only two supplementary arguments may be needed in order to point out why and where all other ethical proposals (let me call them socialist) are argumentatively indefensible.
According to the private-property ethics, scarce resources that are under the exclusive control of their owners are defined in physical terms, and, mutatis mutandis, aggression, is defined as an invasion of the physical integrity of another person's property. As indicated, the economic effect of this provision is that of maximizing value-productive efforts. A popular deviation from this is the idea of defining aggression as an invasion of the value or psychic integrity of another person's property instead. This idea underlies John Rawls's "difference principle" that all inequalities have to be expected to be to everyone's advantage regardless of how such inequalities have come about,John Rawls, A Theory of Justice (Cambridge, Mass.: Harvard University Press, 1971), p. 60, pp. 75f., 83. Robert Nozick's claim that a "dominant protection agency" has the right to outlaw competitors regardless of their actual actions, and his related claim that "nonproductive exchanges" in which one party would be better off if the other one did not exist may be outlawed, again regardless of whether or not such exchange involved any physical aggression.Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974), pp. 55f., 83–86.
Such proposals are absurd as well as indefensible. While every person can have control over whether or not his actions cause the physical integrity of something to change, control over whether or not one's actions affect the value of someone's property to change rests with other people and their evaluations. One would have to interrogate and come to an agreement with the entire world population to make sure that one's planned actions would not change another person's evaluations regarding his property. Everyone would be long dead before this could ever be accomplished.
Moreover, the idea that property value should be protected is argumentatively indefensible, for even in order to argue, it must be presupposed that actions must be allowed prior to any actual agreement because if they were not, one could not even argue so. Yet if one can, then this is only possible because of objective borders of property, i.e., borders which every person can recognize as such on his own, without having to agree first with anyone else with respect to one's system of values and evaluations. Rawls and Nozick could not even open their mouths if it were otherwise. The very fact, then, that they do open them proves what they say is wrong.
The second popular deviation, equally absurd and indefensible, is this: Instead of recognizing the vital importance of the prior-later distinction in deciding between conflicting property claims — as the private-property ethics does, thereby assuring value-productive efforts to be as high as possible at all times — the claim is made, in essence, that priority is irrelevant and that latecomers have rights to ownership just as first-comers do. Again, with his belief in the rights of future generations, just savings rates and such things, Rawls may be cited as an example. However, if latecomers indeed had legitimate ownership claims to things, then literally no one would be allowed to do anything with anything as one would have to have all of the latecomers' consent prior to ever doing what one wanted to do.
Neither we, nor our forefathers, nor our progeny could, do, or will survive if one followed this rule. However, in order for any person — past, present, or future — to argue anything it must evidently be possible to survive then and now. Moreover, in order to do just this — and even people behind a Rawlsian "veil of ignorance" would have to be able to survive — property rights cannot be conceived of as being timeless and nonspecific regarding the number of people concerned.
Rather, they must necessarily be thought of as originating through acting at specific points in time for specific acting individuals. Otherwise, it would be impossible for anyone to first say anything at a definite point in time and for someone else to be able to reply. Simply saying, then, that the prior-later distinction can be ignored implies a contradiction, as one's being able to say so must presuppose one's existence as an independent decision-making unit at a given point in time.
Hence, I conclude that any socialist ethic is a complete failure. Only the institution of private property, which also assures the greatest possible production of wealth, can be argumentatively justified, because it is the very precondition of argumentation.
This article originally appeared in the Austrian Economics Newsletter (Winter, 1988). It is also reprinted in volume 3 of Austrian Economics, edited by Stephen Littlechild (London: Edward Elgar, 1990) and is part of the collection The Economics and Ethics of Private Property (1993; 2006) as "The Justice of Economic Efficiency."
What is the logical status of typical economic propositions such as the law of marginal utility (that whenever the supply of a good whose units are regarded as of equal serviceability by a person increases by one additional unit, the value attached to this unit must decrease as it can only be employed as a means for the attainment of a goal that is considered less valuable than the least valuable goal previously satisfied by a unit of this good) or of the quantity theory of money (that whenever the quantity of money is increased while the demand for money to be held in cash reserve on hand is unchanged, the purchasing power of money will fall)?
In formulating his answer to this question, Ludwig von Mises faced a double challenge. On the one hand, there was the answer offered by modern empiricism. The Vienna Ludwig von Mises knew was in fact one of the early centers of the empiricist movement: a movement which was then on the verge of establishing itself as the dominant academic philosophy of the Western world for several decades, and which to this very day shapes the image that an overwhelming majority of economists have of their own discipline.On the Vienna Circle see V. Kraft, Der Wiener Kreis (Vienna: Springer, 1968); for empiricist-positivist interpretations of economics see such representative works as Terence W Hutchison, The Significance and Basic Postulates of Economic Theory [Hutchison, an adherent of the Popperian variant of empiricism, has since become much less enthusiastic about the prospects of a Popperized economics — see, for instance, his Knowledge and Ignorance in Economics — yet he still sees no alternative but to cling to Popper's falsificationism anyway.]; Milton Friedman, "The Methodology of Positive Economics," in idem, Essays in Positive Economics; Mark Blaug, The Methodology of Economics; a positivist account by a participant in Mises's Privat Seminar in Vienna is F. Kaufmann, Methodology of the Social Sciences; the dominance of empiricism in economics is documented by the fact that there is probably not a single textbook, which does not explicitly classify economics as — what else? — an empirical (a posteriori) science.
Empiricism considers nature and the natural sciences as its model. According to empiricism, the aforementioned examples of economic propositions have the same logical status as laws of nature: Like laws of nature they state hypothetical relationships between two or more events, essentially in the form of if-then statements. And like hypotheses of the natural sciences, the propositions of economics require continual testing vis-à-vis experience. A proposition regarding the relationship between economic events can never be validated once and for all with certainty. Instead, it is forever subject to the outcome of contingent, future experiences. Such experience might confirm the hypothesis. But this would not prove the hypothesis to be true, since the economic proposition would have used general terms (in philosophical terminology: universals) in its description of the related events, and thus would apply to an indefinite number of cases or instances, thereby always leaving room for possibly falsifying future experiences. All a confirmation would prove is that the hypothesis had not yet turned out wrong. On the other hand, the experience might falsify the hypothesis. This would surely prove that something was wrong with the hypothesis as it stood. But it would not prove that the hypothesized relationship between the specified events could never be observed. It would merely show that considering and controlling in one's observations only what up to now had been actually accounted for and controlled, the relationship had not yet shown up. It cannot be ruled out, however, that it might show up as soon as some other circumstances have been controlled.
The attitude that this philosophy fuels and that has indeed become characteristic of most contemporary economists and their way of conducting their business is one of skepticism: the motto being "nothing can be known with certainty to be impossible in the realm of economic phenomena." Even more precisely, since empiricism conceives of economic phenomena as objective data, extending in space and subject to quantifiable measurement — in strict analogy to the phenomena of the natural sciences — the peculiar skepticism of the empiricist economist may be described as that of a social engineer who will not guarantee anything.On the relativistic consequences of empiricism-positivism see also Hoppe, A Theory of Socialism and Capitalism (Boston: Kluwer Academic Publishers, 1989), chapter 6; idem, "The Intellectual Cover for Socialism."
The other challenge came from the side of the historicist school. Indeed, during Mises's life in Austria and Switzerland, the historicist philosophy was the prevailing ideology of the German-speaking universities and their establishment. With the upsurge of empiricism this former prominence has been reduced considerably. But over roughly the last decade historicism has regained momentum among the Western world's academia. Today it is with us everywhere under the names of hermeneutics, rhetoric, deconstructionism, and epistemological anarchism.See Ludwig von Mises, The Historical Setting of the Austrian School of Economics (Auburn, Ala.:Ludwig von Mises Institute, 1984); idem, Erinnerungen (Stuttgart: Gustav Fischer, 1978); idem, Theory and History, chapter 10; Murray N. Rothbard, Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von Mises Institute, 1988); for a critical survey of historicist ideas see also Karl Popper, The Poverty of Historicism; for a representative of the older version of a historicist interpretation of economics see Werner Sombart, Die drei Nationalökonomien (Munich: Duncker & Humblot, 1930); for the modern, hermeneutical twist Donald McCloskey, The Rhetoric of Economics (Madison: University of Wisconsin Press, 1985); Ludwig Lachmann, "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society," Journal of Economic Literature (1976).
For historicism, and most conspicuously for its contemporary versions, the model is not nature but a literary text. Economic phenomena, according to the historicist doctrine, are not objective magnitudes that can be measured. Instead, they are subjective expressions and interpretations unfolding in history to be understood and interpreted by the economist just as a literary text unfolds before and is interpreted by its reader. As subjective creations, the sequence of their events follows no objective law. Nothing in the literary text, and nothing in the sequence of historical expressions and interpretations is governed by constant relations. Of course, certain literary texts actually exist, and so do certain sequences of historical events. But this by no means implies that anything had to happen in the order it did. It simply occurred. In the same way, however, as one can always invent different literary stories, history and the sequence of historical events, too, might have happened in an entirely different way. Moreover, according to historicism, and particularly visible in its modern hermeneutical version, the formation of these always contingently related human expressions and their interpretations is also not constrained by any objective law. In literary production anything can be expressed or interpreted concerning everything; and, along the same line, historical and economic events are whatever someone expresses or interprets them to be, and their description by the historian and economist is then whatever he expresses or interprets these past subjective events to have been.
The attitude that historicist philosophy generates is one of relativism. Its motto is "everything is possible." Unconstrained by any objective law, for the historicist-hermeneutician history and economics, along with literary criticism, are matters of esthetics. And accordingly, his output takes on the form of disquisitions on what someone feels about what he feels was felt by somebody else — a literary form which we are only too familiar with, in particular in such fields as sociology and political science.On the extreme relativism of historicism-hermeneutics see Hoppe, "In Defense of Extreme Rationalism"; Murray N. Rothbard, "The Hermeneutical Invasion of Philosophy and Economics," Review of Austrian Economics (1988); Henry Veatch, "Deconstruction in Philosophy: Has Rorty Made it the Denouement of Contemporary Analytical Philosophy," Review of Metaphysics (1985); Jonathan Barnes, "A Kind of Integrity" Austrian Economics Newsletter (Summer 1987); David Gordon, Hermeneutics vs. Austrian Economics (Auburn, Ala.: Ludwig von Mises Institute, Occasional Paper Series, 1987); for a brilliant critique of contemporary sociology see St. Andreski, Social Science as Sorcery (New York: St. Martin's Press, 1973).
I trust that one senses intuitively that something is seriously amiss in both the empiricist as well as the historicist philosophies. Their epistemological accounts do not even seem to fit their own self-chosen models: nature on the one hand and literary texts on the other. And in any case, regarding economic propositions such as the law of marginal utility or the quantity theory of money their accounts seem to be simply wrong. The law of marginal utility certainly does not strike one as a hypothetical law subject forever for its validation to confirming or disconfirming experiences popping up here or there. And to conceive of the phenomena talked about in the law as quantifiable magnitudes seems to be nothing but ridiculous. Nor does the historicist interpretation seem to be any better. To think that the relationship between the events referred to in the quantity theory of money can be undone if one only wished to do so seems absurd. And the idea appears no less absurd that concepts such as money, demand for money, and purchasing power are formed without any objective constraints and refer merely to whimsical subjective creations. Instead, contrary to the empiricist doctrine, both examples of economic propositions appear to be logically true and to refer to events which are subjective in nature. And contrary to historicism, it would seem that what they state, then, could not possibly be undone in all of history and would contain conceptual distinctions which, while referring to subjective events, were nonetheless objectively constrained, and would incorporate universally valid knowledge.
Like most of the better known economists before him, Mises shares these intuitions.Regarding the epistemological views of such predecessors as J. B. Say, Nassau W. Senior, J. E. Cairnes, John Stuart Mill, Carl Menger, and Friedrich von Wieser see Ludwig von Mises, Epistemological Problems of Economics, pp. 17–23; also Murray N. Rothbard, "Praxeology: The Methodology of Austrian Economics," in Edwin Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City: Sheed and Ward, 1976). Yet in quest of the foundation of economics, Mises goes beyond intuition. He takes on the challenge posed by empiricism and historicism in order to reconstruct systematically the basis on which these intuitions can be understood as correct and justified. He thereby does not want to help bring about a new discipline of economics. But in explaining what formerly had only been grasped intuitively, Mises goes far beyond what had ever been done before. In reconstructing the rational foundations of the economists' intuitions, he assures us of the proper path for any future development in economics and safeguards us against systematic intellectual error.
Empiricism and historicism, Mises notes at the outset of his reconstruction, are self-contradictory doctrines.In addition to Mises's works cited at the outset of this chapter and the literature mentioned in note 40, see Murray N. Rothbard, Individualism and the Philosophy of the Social Sciences (San Francisco: Cato Institute, 1979); for a splendid philosophical critique of empiricist economics see Hollis and Nell, Rational Economic Man; as particularly valuable general defenses of rationalism as against empiricism and relativism — without reference to economics, however, — see Blanshard, Reason and Analysis; Kambartel, Erfahrung und Struktur. The empiricist notion that all events, natural or economic, are only hypothetically related is contradicted by the message of this very basic empiricist proposition itself: For if this proposition were regarded as itself being merely hypothetically true, i.e., a hypothetically true proposition regarding hypothetically true propositions, it would not even qualify as an epistemological pronouncement. For it would then provide no justification whatsoever for the claim that economic propositions are not, and cannot be, categorically, or a priori true, as our intuition informs us they are. If, however, the basic empiricist premise were assumed to be categorically true itself, i.e., if we assume that one could say something a priori true about the way events are related, then this would belie its very own thesis that empirical knowledge must invariably be hypothetical knowledge, thus making room for a discipline such as economics claiming to produce a priori valid empirical knowledge. Further, the empiricist thesis that economic phenomena must be conceived of as observable and measurable magnitudes — analogous to those of the natural sciences — is rendered inconclusive, too, on its own account: For, obviously, empiricism wants to provide us with meaningful empirical knowledge when it informs us that our economic concepts are grounded in observations. And yet, the concepts of observation and measurement themselves, which empiricism must employ in claiming what it does, are both obviously not derived from observational experience in the sense that concepts such as hens and eggs or apples and pears are. One cannot observe someone making an observation or measurement. Rather, one must first understand what observations and measurements are in order to then be able to interpret certain observable phenomena as the making of an observation or the taking of a measurement. Thus, contrary to its own doctrine, empiricism is compelled to admit that there is empirical knowledge which is based on understanding — just as according to our intuitions economic propositions claim to be based on understanding — rather than on observations. For an elaborate defense of epistemological dualism see also Apel, Transformation der Philosophie, 2 vols, and Habermas, Zur Logik der Sozialwissenschaften.
And regarding historicism, its self-contradictions are no less manifest. For if, as historicism claims, historical and economic events — which it conceives of as sequences of subjectively understood rather than observed events — are not governed by any constant, time-invariant relations, then this very proposition also cannot claim to say anything constantly true about history and economics. Instead, it would be a proposition with, so to speak, a fleeting truth value: it may be true now, if we wish it so, yet possibly false a moment later, in case we do not, with no one ever knowing anything about whether we do or do not. Yet, if this were the status of the basic historicist premise, it, too, would obviously not qualify as an epistemology. Historicism would not have given us any reason why we should believe any of it. If, however, the basic proposition of historicism were assumed to be invariantly true, then such a proposition about the constant nature of historical and economic phenomena would contradict its own doctrine denying any such constants. Furthermore, the historicist's — and even more so its modern heir, the hermeneutician's — claim that historical and economic events are mere subjective creations, unconstrained by any objective factors, is proven false by the very statement making it. For evidently, a historicist must assume this very statement to be meaningful and true; he must presume to say something specific about something, rather than merely uttering meaningless sounds like abracadabra. Yet if this is the case, then, clearly, his statement must be assumed to be constrained by something outside the realm of arbitrary subjective creations. Of course, I can say what the historicist says in English, German, or Chinese, or in any other language I wish, in so far as historic and economic expressions and interpretations may well be regarded as mere subjective creations. But whatever I say in whatever language I choose must be assumed to be constrained by some underlying propositional meaning of my statement, which is the same for any language, and exists completely independent of whatever the peculiar linguistic form may be in which it is expressed. And contrary to historicist belief, the existence of such a constraint is not such that one could possibly dispose of it at will. Rather, it is objective in that we can understand it to be the logically necessary presupposition for saying anything meaningful at all, as opposed to merely producing meaningless sounds. The historicist could not claim to say anything if it were not for the fact that his expressions and interpretations are actually constrained by laws of logic as the very presupposition of meaningful statements as such.See on this in particular Hoppe, "In Defense of Extreme Rationalism."
With such a refutation of empiricism and historicism, Mises notices, the claims of rationalist philosophy are successfully reestablished, and the case is made for the possibility of a priori true statements, as those of economics seem to be. Indeed, Mises explicitly regards his own epistemological investigations as the continuation of the work of western rationalist philosophy. With Leibniz and Kant he stands opposite the tradition of Locke and Hume.See Mises, The Ultimate Foundation of Economic Science, p. 12. He sides with Leibniz when he answers Locke's famous dictum "nothing is in the intellect that has not previously been in the senses" with his equally famous one "except the intellect itself." And he recognizes his task as a philosopher of economics as strictly analogous to that of Kant's as a philosopher of pure reason, i.e., of epistemology. Like Kant, Mises wants to demonstrate the existence of true a priori synthetic propositions, or propositions whose truth values can be definitely established, even though in order to do so the means of formal logic are insufficient and observations are unnecessary.
My criticism of empiricism and historicism has proved the general rationalist claim. It has proved that we indeed do possess knowledge which is not derived from observation and yet is constrained by objective laws. In fact, our refutation of empiricism and historicism contains such a priori synthetic knowledge. Yet what about the constructive task of showing that the propositions of economics — such as the law of marginal utility and the quantity theory of money — qualify as this type of knowledge? In order to do so, Mises notices in accordance with the strictures traditionally formulated by rationalist philosophers, economic propositions must fulfill two requirements: First, it must be possible to demonstrate that they are not derived from observational evidence, for observational evidence can only reveal things as they happen to be; there is nothing in it that would indicate why things must be the way they are. Instead, economic propositions must be shown to be grounded in reflective cognition, in our understanding of ourselves as knowing subjects. And secondly this reflective understanding must yield certain propositions as self-evident material axioms. Not in the sense that such axioms would have to be self-evident in a psychological sense, that is, that one would have to be immediately aware of them or that their truth depends on a psychological feeling of conviction. On the contrary, like Kant before him, Mises very much stresses the fact that it is usually much more painstaking to discover such axioms than it is to discover some observational truth such as that the leaves of trees are green or that I am 6 foot 2 inches.See Kant, Kritik der reinen Vernunft, p. 45; Mises, Human Action, p. 38. Rather, what makes them self-evident material axioms is the fact that no one can deny their validity without self-contradiction, because in attempting to deny them one already presupposes their validity.
Mises points out that both requirements are fulfilled by what he terms the axiom of action, i.e., the proposition that humans act, that they display intentional behavior.On the following see in particular Mises, Human Action, chapter 4; Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1962), chapter 1. Obviously, this axiom is not derived from observation — there are only bodily movements to be observed but no such thing as actions — but stems instead from reflective understanding. And this understanding is indeed of a self-evident proposition. For its truth cannot be denied, since the denial would itself have to be categorized as an action. But is this not just plain trivial? And what has economics got to do with this? Of course, it had previously been recognized that economic concepts such as prices, costs, production, money, credit, etc., had something to do with the fact that there were acting people. But that all of economics could be grounded in and reconstructed based on such a trivial proposition and how, is certainly anything but clear. It is one of Mises's greatest achievements to have shown precisely this: that there are insights implied in this psychologically speaking trivial axiom of action that were not themselves psychologically self-evident as well; and that it is these insights which provide the foundation for the theorems of economics as true a priori synthetic propositions.
It is certainly not psychologically evident that with every action an actor pursues a goal; and that whatever the goal may be, the fact that it was pursued by an actor reveals that he must have placed a relatively higher value on it than on any other goal of action that he could think of at the start of his action. It is not evident that in order to achieve his most highly valued goal an actor must interfere or decide not to interfere — which, of course, is also an intentional interference — at an earlier point in time in order to produce a later result; nor is it obvious that such interferences invariably imply the employment of some scarce means — at least those of the actor's body, its standing room, and the time absorbed by the action. It is not self-evident that these means, then, must also have value for an actor — a value derived from that of the goal — because the actor must regard their employment as necessary in order to effectively achieve the goal; and that actions can only be performed sequentially, always involving a choice, i.e., taking up that one course of action which at some given time promises the most highly valued results to the actor and excluding at the same time the pursual of other, less highly valued goals. It is not automatically clear that as a consequence of having to choose and give preference to one goal over another — of not being able to realize all goals simultaneously — each and every action implies the incurrence of costs, i.e., forsaking the value attached to the most highly ranking alternative goal that cannot be realized or whose realization must be deferred, because the means necessary to attain it are bound up in the production of another, even more highly valued goal. And lastly, it is not evident that at its starting point every goal of action must be considered worth more to the actor than its cost and capable of yielding a profit, i.e., a result whose value is ranked higher than that of the foregone opportunity, and yet that every action is also invariably threatened by the possibility of a loss if an actor finds, in retrospect, that contrary to his expectations the actually achieved result in fact has a lower value than the relinquished alternative would have had.
All of these categories which we know to be the very heart of economics — values, ends, means, choice, preference, cost, profit and loss — are implied in the axiom of action. Like the axiom itself, they are not derived from observation. Rather, that one is able to interpret observations in terms of such categories requires that one already knows what it means to act. No one who is not an actor could ever understand them, as they are not "given," ready to be observed, but observational experience is cast in these terms as it is construed by an actor. And while they and their interrelations were not obviously implied in the action axiom, once it has been made explicit that they are implied, and how, one no longer has any difficulty recognizing them as being a priori true in the same sense as the axiom itself is. For any attempt to disprove the validity of what Mises has reconstructed as implied in the very concept of action would have to be aimed at a goal, requiring means, excluding other courses of action, incurring costs, subjecting the actor to the possibility of achieving or not achieving the desired goal and so leading to a profit or a loss. Thus, it is manifestly impossible to ever dispute or falsify the validity of Mises's insights. In fact, a situation in which the categories of action would cease to have a real existence could itself never be observed or spoken of, since to make an observation and to speak are themselves actions.
All true economic propositions, and this is what praxeology is all about and what Mises's great insight consists of, can be deduced by means of formal logic from this incontestably true material knowledge regarding the meaning of action and its categories. More precisely all true economic theorems consist of
an understanding of the meaning of action,a situation or situational change — assumed to be given or identified as being given — and described in terms of action-categories, anda logical deduction of the consequences — again in terms of such categories — which are to result for an actor from this situation or situational change.The law of marginal utility, for instance,On the law of marginal utility see Mises, Human Action, pp. 119–27 and Rothbard, Man, Economy, and State, pp. 268–71. follows from our indisputable knowledge of the fact that every actor always prefers what satisfies him more over what satisfies him less, plus the assumption that he is faced with an increase in the supply of a good (a scarce mean) whose units he regards as of equal serviceability, by one additional unit. From this it follows with logical necessity that this additional unit can then only be employed as a means for the removal of an uneasiness that is deemed less urgent than the least valuable goal previously satisfied by a unit of such a good. Provided there is no flaw in the process of deduction, the conclusions which economic theorizing yields, no different in the case of any other economic proposition from the case of the law of marginal utility, must be valid a priori. These propositions' validity ultimately goes back to nothing but the indisputable axiom of action. To think, as empiricism does, that these propositions require continual empirical testing for their validation is absurd, and a sign of outright intellectual confusion. And it is no less absurd and confused to believe, as historicism does, that economics has nothing to say about constant and invariable relations but merely deals with historically accidental events. To say so meaningfully is to prove such a statement wrong, as saying anything meaningful at all already presupposes acting and a knowledge of the meaning of the categories of action.
[Economic Science and the Austrian Method]
In 1953, Ludwig von Mises wrote,
The sound-money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system.Mises, L. v. (1953), The Theory of Money and Credit, New Haven, Yale University Press, p. 414 (Part Four, Monetary Reconstruction).
And further,
It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.Ibid.
To Mises, the sound-money principle thus meant
free choice of currency, meaning that money is chosen and produced by the free demand for and free supply of money in the market place, anda line of defense against government violations of individual property rights.In what follows I will try to show that it can be logically concluded that if money does not comply with the sound-money principle, that is if it is unsound money, it will erode and eventually destroy civil liberties by (and here I may add, ever greater) despotic inroads on the part of government.
Such a statement can be shown to be irrefutably true, as it is derived from the sound-money principle, and the sound-money principle can be traced back to the irrefutably true axiom of human action, which is at the heart of praxeology: the logic of human action, as Mises termed it.
II.One of Mises's pathbreaking achievements is that he reconstructed the science of economics along the lines of praxeology.On the praxeological method see Rothbard (1997), "Praxeology: The Methodology of Austrian Economics." For a detailed explanation, seem, for instance, Hoppe (2007), "Praxeology and Economics Science," Economic Science and the Austrian Method, pp. 7–48. At the heart of praxeology is the axiom of human action.
The axiom of human action is of a rather special quality: it meets the requirements of an a priori synthetic judgment, as the German-Prussian philosopher Immanuel Kant (1724–1804) called it.Immanuel Kant developed his epistemology most completely in his Critique of Pure Reason (1781).
To explain, a priori here means knowledge that comes to us before, or irrespective of, sensory experience. A priori knowledge is within our minds, so to speak. It is knowledge about the real world (reality), and for obtaining it one does not have to take recourse to observation.
Consider the following two examples:
If this thing is one meter long, it is not, and cannot be, two meters long.If A is taller than B, and B is taller than C, then A is taller than C.These statements strike one as necessarily a priori true; one wouldn't have to test them for proving their validity.
Synthetic means that one adds to a concept (say, body) a predicate (say, heavy) that is not thought in the concept before. The example is this:
All bodies are heavy.
One would have to learn from experience that bodies are heavy; one wouldn't know this a priori. Synthetic judgments are a posteriori.
Kant maintained that there is the possibility of so-called a priori synthetic judgments: judgments that neither repeat the meaning of concepts tautologically nor express new information about the subject term on the basis of experience.
According to Kant, a priori synthetic judgments must meet two requirements.
They must not be derived from experience but from reflection.They must be self-evident, that is, their truth value cannot be denied without running into an intellectual contradiction.Mises's axiom of human action meets both of these requirements.In this context see Hoppe, H.-H. (2007 [1995]), "Praxeology and Economics Science," Economic Science and the Austrian Method, pp. 7–48, esp. pp. 17–24. The axiom of human action is not derived from sensory observation. To understand that humans act stems from a reflective understanding, not from observation.
And, it is self-evident. The truth value of the axiom of human action cannot be denied, as such a denial would be a form of action and thus contradict the very statement that there cannot be such a thing as human action.
Praxeology, therefore, provides us with true knowledge about the outer world, and the truth of knowledge derived from praxeology is valid independent of sensory experience. It is in this sense that we can speak of praxeology as a priori theory.
III.An a priori economic proposition informs us about the relationships between observable events and the counterfactual alternatives to these events; it does not concern relationships between various observable events.See, for instance, Hülsmann, J. G. (2003), "Facts and Counterfactuals in Economic Law," Journal of Libertarian Studies, volume 17, no. 1, Winter 2003, pp. 57–102.
An aprioristic proposition allows us to name the outcome of a certain action with certainty. For instance, if the stock of money is increased, we know for sure that it will lower the exchange value of a money unit.
We know that the law of diminishing marginal utility is implied in the axiom of human action. This law says that the marginal utility of a unit (that is the utility of an additional unit of the good) declines if the supply of the good increases (other things equal).
An additional money unit in one's possession can only be employed as a means for removing an uneasiness that is deemed less urgent than the least urgent one that has so far been satisfied by the unchanged size of money units in one's possession.
We can therefore say with certainty that a rise in the money stock necessarily reduces the exchange value of a money unit (when compared to a situation in which the money stock had remained unchanged).
This, of course, is not to say that aprioristic propositions allow us to make exact forecasts in a quantitative sense. For instance, we do not know when and by how much the exchange value of a money unit declines if and when the money stock rises.
However, a priori theory tells us in advance (that is, without having to run a social experiment) whether or not a given action — or policy measure, for that matter — can or cannot bring about the promised effects.
For instance, we know with certainty that a rise in the money stock will never be "neutral" in the sense of leaving market agents' income and wealth positions unaffected. A rise in the money stock will always benefit some at the expense of others. It is impossible to think otherwise.
As action requires time — with time being a category of human action — a rise in the money supply benefits the early receivers of the newly created money at the expense of the later receivers of the new money or those who don't receive any of the new money (known as the "Cantillon effect").
IV.In what follows it will be shown that the sound-money principle can be traced back to the axiom of human action. To do so, one has to start with stating some true propositions that can be logically derived from this axiom.
From the irrefutably true axiom of human action we know that human action is purposeful action: means are employed to achieve certain ends.
We also know that means are scarce with regard to the services for which man wants to use them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action — and this is impossible to think.
And because of the scarcity of means, we also know that man prefers more goods over fewer goods.
Assuming that people realize that the division of labor yields a higher productivity than self-sufficient production (which is, it should be stressed, an assumption), they will engage in specialization and trade.
Trading becomes most efficient if people make use of an indirect means of exchange. Exchanging goods against a good that has a higher marketability expands actors' markets, allowing them to take full advantage of the productivity gains provided by the division of labor.
The commodity with the highest marketability will be chosen as money. Mises described the process as follows:
There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.Mises, L. v. (1953), The Theory of Money and Credit, New Haven, Yale University Press, pp. 32–33.
Why, however, is money chosen by the unhampered market necessarily commodity money, as Mises maintains (as did Carl Menger before him)? Already in 1912, Mises had shown with his regression theorem that money must have emerged, for aprioristic considerations, from a commodity.
People demand money because there is uncertainty (which, in turn, is a category of human action), and money helps to deal with uncertainty: It can be exchanged against other vendible items most conveniently, as it has purchasing power.
The purchasing power of money is determined by the supply of and the demand for money. But isn't such an explanation circular? If the purchasing power of money is determined by the supply of and demand for money, how can this explain the demand for money, which is, in turn, determined by the purchasing power of money?
Mises with his regression theorem found the answer to this question. He explained that the demand for money in the present is explained by money's purchasing power experienced in the (immediate) past.
He saw that the purchasing power of money can be regressively traced back to the point in time when a commodity, which had previously been used only for nonmonetary purposes, is used for monetary purposes for the first time.
From a praxeological viewpoint we can therefore conclude that in a free market — where people are assumed to be governed by self-interest and have the ability to appreciate the higher productivity resulting from a division of labor — money must emerge in the form of commodity money, and that free-market money means sound money.
V.Against this backdrop the following questions arise: How can it be that today's moneys — the US dollar, the euro, the Chinese renminbi, the British pound or the Swiss franc — are no longer commodity moneys? How can it be that they are not produced freely (in the sense of complying with free-market principles)?
Today's moneys are so-called fiat moneys: moneys that represent intrinsically valueless paper tickets or "bits and bytes" on computer hard disks; they are not redeemable into anything. These fiat moneys are produced by government-sponsored central banks, which hold the money production monopoly.
We know from history that the gold standard was, in an admittedly prolonged process, replaced by fiat money. Mainstream economists typically maintain that this happened because the gold standard failed — as it didn't allow for a flexible, or politically motivated, increase in the money supply.
However, a priori theory offers a rather different explanation of why the gold standard (sound money) was replaced by a fiat-money standard (unsound money). The central element in this a priori theoretical explanation is the concept of the state.
Murray N. Rothbard developed a new Austrian theory of the state, defining it as follows:
The State is that organization in society which attempts to maintain a monopoly of the use of force and violence in a given territorial area; in particular, it is the only organization in society that obtains its revenue not by voluntary contribution or payment for services rendered but by coercion.Rothbard (2009), Anatomy of the State, Ludwig von Mises Institute, p. 11.
Rothbard not only explained that the state is incompatible with the free-market society; he also outlined in What Has Government Done to Our Money? how and why commodity money was replaced by fiat money — namely, because of the continual expansion of the state.
Hans-Hermann Hoppe has explored in great detail the logical-ethical-economic implications of public ownership of government — as represented by democracy-republicanism — showing that once public ownership of government is put into place, ever-greater violations of individual property rights will be the logical consequence.See in this context Hoppe, H. H. (2006), Democracy — The God That Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order, Transaction Publishers, New Brunswick (US) and London (UK).
Three interrelated factors explain this.
Under public ownership of government there will be temporary caretakers of government power (so-called politicians, or the ruling class). Assuming self-interest on their part, the caretakers of government will use their temporary government power to their own advantage.
The caretakers of government will maximize their current income rather than the present value of all future government revenues. For what the temporary caretaker of government doesn't consume when he holds government power, he won't be able to consume in the future.
Public ownership of government means that those who want to be among the class of the rulers need the support from the majority of the people. The latter, also assumed to be driven by self-interest, will support those who will provide them with the desired (monetary and nonmonetary) benefits.
The caretakers of government will have to win over as many voters as possible to get into and stay in power. This can only be achieved by promising, and providing, potential voters with benefits they otherwise wouldn't, or couldn't, obtain. These benefits will have to be expropriated, and necessarily so, from others.
Assuming that voters prefer more over fewer goods — which is a logical implication of the axiom of human action — it becomes obvious why public ownership of government will necessarily result in progressive violations of individuals' property rights.
Some forms of private-property violations are more advantageous for bringing about a coercive redistribution of income and wealth than others, both from the viewpoint of the rulers and the ruled.
In particular, using fiat money is, politically speaking, more attractive than other forms of expropriation (such as raising taxes). Having recourse to fiat money, Rothbard noted, government "can then appropriate resources slyly and almost unnoticed, without rousing the hostility touched off by taxation."Rothbard, M. N. (2008 [1963]), What Has Government Done To Our Money?, Ludwig von Mises Institute, p. 52.
Rothbard described the various steps through which commodity money is replaced by fiat money (including, for instance, monopolizing the minting business, giving money a name rather than defining it as a weight of the commodity it represents, etc.).
The final step in replacing commodity money by fiat money is allowing banks to suspend the redemption of outstanding bank notes and demand deposits in money proper (which was, in practice, gold).
This is actually what happened on August 15, 1971, when Richard Nixon, president of the United States of America, closed the "gold window." In his television address, President Nixon said,
I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.… The effect of this action, in other words, will be to stabilize the dollar."
President Nixon's order meant that the US dollar was no longer redeemable in gold. The measure was not temporary; it is still in place. And it did not stabilize the US dollar: between August 1971 and July 2011, the greenback lost 82 percent of its purchasing power (on the basis of consumer prices).
Under the Bretton Woods system, all major currencies — the British pound, the French franc, the Japanese yen, to name just a few — were linked to the US dollar. With the suspension of the redeemability of the greenback in gold, all these currencies were also cut loose from gold. Commodity moneys became fiat moneys.
That said, replacing commodity money by fiat money (that is, replacing the sound-money principle by the unsound-money principle) is, from a praxeological viewpoint, a logical consequence of public ownership of government.
VI.What has a priori theory to say about the question of whether fiat money can last, or whether it will have to collapse? The answer can be found within Austrian trade-cycle theory, or with two important implications, which may all too easily escape our attention:
Ongoing injections of fiat money produced through bank-circulation credit to "fight" the crisis caused by fiat-money expansion in the first place prevent unprofitable investments from being liquidated, as they can be refinanced at lower interest rates and appear to be profitable.
Artificially suppressed interest rates — brought about by an expansion of bank-circulation credit — encourage investment projects that would not have been undertaken if the market interest hadn't been pushed down by central-bank policy.
The consequence of these two aspects is that the economy's overall debt load keeps growing at a faster rate over time than real incomes, leading (sooner or later) to a situation of overindebtedness, in particular if and when government is in the hands of temporary caretakers.
A fiat-money regime will therefore end up, and logically so, in a situation in which borrowers will no longer be in a position (or willing, for that matter) to service their debt, and lenders will no longer be willing to rollover maturing debt. It is at this stage when the printing of ever-greater amounts of fiat money will be seen as the policy of the least evil.
This, too, is a praxeological inference. To explain, public ownership of government reduces the economic incentive to limit aggression against individuals' property rights. It reduces peoples' encompassing interest in the market economy by increasing their interest in transfer incomes.See in this Olson, M. (2000), Power and Prosperity, Outgrowing Communist and Capitalist Dictatorships, Basic Books, esp. pp. 1–24. It increases the societal time preference, thereby lowering savings and investment and thus economic progress.
Government beneficiaries (such as those employed by government or firms receiving orders from the public sector) will increasingly be in favor of an expanding government — as big government will give them (at least the chance of) bigger business and higher (monetary and nonmonetary) income — setting into motion a process in which ever-greater numbers of people team up with government. Frederic Bastiat put the underlying logic succinctly: "Government is that great fiction, through which everybody endeavors to live at the expense of everybody else."Bastiat, C. F. (2007), The Bastiat Collection, Volume I, Ludwig von Mises Institute, p. 99.
It was actually in accordance with praxeology when Mises concluded as early as 1923 — well before he put forward praxeology — that under public ownership of government, fiat money will be progressively debased, or even completely destroyed:
If a government is not in a position to negotiate loans and does not dare levy additional taxation for fear that the financial and general economic effects will be revealed too clearly too soon, so that it will lose support for its program, it always considers it necessary to undertake inflationary measures. Thus inflation becomes one of the most important psychological aids to an economic policy which tries to camouflage its effects.… By deceiving public opinion, it permits a system of government to continue which would have no hope of receiving the approval of the people if conditions were frankly explained to them.Mises, L. v. (2006, 1923), "Stabilization of the Monetary Unit — From the Viewpoint of Theory," The Causes of the Economic Crisis, p. 38.
VII.To sum up, Mises's sound-money principle can be logically deduced from the axiom of human action, which is at the heart of praxeology; the sound-money principle is axiomatic in nature.
This is all the more important as we find that the sound-money principle has been replaced by the unsound-money principle the world over:
money production is monopolized by government, andgovernment's power over money production is leading to ever-greater violations of individuals' private-property rights.It is in this way that fiat money — with all its corruptive consequences — is instrumental in eroding the fundament of the free-market order, increasingly transforming it into a socialist order.
The way back to the sound-money principle is theory dependent. Mises wrote,
The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.Ibid, p. 44.
To Mises, a return to the sound-money principle must start with unmasking false theories. This is because theories are at the heart of human action:
Action is preceded by thinking.… He who thinks a causal relation thinks a theorem. Action without thinking, practice without theory are unimaginable. Mises, L. v. (1996), Human Action, 4th ed., Fox & Wilkes, San Francisco, p. 177.
A priori theory is a powerful intellectual tool for classifying theories as true or false. In fact, apriorism puts us in a position to unmask false economic theories ex ante, theories that make false promises, resulting in detrimental (even disastrous) consequences if put into practice.
Making use of a priori theory shows us that free-market money is sound money, and that deviating from the sound-money principle leads to disastrous economic, social, and political damage.
To return to sound money, one has to understand the aprioristic nature of the sound-money principle. And so Mises's work on the methodology of the science of economics deserves the highest attention.
"The only fully Misesian economists are Rothbardians, and most Rothbardians have abandoned Mises's entire approach to the 'why' of liberalism."Students of classic liberalism and Austrian economics might come across a curious inconsistency concerning the doctrine of utilitarianism in Austro-liberal literature.
On one hand, you may find vigorous attempts to refute the doctrine, or denunciations of its alleged inadequacy. Especially among modern libertarian writers, "utilitarianism" may come off as something of a dirty word: down there with positivism and Keynesianism among doctrines antithetical to modern Austro-liberal thought.
On the other hand, you may find in the writings of Ludwig von Mises, the fountainhead of Austro-liberalism, a full espousal of utilitarianism.
One reason for this inconsistency is semantic. What many libertarians mean when they denounce "utilitarianism" is vitally different from what Mises meant by the term. For example, there is a strand of utilitarianism that attempts to "measure" utility, and use utility measurements to decide ethical and political issues. Many libertarians refer to the fallacy of this approach when attempting to refute "utilitarianism."
But nothing could be further from Mises's utilitarianism than this doctrine. Indeed Mises himself was, from very early on in his career, in the forefront of refuting the very notion of measurable utility. Utility, he demonstrated, was a purely ordinal matter of ranking, and could never be a cardinal magnitude.
One would think that students of Mises, when referring to "utilitarianism" would pay due regard to what Mises himself (as well as other Austrian utilitarians like Henry Hazlitt and Leland Yeager) meant when he spoke of the doctrine. Instead, many refer solely to fallacious formulations of utilitarianism that Mises did not endorse.
But the primary reason for the above-stated inconsistency is that there has been a revolution in the ethics of Austro-liberalism. Mises's greatest student, Murray N. Rothbard, considered utilitarianism to be inadequate, criticized it with characteristic vigor, and proposed his own alternative "natural-rights" libertarian ethical doctrine.
Rothbard's critique of utilitarianism has been widely accepted by Austro-liberals, who also either accepted his ethical doctrine wholesale, or used it as a springboard for developing their own nonutilitarian ethical doctrine (for example, the "argumentation ethics" of Hans-Hermann Hoppe and the neoeudaimonism of Roderick Long).
Rothbard happened to also be the scholar who was most true to Mises's economics. While the followers of Mises's other student F.A. Hayek have taken Austrian economics into divergent directions, it is Rothbardian economists who have been most true to Mises's economic vision.
These two developments have led to the poignant state of affairs that, while Mises has been hugely influential through his students Rothbard and Hayek, there are very few thoroughgoing Misesians left today, in the sense of having Mises as their primary influence in social philosophy in general. The only fully Misesian economists are Rothbardians, and Rothbardians have abandoned Mises's entire approach to the "why" of liberalism.
I contend that this development was a turn for the worse, and that modern Austro-liberalism would gain soundness, clarity, and power by returning to Mises in this regard. In the present essay, I will address various objections to Mises's utilitarian liberalism.For expositions of utilitarianism, and examples of its application, see my essays " Why Liberalism?," The Profound Significance of Social Harmony," and " The Utilitarian Foundation of Morality."
Value Freedom and UtilitarianismUtilitarianism is often associated with the English philosopher Jeremy Bentham, who, echoing Joseph Priestly, wrote, "the greatest happiness of the greatest number is the foundation of morals.""Extracts from Bentham's Commonplace Book," in Collected Works, x, p. 142. The formulation was actually originally stated by Frances Hutcheson (Inquiry concerning Moral Good and Evil, sect. 3.)
This is sometimes construed to be a posited scientific "ought": a statement that it is an objective fact that individuals ought to pursue the greatest happiness of the greatest number of people. Critics may object to this as an unfounded assumption.
All such objections would be pushing against an open door with regard to Mises's utilitarianism. Mises did not believe in scientific "oughts." To the contrary, he held that all science was necessarily value free, or in German, wertfrei. He, agreeing with philosopher David Hume, believed it was vain to try to infer an "ought" from an "is." He held that "there is no such thing as a scientific ought,"Ludwig von Mises, Socialism, Appendix. and, "[t]here is no such thing as a normative science, a science of what ought to be."Mises, Theory and History, Ch. 3. Mises believed that there is no such thing as "objective value," whether in market exchanges, or in human conduct in general.
Roderick Long explained how Mises's utilitarianism does not involve assertions of objective value.
You might think that if someone says economics implies utilitarianism, it sounds like they think that economics implies a positive ethical theory — because we usually think of utilitarianism as a particular ethical theory, a theory that says that certain things are objectively good. The standard versions of utilitarianism, like John Stuart Mill's version, assert that a certain goal — human welfare, happiness, pleasure, satisfaction — is intrinsically valuable and worth pursuing, objectively so. And then our job is to pursue it.
Clearly Mises can't mean that. Since Mises thinks that there are no objective values, when Mises embraces utilitarianism he can't be embracing the view that human welfare is an objective value. What Mises means by "utilitarianism" is a little bit different from the kind of utilitarianism that people like John Stuart Mill advocate. By "utilitarianism" Mises means something like simply giving people advice about how to achieve the goals they already have. So you're not necessarily endorsing their goals, but utilitarianism says that really the only real role for any kind of evaluation is simply to talk about means to ends, because you can't evaluate the ends.Roderick T. Long, "Economics and Its Ethical Assumptions."
Long's characterization of Mises's value-free utilitarianism is shown to be accurate by the following statement by Mises: "Utilitarianism, on the other hand, does not deal at all with ultimate ends and judgments of value. It invariably refers only to means."Mises, Theory and History, Ch. 3.
The Social Phenomenon of MoralityLong's characterization is a useful corrective, and is basically sound, but it can lead to a misconstruction. When Long says that utilitarianism is about "giving people advice about how to achieve the goals they already have," it can lead one to think that the role of the utilitarian social philosopher is to offer such advice to individuals facing particular dilemmas of interpersonal conduct.
Taking this view, many libertarian critics of utilitarianism raise scenarios in which an individual's preferences, even with all the long-term consequences considered, would not line up with liberal principles.See for example Robert P. Murphy, " Is Utilitarianism Viable?"
If the value-free utilitarian cannot say anything to convince such people to adhere to liberalism, the objection runs, then you need some other nonutilitarian argument (like a natural-rights argument, or argumentation ethics, for example) to make the case for liberty.
This evinces a misunderstanding of the social phenomenon of morality. To see why, first we must consider some basic principles.
First of all, it must be realized that moral codes are human things. As Mises wrote, "The notion of right and wrong is a human device."Ludwig von Mises Human Action, Ch. 27, Sec. 3.
Furthermore, moral codes, like all human devices, have a purpose for which they are made:
All moral rules and human laws are means for the realization of definite ends. There is no method available for the appreciation of their goodness or badness other than to scrutinize their usefulness for the attainment of the ends chosen and aimed at.Ibid.
And the purpose for which moral codes are adopted is as a means for the attainment of ends that are only possible through social cooperation: for social utility: "The notion of right and wrong is … a utilitarian precept designed to make social cooperation under the division of labor possible."Ibid.
The sound utilitarian does not say the purpose of a moral code should be social utility. But rather the purpose of moral codes are and always have been ultimately social utility. In this way, utilitarianism, strictly speaking, is more about "meta-ethics" than "ethics."
If thought leaders realize that, for example, a liberal moral code (both as a whole, and in its constituent parts) is more socially expedient than alternative codes, and they convince the general populace of that fact, this revolution in public opinion would engender a revolution in the prevailing morality.
When a moral code is adopted in society, approbation and good will for following the code, as well as reprobation and ill will for violating it, become common. This approbation and reprobation also generally become internalized, forming the consciences of individuals.
Moral traditions can take on a life of their own, and become quasi ends in themselves. For the sake of their transmission and perpetuation, they can also be buttressed by divine or metaphysical pronouncements, and adorned by ritual. But ultimately all customs are human means, not divine or ultimate ends in themselves.
When making decisions that are covered by a moral code, individuals do not deliberate over the ultimate utilitarian considerations on which the code is based. Instead their decision is immediately determined by social pressure and conscience. However, that doesn't change the fact that the ultimate basis for the adoption of the moral code is utilitarian, and that the ultimate, mediate cause of moral action is social utility.
The role of the utilitarian social philosopher is not to parachute into ethical dilemmas and inform individuals which choice is in their enlightened self-interest. It is to inform individuals in their moments of sober reflection (when they are not caught up in an urgent crisis) which set of general rules is in their enlightened self-interest.The stress on the utility of general rules, as opposed to the utility of particular actions in isolation, is the difference between the "rule utilitarianism" of Mises, Hazlitt, and Hume and the "act utilitarianism" (or as Hazlitt termed it "ad hoc utilitarianism") of Jeremy Bentham and John Stuart Mill. See Henry Hazlitt, The Foundations of Morality, Ch. 8. If the social philosopher is generally successful, those general rules will become integrated into the prevailing moral code.
Once that moral code is adopted, it is the role not of social philosophers but of parents, mentors, peers, and conscience to make the prevalent morality effective on a daily basis.
Economic Intervention and Moral RestraintMany critics accuse utilitarian economists of inserting value judgments into their analysis. Mises clarified the matter:
While many people blame economics for its neutrality with regard to value judgments, other people blame it for its alleged indulgence in them.…
The semantic confusion in the discussion of the problems concerned is due to an inaccurate use of terms on the part of many economists. An economist investigates whether a measure a can bring about the result p for the attainment of which it is recommended, and finds that a does not result in p but in g. an effect which even the supporters of the measure a consider undesirable. If this economist states the outcome of his investigation by saying that a is a bad measure, he does not pronounce a judgment of value. He merely says that from the point of view of those aiming at the goal p, the measure a is inappropriate. In this sense the free-trade economists attacked protection. They demonstrated that protection does not, as its champions believe, increase but, on the contrary, decreases the total amount of products, and is therefore bad from the point of view of those who prefer an ampler supply of products to a smaller. It is in this sense that economists criticize policies from the point of view of the ends aimed at. If an economist calls minimum wage rates a bad policy, what he means is that its effects are contrary to the purpose of those who recommend their application.
In this sense we may say that economics is apolitical or nonpolitical, although it is the foundation of politics and of every kind of political action. We may furthermore say that it is perfectly neutral with regard to all judgments of value, as it refers always to means and never to the choice of ultimate ends.Mises, Human Action, Ch. 39, Sec. 2.
The only kind of "should" statement Mises accepts as nonarbitrary is the kind that runs, "If you want Y, you should do X," which can be restated in a more unambiguously value-free way as, "Doing X results in Y, which you want."
The above characterization by Mises, if considered without care, might also be misleading. It may once again conjure the image of the "parachuting social philosopher": in this case of an economist heroically bounding into a lobbyist's office and convincing the lobbyist that the particular tariff he is advocating is against his enlightened self-interest.
Mises recognized that in such a situation a lobbyist may very well actually benefit from a tariff, if he considers the policy in isolation. But if one considers the policy as a single instance in a general pro-tariff state of affairs, economics would show that the whole system is to his detriment.
Mises gave the example of featherbedding.Mises, Theory and History, Chapter. Considering the policy alone, it may seem beneficial for a worker to support featherbedding in his own field. But the worker, Mises pointed out, "cannot prevent featherbedding from becoming a general practice" and that then the practice would hurt the individual worker as a consumer far more than it helps him as a producer.
Of course the featherbedding promoted by a single worker is a very small factor in making featherbedding a general practice. Therefore, a worker may very well judge that the personal benefits of a single instance of featherbedding greatly outweighs the costs to him of its miniscule contribution to the general practice.
But the point is not that each worker will eschew featherbedding on these considerations alone. The point is that, if it were generally realized that the systemic effects of featherbedding was general impoverishment, a general antifeatherbedding mentality would become part of the prevailing moral code. Featherbedding would become an object of general reprobation, and the conscience of the individual would generally recoil at it. For the individual worker, reprobation, ill will of others, and pangs of conscience within himself, would then be weighed in the balance as tremendous downsides of featherbedding.
Since featherbedding has to do with property, antifeatherbedding would become part of the legal code as well. In a society with an antifeatherbedding mentality (caused by a general realization of its social disutility) social pressure and conscience would be enough to prevent the advocacy of featherbedding in most cases. In the few cases in which that was not true, its realization would be prevented by the legal force that would be characteristic of such a state of public opinion.
The matter is the same with regard to businessmen as it is with regard to workers. As Mises wrote, "There have always been businessmen who ask for privileges, protection, and so on."Mises, Marxism Unmasked, 9th Lecture.
However, "The duty to make such a system of privileges disappear does not rest with the businessman but with public opinion."Ibid.
Now, what certainly would not prevent tariffs, featherbedding, and other antiliberal privileges would be social philosophers parachuting in to inform lobbyists and workers about "violations of right reason concerning the nature of man" (natural-rights arguments) or the "performative contradictions" implicit in their proposals (argumentation ethics).
Caste Conflicts and Long-Run InterestsMises wrote eloquently on the "harmony of interests."Daniel James Sanchez, "The Profound Significance of Social Harmony." However, he would generally qualify his statements concerning the "harmony of interests" by saying that it only exists "on the market." Rothbard stressed this qualification:
It is true that on the free market there are no clashes of class or group interest; all participants benefit from the market and therefore all their interests are in harmony.
But the matter changes drastically, Mises points out, when we move to the intervention of government. For that very intervention necessarily creates conflict between those classes of people who are benefited or privileged by the State and those who are burdened by it. These conflicting classes created by State intervention Mises calls castes. As Mises states,
Thus there prevails a solidarity of interests among all caste members and a conflict of interests among the various castes. Each privileged caste aims at the attainment of new privileges and at the preservation of old ones. Each underprivileged caste aims at the abolition of its disqualifications. Within a caste society there is an irreconcilable antagonism between the interests of the various castes.Murray N. Rothbard, " Our Interests and Their Interests," excerpted from Rothbard's 1978 preface to Ludwig von Mises's The Clash of Group Interests and Other Essays.
Rothbard thought this posed a problem for Mises's utilitarianism:
But Mises has a grave problem; as a utilitarian … he has to be able to convince everyone, even those whom he concedes are the ruling castes, that they would be better off in a free market and a free society, and that they too should agitate for this end. He attempts to do this by setting up a dichotomy between "short-run" and "long-run" interests, the latter being termed "the rightly understood" interests. Even the short-run beneficiaries of statism, Mises asserts, will lose in the long run. As Mises puts it,
In the short run an individual or a group may profit from violating the interests of other groups or individuals. But in the long run, in indulging in such actions, they damage their own selfish interests no less than those of the people they have injured. The sacrifice that a man or a group makes in renouncing some short-run gains, lest they endanger the peaceful operation of the apparatus of social cooperation, is merely temporary. It amounts to an abandonment of a small immediate profit for the sake of incomparably greater advantages in the long run.
The great problem here is: why should people always consult their long-run, as contrasted to their short-run, interests? Why is the long run the "right understanding"? Ludwig von Mises, more than any economist of his day, has brought to the discipline the realization of the great and abiding importance of time preference in human action: the preference of achieving a given satisfaction now rather than later. In short, everyone prefers the shorter to the longer run, some to different degrees than others.
How can Mises, as a utilitarian, say that a lower time preference for the present is "better" than a higher?Ibid.
First of all, the market is so productive and widespread in its beneficence that vanishingly few in the power elite "caste" would not benefit from it being made more free. As Mises pointed out, "The average American worker enjoys amenities for which Croesus, Crassus, the Medici, and Louis XIV would have envied him."Mises, Human Action, Ch. 15, Sec. 3.
Had Louis XIV established economic liberty at the beginning of his reign, capitalist France would have poured a greater cornucopia of goods and services on his head than his crippling taxes and imperialistic wars ever did.
Following Rothbard's line of reasoning, Robert Murphy, in a critique of utilitarianism, asked, "Is it really true, for example, that Josef Stalin acted against his interests, even in the long run?"Murphy, "Is Utilitarianism Viable?"
Perhaps Stalin may have been one of the tiny minority of people who did prosper more than he would have under a more liberal order. But he only did so ex post. Stalin was extremely lucky: he happened to end up on top of the murder heap, and not somewhere in the middle as the victim of yet another Stalin's purge. Ex ante, he had no guarantee that would occur, and any person in a similar ex ante position could only reasonably expect to be liquidated at a young age. And it is the ex ante tendencies of general rules that matter in the adoption of codes of interpersonal conduct.
Furthermore, it is not true that utilitarian liberals need to convince literally everyone that a liberal society would better serve their interests. Only the majority need be convinced. Such a revolution in public opinion would necessarily engender a revolution in the prevailing morality. Against such a prevailing morality, even the most ardent statist caste member would be unable to make any headway.
In the above passage, Rothbard also misinterpreted what Mises meant in his discussion of the "harmony of long-run interests." Mises would not make such an elementary mistake as to say that a lower time preference is somehow objectively better than a higher one. Mises was not saying people should, according to some imposed external standard, consult the long-run interest of avoiding the pitfalls of interventionism instead of consulting the short-run interest of enjoying the benefits of privilege.
Rather the issue is that the long-run impacts of an intervention are more difficult to know about than short-run impacts, especially for one unacquainted with economics. Mises concluded, using his thymological judgment, that most would prefer to avoid the long-run pitfalls if they only knew about them. When Mises said that the long-run benefits of preserving social cooperation are "incomparably greater," he meant according to nearly every acting individual's own judgment (were they only aware of the long-run consequences), not according to some imposed external standard.
Utilitarian liberalism does not say, "You want B, but you should really want A." Rather, it says, "You think B will result in Y, which you want. But it will not. Instead it will result in X, which you do not want. However, if you adopt A, you will get Z, which you would like best, but did not even know was possible."
And it says this, not with regard to particular choices considered in isolation, but with regard to the systemic consequences to be expected of general rules. Furthermore, it says this not in order to persuade each individual in every concrete choice in their daily lives, but so as to effect a revolution in public opinion concerning social expediency, which in turn will necessarily engender a revolution in the prevailing moral code.
There is indeed a harmony of interests, but not only with regard to acts of exchange within a liberal society and a free market. There is also more general harmony of interests that always persists. Even within an illiberal society and a hampered market, the establishment of a liberal society and a free market, through the adoption of a liberal moral code, is in the interest of virtually everyone, from power-elite potentate to poverty-stricken pleb.
By using praxeology and economics to unveil that fact, utilitarian liberalism can translate the ever-present harmony of interests into a harmony of actual preferences among the general public, paving the way for a peaceful and prosperous liberal social order.
We classic liberals want to change the world. We cannot change the world by steering our skeptical auditors into "blank-out" moments using ingenuous philosophical arguments that they may for the moment be unable to refute. To change the world, we must speak, not solely to man's reason, but to his purposes.
[David Gordon and Daniel Sanchez will be teaching Libertarian Ethics, an online course starting October 27.]
In Thucydides's History of the Peloponnesian War, the rhetorical orations of ancient Greek statesmen often alternated between appealing to honor and to interest: to justice and to expediency.[1]
Similarly, modern classical liberals (libertarians) often take a dual approach to making the case for liberty.
On one hand they put forth arguments that can be characterized as "economic," "pragmatic," "consequentialist," or "utilitarian." For example, when making the case against price ceilings, a libertarian acquainted with economics may point out that such a policy would result in shortages.
On the other hand they put forth arguments that can be characterized as "moral," "ethical," "principled," or "deontological." For example, a libertarian may object to price ceilings on the grounds that such a policy would simply constitute aggression against sellers who would like to charge prices above the ceiling.
The libertarian who uses both approaches will argue from two different sets of grounds to arrive at the same conclusion. Many libertarians simply welcome the thought that their rhetorical armory has two expansive wings, and pay little regard to if and how the two wings are connected. But when two different approaches to a question happen to arrive at the same answer, the hand tends to drift toward Ockham's razor. The suspicion arises that one approach can ultimately be resolved into the other.
Characterizing the deontological approach as the "moral" one can be misleading. It can make it seem as if those who exclusively take the utilitarian approach are somehow "antimorality." But that is not the case. Utilitarians consider morality to be essential. The two approaches simply operate under different conceptions of what morality is.
Morality has to do with codes of interpersonal conduct. When a libertarian says, "X should be refrained from because it is immoral, or constitutes aggression (initiation of force), or is a violation of property rights, etc.," they are ultimately saying, "X should be refrained from because it is contrary to a given code of interpersonal conduct."
Deontological libertarians often treat their favored code of interpersonal conduct to be somehow natural, perennial, divine, or absolute in some other way.
Utilitarian liberals recognize that all codes of conduct are "artificial" in that they are man-made things. Ludwig von Mises, the greatest utilitarian liberal, wrote,
There is, however, no such thing as a perennial standard of what is just and what is unjust. Nature is alien to the idea of right and wrong.… The notion of right and wrong is a human device.[2]
Furthermore, all things made by men are made for a purpose, and the only standard by which a man-made thing can be judged is according to how well it fulfills the purpose for which it was made. Again, Mises:
All moral rules and human laws are means for the realization of definite ends. There is no method available for the appreciation of their goodness or badness other than to scrutinize their usefulness for the attainment of the ends chosen and aimed at.[3]
So when a libertarian says something tantamount to, "X should be refrained from because it is contrary to a given code of interpersonal conduct," that only raises the question, Why should this code of interpersonal conduct be adopted, and not others?
To answer, "because it is the only code of interpersonal conduct that is moral" would be untenable. It would be tantamount to saying, "because it is the only code of interpersonal conduct that is consistent with some second code of conduct"; and this only leads to an infinite regress. Why should the second code of conduct, according to which the first code of conduct is judged, be adopted? Because of a third code of conduct?
The only escape from this infinite regress is to recognize that, as pointed out by Mises above, codes of interpersonal conduct are ultimately adopted by acting individuals for a purpose. And that purpose is the facilitation of social cooperation, which, because of the greater productivity of the division of labor, is the foremost means to nearly everyone's ends. In a passage he called "The Utilitarian Doctrine Restated," Mises wrote,
Human effort exerted under the principle of the division of labor in social cooperation achieves, other things remaining equal, a greater output per unit of input than the isolated efforts of solitary individuals. Man's reason is capable of recognizing this fact and of adapting his conduct accordingly. Thus social cooperation becomes for almost every man the great means for the attainment of all ends. An eminently human common interest, the preservation and intensification of social bonds, is substituted for pitiless biological competition, the significant mark of animal and plant life. Man becomes a social being.[4]
The fact that social cooperation is "the great means for the attainment of all ends" leads to important conclusion. Libertarians who, following Murray Rothbard, search for an "objective ethic" argue that utilitarian and economic arguments regarding the suitability of means are insufficient for making the case for liberty. They claim that ethical arguments regarding which ultimate ends one ought to have are necessary. Mises rejects this, because
As social cooperation is for acting man a means and not an end, no unanimity with regard to value judgments is required to make it work.… With the exception of the small, almost negligible number of consistent anchorites, all people agree in considering some kind of social cooperation between men the foremost means to attain any ends they may aim at. This undeniable fact provides a common ground on which political discussions between men become possible.[5]
The following objection may be raised. Why is the greater productivity of the division of labor such a big deal that it makes social cooperation the foremost means to all our ends? Is that not crass materialism? For many, are not spiritual ends more important than brute "productivity"? Mises answered this objection as follows:
It is a fact that almost all men agree in aiming at certain ends, at those pleasures which ivory-tower moralists disdain as base and shabby. But it is no less a fact that even the most sublime ends cannot be sought by people who have not first satisfied the wants of their animal body. The loftiest exploits of philosophy, art, and literature would never have been performed by men living outside of society.[6]
Or as Phillip Wicksteed pithily put it,
In fact, a man can be neither a saint, nor a lover, nor a poet, unless he has comparatively recently had something to eat.[7]
The utility of social cooperation is paramount for virtually all acting men, and it is the very foundation of morality.
The notion of right and wrong is … a utilitarian precept designed to make social cooperation under the division of labor possible.[8]
And as the foundation of all morality in general, the utility of social cooperation is also the alpha and the omega of all questions of justice and property in particular.
The ultimate yardstick of justice is conduciveness to the preservation of social cooperation. Conduct suited to preserve social cooperation is just, conduct detrimental to the preservation of society is unjust. There cannot be any question of organizing society according to the postulates of an arbitrary preconceived idea of justice. The problem is to organize society for the best possible realization of those ends which men want to attain by social cooperation. Social utility is the only standard of justice.[9]
People develop the custom of abiding by general rules (including the rules of justice) because of a general recognition that when both the long-run and short-run are taken into account, any given individual is likely to be better off, according to his own preferences, with the rules, than without them.
The general expediency of certain codes of conduct are recognized by thought leaders in society. These thought leaders convince others, who in turn convince still others. Over time, and as codes of conduct are passed across generations and intellectual strata, consciously formulated customs gradually evolve into blindly imbibed folkways.
Moral standards are initially adopted to please one's parents, peers, or divinity; then as adherence to them becomes habitual through repetition, they are internalized as one's own conscience. This internalization can become so complete that people can come to think of their moral standards as facts of nature, and not as human devices; philosophically minded people will even attempt to concoct rationalizations for this conclusion.
Some moral traditions can take on a life of their own, and become quasi ends in themselves. For the sake of their transmission and perpetuation, they can also be buttressed by divine or metaphysical pronouncements, and adorned by ritual. But ultimately all customs are human means, not divine or ultimate ends in themselves. And if a general awareness of the relative inexpediency of a custom arises, this will erode the utilitarian basis of its social acceptance, and it will eventually topple.
Before the advent of economic science, society's thought leaders were groping around in the dimness of mankind's lengthy intellectual dawn. They were able to glean a few basic principles of social expediency. Foremost of these is that everybody is better off if there exists some form and extent of property rights over scarce goods (including human bodies). This realization is the ultimate pragmatic underpinning of the Decalogue's "Thou shalt not murder" and of "Thou shalt not steal"; it is the essence of the very concept of "justice" and has been the foundation of even the most basic levels of civilization.
As David Hume wrote,
the obligation to justice is founded entirely on the interests of society, which require mutual abstinence from property.[10]
And as Mises wrote,
If history could teach us anything, it would be that private property is inextricably linked with civilization.[11]
It did not require high philosophy to realize that the modus operandi of "snatch as snatch can" would make everyone worse off. And any group of people who did not achieve that realization would have rapidly slaughtered and starved themselves into oblivion. But exactly how property rights are delineated has varied from civilization to civilization throughout human history.
In primitive tribes, thoroughgoing egalitarianism prevented any kind of capital accumulation.[12] In most of antiquity, to hold other human beings as chattel was considered legitimate. In caste societies property was largely a function of inherited status.
But as western Europe, beginning in the medieval era, gradually progressed away from human bondage and caste privilege, it managed to grope its way toward a property order that allowed for the advent of capitalism.
This first florescence of capitalism paved the way for its own analysis. It did so in two ways. First the wealth, leisure, optimism, tolerance, and social dynamism it generated made possible the Age of Enlightenment. Second, it provided in itself a fascinating subject of study for the Enlightenment thinkers who became the first economists — thinkers like Richard Cantillon, David Hume, the Physiocrats, and Adam Smith.
From that point forward, sound social theory, led by economics, gradually unveiled which facets of the existing moral and legal order were responsible for the new prosperity, and which facets were holding it back.
The culmination of this unveiling process is the moral/legal code promoted by Austro-liberalism. The economic works of Mises, Rothbard, and modern Austrian economists make evident that the most expedient moral and legal order, in which most any given individual is likely to benefit to the greatest degree, is the one based on the perpetual and even distant ownership of rivalrous goods that one has homesteaded or contracted for, and all rivalrous products of those goods.
Furthermore, it has arisen that security, defense, and juridical services present no exception to this rule. The Austro-anarchist tradition has made good progress in fulfilling the prediction of the first anarcho-capitalist Gustave de Molinari, that
a careful examination of the facts will decide the problem of government more and more in favor of liberty, just as it does all other economic problems.[13]
It would make even better progress if it would not so frequently bog itself down in spinning out ingenious but spurious moral doctrines that are divorced from social utility.
Some libertarians may recoil at the thought of the pugnacious, and often emotionally satisfying, "moral argument" being resolved into its fundamental basis in social utility. They may think it deprives libertarianism of its bite, urgency, and consistency. For those libertarians, I offer another insight from Hume:
public utility is the sole origin of justice … reflections on the beneficial consequences of this virtue are the sole foundation of its merit.…
These reflections are far from weakening the obligations of justice, or diminishing anything from the most sacred attention to property. On the contrary, such sentiments must acquire new force from the present reasoning. For what stronger foundation can be desired or conceived for any duty, than to observe, that human society, or even human nature, could not subsist without the establishment of it; and will still arrive at greater degrees of happiness and perfection, the more inviolable the regard is, which is paid to that duty?[14]
"Arguments from morality" are ultimately sterile, because they miss the point. The business end of social philosophy is to discover, and then argue for, the most socially expedient morality.
That can only be done by demonstrating how well the moral code fulfills the purpose for which moral codes are adopted in the first place: the achievement of human ends through the facilitation of the universal means of social cooperation.
And that, in turn, can only be done with the science of praxeology and its subdiscipline of economics, which reveal the systemic consequences that can be expected from general adherence to any given moral code.
Do you find utilitarianism convincing, or do you subscribe to natural-law or argumentation ethics instead? Sign up for Libertarian Ethics, an online course starting October 27, in which all of these doctrines will be explained and explored!
Notes[1] Clifford Orwin, The Just and the Advantageous in Thucydides (JSTOR).
[2] Ludwig von Mises, Human Action, Ch. 27, Sec. 3.
[3] Ibid.
[4] Mises, Theory and History, Ch. 3.
[5] Ibid.
[6] Ibid.
[7] Philip Wicksteed, The Common Sense of Political Economy, Ch. 4.
[8] Mises, Human Action, Ch. 27, Sec. 3.
[9] Mises, Theory and History, Ch. 3.
[10] David Hume, Of Passive Obedience.
[11] Mises, Human Action, Ch. 15, Sec. 3.
[12] Murray N. Rothbard, Freedom, Inequality, Primitivism, and the Division of Labor.
[13] Gustave de Molinari, The Production of Security.
[14] David Hume, Of Justice, An Enquiry Concerning the Principles of Morals.
One of the implications that can be logically deduced from the irrefutably true axiom of human action is that human action is purposeful (or conscious) action — action that is directed at attaining certain ends.
This insight is essential for fully understanding Mises's reconstruction of economics as a formal-logical science (praxeology, as he called it), and all the implications that can be deduced from it.
These implications include, for instance, that cause and effect (causality) and time are categories of human action, that means are scarce with respect to the ends that they could possibly serve, and that the existence of human action implies uncertainty about the future course of events.
However, the truth claim that human action is purposeful action may all too easily invite criticism. For instance, couldn't one challenge Mises's insight by saying that many decisions people make are not purposeful, but rest on arbitrariness, whim, or impulse?
Rejecting the insight that human action is purposeful would call into question the truth claims that can be derived from the axiom of human action. This would open the door for methodological disorientation and, as a result, false theories in the field of economics.
Given the importance of understanding the irrefutable truth that human action is purposeful action, it is worthwhile to briefly remind ourselves how Mises arrives at his insight, which he deduces from the axiom of human action.
As noted earlier, the axiom of human action is irrefutably true. It is a self-evident proposition whose truth-value cannot be denied. Any attempt at denial would result in an insoluble intellectual contradiction, because saying "Humans cannot act" is a form of human action.
Action is replacing "a more satisfactory state of affairs for a less satisfactory," and man must make use of means to attain ends. Means, in turn, are always scarce with regard to the attainment of ends. If means were not scarce, they wouldn't be subject to economizing, and so there couldn't be any action — and this is, of course, impossible to believe.
It is in this sense that human action is purposeful action — that is, making use of means for attaining certain ends. And praxeology remains unconcerned about the content of certain ends or how concrete ends were motivated.
Mises notes,
Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.
II.At the same time, Mises states that not all actions performed by humans qualify as purposeful actions. He explicitly refers to nonpurposeful (or: unconscious) action, namely "the reflexes and the involuntary responses of the body's cells and nerves to stimuli."
Would Mises's reference to nonpurposeful action allow the conclusion that there are humans who do not act as implied by the axiom of human action? As will be shown below, the question can be answered in the negative.
(1) To start with, it should be noted that the insight that human action is purposeful action is not related to psychology. Whereas the latter aims at explaining the workings of the inner (mental) events of a person and the motives that lead to certain action, praxeology is strictly confined to the logic of human action.
Praxeology, resting on the axiom of human action, derives from the conclusion that human action is purposeful action — which stands in sharp contrast to nonpurposeful action — by means of formal logic. It does not take recourse to any kind of behavioral assumptions.
(2) To Mises, examples of nonpurposeful action are the workings of the body (the beating of the heart, breathing, etc.) and reflexive, involuntary responses to stimuli (e.g., noise-related flinching). Nonpurposeful action has, in Mises's understanding, the same status as external data: it is part of the general conditions under which human action — the purposeful action — takes place.
Mises writes,The unconscious behavior of the bodily organs and cells is for the acting ego no less a datum than any other fact of the external world. Acting man must take into account all that goes on within his own body as well as other data, e.g., the weather or the attitudes of his neighbors.
Insofar as these conditions are overcome by action (such as, for instance, suppressing reflexes), human beings actually extend their scope of purposeful action: "If a man abstains from controlling the involuntary reaction of cells and nerve centers, although he would be in a position to do so, his behavior is from our point of view purposeful."
(3) Is it possible to draw an exact line between purposeful and nonpurposeful action? A human fetus, a human asleep, or a person under the influence of drugs may show action that seems — to an observer — nonpurposeful rather than purposeful.
However, the observer is in no position at all to come up with the conclusion that a person is not acting purposefully, no matter how nonpurposeful, meaningless, or nonsensical a person's action may appear to him. Even an insane person or a person under the influence of drugs acts, and thereby aims at achieving certain ends.[2]
Mises writes,
People are sometimes prepared to believe that the boundaries between conscious behavior and the involuntary reaction of the forces operating within man's body are more or less indefinite. This is correct only as far as it is sometimes not easy to establish whether concrete behavior is to be considered voluntary or involuntary. But the distinction between consciousness and unconsciousness is nonetheless sharp and can be clearly determined.
(4) In a final step, it is worthwhile to highlight the consequences that a denial of the truth claim that human action is purposeful action would imply.
Mises writes,The denial of purposefulness in man's attitudes can be sustained only if one assumes that the choosing both of ends and of means is merely apparent and that human behavior is ultimately determined by physiological events which can be fully described in the terminology of physics and chemistry.
Even the most fanatical champions of the "Unified Science" sect shrink from unambiguously espousing this blunt formulation of their fundamental thesis. There are good reasons for this reticence. So long as no definite relation is discovered between ideas and physical or chemical events of which they would occur as the regular sequel, the positivist thesis remains an epistemological postulate derived not from scientifically established experience but from a metaphysical world view.…
But it is evident that such a metaphysical proposition can in no way invalidate the results of the discursive reasoning of the sciences of human action. The positivists for emotional reasons do not like the conclusions that acting man must necessarily draw from the teachings of economics. As they are not in a position to find any flaw either in the reasoning of economics or in the inferences derived from it, they resort to metaphysical schemes in order to discredit the epistemological foundations and the methodological approach of economics."
III.To conclude, Mises showed that human action is purposeful action: the purposeful attempt to remove a felt uneasiness or to replace a less satisfactory state of affairs with one that is more satisfactory. It logically follows from the axiom of human action.
The knowledge that human action is purposeful action has nothing to do with psychology. Stating that human action is purposeful action does not take recourse to assumptions about the actor's concrete motivation.
Nonpurposeful behavior is, as far as praxeology is concerned, to be classified as external data, part of the general conditions under which human action takes place. It is outside the scope of praxeology.
While a distinct line can be drawn between purposeful and nonpurposeful action at a conceptual level, such a distinction cannot necessarily be detected by the outsider through observation — but this does not invalidate the distinction drawn by Mises.
Human action is purposeful action. This knowledge is derived logically from the irrefutably true axiom of human action, which is at the heart of praxeology.
The stimulating methodological controversy between Professors Machlup and Hutchison proves that there are sometimes more than two sides to every question.Terence W. Hutchison, "Professor Machlup on Verification in Economics," Southern Economic Journal(April 1956): pp. 476–83; Fritz Machlup, "Rejoinder to a Reluctant Ultra-Empiricist," ibid., pp. 483–93. In many ways, the two are debating at cross-purposes: Professor Hutchison is primarily tilting against the methodological (and political) views of Professor Ludwig von Mises; his most serious charge is that Professor Machlup's entire position is, at bottom, an attempt to cloak the Misesian heresy in the garments of epistemological respectability. Professor Machlup's reply, quite properly, barely mentions Mises; for, in fact, their methodological views are poles apart. (Machlup's position is close to the central "positivist" tradition of economic methodology.) But, in the meanwhile, we find that Professor Mises and "extreme apriorism" go undefended in the debate. Perhaps an extreme apriorist's contribution to this discussion may prove helpful.
First, it should be made clear that neither Professor Machlup nor Professor Hutchison is what Mises calls a praxeologist, that is, neither believes (a) that the fundamental axioms and premises of economics are absolutely true; (b) that the theorems and conclusions deduced by the laws of logic from these postulates are therefore absolutely true; (c) that there is consequently no need for empirical "testing," either of the premises or the conclusions; or (d) that the deduced theorems could not be tested even if it were desirable.The praxeological tradition, though named only recently, has a long and honored place in the history of economic thought. In the first great methodological controversy in our science, John Stuart Mill was the positivist and Nassau Senior the praxeologist, with J.E. Cairnes wavering between the two positions. Later on, the praxeologic method was further developed by the early Austrians, by Wicksteed, and by Richard Strigl, reaching its full culmination in the works of Ludwig von Mises. Mises's views may be found in Human Action (New Haven, Conn.: Yale University Press, 1949), and in his earlier Grundprobleme der Nationalökonomie [translated into English as Epistemological Problems of Economics (Princeton, N.J.: D. Van Nostrand, 1960)]. On the similarity between Senior and Mises, see Marian Bowley, Nassau Senior and Classical Economics (New York: Augustus M. Kelley, 1949), chap. 1, esp. pp. 64–65. Lionel Robbins's Essay on the Nature and Significance of Economic Science (London: Macmillan, 1932) was emphatically praxeologic, although it did not delve into the more complex methodological problems. Both disputants are eager to test economic laws empirically. The crucial difference is that Professor Machlup adheres to the orthodox positivist position that the assumptions need not be verified so long as their deduced consequents may be proven true — essentially the position of Professor Milton Friedman — while Professor Hutchison, wary of shaky assumptions, takes the more empirical — or institutionalist — approach that the assumptions had better be verified as well.
Strange as it may seem for an ultra-apriorist, Hutchison's position strikes me as the better of the two. If one must choose between two brands of empiricism, it seems like folly to put one's trust in procedures for testing only conclusions by fact. Far better to make sure that the assumptions also are correct. Here I must salute Professor Hutchison's charge that the positivists rest their case on misleading analogies from the epistemology of physics. This is precisely the nub of the issue.
All the positivist procedures are based on the physical sciences.On the differences between the methodologies of praxeology and physics, see Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics," in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, Mary Sennholz, ed. (Princeton, N.J.: D. Van Nostrand, 1956), p. 226ff.; included in this volume as chapter 17. It is physics that knows or can know its "facts" and can test its conclusions against these facts, while being completely ignorant of its ultimate assumptions. In the sciences of Human Action, on the other hand, it is impossible to test conclusions. There is no laboratory where facts can be isolated and controlled; the "facts" of human history are complex ones, resultants of many causes. These causes can only be isolated by theory, theory that is necessarily a priori to these historical (including statistical) facts. Of course, Professor Hutchison would not go this far in rejecting empirical testing of theorems; but, being commendably skeptical of the possibilities of testing (though not of its desirability), he insists that the assumptions be verified as well.
In physics, the ultimate assumptions cannot be verified directly, because we know nothing directly of the explanatory laws or causal factors. Hence the good sense of not attempting to do so, of using false assumptions such as the absence of friction, and so on. But false assumptions are the reverse of appropriate in economics. For Human Action is not like physics; here, the ultimate assumptions are what is clearly known, and it is precisely from these given axioms that the corpus of economic science is deduced. False or dubious assumptions in economics wreak havoc, while often proving useful in physics.This holds also for Professor Machlup's "heuristic principles," which are allegedly "empirically meaningful" without being verifiable as true. I do not wish to deny that false assumptions are useful in economic theory, but only when they are used as auxiliary constructs, not as premises from which empirical theories can be deduced. The most important such construct is the evenly rotating economy, or "equilibrium." It is not intended that this state be considered as real, either actual or potential. On the contrary, the empirically impossible ERE is constructed precisely in order to analyze theoretically a state of no change. Only by analyzing a fictive changeless state can we arrive at a proper analysis of the changing real economic world. However, this is not a "false" assumption in the sense used by the positivists, because it is an absolutely true theory of a changeless state, if such a state could exist.
Hence, Professor Hutchison is correct in wishing to establish the assumptions themselves. But these premises do not have to be (indeed, cannot be) verified by appeal to statistical fact. They are established, in praxeology, on a far more certain and permanent basis as definitely true. How, then, are these postulates obtained?
Actually, despite the "extreme a priori" label, praxeology contains one fundamental axiom — the axiom of action — which may be called a priori, and a few subsidiary postulates which are actually empirical. Incredible as it may seem to those versed in the positivist tradition, from this tiny handful of premises the whole of economics is deduced — and deduced as absolutely true. Setting aside the fundamental axiom for a moment, the empirical postulates are: (a) small in number, and (b) so broadly based as to be hardly "empirical" in the empiricist sense of the term. To put it differently, they are so generally true as to be self-evident, as to be seen by all to be obviously true once they are stated, and hence they are not in practice empirically falsifiable and therefore not "operationally meaningful."
What are these propositions? We may consider them in decreasing order of their generality: (1) the most fundamental — variety of resources, both natural and human; from this follows directly the division of labor, the market, etc.; (2) less important, that leisure is a consumer good. These are actually the only postulates needed. Two other postulates simply introduce limiting subdivisions into the analysis. Thus, economics can deductively elaborate from the fundamental axiom and postulates 1 and 2 (actually, only postulate 1 is necessary) an analysis of Crusoe economics, of barter, and of a monetary economy. All these elaborated laws are absolutely true. They are only applicable in concrete cases, however, where the particular limiting conditions apply.
There is nothing, of course, remarkable about this; we can enunciate as a law that an apple, unsupported, will drop to the ground. But the law is applicable only in those cases where an apple is actually dropped. Thus, the economics of Crusoe, of barter, and of a monetary economy are applicable when these conditions obtain. It is the task of the historian, or "applied economist," to decide which conditions apply in the specific situations to be analyzed. It is obvious that making these particular identifications is simplicity itself.
When we analyze the economics of indirect exchange, therefore, we make the simple and obvious limiting condition (postulate 3) that indirect exchanges are being made. It should be clear that by making this simple identification we are not "testing the theory"; we are simply choosing that theory which applies to the reality we wish to explain.
The fourth — and by far the least fundamental — postulate for a theory of the market is the one which Professors Hutchison and Machlup consider crucial — that firms always aim at maximization of their money profits. As will become clearer when I treat the fundamental axiom below, this assumption is by no means a necessary part of economic theory. From our axiom is derived this absolute truth: that every firm aims always at maximizing its psychic profit. This may or may not involve maximizing its money profit. Often it may not, and no praxeologist would deny this fact.
When an entrepreneur deliberately accepts lower money profits in order to give a good job to a ne'er-do-well nephew, the praxeologist is not confounded. The entrepreneur simply has chosen to take a certain cut in monetary profit in order to satisfy his consumption-satisfaction of seeing his nephew well provided. The assumption that firms aim at maximizing their money profits is simply a convenience of analysis; it permits the elaboration of a framework of catallactics (economics of the market) which could not otherwise be developed. The praxeologist always has in mind the proviso that where this subsidiary postulate does not apply — as in the case of the ne'er-do-well — his deduced theories will not be applicable. He simply believes that enough entrepreneurs follow monetary aims enough of the time to make his theory highly useful in explaining the real market.I do not mean to endorse here the recent strictures that have been made against the monetary-profit-maximization assumption — most of which ignore long-run as opposed to short-run maximization. The curious idea that failure to pursue monetary goals is "irrational," or refutes economics, is similar to the old notion that consumers were being irrational, or "uneconomic," when they preferred to pay higher prices in stores nearer to them, or with a more congenial atmosphere.
We turn now to the fundamental axiom (the nub of praxeology): the existence of Human Action. From this absolutely true axiom can be spun almost the whole fabric of economic theory. Some of the immediate logical implications that flow from this premise are: the means-ends relationship, the time structure of production, time preference, the law of diminishing marginal utility, the law of optimum returns, etc. It is this crucial axiom that separates praxeology from the other methodological viewpoints — and it is this axiom that supplies the critical "a priori" element in economics.
First, it must be emphasized that whatever role "rationality" may play in Professor Machlup's theory, it plays no role whatever for Professor Mises. Hutchison charges that Mises claims "all economic action was (or must be) rational."Hutchison, "Professor Machlup on Verification in Economics," p. 483. This is flatly incorrect. Mises assumes nothing whatever about the rationality of Human Action (in fact, Mises does not use the concept at all). He assumes nothing about the wisdom of man's ends or about the correctness of his means. He "assumes" only that men act, that is, that they have some ends, and use some means to try to attain them. This is Mises's fundamental axiom, and it is this axiom that gives the whole praxeological structure of economic theory built upon it its absolute and apodictic certainty.
Now the crucial question arises: How have we obtained the truth of this axiom? Is our knowledge a priori or empirical, "synthetic" or "analytic"? In a sense, such questions are a waste of time, because the all-important fact is that the axiom is self-evidently true, self-evident to a far greater and broader extent than the other postulates. For this axiom is true for all human beings, everywhere, at any time, and could not even conceivably be violated. In short, we may conceive of a world where resources are not varied, but not of one where human beings exist but do not act. We have seen that the other postulates, while "empirical," are so obvious and acceptable that they can hardly be called "falsifiable" in the usual empiricist sense. How much more is this true of the axiom, which is not even conceivably falsifiable!
Positivists of all shades boggle at self-evident propositions. And yet, what is the vaunted "evidence" of the empiricists but the bringing of a hitherto obscure proposition into evident view? But some propositions need only to be stated to become at once evident to the self, and the action axiom is just such a proposition.
Whether we consider the action axiom "a priori" or "empirical" depends on our ultimate philosophical position. Professor Mises, in the neo-Kantian tradition, considers this axiom a law of thought and therefore a categorical truth a priori to all experience. My own epistemological position rests on Aristotle and St. Thomas rather than Kant, and hence I would interpret the proposition differently. I would consider the axiom a law of reality rather than a law of thought, and hence "empirical" rather than "a priori." But it should be obvious that this type of "empiricism" is so out of step with modern empiricism that I may just as well continue to call it a priori for present purposes. For (1) it is a law of reality that is not conceivably falsifiable, and yet is empirically meaningful and true; (2) it rests on universal inner experience, and not simply on external experience, that is, its evidence is reflective rather than physical;See Professor Knight's critique of Hutchison's "Significance and Basic Postulates of Economic Theory." Frank H. Knight, "What is Truth in Economics?" Journal of Political Economy (February 1940): pp. 1–32. and (3) it is clearly a priori to complex historical events.Professor Hutchison may have had me in mind when he says that in recent years followers of Professor Mises try to defend him by saying he really meant "empirical" when saying "a priori." Thus, see my "Praxeology, Reply to Mr. Schuller," American Economic Review (December 1951): pp. 943–44; included in this volume as chapter 7. What I meant is that Mises's fundamental axiom may be called "a priori" or "empirical" according to one's philosophical position, but is in any case a priori for the practical purposes of economic methodology.
The epistemological pigeonholing of self-evident propositions has always been a knotty problem. Thus, two such accomplished Thomists as Father Toohey and Father Copleston, while resting on the same philosophical position, differ on whether self-evident propositions should be classified as "a posteriori" or "a priori," since they define the two categories differently.Thus, Copleston calls self-evident principles "synthetic propositions a priori" (though not in the Kantian sense) — synthetic as conveying information about reality not contained logically in previous premises; and a priori as being necessary and universal. Toohey virtually obliterates the distinctions and terms self-evident propositions synthetic — a posteriori, because, while being necessary and universals, they are derived from experience. See F.C. Copleston, S.J., Aquinas (London: Penguin Books, 1955), pp. 28 and 19–41; John J.H. Toohey, S.J., Notes on Epistemology (Washington, D.C.: Georgetown University, 1952), pp. 46–55. All this raises the question of the usefulness of the whole "analytic-synthetic" dichotomy, despite the prominence implicitly given it in Hutchison's "Significance and Basic Postulates of Economic Theory," Journal of Political Economy 49 (1934). For a refreshing skepticism on its validity, and for a critique of its typical use to dispose of difficult-to-refute theories as either disguised definitions or debatable hypotheses, see Hao Wang, "Notes on the Analytic-Synthetic Distinction," Theoria 21 (Parts 2–3, 1955): p. 158ff.
From the fundamental axiom is derived the truth that everyone tries always to maximize his utility. Contrary to Professor Hutchison, this law is not a disguised definition — that they maximize what they maximize. It is true that utility has no concrete content, because economics is concerned not with the content of a man's ends, but with the fact that he has ends. And this fact, being deduced directly from the action axiom, is absolutely true.See Hutchison, "Professor Machlup on Verification Economics," p. 480. Alan Sweezy fell into the same error when he charged that Irving Fisher's dictum "each individual acts as he desires," since not meant as a testable proposition in psychology, must reduce to the empty "each individual acts as he acts." On the contrary, the dictum is deducible directly from the action axiom, and is therefore both empirically meaningful and apodictically true. See Rothbard, "Toward a Reconstruction of Utility and Welfare Economics," pp. 225–28.
We come finally to Mises's ultimate heresy in the eyes of Professor Hutchison: his alleged logical deduction of "wholesale political conclusions" from the axioms of economic science. Such a charge is completely fallacious, particularly if we realize that Professor Mises is an uncompromising champion of Wertfreiheit not only in economics, but also for all the sciences. Even a careful reading of Hutchison's selected quotations from Mises will reveal no such illegitimate deductions.Thus: "Liberalism starts from the pure sciences of political economy and sociology which within their systems make no valuations and say nothing about what ought to be or what is good or bad, but only ascertain what is and how it is." Quoted by Hutchison, "Professor Machlup on Verification Economics," p. 483n. Indeed, Mises's economics is unrivaled for its avoidance of unanalyzed ad hoc value judgments, slipped into the corpus of economic analysis.
Dean Rappard has posed the question: how can Mises be at the same time a champion of "Wertfreiheit in economics and of laissez-faire" liberalism, a "dilemma" which leads Professor Hutchison to accuse Mises of making political deductions from economic theory?William E. Rappard, "On Reading von Mises," in On Freedom and Free Enterprise, M. Sennholz, ed., pp. 17–33.
The following passages from Mises give the clue to this puzzle:
Liberalism … is a political doctrine. … As a political doctrine liberalism [in contrast to economic science] is not neutral with regard to values and ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to their valuational principles. While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, … abundance to poverty. It teaches men how to act in accordance with these valuations.Mises, Human Action, pp. 153–54; also see pp. 879–81.
Economic science, in short, establishes existential laws, of the type: if A, then B. Mises demonstrates that this science asserts that laissez-faire policy leads to peace and higher standards of living for all, while statism leads to conflict and lower living standards. Then, Mises as a citizen chooses laissez-faire liberalism because he is interested in achieving these ends. The only sense in which Mises considers liberalism as "scientific" is to the extent that people unite on the goal of abundance and mutual benefit.
Perhaps Mises is overly sanguine in judging the extent of such unity, but he never links the valuational and the scientific: when he says that a price control is "bad" he means bad not from his point of view as an economist, but from the point of view of those in society who desire abundance. Those who choose contrasting goals — who favor price controls, for example, as a route to bureaucratic power over their fellow men, or who, through envy, judge social equality as more worthwhile than general abundance or liberty — would certainly not accept liberalism, and Mises would certainly never say that economic science proves them wrong. He never goes beyond saying that economics furnishes men with the knowledge of the consequences of various political actions; and that it is the citizen's province, knowing these consequences, to choose his political course.
This article is excerpted from Economic Controversies (2011). It originally appeared in the Southern Economic Journal (January 1957): pp. 314–20.
So I'm at the Rothbard Graduate Seminar. It's the first day, the first class, and Bob Murphy mentions the fallacy of a cardinal preference scale. This starts me thinking back to when I was working on my first masters degree, in sociology, learning survey-research methods.
In our classes on data analysis we learned about the different levels of data in a pretty rigorous way. This was important then because there are different data analysis methods that are appropriate for different levels of data. If you use an inappropriate method of analysis, your results will be at best distorted and possibly meaningless.
In the context of economics, even though we talk a lot about the error of treating preferences as cardinal, I think we don't emphasize the nature of the error enough. This may be an arcane point, but I think many of our students don't realize just how egregious this error is.
The simplest type of data is nominal-level data. I am male. I am married. I live in Columbia, Missouri. I am a graduate student. These are all nominal data — the observation is placed in categories that have simple names. Nominal data are commonly used in surveys of all kinds, including economic studies. Demographic data are probably the most common variety of nominal data.
The next step up is ordinal data. Preference scales are of course ordinal. Likert scales are also ordinal; these are the "strongly agree, agree, neutral, disagree, strongly disagree" types of questions you see on surveys or course evaluations. Ordinal data exist as a list, ordered from best to worst, most desirable to least desirable, or according to some other relevant criterion. The distinguishing feature of ordinal data is that there is no implied "distance" from one rank to the next. For example, the question of how much more you agree if you mark "strongly agree" rather than "agree" is meaningless.
The category of cardinal data actually contains two subcategories. The next step up from ordinal is interval-level data. We don't encounter interval-level data much in the social sciences, but it is fairly common in natural sciences. Temperature is a commonly used interval scale. The amount of temperature change measured by one degree Fahrenheit is (roughly) constant over the range of temperatures encountered in the real world. When we say that 70°F is ten degrees hotter than 60°F, or that 90°F is five degrees hotter than 85°F, those are meaningful statements. Moreover, we can say that those two intervals are comparable; a ten-degree interval is twice as big as a five-degree interval. However, we cannot say the same thing about the temperatures themselves; to say that 90°F is "twice as hot" as 45°F is, again, meaningless.
The final category of data is ratio-level data. Ratio-level data differ from interval-level data in that they have a meaningful zero point. The reason we can't meaningfully say that 90°F is twice as hot as 45°F is that the 0°F point was chosen arbitrarily. It doesn't have any connection to the actual heat content of the thing being measured. Length, on the other hand, is a ratio-level measure. Zero length is a clear, easily definable concept. Because of this, we can meaningfully say that 12 inches is twice as long as 6 inches. Monetary measures are also ratio level. We all know what it means to have zero dollars, and we know that $10 is twice as much as $5.
Moreover, a negative amount can have meaning in a ratio-level measure. For instance, we use the negative sign to denote a sum of money we owe as opposed to money we have. A negative temperature just means it's getting colder.
When we transform an ordinal preference scale into the utility function that our neoclassical friends love so much, it has to become ratio-level data. The operations of calculus that we perform on utility functions, like differentiation and constrained optimization, require ratio-level numbers. Anything less than that gives meaningless results. You can see, then, that imputing cardinality is not one error, but two together. In treating preference scales as ratio-level data, we are adding two characteristics to the scale that were not there before.
At the interval level, we are saying that there is an identifiable, constant unit for measuring utility or preference. This necessarily implies that the nature of the satisfaction we derive from consumption of different goods is qualitatively the same. That is, the satisfaction or utility I get from drinking a big glass of iced tea after mowing the lawn, or from reading a good book, or riding my bicycle on the MKT Trail, or giving a really good economics lecture, are all qualitatively the same and therefore can be measured with the same scale, even though they may differ in magnitude.
It also implies that this completely internal event that we call satisfaction, which has no extension in space and no observable characteristics, is somehow objectively measureable at all. This is all patent nonsense, and we haven't yet even addressed the question of whether that identifiable unit of utility is the same for different individuals.
At the ratio level, we are saying that the concept of zero utility is meaningful. But how can this be? What is the total absence of satisfaction? Is utility always positive, like length or weight, or can it be negative? Could dissatisfaction be "negative" utility, or does that just mean that our actual "level" of satisfaction is lower than we would like?
We are all dissatisfied to some degree all the time, or we would never act. So are we always climbing toward zero on our utility scale, or climbing toward infinity? A ratio-level measure requires a nonarbitrary zero point, but there is no way of finding that. Zero utility is obviously nonsense; again, this is shown to be true before we ask whether my zero point and yours are the same or different.
Imputing either one of these cardinal characteristics to a preference scale is nonsense; making both errors together is, as Walter Block likes to say, nonsense on stilts. Preferences are ordinal, and our analysis has to reflect that simple, unavoidable fact.
I. How do we know about the outer world — or reality, for that matter? Where does our knowledge about it come from? The attempt to answer these questions leads to epistemology, the branch of philosophy dealing with the origin, scope, and validity of human knowledge.
In the epistemological debate, there are two archetypal and actually diametrically opposed concepts: empiricism and rationalism. Empiricism claims that sensory experience (observation) is man's main (or even sole) source of knowledge, while rationalism claims that his knowledge stems from human reason.
Hardly anyone would deny that there is knowledge that comes to us from sensory experience. Take, for instance, the knowledge that water freezes at zero degrees Celsius. It actually takes observation(s) to acquire such knowledge.
However, in the field of science, which formulates knowledge that applies universally, irrespective of time and place, rationalism holds that empirical knowledge gained through sensory experience doesn't have the same validity as knowledge deduced from reasoning.
Take, for instance, the following two observations:
In the last decades, the fiat-money supply rose 200 percent year to year, while real GDP increased 50 percent year to year.
In the last decades, government tax revenues rose from 10 percent to 50 percent of GDP, while per capita income increased 40 percent.
How can we make sense of these findings? Did real GDP increase because of a rise in the fiat-money supply, or did real GDP go up despite a rise in the fiat-money supply? Likewise, one can ask, Did real GDP increase because or despite a rise in taxes?
Each of these explanations appears equally plausible. So which is the correct one? The first step towards answering this question is the understanding that employing a theory (an idea of putting together in a systematic fashion the knowledge one has of aspects of reality) is indispensible for observing "facts."
II. Indeed, there is no "presuppositionless observation of 'facts,'"[1] as Ludwig von Mises (1881–1973) pointed out:
There is no such thing as a mere recording of unadulterated facts apart from any reference to theories. As soon as two events are recorded together or integrated into a class of events, a theory is operative.[2]
The notion of "letting the facts speak for themselves" without taking recourse to a theory is nonsensical.[3] Mises was aware that people's "reasoning may be faulty and the theory incorrect; but thinking and theorizing are not lacking in any action."[4]
How do we know, and how can we make sure, that we employ a correct theory? Fortunately, in social science a satisfactory answer can be given to these questions by taking recourse to a priori theory — meaning propositions that provide true knowledge about reality, and whose truth value can be validated independent of experience.
To explain, we have to turn briefly to the Prussian philosopher Immanuel Kant (1724–1804) and his groundbreaking The Critique of Pure Reason (1781). A central outcome of what Kant called transcendental investigation is his discovery of so-called a priori synthetic judgments.[5]
A priori denotes a proposition (a declarative statement) expressing knowledge that is acquired prior to, or independently from, experience. In contrast, a posteriori denotes knowledge that is acquired through and on the basis of experience.
A synthetic judgment refers to knowledge that is not contained in the subject matter. An example is All bodies are heavy. Here, the predicate "heavy" conveys knowledge that goes beyond the mere concept of body in general. A synthetic judgment thus yields new knowledge about the subject matter.
Analytical judgments repeat what the concept of the subject matter already presupposes. An example is All bodies are extended. In order to know that bodies are extended one does not need experience, as this information is already in the concept of bodies.
One would expect that analytical judgments are a priori, while synthetic judgments are a posteriori. However, Kant claims that there exist a priori synthetic judgments — knowledge that neither merely repeats the meaning of the concept under review nor requires experience to say something new about the subject matter.
How can a priori synthetic judgments be identified? According to Kant, a proposition must meet two requirements in order to qualify as an a priori synthetic judgment. First, it must not result from experience, but from reasoning. Second, it cannot be denied without causing an intellectual contradiction.
III. Mises realized that the axiom of human action is an a priori synthetic judgment. The axiom of human action says that humans act. This might sound trivial at first glance. At second glance, however, it becomes obvious that the axiom of human action has far-reaching implications.[6]
The axiom of action meets the requirements of an a priori synthetic judgment. First, one cannot observe that humans act in the first place. For doing so, one needs an understanding of what human action is. This knowledge cannot be acquired through experience, because it comes from reason and not from experience.
Second, one cannot deny that humans act, for doing so would result in an intellectual contradiction. Saying "humans cannot act" is itself a form of human action, and it would thus contradict the statement's truth claim.
Mises also realized that, by using formal logic, other truth claims can be deduced from the irrefutably true axiom of human action. This approach he termed praxeology: the logic of human action. Mises reconstructed economics on the basis of praxeology.
Praxeology is a priori theory. It yields propositions about reality that are irrefutably true — propositions that can be validated without taking recourse to experience. Take, for instance, the concept of causality — the idea that each effect has a cause. It is logically implied in the axiom of human action.
As Mises put it,
Acting requires and presupposes the category of causality. Only a man who sees the world in the light of causality is fitted to act. In this sense we may say that causality is a category of action. The category means and ends presupposes the category cause and effect. In a world without causality and regularity of phenomena there would be no field for human reasoning and human action. Such a world would be a chaos in which man would be at a loss to find any orientation and guidance. Man is not even capable of imagining the conditions of such a chaotic universe. Where man does not see any causal relation, he cannot act.[7]
A priori theory offers an approach for reviewing, criticizing, and possibly revising commonly held theoretical explanations of historical events.[8] When (re)viewed from point of a priori theory, what can be said about the two observations that were rolled out at the beginning of this article?
Re 1: From the viewpoint of a priori theory, we can say with certainty that a rise in the fiat money supply does not raise a society's standard of living. A rise in the fiat money stock does not confer a social benefit, because money's sole function is as the means of exchange.
Furthermore, a priori theory shows that fiat money exerts economically detrimental effects on the economy. Fiat money is typically created through bank circulation credit, thereby necessarily causing capital consumption and malinvestment.
The fiat-money injection lowers the market interest rate to below the natural interest rate (as determined by societal time preference), thereby enabling firms producing goods and services that do not correspond to the market's true demand. It induces a boom, which must then result in a bust.
The increase in production that comes with fiat-money expansion is unsustainable and will be corrected sooner or later. Output gains from fiat-money-induced activities may tend to show up earlier than the output losses that come with it, giving the sensory impression that an increase in fiat money can increase output. The truth is, however, that fiat-money creation does not increase peoples' standard of living, but rather lowers it compared to a situation in which there is no rise in the fiat-money supply.
Re 2: We can say with certainty that imposing (higher and higher) taxes on income earners will lower, rather than raise, peoples' standard of living. This is because (higher) taxes (increasingly) divert scarce resources from homesteaders, producers, and contractors to nonhomesteaders, nonproducers, and noncontractors.
This lowers the incomes of homesteaders, producers, and contractors, and thus necessarily raises their respective time preference. As a result, savings and investment will decline, and capital stock and real wages will grow slower (or may even decline) compared with a situation where there is no taxation.
IV. A priori theory provides true knowledge about the outer world, and the truth of knowledge derived from a priori theory can be validated independent of sensory experience.
By no means less important, a priori knowledge trumps empirical knowledge: "A proposition of an aprioristic theory can never be refuted by experience."[9]
Praxeology, the a priori science of human action, and, more specifically, its up to now best-developed part, economics, provides in its field a consummate interpretation of past events recorded and a consummate anticipation of the effects to be expected from future actions of a definite kind.[10]
$19 $15
An a priori theorist can thus decide in advance (that is, without engaging in social experimentation, or testing, for that matter) whether or not a given action — policy measure — can bring about the promised effects.
For instance, we know a priori that issuing fiat money does not create economic prosperity, that tax- or debt-financed government spending does not improve society's material well-being, and that these measures are actually economically harmful.
A priori theory is an intellectually powerful defense against promises made by false theory and its detrimental (even disastrous) economic consequences if put into practice. Students of social sciences should therefore be increasingly encouraged to engage in a priori theory.
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Notes [1] Mises, L. (2003), Epistemological Problems of Economics, 3rd ed., "The Task and Scope of the Science of Human Action," Ludwig von Mises Institute, Auburn, US Alabama, p. 29.
[2] Mises, L. (1996), Human Action, 4th ed., Fox & Wilkes, San Francisco, p. 647.
[3] See, for instance, Cohen, M.R., Nagel, E. (2002 [1934]), An Introduction To Logic And Scientific Method, Simon Publications Inc., Safety Harbor, Chapter XI, esp. p. 199.
[4] Mises, L. (1996), Human Action, 4th ed., Fox & Wilkes, San Francisco, p. 177.
[5] A highly recommendable introduction is written by Marcus Weigelt in his Introduction to Kant, I. (2007 [1781]), Critique of Pure Reason, Penguin Books, pp. xv–lxix.
[6] See in this context a "must read" is Hoppe, H.H. (2007 [1995]), Economic Science and The Austrian Methodology, Ludwig von Mises Institute, Auburn, US Alabama.
[7] Mises, Human Action, 4th ed., Fox & Wilkes, San Francisco, p. 22.
[8] See, for instance, Hoppe, H.H. (2006), Democracy, The God That Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order, Transaction Publishers, New Brunswick (US) and London (UK), in particular his Introduction, pp. xv–xix.
[9] Mises, L. (2003), Epistemological Problems of Economics, 3rd ed., "The Task and Scope of the Science of Human Action," Ludwig von Mises Institute, Auburn, US Alabama, p. 30.
[10] Mises, L. (1985), Theory and History: An Interpretation of Social and Economic Evolution, Ludwig von Mises Institute, Auburn, US Alabama, p. 309.
In my previous article, "Mises on Mind and Method," I organized Ludwig von Mises's epistemological doctrines, drawing from several of his works, into a single exposition. In the present article, I do the same with Mises's teachings on the most fundamental praxeological insights. Those insights are threaded throughout Mises's great work, Human Action. Herein, I gather them together and attempt to explain them and how they interrelate, using the technique of "Crusoe Economics."
Introduction"Man is a social animal": thus Aristotle's famous dictum is often translated. Ludwig von Mises believed that man could not have acquired the ability to act had his forebears lived in complete isolation. And John Donne said, "No man is an island."
Society is so central to the human condition that writers have, for millennia, used isolation as a dramatic Herculean challenge for their heroes to overcome. From the ancient Egyptian Story of the Shipwrecked Sailor, to the Arabian Sinbad, to Robinson Crusoe, to Tom Hanks's character in the movie Castaway, the idea of island isolation has horrified and fascinated us. In the hands of the economist, it has also come to instruct us.
It makes sense that the notion of an isolated individual can be instructive for economic reasoning. As propounded by Mises, sound economic reasoning is the discovery of necessary truths about special modes of action, by deducing the logical implications of both (a) our a priori[1] understanding of the meaning of action (purposeful behavior) and (b) the conditions that characterize the special modes of action in question.
The special modes of action that actually occur in the real world are so complex and inaccessible to inquiry that it is impossible for the human mind to apprehend them fully enough to derive any general economic laws from them.
Instead, the economist must consider modes of action simple enough for his finite mind to grasp. Since such simple sets of conditions do not occur in the real world, the economist must conceive them in his mind. He must formulate imaginary constructions (or "thought experiments"), in which the modes of action are defined by assumptions. These assumptions are chosen for the purpose of describing the essential effects of factors that in real life are too hidden amid the static and din of the effects of other factors, but that in the mind can be isolated and described.
The specific method of economics is the method of imaginary constructions. … The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present in actual action. Then we are in a position to grasp the hypothetical consequences of the absence of these conditions and to conceive the effects of their existence.[2]
Since economics is by definition about human action, the simplest imaginary construction in economics is that of a single, isolated human actor: a "Robinson Crusoe."[3] A key merit of "Crusoe praxeology" is that by simplifying things to the extreme, the praxeologist can get at what is logically necessary about all human action. He can do this by "assuming away" (or "abstracting from") conditions until he gets to a point where assuming away anything more will result in something that can no longer be considered action.
Thus we conceive the category of action by constructing the image of a state in which there is no action.[4]
The praxeologist can then discover more specific praxeological laws by progressively adding more assumptions.
Let us see what Crusoe can teach us about action.
The ActorBut first, do we even need Crusoe, or anyone else in our imaginary construction? Can one even conceive of action without an actor? If not, then one must consider the existence of an actor to be a necessary prerequisite of action.
UneasinessLet us say Crusoe awakens, stranded on an island after having floated unconscious onto the shore on a piece of flotsam. The first thing that enters his consciousness is a sharp pain in his hand, which is being caused by a large splinter. He wants to alleviate the pain, and prevent any infection the splinter might cause. The matter is especially urgent, because he feels he is about to pass out in a few moments, and he is worried that infection could set in while he is unconscious.
The incentive that impels a man to act is always some uneasiness.[5]
In this case, Crusoe has an uneasiness concerning the pain that he feels and the damage his body might suffer.
An important distinction is that the praxeological uneasiness is not the pain itself. Praxeology is not psychology, and economics does not posit acting man as necessarily a purely hedonistic (pleasure-pursuing and pain-avoiding) creature. It is conceivable that a person with a splinter in his hand is a masochist and that he feels pain but no uneasiness about the presence of that pain and thus no desire to remove the splinter.
By assumption, Crusoe happens not to be a masochist, and the pain involved happens to be one of the factors (along with the possible damage involved) that causes him to be uneasy about the splinter. But, whatever the cause may be, what is important for praxeology is that Crusoe regards the state of affairs involving the splinter in his hand as imperfect.
It is easy to imagine action without pain, but is it even possible to coherently imagine action without prior uneasiness? No, argued Mises:
A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care.[6]
It is inconceivable for a being to intervene in a state of affairs that he already regards as perfect. Intervention implies perceived imperfection. Uneasiness, therefore, is a necessary prerequisite of action.[7] The presence of an uneasiness can also be referred to as a want or desire, and the removal of an uneasiness can be referred to as the satisfaction of a want or desire.
EndsCrusoe now has a goal in mind (an end): to relieve (remove) his uneasiness concerning the splinter's deleterious effects.
The end, goal, or aim of any action is always the relief from a felt uneasiness.[8]
An end is the most obvious prerequisite of action (purposeful behavior), because "end-seeking" is synonymous with "purposeful."
Already processes have begun in Crusoe's body that may alleviate the deleterious effects of the splinter. For example, the flesh of his hand around the splinter has become inflamed, which is part of the human body's healing process. This process can be seen to have a biological "quasi purpose." And Crusoe may find this process to be advantageous regarding his conscious purposes. But the biological process is not truly "end-seeking."
Conscious or purposeful behavior is in sharp contrast to unconscious behavior, i.e., the reflexes and the involuntary responses of the body's cells and nerves to stimuli.[9]
Image of a More Satisfactory State of AffairsCrusoe imagines himself in a future in which, by virtue of his own intervention, he has no splinter in his hand. He considers that future to be more satisfactory than the future that would eventuate without any intervention on his part, because it would achieve his end: i.e., to remove the uneasiness he has about the splinter's deleterious effects.
Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better.[10]
Try to imagine an action in which the actor does not have any "image of a more satisfactory state."[11] It is inconceivable. Without such an image, an actor would have no idea as to why his action would remedy his uneasiness.
The Action ItselfCrusoe can relieve his uneasiness by carefully removing the splinter using his other hand.
HopeFor Crusoe to try to pull the splinter out, it is necessary for him to anticipate the possibility of the action being successful.
[T]he expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.[12]
Hope, therefore, is a universal implication of action.
MeansThis action would involve the expenditure of Crusoe's personal energy, which is the means Crusoe would use toward the end of relieving the uneasiness associated with his pain.
A means is what serves to the attainment of any end, goal, or aim.[13]
A means can also be referred to as a good.
Try to imagine action with only an end, but no means by which the end is achieved. It cannot be done.
TimeCrusoe's forethought regarding pulling out the splinter, and his actual pulling out of the splinter, is future-oriented (however immediate that future may be), and thus involves the passing of time.
The idea of time is a praxeological category.
Action is always directed toward the future; it is essentially and necessarily always a planning and acting for a better future. Its aim is always to render future conditions more satisfactory than they would be without the interference of action. The uneasiness that impels a man to act is caused by a dissatisfaction with expected future conditions as they would probably develop if nothing were done to alter them. In any case action can influence only the future, never the present that with every infinitesimal fraction of a second sinks down into the past.[14]
Crusoe must use time to remove the splinter. Time is a necessary means for any action.
ScarcityRemoving the splinter is not the only thing Crusoe could expend his personal energy on in his few remaining moments of consciousness. He could also conceivably just lie there, try to ignore the pain, and rest. However, he cannot do both at the same time. His personal energy and time are scarce with regard to his ends.
There are elements in Crusoe's environment that contribute to his welfare but which are not now scarce with regard to his ends. Nonscarcity is also called "superabundance."
For example, the air he breathes contributes to his welfare. But it is immediately available to him in such abundance that he does not need to take any action with regard to it.
However, this was not the case an hour ago, when, immediately after his shipwreck, he was drowning. At that time, air was not abundant. It was scarce. So he had to take action with regard to it. He had to purposefully swim to the surface of the water and take hold of a piece of flotsam in order to get air. At that time air was an object of action.
But now on the island, air is superabundant (nonscarce), and so it requires no action. Therefore, it is not a means (good). Superabundant things are "not the object of any action. They are general conditions of human welfare."[15]
However, Crusoe's personal energy and time are scarce, and therefore they are means (goods) and objects of human action.
Means are necessarily always limited, i.e., scarce with regard to the services for which man wants to use them. If this were not the case, there would not be any action with regard to them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action.[16]
The hypothetical scenario of general superabundance (nonscarcity) is frequently referred to by Mises as the "land of Cockaigne," which, according to Wikipedia,
is a medieval mythical land of plenty, an imaginary place of extreme luxury and ease where physical comforts and pleasures are always immediately at hand and where the harshness of medieval peasant life does not exist.[17]
PreferenceCrusoe can conceivably devote his personal energy in his remaining conscious moments toward pulling out the splinter or resting, but not both. In undertaking one alternative, he is implicitly renouncing the others.
Action always involves a scarcity of means with regard to ends. Thus, there are multiple possible ends to which an actor can dedicate any single means. Therefore, action always involves alternatives.
The undertaking of one alternative is an implicit renunciation of another. Thus, action always involves choices and decisions, even when they are "no-brainer" or "snap" decisions. Choice regarding the dedication of scarce means to some ends, and not to others, is called economization. Another way of saying this is that economization is the selective allocation of scarce means to ends. Furthermore, to choose one alternative and renounce another is to prefer one over the other. Thus, action always involves preference.
Acting man chooses between various opportunities offered for choice. He prefers one alternative to others.[18]
Now Crusoe becomes aware of another uneasiness. He feels a sharp pain in his back, because he is lying on a sharp rock. Besides the pain, he is also concerned that if he were to pass out while lying on the rock, his spine could become damaged. There is now even more scarcity of means with regard to his ends, because he cannot expend his personal energy on dragging himself off the rock, removing the splinter, and resting at the same time. In fact, he anticipates he only has time to do one of the three things before he passes out.
Let us say Crusoe chooses to roll off the rock, and thus renounces the opportunity to pull out the splinter or to rest. By doing so, he would be demonstrating that the wants satisfied by rolling off the rock are more urgent than the wants satisfied by either of the other two alternatives. This is necessarily true, because action is always undertaken for the achievement of ends (relief of uneasiness, satisfaction of wants).
The only kind of preference praxeology is concerned with is demonstrated preference: preferences demonstrated by action, not merely expressed in speech or considered in reflective thought.
For example, Crusoe might prefer not to be stranded on an island at all. He may prefer to be magically whisked back home. But as long as this preference has no bearing on action, it is not an object of praxeology.
Action is not simply giving preference. Man also shows preference in situations in which things and events are unavoidable or are believed to be so. Thus a man may prefer sunshine to rain and may wish that the sun would dispel the clouds. He who only wishes and hopes does not interfere actively with the course of events and with the shaping of his own destiny. But acting man chooses, determines, and tries to reach an end. Of two things both of which he cannot have together he selects one and gives up the other. Action therefore always involves both taking and renunciation.[19]
Furthermore, Crusoe may think to himself that he prefers to rest. But if his actions belie that thought, and he actually rolls off of the rock instead of resting, then, to the praxeologist, he did not really prefer to rest.
To express wishes and hopes and to announce planned action may be forms of action in so far as they aim in themselves at the realization of a certain purpose. But they must not be confused with the actions to which they refer. They are not identical with the actions they announce, recommend, or reject. Action is a real thing. What counts is a man's total behavior, and not his talk about planned but not realized acts.[20]
A choice observed by an economic historian in real life only demonstrates that which is chosen, and it does not demonstrate with certainty what was renounced. However, in an imaginary construction (thought experiment), a praxeologist can make assumptions in order to work out the logical implications of those assumptions. And so a praxeologist can assume what alternative would have been chosen had the top alternative not been available. Furthermore, he can assume what alternative would have been chosen had the top two alternatives not been available, and so on.
For example, we can assume that if there had been no rock in his back, Crusoe would have instead devoted his personal energy to removing the splinter, and that if there had been no rock or splinter, he would have rested. These assumptions can be visualized in a list of the actor's alternatives, in order of descending preference.
Rolling off the rockRemoving the splinterRestingTo prefer one alternative over another is to value one alternative more highly than another. Thus, the above ranking can be called a scale of values. Implied in the above assumptions is that the wants satisfied by removing the rock are more urgent than the wants satisfied by removing the splinter, which are in turn more urgent than the wants satisfied by resting.
Thus the above assumptions can also be visualized in a "scale of wants," a list of the actor's wants ranked in the order of descending urgency. In the example above, the following would be Crusoe's scale of wants:
Avoiding the deleterious effects of the rock.Avoiding the deleterious effects of the splinter.The salutary effects of resting.Since an alternative is evaluated according to the ends it serves, an alternative's ranking in an actor's scale of values is determined by the relative urgency of the wants it would satisfy, as visualized in the actor's scale of wants.
But this requires a reminder about the reality of action:
one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. … Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man's acting.[21]
Psychic Yield/Cost and Psychic Profit/LossIf Crusoe is successful in rolling off of the rock, he has attained the result he sought. The perceived benefit involved in attaining his goal can be called the psychic yield of the action.
Every action involves a choice. And as explained above, and to quote St. Thomas Aquinas, "every choice is a renunciation." That which is given up (renounced) for the sake of another thing is the psychic cost of the thing.
Is Crusoe's personal energy the psychic cost of avoiding the deleterious effects of the rock on his back? No, his personal energy is a means, not an end in itself. What he is really giving up is the opportunity to use his personal energy for alternative ends: either removing the splinter or resting. For praxeology, all psychic costs are thus opportunity costs. His psychic cost is the alternative want-satisfaction he is implicitly giving up when he makes his choice.
So, then, does the opportunity cost of his action consist of giving up the want-satisfaction of both removing the splinter and resting? No, compounding the renounced alternatives in this way does not make sense. If he could not roll off of the rock, he would not then be able to both remove the splinter and rest. He would only be able to undertake the one alternative that satisfies the want that had previously been second highest on his scale of wants: removing the splinter. The want-satisfaction associated with removing the splinter is what he is truly giving up, and therefore represents his opportunity cost.
Costs are the value attached to the most valuable want-satisfaction which remains unsatisfied because the means required for its satisfaction are employed for that want-satisfaction the cost of which we are dealing with.[22]
When Crusoe awakens, he may momentarily reflect on the outcome of his action (rolling off of the rock). Perhaps he succeeded in getting off of the rock, and thus succeeded in protecting his spine. Fortunately, his splinter did not cause an infection, although its continued presence has caused him to wake up in a great deal of pain.
He is, on balance, pleased with his choice. Another way of saying this is that he considers the psychic yield (the benefit of rolling off of the rock) to be superior to the psychic cost (the foregone benefit of removing the splinter) of the action. We can then say he has made a psychic profit.
Counterfactually, perhaps either he did not have sufficient energy to get off the rock — and so his spine was damaged anyway — or a deadly infection did set in because of his splinter.
In either of these unfortunate cases, he may very well regret his action. This is to say that he considers the psychic yield to be inferior to the psychic cost of the action. Such a situation could be characterized as a psychic loss.
Profit, in a broader sense, is the gain derived from action; it is the increase in satisfaction (decrease in uneasiness) brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment; it, in other words, yield minus costs. To make profit is invariably the aim sought by any action. If an action fails to attain the ends sought, yield either does not exceed costs or lags behind costs. In the latter case the outcome means a loss, a decrease in satisfaction.[23]
Mises here uses words that convey a sense of quantifiability ("increase," "decrease," "difference," "minus," etc). But he meant them in a figurative sense only. They can easily be replaced by ordinal terms (as with my use of "superior"/"inferior" instead of "more"/"less"). Mises was careful to avoid any literal interpretation of these words by making the following important point:
Profit and loss in this original sense are psychic phenomena and as such not open to measurement and a mode of expression which could convey to other people precise information concerning their intensity. A man can tell a fellow man that a suits him better than b; but he cannot communicate to another man, except in vague and indistinct terms, how much the satisfaction derived from a exceeds that derived from b.[24]
The psychic profit and loss that is present in even simple isolated action can only ever be ordinal, unmeasurable, and incalculable phenomena. "Profit" and "loss" in the usual sense (which is distinct from, although ultimately derived from, psychic profit and loss) as cardinal, measurable, and calculable phenomena is only present in the reckoning of a individual member of a market economy utilizing money prices.
Praxeology and EconomicsA crucial insight of Mises's is that the social system of production known as the market economy (or capitalism) is only possible with, and is characterized by, the existence of economic calculation, which in turn depends on the existence of cardinal and calculable profit and loss, which in turn depends on the existence of money prices.
Mises regards economics proper (or "catallactics") to be the subfield of praxeology that deals with the market economy, which again is distinguished by the existence of calculable action.
The field of catallactics or of economics in the narrower sense is the analysis of the market phenomena. This is tantamount to the statement: Catallactics is the analysis of those actions which are conducted on the basis of monetary calculation.[25]
Therefore, Crusoe "economics" and the study of barter exchanges (which can only ever be ad hoc, and never be an integrated part of a social system of production) are not really part of economics, in the strict Misesian sense (which again is the study of the market economy), but instead are part of praxeology in general.
Some Austrian scholars and students prefer Murray Rothbard's distinction between praxeology and economics, which preserves the status of barter analysis as part of economics.[26] However, as always, Mises's distinctions are not to be lightly cast aside. Mises eloquently explained why the distinction between noncalculable and calculable action is the most important distinction in the science of human action.
Every action can make use of ordinal numbers. For the application of cardinal numbers and for the arithmetical computation based on them special conditions are required. These conditions emerged in the historical evolution of the contractual society. Thus the way was opened for computation and calculation in the planning of future action and in establishing the effects achieved by past action. Cardinal numbers and their use in arithmetical operations are also eternal and immutable categories of the human mind. But their applicability to premeditation and the recording of action depends on certain conditions which were not given in the early state of human affairs, which appeared only later, and which could possibly disappear again.
It was cognition of what is going on within a world in which action is computable and calculable that led men to the elaboration of the sciences of praxeology and economics. Economics is essentially a theory of that scope of action in which calculation is applied or can be applied if certain conditions are realized. No other distinction is of greater significance, both for human life and for the study of human action, than that between calculable action and noncalculable action. Modern civilization is above all characterized by the fact that it has elaborated a method which makes the use of arithmetic possible in a broad field of activities.[27]
What has been the primary concern of economists since the earliest days of the science has been the elucidation of market phenomena. And, because of its paramount importance described by Mises above, and its distinct scientific challenges, if anything deserves to be ascribed a subscience of its own, it is the momentous realm of calculable action.
UncertaintyThe possibility of Crusoe suffering a psychic loss exemplifies the ever-present reality of uncertainty in the realm of action. Uncertainty too is a necessary prerequisite of action.
The uncertainty of the future is already implied in the very notion of action ….to acting man the future is hidden. If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own.[28]
Action as ExchangeTo give up (renounce) one thing for the purpose of acquiring another can be characterized, in a manner of speaking, as an exchange. Therefore, since every action is a choice, and every choice is a renunciation, every action is also an exchange.
Action always is essentially the exchange of one state of affairs for another state of affairs. If the action is performed by an individual without any reference to cooperation with other individuals, we may call it autistic exchange.[29]
Time PreferenceOther things being equal, satisfaction is preferred sooner rather than later. This universal feature of acting man is called "time preference." Time preference can even be seen in the behavior of children, as in the seminal "marshmallow experiment" conducted at Stanford University.
As reported in the New Yorker,
In the late nineteen-sixties, Carolyn Weisz, a four-year-old with long brown hair, was invited into a "game room" at the Bing Nursery School, on the campus of Stanford University. The room was little more than a large closet, containing a desk and a chair. Carolyn was asked to sit down in the chair and pick a treat from a tray of marshmallows, cookies, and pretzel sticks. Carolyn chose the marshmallow. Although she's now forty-four, Carolyn still has a weakness for those air-puffed balls of corn syrup and gelatine. "I know I shouldn't like them," she says. "But they're just so delicious!" A researcher then made Carolyn an offer: she could either eat one marshmallow right away or, if she was willing to wait while he stepped out for a few minutes, she could have two marshmallows when he returned. He said that if she rang a bell on the desk while he was away he would come running back, and she could eat one marshmallow but would forfeit the second. Then he left the room. …
Most of the children were like Craig. They struggled to resist the treat and held out for an average of less than three minutes. "A few kids ate the marshmallow right away," Walter Mischel, the Stanford professor of psychology in charge of the experiment, remembers. "They didn't even bother ringing the bell. Other kids would stare directly at the marshmallow and then ring the bell thirty seconds later." About thirty per cent of the children, however, were like Carolyn. They successfully delayed gratification until the researcher returned, some fifteen minutes later. These kids wrestled with temptation but found a way to resist.
In struggling with "temptation," these children were actually deliberating over an "autistic exchange." (Obviously the researchers would not really count as interested "parties" in the exchange.) They were deciding over an exchange concerning two different goods: a present good (the one treat laid out before them) in exchange for a quantitatively greater future good (two treats in 15 minutes).
By virtue of their closeness in time, present goods always have a premium in relation to future goods, other things being equal. This premium is called time preference, and it varies from person to person. Another way of saying the same thing is that, by virtue of their remoteness in time, future goods always have a discount in relation to present goods, and this discount varies from person to person.
Craig and the other children who did not wait exhibited a higher time preference than Carolyn and the other children who did wait. In other words, they placed a higher premium on "now," or a higher discount on "later."
Going back to Crusoe, the fact that resting now would involve satisfaction that is immediate gives that alternative a slight additional appeal, while the fact that removing the rock or splinter mostly provides more remote satisfaction (enjoying the benefits of living without an injured back or hand after he wakes up) slightly lessens the appeal of those options. Of course, for everyone aside from the most ridiculous procrastinators, the degree to which the appeal of avoiding injury would be lessened by time preference in such a situation would be extremely negligible, and would not make any difference in his choice.
However, in daily life, time preference is a major factor in decisions. And, whether it "tips the scales" of a particular choice or not, time preference is nonetheless always present.
Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not — other things being equal — preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.
Not only the first step toward want-satisfaction, but also any further step is guided by time preference. Once the desire a to which the scale of values assigns the rank 1 is satisfied, one must choose between the desire b to which the rank 2 is assigned and c that desire of tomorrow to which — in the absence of time preference — the rank 1 would have been assigned. If b is preferred to c, the choice clearly involves time preference. Purposive striving after want-satisfaction must needs be guided by a preference for satisfaction in the nearer future over that in a remoter future.[30]
Action as ProductionIf Crusoe succeeds in pulling the splinter out, he can be said to have produced the new state of affairs in which his ends (removing the deleterious effects of the splinter) are achieved.
Focusing on the cause-and-effect aspect of action, all action can be seen as production.
Action, if successful, attains the end sought. It produces the product.[31]
To analyze Crusoe's actions as production, let us present him with a new challenge. Let us say Crusoe chose to drag himself off the rock. He then passed out, and when he woke up, he removed the splinter. Fortunately he did not get an infection. Then he relaxes for a few moments. While relaxing, another want (uneasiness) arises. He feels a sharp hunger in his belly. And so Crusoe has another end he wants to achieve: to eat.
In the prior thought experiments, Crusoe only had to use, as a means, his own personal energy to satisfy his most pressing wants (most urgent uneasinesses). But to alleviate his hunger, he would need to use means from outside of himself.
Fortunately he sees a coconut on the beach. This coconut is a good (a means).
It is important to note that praxeology (and economics) concerns the meaning that the mind of man gives to the world around him, not to the intrinsic properties of the outside world itself. The day before Crusoe's shipwreck, the coconut laying on the island was not a good. It was just a thing. For an outside scientific observer studying the scenario on the island, it was an object of botany and topography, but not of economics. It was only when Crusoe cast his eyes upon it and judged it to be potentially useful for achieving his ends that it became a good. In other words, the coconut derives its character as a good ("goods-character")[32] from its perceived usefulness in achieving ends.
Praxeological reality is not the physical universe, but man's conscious reaction to the given state of this universe. Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.[33]
The coconut happens to have somehow been smashed open and is inches away from his face. Crusoe can just shove his face into the coconut and start eating immediately. The open coconut is directly serviceable for Crusoe. Directly serviceable means are called consumers' goods, or goods of the first order.
Unfortunately, the coconut has very little meat, and so afterward he is still ravenously hungry.
But Crusoe sees another coconut. However, this one is not busted open. It is not directly serviceable. He thinks about trying to rip it open with his bare hands. Only after opening it would the coconut be a consumers' good. While it is still unopened, it is not directly serviceable. It is only potentially indirectly serviceable, because Crusoe can use the unopened coconut in combination with his personal energy (ripping it open) to produce an open coconut.
Indirectly serviceable means are called factors of production or producers' goods. Producers' goods that directly produce consumers' goods (goods of the first order) are called goods of the second order. Producers' goods that directly produce goods of the second order are called goods of the third order, and so on. As we progress in this manner, we move from lower-order goods to higher-order goods.
Crusoe does not need to produce the unopened coconut; he just found it in nature. Such factors of production that are themselves not produced, but are instead taken directly out of nature, are often called land.
Personal energy used as a factor of production is called labor.
Since neither land nor labor is "produced" in the usual sense of the word, they are often termed "original factors of production."
So combining land (the unopened coconut) and labor (his own effort) Crusoe can try to produce a consumers' good (the opened coconut).
However, Crusoe finds that he is too weak to rip open the coconut with his bare hands. But he has the idea of using a nearby flint rock to smash open the coconut. The flint rock is a good now too (a factor of production), and since it was found in nature it would be characterized as land.
The flint rock's goods-character is derived from the goods-character of the open coconut it helps produce, just as the open coconut in turn derives its goods-character from the satisfaction it provides.
Unfortunately, Crusoe finds that the rock, the unopened coconut, and his labor are still not enough to produce the opened coconut: the coconut husk is just too solid.
So he has another idea: using a cobblestone to break off flakes from the flint rock to make it sharp, and then using the sharp rock to cleave open the coconut.[34]
He uses the cobblestone, labor, and the dull flint rock to produce something new: a sharp flint rock.
This sharp flint rock is not land, because it was not simply found in nature; it was produced. But it is still a factor of production (not a consumers' good), since it is only indirectly serviceable (via creating the open coconut). It is a produced factor of production. Produced factors of production are often called capital goods.
The cobblestone derives its goods-character from the sharp rock, the sharp rock from the opened coconut it helps produce, and the open coconut from the satisfaction it provides.
Thus we have the classical triad of factors of production: land, labor, and capital goods.
It is important to note that Mises did not think the land, labor, and capital triad was useful for value and price theory, and thus he downplayed the importance of the land/labor (original factors of production) vs. capital good (produced factor of production) distinction, especially as less important than the "orders of goods" scheme.[35]
So let us analyze Crusoe's situation using that scheme.
The desired open coconut is a good of the first order. The sharp flint rock used to open the coconut is a good of the second order. And the cobblestone used to sharpen the rock is a good of the third order. Analyzed physically, higher-order goods cause lower-order goods. But analyzed teleologically, causation flows in the reverse direction (backward through time in the mind of the individual): the goods-character of lower-order goods cause the goods-character of higher-order goods.
The goods-character of a good is directly derived from the good(s) of the next-lower order it directly helps to produce. But the goods-character of every good is ultimately derived from the first-order good(s) it indirectly (or directly) helps produce. This is true of even the most lengthy chains of production.
RecipesIn the above hypothetical acts of coconut production, Crusoe had to deploy factors of production according to certain methods in order to try to produce a consumers' good. The technical knowledge of such methods of deployment are called recipes. All production requires recipes.
Producer and Consumer as FunctionsSince even before Adam Smith, functional analysis has been a crucial method in economic science. This method reached maturity in the "functional distribution" approach of John Bates Clark,[36] which was adopted and perfected by Mises.
The underlying notion of functional distribution goes back to Aristotle, who explains the concept quite well: "a man who is a doctor might cure himself. Nevertheless it is not in so far as he is a patient that he possesses the art of medicine: it merely has happened that the same man is doctor and patient."[37]
In other words a doctor who obeys the call to "heal thyself" cures in his capacity as a doctor ("qua doctor"), and is cured in his capacity as a patient ("qua patient").
Taking this approach, there are two ways of looking at Crusoe with regard to his action regarding the coconut. There is the aspect of Crusoe as a possessor of ends to be accomplished, a felt uneasiness that is to be removed. This is Crusoe in his function as a consumer.
There is also the aspect of Crusoe as a deployer of means (factors of production). This is Crusoe in his function as a producer.
Just as means are always deployed for the sake of ends, production is always for the sake of consumption, and never the other way around. "Crusoe the coconut opener" is always (and by definition) at the service of "Crusoe the eater," so to speak. "Crusoe the consumer" is "sovereign" over "Crusoe the producer."
This "consumer sovereignty" (a term coined by William H. Hutt[38] and adopted by Mises) is not just present in autistic exchange. As can be discovered in an exploration of economics proper, it also carries over into barter exchange and into even the most complex market economy. Through social cooperation, the means-ends coordination present in the actions of an individual isolated actor is extended to the market society as a whole.
However, the way in which this occurs involves complicated and subtle processes. This complexity and subtlety sufficiently confuses many people to the extent that, based on their confusion, they propose fundamentally absurd economic doctrines.
For example, there are the syndicalist and corporativist fallacies,[39] which in effect try to make consumption for the sake of production.
And there are the Keynesian and other underconsumptionist fallacies, which, at bottom, are just as absurd as thinking that Crusoe could become richer in consumers' goods by consuming more in order to stimulate his own production. There is a great deal that Mr. Crusoe could teach Mr. Krugman, if the arch-Keynesian would only deign to spend some quality time with him.
As the great Frederic Bastiat wrote, "How happy will nations be when they see clearly how and why what we find false and what we find true of man in isolation continue to be false or true of man in society!"[40]
To fully spell out why most of the economic doctrines that dominate present-day policy are absurd and destructive, we must eventually leave our little island. However, the path toward economic understanding can be followed much more easily if we walk the first mile in Crusoe's sea-soaked shoes.
Notes[1] Daniel James Sanchez, "Mises on Mind and Method," Sec. "A Priori" and "Categories."
[2] Ludwig von Mises, Human Action (HA), Ch. 14, Sec. 2.
[3] The imaginary construction of Crusoe on his island has been used since long before Mises rigorized the methodology of theoretical economics, which goes to support Mises's contention that economics, no matter how muddled it has been at times, has always been a priori and theoretical in the soundness of its core.
[4] Ibid.
[5] Mises, HA, Ch. 1, Sec. 2.
[6] Ibid.
[7] The theological implications of this are interesting to say the least.
[8] Mises, HA, Ch. 4, Sec. 1.
[9] Mises, HA, Ch. 1, Sec. 1.
[10] Mises, HA, Ch 1., Sec. 2.
[11] Ibid.
[12] Mises, HA, Ch. 1, Sec. 2.
[13] Mises, HA, Ch. 4, Sec. 1.
[14] Mises, HA, Ch. 5, Sec. 2.
[15] Mises, HA, Ch. 4, Sec. 1.
[16] Mises, HA, Ch. 4, Sec. 1.
[17] "Cockaigne," Wikipedia, retrieved 2011-05-10.
[18] Mises, HA, Ch. 4, Sec. 2.
[19] Mises, HA, Ch. 1, Sec. 1.
[20] Mises, HA, Ch. 1, Sec. 1.
[21] Mises, HA, Ch. 4, Sec. 2.
[22] Mises, HA, Ch. 16, Sec. 15.
[23] Mises, HA, Ch. 15, Sec. 8.
[24] Ibid.
[25] Mises, HA, Ch. 14, Sec. 1.
[26] Murray N. Rothbard, Man, Economy, and State, Ch. 1, Appendix A.
[27] Mises, HA, Ch. 10, Sec. 3.
[28] Mises, HA, Ch. 6, Sec. 1.
[29] Mises, HA, Ch. 10, Sec. 1.
[30] Mises, HA, Ch. 18, Sec. 2.
[31] Mises, HA, Ch. 7, Sec. 4.
[32] Carl Menger, Principles of Economics, Ch. 1.
[33] Mises, HA, Ch. 4, Sec. 1.
[34] Incidentally, a production process almost identical to this is adopted by Tom Hanks's character in the film Castaway.
[35] Mises, HA, Ch. 15, Sec. 2.
[36] Joseph T. Salerno, "Mises's Favorite Anglo-American Economists."
[37] Aristotle, Physics, Book II.
[38] Joseph T. Salerno, "The Essence of Hutt."
[39] Daniel James Sanchez, "Overt and Covert Socialisms."
[40] Frederic Bastiat, Economic Harmonies, Ch. 4.
Introduction"A Priori" and "Categories"CausalityTeleology and ActionThe WillPraxeologyEconomicsPraxeology Is Nothing NewNature and the Human RealmRadical AntiteleologyScientistic EconomicsConclusionNotesIntroductionWhen Austrian economist Thomas DiLorenzo recently testified before the House Subcommittee on Domestic Monetary Policy, Congressman William Lacy Clay tried to dismiss the Austrian School of economics as lacking "scientific rigor," because it relies on "deductive reasoning."
There is something dystopian about a member of the government saying to a dissenting intellectual, in essence, "Isn't it true, sir, that you are part of a group of thinkers who uses [cue the scary music] … logic?" Not even the obtuse inquisitors of Socrates, Abelard, and Galileo would have been so bold.
It has become a popular trick among people who are unprepared to grapple with the actual economic arguments of the Austrian School to try to short-circuit the debate by groaning, zombie-like, "unscientific!" with hardly any familiarity, outside of what they were taught in grade school, of even the epistemological issues concerning the natural sciences, let alone the even more neglected epistemological issues concerning the social sciences.
Crude methodological critiques like these against sound economics are old, predating Austrian economics itself. Before Carl Menger had even started the Austrian School, the members of the German Historical School thought they could discredit the classical economists, not by actually grappling with their arguments, but by simply dismissing the whole enterprise of theoretical economics as "bloodless abstractions."
Ludwig von Mises remarked that when faced with such potentially biased methodological attacks on the validity of sound economics, it may seem appropriate to simply "let the dogs bark and pay no heed to their yelping," and to remember the dictum of Baruch Spinoza that "just as light defines itself and darkness, so truth sets the standard for itself and falsity."[1]
However, Mises rejected such an "above it all" approach, insisting,
No scientist is entitled to assume beforehand that a disapprobation of his theories must be unfounded because his critics are imbued by passion and party bias. He is bound to reply to every censure without any regard to its underlying motives or its background.[2]
He considered spelling out the foundational underpinnings of economics to be essential. For this reason, Mises devoted a significant amount of his scientific attention to epistemological and methodological problems.
In what follows, I will endeavor to systematically explain Mises's epistemology and its bearings on his economics, drawing especially on his treatises Human Action, Theory and History, and The Ultimate Foundation of Economic Science.
"A Priori" and "Categories"Mises characterized economics as an a priori science. By this he means that economic laws are prior to, and independent of, economic experience, and that it makes no sense to try to test economic laws with experiments, observations, statistics, or any other kind of empirical data.
This position tends to immediately set off alarms with people inculcated with a simplistic version of the methods used by the natural sciences. Some even go so far as to malign such an approach as "religious," because anything that isn't based on empirical fact must be "faith based." One wonders if such critics think of geometry as a religion, being that the theorems of geometry are prior to, and not based on, the gathering of topographical data. (More on that comparison later.)
Such critics don't realize that all reasoning (including the reasoning of the natural sciences) has an a priori aspect.
To deny this would be to think of the mind in the way that is, as Mises wrote, "implied in the famous dictum of John Locke according to which the mind is a sheet of white paper upon which the external world writes its own story."[3]
On the contrary, the "human mind is not a tabula rasa on which the external events write their own history."[4]
There is an empiricist doctrine that nothing is in the intellect that has not previously been in the senses. As Mises noted, the philosopher Gottfried Leibniz added the essential proviso: "except the intellect itself." This is because for external events to even become knowledge, they need to be processed by the intellect/mind. And for the mind to meaningfully process events, it must be, as Mises puts it, "equipped with a set of tools for grasping reality."[5]
Mises credited Immanuel Kant for spelling out this key insight: "Experience, [Kant] taught, provides only the raw material out of which the mind forms what is called knowledge."[6] .
The "set of tools for grasping reality" are certain inbuilt conceptions that the mind must apply to raw sensations in order for those sensations to be converted into actual knowledge. We must have these conceptions, for all sensation would be meaningless without their application. And these conceptions must be inbuilt, because they cannot be learned, since learning is the acquisition of knowledge (meaningful interpretations of external and internal sensations), and the acquisition of knowledge presupposes the capacity to apply these "reality-grasping" conceptions.[7]
Kant called these inbuilt conceptions "categories" (a term Mises used very frequently). Mises referred to the "categories" as necessary features of the "logical structure of the human mind,"[8] and as the mind's "projection into the external world of becoming and change."[9]
All knowledge is conditioned by the categories that precede any data of experience both in time and in logic. The categories are a priori; they are the mental equipment of the individual that enables him to think and — we may add — to act.[10]
A primary example of this "mental equipment" is the laws of logic themselves. Application of the "fundamental logical relations" (for example, the law of noncontradiction) is necessary for all reasoning regarding truth and falsity, but the principles of logic themselves
are not subject to proof or disproof. Every attempt to prove them must presuppose their validity. It is impossible to explain them to a being who would not possess them on his own account. Efforts to define them according to the rules of definition must fail. They are primary propositions antecedent to any nominal or real definition. They are ultimate unanalyzable categories. The human mind is utterly incapable of imagining logical categories at variance with them. No matter how they may appear to superhuman beings, they are for man inescapable and absolutely necessary. They are the indispensable prerequisite of perception, apperception, and experience.
The apriori forms and categories of human thinking and reasoning cannot be traced back to something of which they would appear as the logically necessary conclusion. It is contradictory to expect that logic could be of any service in demonstrating the correctness or validity of the fundamental logical principles. All that can be said about them is that to deny their correctness or validity appears to the human mind nonsensical and that thinking, guided by them, has led to modes of successful acting.[11]
CausalityEven the natural sciences must take recourse to a priori categories. Considering observed experiences scientifically useful at all for discovering causal laws itself rests on what Mises called an "aprioristic assumption."
Experience is necessarily of past events. It can be resorted to for the prediction of future events only with the aid of the assumption that an invariable uniformity prevails in the concatenation and succession of natural phenomena.
Only with this aprioristic assumption can one infer "from regularity observed in the past to the same regularity in future events."[12]
Furthermore, as David Hume pointed out in his famous discussion of the "problem of induction," if you say that we can know that prior regularity predicts subsequent regularity, because it has reliably done so in the past, then that is simply begging the question (committing the logical fallacy of assuming that which is to be proved). That would be assuming that a prior regularity ("prior regularity predicting subsequent regularity in the past") predicts a subsequent regularity ("prior regularity predicting subsequent regularity in the future"), which is exactly what one is trying to prove in the first place.[13]
The "category of causality" is our inbuilt conception that past regularity predicts future regularity. That conception is a prerequisite to all reasoning regarding cause and effect in the natural world. As Mises wrote, agreeing with Hume, there is no deductive proof that past regularity predicts future regularity.
There is no deductive demonstration possible of the principle of causality and of the ampliative inference of imperfect induction; there is only recourse to the no less indemonstrable statement that there is a strict regularity in the conjunction of all natural phenomena. If we were not to refer to this uniformity, all the statements of the natural sciences would appear to be hasty generalizations.[14]
However, there is no other imaginable way of making sense of the material world without assuming that past regularity predicts future regularity. Without taking recourse to the category of causality, the physical universe around us would be a meaningless jumble of sensations.
Not only the natural sciences but everyday life would be impossible without our inbuilt conception that past regularity does indeed predict future regularity. Without it, we would never have developed agriculture, because we would have no reason to infer from past seasonal cycles that similar seasonal cycles might occur in the future. Without it, we would never even avoid contact with flame, because we would have no reason to infer from past contact the pain and damage we would incur from future contact.
In a world without causality and regularity of phenomena there would be no field for human reasoning and human action. Such a world would be a chaos in which man would be at a loss to find any orientation and guidance. Man is not even capable of imagining the conditions of such a chaotic universe.[15]
Teleology and ActionThe most important "mental equipment" for thinking about mankind is the "category of teleology/action": our inbuilt conception of purpose and purposeful behavior. Action (purposeful behavior) is the use of means to seek an end (the "end" always being "the relief from a felt uneasiness").[16]
"Should I try to deny the reality of purpose, means and ends, I would find myself caught in the manifest absurdity of trying to deny the reality of trying."Just as the natural world would be a meaningless jumble of sensations without the category of causality, the social world around us (as well as our understanding of our own states of mind) would be a meaningless jumble of sensations if we were not equipped with the category of teleology/action. The conception of action in general is necessarily prior to the cognition of any particular action.
Gestures and words would be meaningless motions and sounds unless the mind were able to apply the conception of "purpose" to them. And how could you explain "purpose" to someone who did not already have an inbuilt conception of it, when such an explanation would be, to your "student," meaningless motions and sounds?
If I know anything, I know what action is. With every sentence I write with the purpose of communicating to you, the reader, I live it. And if you are looking at these words with the purpose of understanding them, you, too, are living it. Should I try to deny the reality of purpose, means and ends, I would find myself caught in the manifest absurdity of trying to deny the reality of trying.
The WillAccording to Mises, man's will is not free in the metaphysical sense (that is, free from causation):
The content of human action, i.e., the ends aimed at and the means chosen and applied for the attainment of these ends, is determined by the personal qualities of every acting man. Individual man is the product of a long line of zoological evolution which has shaped his physiological inheritance. He is born the offspring and the heir of his ancestors, and the precipitate and sediment of all that his forefathers experienced are his biological patrimony. When he is born, he does not enter the world in general as such, but a definite environment. The innate and inherited biological qualities and all that life has worked upon him make a man what he is at any instant of his pilgrimage. They are his fate and destiny. His will is not "free" in the metaphysical sense of this term. It is determined by his background and all the influences to which he himself and his ancestors were exposed.[17]
Furthermore, man is not a wholly independent "god" outside of the "machine" of the universe.
Freedom of the will does not mean that the decisions that guide a man's action fall, as it were, from outside into the fabric of the universe and add to it something that had no relation to and was independent of the elements which had formed the universe before. Actions are directed by ideas, and ideas are products of the human mind, which is definitely a part of the universe and of which the power is strictly determined by the whole structure of the universe.[18]
However, according to Mises, man's will is free in the sense that he can suppress his impulses.[19] "Man is not, like the animals, an obsequious puppet of instincts and sensual impulses. Man has the power to suppress instinctive desires, he has a will of his own, he chooses between incompatible ends. In this sense he is a moral person; in this sense he is free."[20]
Yet, the notion of "will" is but a facet of the notion of "action." "Action is will put into operation."[21]
So, for all the reasons listed that action is a necessary reality for man, will also is a necessary reality. Whether it is called "free" or not, man (as far as man himself is concerned) does have a will.
Some philosophers are prepared to explode the notion of man's will as an illusion and self-deception because man must unwittingly behave according to the inevitable laws of causality. They may be right or wrong from the point of view of the prime mover or the cause of itself. However, from the human point of view action is the ultimate thing. We do not assert that man is "free" in choosing and acting. We merely establish the fact that he chooses and acts.[22]
The last two sentences seem consonant with the dictum of Arthur Schopenhauer: "Man can do what he wills, but he cannot will what he wills."[23]
PraxeologyAction, although it is an inbuilt conception, is not as simple a conception as one might first think. There are quite a few subsidiary notions that are "bundled up" (implied) in the notion of action. The "unbundling" of those notions (making explicit that which is implicit about action) is what Mises referred to as the science of praxeology (of which the science of economics is a subdiscipline).[24]
The scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action. It is a knowledge that is our own because we are men; no being of human descent that pathological conditions have not reduced to a merely vegetative existence lacks it. No special experience is needed in order to comprehend these theorems, and no experience, however rich, could disclose them to a being who did not know a priori what human action is. The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action. We must bethink ourselves and reflect upon the structure of human action. Like logic and mathematics, praxeological knowledge is in us; it does not come from without.
All the concepts and theorems of praxeology are implied in the category of human action. The first task is to extract and to deduce them, to expound their implications and to define the universal conditions of acting as such.[25]
One can "unbundle" the subsidiary notions contained within the conception of action by simply thinking of conditions whose absence would make the existence of action nonsensical. For example, the notion of action without time is clearly nonsensical, and so time is a necessary implication of action.
One potentially confusing aspect of Mises's writings is that he referred to necessary implications of actions as "categories of action." Thus now we have two meanings of "category of action." There is the general inbuilt conception of action itself (which was the first meaning we met with), and now there are subsidiary notions that are bundled up in the conception of action.
These subsidiary notions are also characterized as categories, because they are also inbuilt and prior to experience. Thus we can also say that time is a "category of action." The best way of distinguishing between the two meanings is to keep in mind that "the category of action" refers to the former definition and "a category of action" refers to the latter.
Other subsidiary categories of action include
the existence of an actorthe "felt uneasiness" of the actorthe actor's anticipation of the possible success of action"technological ideas" or "recipes": plans for specific arrangements of means to achieve endsan environment in which exist possible means (goods) for the attainment of endsutility: the perceived causal relevance of various means for the alleviation of felt uneasinessa scarcity of means with regard to the ends that could potentially be servedeconomization: the allocation of scarce means to various endspreference: ranking alternative actions allocating scarce means according to the relative priorities of various endschoice: undertaking the highest-ranked action for the sake of the highest priority ends it servesopportunity cost: the second-highest ranked action that is forgone when the highest ranked action is chosenVery importantly, the causality category itself is a category of human action, because, again, as Mises noted, action would be unthinkable without the assumption of regularity in the natural world.[26]
The above are subsidiary categories of all action. But praxeology is not limited to propositions of such great generality as that, else it would not be nearly as useful as it actually is.
Having shown what conditions are required by any action, one must go further and define — of course, in a categorial and formal sense — the less general conditions required for special modes of acting.[27]
For example, one can think about the special mode of action, "indirect exchange" (exchanging for a good only for the purpose of exchanging that good for yet another good), and then think about the conditions that would be required for that special mode. These conditions would include the existence of more than two actors, the existence of at least three goods, etc.
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Pocket Edition"But the end of science is to know reality," Mises adds. "It is not mental gymnastics or a logical pastime. Therefore praxeology restricts its inquiries to the study of acting under those conditions and presuppositions which are given in reality."[28]
For example, Mises does not consider the "disutility of labor" to be a category of action.[29] He regards the notion of labor having no disutility as being fully consistent with the notion of action. However, it is an easily observed fact that the disutility of labor pervades the real world. So the praxeologist, in order for his studies to be useful in the real world, must assume the disutility of labor in his reasonings. Mises stresses that this does not make praxeology an "empirical" discipline.
However, this reference to experience does not impair the aprioristic character of praxeology and economics. Experience merely directs our curiosity toward certain problems and diverts it from other problems. It tells us what we should explore, but it does not tell us how we could proceed in our search for knowledge.[30]
EconomicsFor example, it is a matter of fact that we live in a society in which actors who produce goods are able to utilize prices consisting of a near-universal and basically commensurable medium of exchange (money) in order to use arithmetic to calculate profit and loss for their business as a whole, and for various subbranches of their business.
Money prices and economic calculation are not categories of all action. Primitive autarkic households (as well as socialist states) have no recourse to monetary calculation. But since we observe that they do exist in our society, our curiosity is directed toward problems concerning them.
Thus, in order for our studies to be useful to us in the real world, we restrict many of our praxeological reasonings to the subdiscipline of praxeology known as economics, or "catallactics," which, as Mises defined it, is the study of the market economy, i.e., "the analysis of those actions which are conducted on the basis of monetary calculation."[31] To engage in economic science, we must, again, define the conditions required for this "special mode of acting" (calculative action), and unbundle the special implications bound up in the notion of a market economy.
The economist can then add further assumptions, based on real-life conditions (though never perfectly modeling them) in order to inquire into the necessary implications of those conditions. For example, not every conceivable market economy is burdened by price controls and restrictions on production. Unfortunately, ours is, and so we assume those conditions and unbundle the implications bound up in that more complicated notion. All the valid laws of economics are simply such implications made explicit.
It is easier to accept broader economic laws as true, as they seem to be "verified" all the time in life, because the conditions they are concerned with are so broad. But as we progressively add assumptions to our thought experiments to produce ever-more specific economic laws, the question arises: cannot such a specific proposition be disproved by events? To understand why this question is spurious, it is useful to consider the analogy of geometry.
"The ancient Greeks pioneered using long chains of deductive inferences to discover geometric principles (fortunately, there was no ancient Greek Congressman Clay at the time to deride this deductive scientific enterprise)."First let us reflect on the methodology of geometry. In preclassical times, geometry was largely empirical. For example, ancient Egyptian surveyors called "rope stretchers" used to find right angles by stretching out knotted ropes to make a 3-4-5 triangle (a triangle with sides in the ratio of 3 to 4 to 5). The geometric principle that all 3-4-5 triangles form right angles might have been discovered by the Egyptians through experience, by simply noticing that such triangles generally have perpendicular legs by eyeballing multiple instances of them.
However, the ancient Greeks pioneered using long chains of deductive inferences to discover geometric principles (fortunately, there was no ancient Greek Congressman Clay at the time to deride this deductive scientific enterprise). And so the Greeks could discover the same principle (that all 3-4-5 triangles form right angles) by reasoning from the Pythagorean theorem. And the Greeks were able to use deductive geometry to discover a great many geometric principles that would have been too subtle to find with empirical methods.[32]
Nowadays the deductive method for geometry is universally embraced. A good geometry teacher will not demonstrate the Pythagorean theorem with measuring tape and a pile of plastic right triangles, except perhaps as a preliminary exercise. She will teach her students to derive the theorem from prior premises.
What if, when measuring plastic triangles, one of the geometry teacher's students discovers something that does not seem to fit the Pythagorean theorem as it was taught to him by the teacher? There are a few possible explanations for such an occurrence.
Perhaps the teacher, bizarrely, doesn't know the correct Pythagorean theorem herself, or how to derive it. An economic analogy to this situation is when a theoretical economist introduces vicious formulations (as the classical economists did with their value theory) and invalid reasoning (as Keynes did with much of his work) to build a false economic theorem.
Perhaps the student measured the right triangles incorrectly. This would be analogous to an economic statistician gathering faulty data.
Perhaps the student is not even dealing with right triangles in the first place, and so the Pythagorean theorem is not applicable. This would be analogous to an economist trying to explain a rise in a good's price using the quantity theory of money when the quantity of money didn't actually change, and instead the price rose because of an increase in demand.
If economic data do not seem to demonstrate the playing out of a certain market process described by economic theory (assuming the theory is sound and the data are correct), that would indicate that circumstances must have been dominated by another market process (also described by pure economic theory), another set of factors, or the interplay of several market processes/sets of factors.
The economic historian uses data to determine which economic laws are most relevant in any given episode. If, for example, the economic historian discovers trustworthy data that show that after an increase in the supply of a certain good the price for that good increased, instead of falling, that would not testify against the law of supply. That would instead be an indication that other relevant factors are at work, like perhaps a precipitous drop in the supply of another good for which the first good can serve as a substitute.
"No matter how precise your instruments, no matter how powerful your computers, all you will find in the brain are chemical, electrical, subatomic, and other physical patterns and processes. You will never find preferences, purposes, costs, or proceeds."Whatever the case ultimately proves to be, what should the geometry student do when faced with data that do not harmonize with the theory he is using? Should he proudly announce that he has refuted the "orthodoxy of Pythagoras" and publish a new theorem, based on his measurements? Should he gather a larger sample set of plastic triangles and perform statistical analysis on the data gathered?
Of course not. He should check the soundness of the reasoning used in deriving the theorem, check his measurements, and check the applicability of the theorem to the data.
Insofar as the student derived the Pythagorean theorem using discursive reasoning, he was a geometer. But insofar as he was using geometry along with measurement to study plastic triangles, he was a topographer, not a geometer. While geometry is indispensable for topography, it is completely invalid to try to derive geometric laws from topography.
This is analogous to the crucial distinction between economics and economic history. Insofar as a scholar derives economic theorems using discursive reasoning, he is an economist. But insofar as he uses economics along with data-gathering to study actual events, he is an economic historian, not an economist. While economics is indispensable for economic history, it is completely invalid to try to derive economic laws from history.
This is not to say that either topography or economic history is an unworthy endeavor; far from it, both of these are incredibly important.
Yet the most history can do for an economist is to provide either an example with which to illustrate (but not prove) an economic theorem to help students grasp the concept by giving them a concrete manifestation of it, or a clue that perhaps he has performed fallacious reasoning in deriving the economic theorems he has been operating with. But even in the latter case, he must use discursive reasoning to catch the fallacy, and then to adjust his theory according to the corrected reasoning.
Mises used the fruitful comparison to geometry to refute another popular objection to theoretical economics:
Aprioristic reasoning is purely conceptual and deductive. It cannot produce anything else but tautologies and analytic judgments. All its implications are logically derived from the premises and were already contained in them. Hence, according to a popular objection, it cannot add anything to our knowledge.
All geometrical theorems are already implied in the axioms. The concept of a rectangular triangle [right triangle] already implies the theorem of Pythagoras. This theorem is a tautology, its deduction results in an analytic judgment. Nonetheless nobody would contend that geometry in general and the theorem of Pythagoras in particular do not enlarge our knowledge. Cognition from purely deductive reasoning is also creative and opens for our mind access to previously barred spheres. The significant task of aprioristic reasoning is on the one hand to bring into relief all that is implied in the categories, concepts, and premises and, on the other hand, to show what they do not imply. It is its vocation to render manifest and obvious what was hidden and unknown before.
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In the concept of money all the theorems of monetary theory are already implied. The quantity theory does not add to our knowledge anything which is not virtually contained in the concept of money. It transforms, develops, and unfolds; it only analyzes and is therefore tautological like the theorem of Pythagoras in relation to the concept of the rectangular triangle. However, nobody would deny the cognitive value of the quantity theory. To a mind not enlightened by economic reasoning it remains unknown. A long line of abortive attempts to solve the problems concerned shows that it was certainly not easy to attain the present state of knowledge.
It is not a deficiency of the system of aprioristic science that it does not convey to us full cognition of reality. Its concepts and theorems are mental tools opening the approach to a complete grasp of reality; they are, to be sure, not in themselves already the totality of factual knowledge about all things. Theory and the comprehension of living and changing reality are not in opposition to one another. Without theory, the general aprioristic science of human action, there is no comprehension of the reality of human action.[33]
Another mistake critics make along these lines, is that they are confused regarding the sense in which the theorems of economics are tautologies. When Mises says that the quantity theory of money, as well as the Pythagorean theorem, is a tautology, he is using the technical definition of "tautology," as it is used in the field of logic: "a statement that is true by necessity or by virtue of its logical form."
He is not using the everyday definition that has arisen for the term: "the saying of the same thing twice in different words," as in "bachelors are unmarried adult males." The latter pleonastic kind of tautology is indeed barren (see my discussion of the "action axiom" in footnote 24), because it does not tell anybody anything they do not already know. But, as Mises explained above, the former kind of tautology is incredibly fruitful in expanding the knowledge of anyone who does not already know all the implications of the premise.
Praxeology Is Nothing NewSince "praxeology" is a neologism, and since Mises's writings are distinctive by their consistent characterization of economics as a priori, it is easy to suppose that Mises was inventing some new way of looking at the world. But that is not the case.
In asserting the a priori character of praxeology we are not drafting a plan for a future new science different from the traditional sciences of human action. We do not maintain that the theoretical science of human action should be aprioristic, but that it is and always has been so. Every attempt to reflect upon the problems raised by human action is necessarily bound to aprioristic reasoning.[34]
In his methodological writings, Mises was not basing economics on some new foundation so much as he was pointing out the foundations upon which sound economics had always been based. Everything that is valid in Gresham's law, Hume's price-specie flow mechanism, Ricardo's law of comparative advantage, and Say's law of markets is valid because it is based on the originator's sound aprioristic understanding of human action and the assumptions introduced in formulating the theorem.
Furthermore, all careful thinkers about human affairs (not only economists) can only ever have had any success to the extent that they engaged in aprioristic, praxeological reasoning.
Every attempt to reflect upon the problems raised by human action is necessarily bound to aprioristic reasoning. It does not make any difference in this regard whether the men discussing a problem are theorists aiming at pure knowledge only or statesmen, politicians, and regular citizens eager to comprehend occurring changes and to discover what kind of public policy or private conduct would best suit their own interests. People may begin arguing about the significance of any concrete experience, but the debate inevitably turns away from the accidental and environmental features of the event concerned to an analysis of fundamental principles, and imperceptibly abandons any reference to the factual happenings which evoked the argument.[35]
In fact, all mankind has always utilized praxeological reasoning. Mises only made clear the distinctions between that everpresent part of human reasoning and other parts. Only after it was made distinct could that part of human reasoning be given a name. If man had not always utilized praxeological reasoning, the most rudimentary understanding of the actions of his fellow man, and thus all of human society, would have been totally impossible.
[A]ll experience concerning human action is conditioned by the praxeological categories and becomes possible only through their application. If we had not in our mind the schemes provided by praxeological reasoning, we should never be in a position to discern and to grasp any action. We would perceive motions, but neither buying nor selling, nor prices, wage rates, interest rates, and so on. It is only through the utilization of the praxeological scheme that we become able to have an experience concerning an act of buying and selling, but then independently of the fact of whether or not our senses concomitantly perceive any motions of men and of nonhuman elements of the external world. Unaided by praxeological knowledge we would never learn anything about media of exchange. If we approach coins without such preexisting knowledge, we would see in them only round plates of metal, nothing more. Experience concerning money requires familiarity with the praxeological category medium of exchange.[36]
Nature and the Human RealmOf the three types of categories discussed above, one (the fundamental logical relations) is fundamental in all reasoning. The other two (causality and teleology/action) are fundamental in any reasoning about change in the world.
The Mises WikiThere are for man only two principles available for a mental grasp of reality, namely, those of teleology and causality. What cannot be brought under either of these categories is absolutely hidden to the human mind. An event not open to an interpretation by one of these two principles is for man inconceivable and mysterious. Change can be conceived as the outcome either of the operation of mechanistic causality or of purposeful behavior; for the human mind there is no third way available.[37]
And again, these categories are prior to all experience, because they are prerequisite to the meaningfulness of any experience. For sensation to make sense, it must be refracted through the dual cognitive lenses of "cause" and "purpose."
What differentiates the realm of the natural sciences from that of the sciences of human action is the categorical system resorted to in each in interpreting phenomena and constructing theories. The natural sciences do not know anything about final causes; inquiry and theorizing are entirely guided by the category of causality.[38]
The existence of these dual alternative ways of explaining change (causality and teleology) in the world raises questions: How do we know which one to use regarding any particular change? How do we know when we are dealing with nature and when we are dealing with the realm of human action?
We are with every reflective moment aware of our own status as an acting being. But what about those other beings moving around who happen to look and sound like us? How can we be sure without somehow peering into their minds that they are not mere simulacra? This is obviously an extravagant question. There is no praxeological proof of the existence of any given alter ego. But, as Mises wrote,
it is beyond doubt that the principle according to which an Ego deals with every human being as if the other were a thinking and acting being like himself has evidenced its usefulness both in mundane life and in scientific research. It cannot be denied that it works.[39]
And once we choose to consider others as acting beings, all the general theorems of praxeology must be considered as applicable to those others.
The category of teleology is such a prominent feature of the human mind, that relatively inexperienced minds often paint the whole world in teleological colors.
Both primitive man and the infant, in a naive anthropomorphic attitude, consider it quite plausible that every change and event is the outcome of the action of a being acting in the same way as they themselves do. They believe that animals, plants, mountains, rivers, and fountains, even stones and celestial bodies, are, like themselves, feeling, willing, and acting beings.[40]
Here Mises described animism, a view of the universe in which objects that more experienced minds describe as inanimate are assigned intelligence and will.
As culture develops, a society often moves from animism to theism, in which the objects themselves are considered inanimate, but their motions are determined according to the purposes of willing, acting gods.
Where people did not know how to seek the relation of cause and effect, they looked for a teleological interpretation. They invented deities and devils to whose purposeful action certain phenomena were ascribed. A god emitted lightning and thunder. Another god, angry about some acts of men, killed the offenders by shooting arrows.[41]
However, it should not be supposed that primitive peoples only resorted to the category of teleology, and never to the category of causality.
Both categories were resorted to by primitive man and are resorted to today by everybody in daily thinking and acting. The most simple skills and techniques imply knowledge gathered by rudimentary research into causality.[42]
Just as, in the example given earlier in this paper, a man devoid of the category of causality could never learn to avoid fire, a people devoid of the category of causality could never learn to make fire. Nobody would ever have any reason to suppose that friction generating flame in the past had any bearing on the future.
As culture and technology progresses, the ambit of causality tends to expand at the expense of the ambit of teleology. Thus progressing societies tend, as Mises explains, to substitute causality for animistic teleology: "Only at a later stage of cultural development does man renounce these animistic ideas and substitute the mechanistic world view for them."[43]
And societies eventually substitute causality as well for theistic teleology: "Slowly people came to learn that meteorological events, disease, and the spread of plagues are natural phenomena and that lightning rods and antiseptic agents provide effective protection while magic rites are useless."[44]
This transition in thought was brilliantly exemplified by the ancient Greek doctor Hippocrates, in writing on epilepsy, which had, before his time, been called the "sacred disease."
It is thus with regard to the disease called Sacred: it appears to me to be nowise more divine nor more sacred than other diseases, but has a natural cause from the originates like other affections. Men regard its nature and cause as divine from ignorance and wonder, because it is not at all like to other diseases. And this notion of its divinity is kept up by their inability to comprehend it, and the simplicity of the mode by which it is cured, for men are freed from it by purifications and incantations. But if it is reckoned divine because it is wonderful, instead of one there are many diseases which would be sacred; for, as I will show, there are others no less wonderful and prodigious, which nobody imagines to be sacred.[45]
Abandoning teleology for causality had such satisfactory results in pragmatic affairs that thinkers began to make the same shift even regarding matters far removed from day-to-day life, and over which they had no control.
Carl Sagan described this process eloquently in his book Cosmos.
For thousands of years humans were oppressed — as some of us still are — by the notion that the universe is a marionette whose strings are pulled by a god or gods, unseen and inscrutable. Then, 2,500 years ago, there was a glorious awakening in Ionia: on Samos and the other nearby Greek colonies that grew up among the islands and inlets of the busy eastern Aegean Sea. Suddenly there were people who believed that everything was made of atoms; that human beings and other animals had sprung from simpler forms; that diseases were not caused by demons or the gods; that the Earth was only a planet going around the Sun. And that the stars were very far away.
This revolution made Cosmos out of Chaos. The early Greeks had believed that the first being was Chaos, corresponding to the phrase in Genesis in the same context, "without form." Chaos created and then mated with a goddess called Night, and their offspring eventually produced all the gods and men. A universe created from Chaos was in perfect keeping with the Greek belief in an unpredictable Nature run by capricious gods. But in the sixth century B.C., in Ionia, a new concept developed, one of the great ideas of the human species. The universe is knowable, the ancient Ionians argued, because it exhibits an internal order: there are regularities in Nature that permit its secrets to be uncovered. Nature is not entirely unpredictable; there are rules even she must obey. This ordered and admirable character of the universe was called Cosmos.
And in the television series upon which the book Cosmos was based, Sagan said,
The first Ionian scientist was named Thales. He was born over there, in the city of Miletus, across this narrow strait. He had traveled in Egypt and was conversant with the knowledge of Babylon. Like the Babylonians, he believed that the world had once all been water. To explain the dry land, the Babylonians added that their god Marduk had placed a mat on the face of the waters and had piled dirt up on top of it. Thales had a similar view but he left Marduk out. Yes, the world had once been mostly water, but it was a natural process which explained the dry land. Thales thought it was similar to the silting up that he had observed at the delta of the River Nile.
Whether Thales's conclusions were right or wrong is not nearly as important as his approach. The world was not made by the gods, but instead was the result of material forces interacting in nature.
This approach eventually led to the scientific revolution of modern ages.
Radical AntiteleologyMises describes how the track record of the shift from teleology to causality led some thinkers to assume that the complete abolition of teleology from all scientific thought was in order.
The marvelous achievements of the experimental natural sciences prompted the emergence of a materialistic metaphysical doctrine, positivism. Positivism flatly denies that any field of inquiry is open for teleological research. The experimental methods of the natural sciences are the only appropriate methods for any kind of investigation.[46]
Positivists and other radical antiteleologists even reject teleological investigations into the social sciences. In an instance of "scientism" (the proclivity of aping the physical sciences) these critics of the traditional approaches to the studies of human affairs think of all teleological sciences as the last refuge of animism. B.F. Skinner, the founder of radical behaviorism, typified this attitude when he wrote,
For twenty-five hundred years people have been preoccupied with feelings and mental life, but only recently has any interest been shown in a more precise analysis of the role of the environment. Ignorance of that role lead in the first place to mental fictions, and it has been perpetuated by the explanatory practices to which they gave rise.[47]
Radical antiteleologists characterize words like "intend," "believe," "desire," and "love" as "mentalese" or "folk psychology." Many do not even believe that these concepts can be reduced to material phenomena (an endeavor many consider to be proved futile by Franz Brentano's theory of intentionality). But rather they regard these teleological notions as complete fictions that should be discarded, just as teleological animism and theism were not "reduced," but simply discarded.
Sidney Morgenbesser is said to have asked a question to B.F. Skinner that succinctly displayed the ridiculousness of adopting this approach to the social sciences: "Let me see if I understand your thesis. You think we shouldn't anthropomorphize people?"
Yet, some people assume radical antiteleology is a necessary concomitant of materialist monism, and of rejecting Cartesian mind-body dualism. They think that anything less than radical antiteleology would be, to some extent, accepting the independence of the soul as some kind of "ghost in the shell."
Mises denied this. He argued that what he called "methodological dualism" (applying causality to nature and teleology to human affairs) does not necessarily imply "ghost in the shell" dualism.[48] Furthermore, methodological dualism is still necessary, even if you completely accept materialist monism.
We may fairly assume or believe that they are absolutely dependent upon and conditioned by their causes. But as long as we do not know how external facts — physical and physiological — produce in a human mind definite thoughts and volitions resulting in concrete acts, we have to face an insurmountable methodological dualism.[49]
Methodological dualism is not resorted to because we do not know whether actions are determined. Even if we assume that human behaviors are indeed determined, so long as we do not know which actions will be caused by which factors, we still must resort to methodological dualism.
It is not enough to know that firing neurons lead to behaviors. For a scientist studying human behavior to practice methodological monism, he would need to know which circumstances regarding the firing of neurons would lead to deciding to the bodily motions that "silly folk psychologists" call "composing a symphony," and which circumstances regarding the firing of neurons would instead lead to the bodily motions that "silly folk psychologists" call "reading a book." So long as we can't accomplish such a mind-boggling feat as that, the only way of studying human affairs that makes sense is by considering humans as acting beings with minds, wills, and intentions.
"There is nothing wrong with neurobiology and neurochemistry; indeed these sciences are achieving wonders for us. But the social sciences can never be resolved into these natural sciences."Some claim that "methodological dualism" is a provisional stance, resorted to only because we do not yet have the technology to fully explain the complexity of the human brain, and that this stance can eventually be dropped once we do achieve that level of technology.
However, to add an argument of my own, complementary to Mises's, humans are not special for science just because they are complex. They are not basically on the same scientific grounds as weather patterns. They are special for science because the very questions we want answered about them are teleological in nature. The reason we study human action in the first place is that we have certain questions that are inextricably bound up with the human purposes that antiteleologists dismiss as mentalist fictions.
For example, people are vitally interested in economics largely in order to discover the legal and institutional arrangements by which humans can prosper. How can one explain "how humans prosper" when the teleological, "mental fiction" of "prospering" is dismissed as nonsense at the outset? I would challenge any antiteleological economist to even define (let alone explain) "goods," "money," "profit," "loss," and "income" without using the teleological, "mentalist" language they deride as "folk psychology."
Inquiries into the causes and nature of the wealth of nations are fundamentally different from inquiries into the causes and nature of the humidity of trade winds. If we had precise enough instruments and powerful enough computers, we could explain every single thing about the most complex weather pattern. But no matter how precise your instruments, no matter how powerful your computers, all you will find in the brain are chemical, electrical, subatomic, and other physical patterns and processes. You will never find preferences, purposes, costs, or proceeds.
This is not to say that the former does not cause the latter. It is rather that the terms in which our minds grasp causality and teleology are fundamentally different and simply do not translate into each other.
The most thoroughgoing, radical antiteleologists are actually right insofar as, in the language of causality, there is no such thing as teleology. That is why they do not want to explain teleology in terms of causality; instead they want to abandon teleology altogether. Their position is ridiculous, because it would involve the abandonment of all economic, sociological, ethnographic, and historical questions, but at least it is more logical than that of people who think they can answer teleological questions with causality answers.
We have many causality-related questions about our bodies (including our brains), because our bodies are useful to us. But we also have many teleological questions about choice, success, failure, prosperity, and poverty. Once you abandon teleological language, you have effectively changed the question. So, as long as we are still asking teleological questions, we need to continue providing teleological answers.
There is nothing wrong with neurobiology and neurochemistry; indeed these sciences are achieving wonders for us. But the social sciences can never be resolved into these natural sciences, because the human mind can never resolve teleology into causality without abandoning teleology altogether, and to study human affairs without considering purposive action is not to study human affairs at all.
Scientistic EconomicsMost social scientists who aim to emulate the natural sciences do not take things so far as to deny teleology altogether. Most consider humans as acting beings. However, in their "scientistic" striving, they end up vitiating all their efforts with faulty approaches. One aspect of the natural sciences they try to emulate is the latter's empirical methods.
ComplexityYet, all data, no matter how numerous and carefully gathered, are always information about past events: historical experience. And as Mises wrote,
The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways. …
Complex phenomena in the production of which various causal chains are interlaced cannot test any theory. Such phenomena, on the contrary, become intelligible only through an interpretation in terms of theories previously developed from other sources. In the case of natural phenomena the interpretation of an event must not be at variance with the theories satisfactorily verified by experiments. In the case of historical events there is no such restriction. Commentators would be free to resort to quite arbitrary explanations. Where there is something to explain, the human mind has never been at a loss to invent ad hoc some imaginary theories, lacking any logical justification.[50]
NonregularityMoreover, the empirical approach to the natural sciences is only fruitful because of its regularity, and our ability to use the category of causation to infer use carefully observed past regularity to infer such regularities in general (in other places and times). But, as Mises argued, there is simply no such regularity in the realm of human action:
Epistemologically the distinctive mark of what we call nature is to be seen in the ascertainable and inevitable regularity in the concatenation and sequence of phenomena. On the other hand the distinctive mark of what we call the human sphere or history or, better, the realm of human action is the absence of such a universally prevailing regularity. Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these regular patterns of reacting, and we can make use of this knowledge in directing our actions toward definite goals. Our classification of natural objects and our assigning names to these classes is an outcome of this cognition. A stone is a thing that reacts in a definite way. Men react to the same stimuli in different ways, and the same man at different instants of time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way.[51]
Mathematical EconomicsNonregularity in the realm of human action also makes hopeless the other way in which many economists try to ape the physical sciences: their "quantophrenia" (an irrational haste to introduce mathematical analyses to their work).
First of all, measurements require constant relations. So, in contrast to the natural realm, the utter lack of constant relations in the realm of human action precludes any useful measurements.
In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics. …
Those economists who want to substitute "quantitative economics" for what they call "qualitative economics" are utterly mistaken. There are, in the field of economics, no constant relations, and consequently no measurement is possible.[52]
Secondly, equations also require constant relations. So, again in contrast to the natural realm, the utter lack of constant relations in the realm of human action precludes the formulation of any meaningful equations.
[I]n mechanics the equation can render very important practical services. As there exist constant relations between various mechanical elements and as these relations can be ascertained by experiments, it becomes possible to use equations for the solution of definite technological problems. Our modern industrial civilization is mainly an accomplishment of this utilization of the differential equations of physics. No such constant relations exist, however, between economic elements. The equations formulated by mathematical economics remain a useless piece of mental gymnastics and would remain so even it they were to express much more than they really do.[53]
Besides these more basic epistemological errors, mathematical economists also torture economic concepts like utility and equilibrium into vicious formulations so as to make them mathematically manipulable, at the cost of truth and meaningfulness. As this is a paper on epistemology, and not economics proper, I will not present all of Mises's arguments against the fallacies of mathematical economics, except only to direct the reader to my study guide of Mises's Theory of Money and Credit, chapter 2, and Human Action, chapter 9, section 5.
$275
The Mises BustConclusionLudwig von Mises did the social sciences (and humanity itself) an inestimable service by not only using his crystal clear understanding of the true character of the sciences of human action to systematize and advance economic science, but also by illuminating that true character for posterity.
Mises demonstrated once and for all that (and in what way) economics is indeed an exact, certain, a priori, and (yes) deductive science.
In these dark days, in which unmoored methodology has led to fallacious economics, which in turn has led to disastrous policies, the epistemological works of Mises shine like a beacon of hope: hope that someday the social sciences will right themselves at the fundamental methodological level, and thus will be clear-eyed enough to guide humanity back toward sanity, peace, and prosperity.
Notes[1] Ludwig von Mises, Human Action (HA), Introduction, § 2.
[2] Ibid.
[3] Mises, The Ultimate Foundation of Economic Science (UFES), ch. 1, § 1.
[4] Mises, HA, ch. 2, § 2.
[5] Ibid.
[6] UFES, ch. 1, § 1
[7] My use of the term "inbuilt" refers to Mises's characterization of the mind being already "equipped" with these conceptions prior to their use in grasping reality. It should not be taken as implying "innate," in the sense that they are present at birth. It may however be that our genetic constitution (which itself is present at birth) is such that we have the biological capacity to develop these conceptions. "Man acquired these tools, i.e., the logical structure of his mind, in the course of his evolution from an amoeba to his present state." HA, ch. 2, § 2. For a meeting of Kant and Darwin in the expansive mind of Mises, see "Hypothesis about the Origin of A Priori Categories" in UFES, ch. 1, § 2. However, regardless of how these conceptions do form, the point is, again, that they cannot be formed from the acquisition of knowledge (meaningful interpretations of external and internal sensations), because the capacity to apply these conceptions is a prerequisite of knowledge.
[8] UFES, ch. 1, § 1.
[9] HA, ch. 2, § 2.
[10] UFES, ch. 1, § 1.
[11] Mises, Theory and History (TH), Introduction.
[12] TH, ch. 14.
[13] David Hume, An Enquiry Concerning Human Understanding, Section IV. "For all inferences from experience suppose, as their foundation, that the future will resemble the past, and that similar powers will be conjoined with similar sensible qualities. If there be any suspicion that the course of nature may change, and that the past may be no rule for the future, all experience becomes useless, and can give rise to no inference or conclusion. It is impossible, therefore, that any arguments from experience can prove this resemblance of the past to the future; since all these arguments are founded on the supposition of that resemblance."
[14] TH, Introduction.
[15] HA, ch. 1, § 5.
[16] HA, ch. 4, § 1.
[17] HA, ch. 2, § 6.
[18] UFES, ch. 3, § 4.
[19] Although I would argue that all acts of suppressing certain impulses are themselves impelled by still other impulses, and that "impulse" is, praxeologically speaking, identical with "felt uneasiness" that brings about all action.
[20] UFES, ch. 3, § 4.
[21] HA, ch. 1, § 1.
[22] HA, ch. 6, § 1.
[23] Arthur Schopenhauer, Prize Essay On The Freedom Of The Will.
[24] Many followers of Mises have characterized praxeology as deductions from an "action axiom." And some say that this "action axiom" is "humans act" or "action is purposeful behavior." It is important to note that Mises never used the term "action axiom." Mises used "human" basically as a synonym for "actor." Thus saying "humans act" is tantamount to saying "acting beings are acting beings." Furthermore, "purposeful behavior" means nothing more and nothing less than "action." Therefore, saying "action is purposeful behavior" is tantamount to saying "action is action." Thus both "axioms" are pleonastic, and nothing useful can be deduced from them. Praxeology is the unbundling of the implications of a conception, not of a proposition. Praxeology stems from the conception we think of when we hear the single word"action" (or any of its translations or synonyms), not from the proposition "action is purposeful behavior." When Mises wrote "action is purposeful behavior," he introduced "purposeful behavior" as a clarifying substitute for "action," just in case readers are thinking of another meaning of the word "action," not as the second half of non-pleonastic proposition from which to derive theorems. Mises derived praxeology from the a priori category of action, not the "action axiom." The propositions immediately implied by the category of action might be considered axioms (e.g., "Action always involves the passing of time."), because they are actually propositions, and thus can be used for edifying deductions. But nouns ("action") and pleonasms ("action is action") cannot be so used.
[25] HA, ch. 2, § 10.
[26] David Hume himself seemed to imply that causality was a necessary implication of action when he wrote that without the presumption of regularity, "we should never have been able to adjust means to end, or employ our natural powers, either to the producing of good, or avoiding of evil." An Enquiry Concerning Human Understanding, Section V. In fact, far from being the "prepositivist" as he is often portrayed, Hume posited that our very notion of cause-and-effect is derived from our understanding of will and action: "An act of volition produces motion in our limbs, or raises a new idea in our imagination. This influence of the will we know by consciousness. Hence we acquire the idea of power or energy; and are certain, that we ourselves and all other beings are possessed of power. This idea, then, is an idea of reflection, since it arises from reflecting on the operations of our own mind, and on the command which is exercised by will, both over the organs of the body and faculties of the soul." Ibid., Section VII.
[27] HA, ch. 2, § 10.
[28] Ibid.
[29] Ibid.
[30] Ibid.
[31] HA, ch. 14, § 1.
[32] While the similarities between geometry and economics are instructive, there are important differences between the a priori natures of the two, discussed by Mises in UFES, "Some Preliminary Observations Concerning Praxeology Instead of an Introduction," Section 4. Another important discussion of the apriorism of geometry is in UFES, Ch 1. § 1.
[33] HA, ch. 2, § 3.
[34] Ibid.
[35] Ibid.
[36] Ibid.
[37] HA, ch. 1, § 6.
[38] TH, ch. 11.
[39] HA, ch. 1, § 6.
[40] Ibid.
[41] TH, ch. 11.
[42] Ibid.
[43] HA, ch. 1, § 6.
[44] TH, ch. 11.
[45] Hippocrates, On the Sacred Disease.
[46] TH, ch. 11.
[47] B.F. Skinner, About Behaviorism, ch. 1.
[48] In fact, Mises provides a good reason why it is natural to reject "ghost in the shell" dualism when he points out that "our impotence to ascertain an absolute beginning out of nothing forces us to assume that also this invisible and intangible something — the human mind —is an inherent part of the universe, a product of its whole history." UFES, ch. 3, § 4.
[49] HA, ch. 1, § 3.
[50] HA, ch. 2, § 1.
[51] TH, Introduction.
[52] HA, ch. 2, § 8.
[53] HA, ch. 16, § 5.
After Murray Rothbard finished his theoretical magnum opus — Man, Economy, and State — he turned his attention away from pure positive theory toward dealing with the opposition to Austrian theory. The result was a long series of fantastic scholarly articles taking on every error of the day, and our day too.
Together they form a volume 2 of his great work. This is Economic Controversies. He covers the same range of topics in Man, Economy, and State. Most all have been published, but they are strewn out among journals that are hard to access or books that are out of print. Some have never been published.
Rothbard gives his all in these critiques of the opponents of Austrian theory and policy, slicing through fallacies with breathtaking virtuosity. It’s a model of intellectual combat, page after page of razor-sharp thinking and crystal-clear prose.
To have this all in one place, beautifully organized, creates a treasure in the history of economic ideas.
Gene Epstein of Barron's writes the outstanding introduction.
Savannah Liston, 17, recently posted comments on her Facebook page, expressing excitement that would be reserved by other teenagers for having won free tickets and an all-expenses-paid trip to a Mumford & Sons concert. Savannah's event? An online introduction to logic class.
12 hours before class started — "Bad news: FB finally forced me to get the new profile. Dislike. :( GOOD news: Mises Academy class starts TONIGHT!!! YAY!!!!!!!!!!!! :)"
3 hours before class — "Class starts in 3 hours. I've got about 18 more pages to finish reading. This is really, really great though. I'm uber-excited!!! :)"
10 minutes before class — "This is great! I'm attending the first session of the Intro to Logic course!! It is AMAZING!! If you haven't taken a Mises Academy course yet, you MUST do it!! :)"
5 minutes after class ended — "I just left the first class of Intro to Logic from the Mises Academy. That was GREAT! And I mean, really, really, really, REALLY GREAT!!!!! :)"
As 1 of 211 participants (204 paying students plus a few professors and interns), but 50 years older than most of them, I was struck by how similar my own responses to this logic class were to Savannah's. Despite a legal education, which is supposed to favor logical thinkers, I had not had any prior course in logic, and I wanted to know more about constructing persuasive arguments and spotting fallacies in them.
Savannah and I found by the end of the course that we shared two views: (1) neither of us is suddenly, as if by magic, able to analyze arguments about philosophy, politics, and economics by having worked through the course, but (2) Professor David Gordon has placed us both on a path to practicing skills that can help us avoid fallacies in our own arguments. That alone is ground breaking, because logic is rarely studied today. An introduction to logic ought to be a core offering at the online Mises Academy each year.
Logic hasn't always been such a poor stepchild. It was once required material for every educated adult. Aristotle's system of logic dominated the study of philosophy until the mid-19th century. Once a necessary skill of orators, logic today finds its place in critical thinking, artificial intelligence, and law, among other fields, but not in many educational course offerings outside of philosophy departments. What a serious lack.
Living reasonably requires an understanding of economics. An understanding of economics requires correct reasoning. The study of human action asserts that man acts — that the action axiom is true. From this is logically deduced all the propositions of economics, each verbal and meaningful. Self-ownership, property, and the enforcement of these rights flow from the action axiom. These concepts are fundamental to the existence of free societies and the flourishing of noninvasive, win-win interactions, like voluntary exchange and gifts. These noninvasive actions contrast starkly with the invasive actions of war, murder, assault, robbery, and slavery, which have dominated human history. Thus, understanding economic laws can have practical applications toward obtaining social cooperation and peace. Logic leads us to understand the deduced economic laws.
Ten Lecturesby David Gordon
David Gordon, via his January 13 – February 24 course, How to Think: An Introduction to Logic, may have compelled 204 more students to better grasp economic laws. He accomplished that through presenting the essentials of logic. His professorial success is due to three factors: his presentation, his interaction with students, and his personal integrity.
Savannah found that she loved the spontaneity of the presentations: "while there was order and purpose to the class, there was room for sidetracking depending on the students and their interests."
She also praised the interaction between the professor and students. "About 2 minutes before it started some of the students started petitioning Professor Gordon to open with a logic joke. I don't think he had time to come up with a good one then … perhaps next class he will. :)"
Many times Professor Gordon responded immediately to questions posed to him on the chat board. Israel Castillo's question was respectfully accorded close attention. Castillo proposed that,
If "every square has four sides" is an analytical proposition, then "water freezes at 32 degrees Fahrenheit at atmospheric pressure" must be an analytical proposition as well.
To which Dr. Gordon responded,
Whether a proposition is analytic depends on what is included in the concept of the subject. Joyce is assuming that the freezing temperature of water isn't part of the concept of water. You want to say, I think, that the freezing temperature of water is so well established that it has become part of the concept of water. I don't think there is a universally accepted understanding of what is included in the concept of water, so the issue you raise is difficult to resolve. I tend to think that the ordinary language concept of water favors Joyce.
Dr. Gordon's integrity, his intellectual honesty, was evident and appreciated. As Savannah noted,
He didn't say, "Here, this book and this theory of knowledge is the only correct way to view the world. Everyone else is wrong. Just believe me." He pointed out controversial ideas and explained why they were controversial and encouraged the students to study both sides and come to their own conclusions. I liked that a lot.
Jeffrey Karl was comfortable suggesting a change. His chat query said,
I've learned a lot about logic in your course, but in order to build a solid foundation, I think it would help if I just had some straightforward syllogisms to analyze. I'd feel much more comfortable analyzing longer verbal arguments if I had some practice in identifying fallacies in basic syllogisms first.
In response to a student's frustration with the applications of logic, Dr. Gordon cautioned that "Logic is concerned only with the consistency of propositions. It isn't a tool to help you discover solutions to problems." It is that kind of equitable response that led John Perrings to post, "Prof. Gordon is the man. He is such an all-around knowledgeable person. My criticisms below aside, he can handle any question thrown at him."
There are those educators, like Wendy Brown, the Heller Professor of Political Science at Berkeley, who disparage online courses, whether on logic or on other subjects. She asks,
What is sacrificed when classrooms disappear, the place where good teachers do not merely "deliver content" to students but wake them up, throw them on their feet and pull the chair away? Where ideas can become intoxicating, where an instructor's ardor for a subject or a dimension of the world can be contagious? Where scientific, literary, ethical or political passions are ignited?
But "online" doesn't describe the experience Savannah, or I, had. We definitely received more than software. The hybrid experience of a human, especially a David Gordon, and live chat and interaction, along with Q&A time, quizzes, and other forums, did allow Gordon's ardor for and expertise in logic to bubble across. Like Perrings said, "Prof. Gordon is the man."
Online courses are said to be plagued by high dropout rates, but that did not happen with the logic class. Out of 220 paid participants, only 16 students asked for refunds. The reason given was split between "the class is harder than I thought it would be" and "my time conflicts are too great" (which may be the same reason expressed differently). Overall class size of paid students ended up at 204. Those who were live online during the actual Thursday-evening hours ranged from more than 100 to about 60. More than half the class chose their own hours for viewing. This 204 size places Gordon's Logic class in the top five classes yet given at the Mises Academy. (The largest class was Anatomy of the Fed with 270.)
Participants did find that an online course in general and an introduction to logic in particular are valuable and desirable.
Matt Tordoff's feedback expressed both of the main themes of the comments gathered:
"The idea behind the course — that understanding logic is a critical and basic skill set for being able to argue in the fields of economics and philosophy — is right on the mark.
"As someone who has studied philosophy & logic on an undergrad and grad basis, I would suggest the inclusion of before-class exercises if at all possible [because] you need to practice tearing apart arguments."
John Perrings also urged more hands-on practice. He wrote,
I think it would have been better to take some baby steps in getting [to the real-world example of Krugman]. We haven't even covered the different types of logical fallacies, much less had the opportunity to learn and practice some simpler variations of those fallacies before jumping into more difficult subject matter.
Erick Nieves obviously felt the same way when he typed, "This was all very difficult to grasp in one sitting. Does anybody know of any websites where there are practice questions for logic?" Several responded with suggestions. Asking for more exercises and readings is the mark of interested students.
And the students asked every week for some new material. David Gordon suggested a total of four further books: The Art of Deception, by Nicholas Capaldi; Reason and Argument, by Peter Geach; Logic as a Human Instrument, by Francis Parker and Henry Veatch; and Formal Logic, by Jacques Maritain.
A good half-dozen students seemed so completely up to speed that I imagine they are reading those books already. Joel Pettit, Aneesh Mulye, Mashuri, Jooseppi & Ruth, and Israel, to mention only a few, contributed tough questions, appeared to know answers, and are my picks to show up as students in Gordon's forthcoming How to Know: The Epistemology of Ludwig von Mises which runs April 7 through May 12, 2011. I'm in.
Accolades to Dr. Gordon poured into the chat stream at the end of the final lecture. Like flowers thrown at a star's feet, posts expressed gratitude and exuberance:
"Great lecture and course see you in April." "Bravissimo!" "Thank you Dr. I learned a lot!" "Great class." "You're awesome." "I truly enjoyed it. Already signed up for your next." "Looking forward to Epistemology."
It will not be surprising to see Daniel James Sanchez (an admitted Mises insider and the administrator of the Mises Academy) as a professor someday. Danny (formerly known as Grayson Lilburne) is a star in his own right. Among hundreds of Danny's contributions to the class, four were especially helpful. They were:
"I just think Mises's utilitarianism makes more sense than Rothbard's natural rights position. And Rothbard seems to be winning by default, because the utilitarianism everyone is rejecting is something of a straw man."
"Mises calls the uniformity of nature an 'aprioristic assumption.'"
"According to Hume's reasoning, causal induction can also be considered a prerequisite of action (adjusting means to ends)."
"If it is a universal proposition it only needs to be falsified once for its universality to be destroyed."
Savannah voiced her own response to this, her first online-course experience, writing that
overall, the interest and enthusiasm was amazing. The other students are truly interested in this subject and have a deep desire to learn. I think that is what sets this apart from an ordinary college course. They're not taking it for the credits. They're taking it for the information and knowledge.
I also like the great diversity among the students. While at a traditional college you will see kids from all over the world, you usually don't study with people of all ages from all over the world engaged in all sorts of occupations, from homeschool student to ambassador to soldier to retired mother.
So while the class was a little challenging for me, it was GREAT.
Savannah had told Jeremiah Dyke late last summer that she wanted her first online course to be "something more rigorous than a principles course"; she wanted something to "really challenge me." Considering that this recent high-school graduate was the recipient of the John David Fernandez memorial award at Mises University in 2010, is a webinar Austrian Economics instructor, is author of her first novel Path of Grass, is holder of her first job (office manager), and, in the words of Doug French, is a "live wire," I'd say Mises Academy online courses are proving themselves to be challenging to the best of us and ultimately rewarding for each of us who participate.
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The law of diminishing marginal utility is at the heart of the explanation of numerous economic phenomena, including time preference and the value of goods; and it also plays a crucial role in showing that socialism is economically and ethically inferior to capitalism.
The law of diminishing marginal utility, as developed by Carl Menger (1840–1921), is axiomatic in nature; that is, it is irrefutably true. In mainstream economics, however, this fundamental economic law is typically interpreted as resting on psychology, namely the law of satiation of wants.
Such an interpretation, however, does not actually conceive the law of diminishing marginal utility as a fundamental economic law — which has truth value irrespective of time and place — but as a fleeting explanation of certain economic phenomena, which may or may not hold in a given situation.
Given the importance of the law of diminishing marginal utility for economic theory and policy, it is important to keep advertising that the law of diminishing marginal utility is irrefutably true — because it follows from the axiom of human action. For ignoring this truth leads to fallacious and erroneous conclusions, and eventually to false economic theory and economic policies.
The Axiom of Human Action Ludwig von Mises (1881–1973) reconstructed economics as an axiomatic science, which he called praxeology: the science of the logic of human action. The central element of praxeology is the axiom of human action.[1]
The axiom of human action basically says that human beings act. This may sound trivial at first glance. However, at second glance it becomes obvious that Mises's axiom of human action and its implications are far from being trivial:
To start with, an axiom is a (set of) proposition(s) presumed to be true on the basis of logical necessity; it serves as presenting different subject matters as formal and coherent theories, all of which are propositions which can be deduced from the axiom. For instance, Pythagoras's theorem is deducible from the axioms of Euclidian geometry.
The axiom of human action is of a special nature: It represents a synthetic a priori proposition, to use the terminology of Immanuel Kant (1724–1804). A synthetic a priori proposition is knowledge that (1) cannot be denied without running into an intellectual contradiction, and (2) is derived from reflection rather than observation.
The axiom of human action cannot be denied without running into an insoluble contradiction. This is because denying the axiom of human action implies human action — that is the human act of denying. Arguing that humans cannot act is thus a contradiction in itself, an absurdity.
Further, the axiom of action is derived from human reflection: it is independent of experience. This is because one cannot observe humans making an action per se. In order to know what "action" means, one has to know what action is — which implies that knowledge about action exists prior to action.
That said, the axiom of human action fulfills both of Immanuel Kant's requirements for qualifying as an a priori synthetic proposition: it is self-evidently true, and it is derived from reflection. That said, logical deductions from the axiom of human action must be also absolutely, or apodictically, true as well.
By developing praxeology, Mises showed that economic theory is the formal logic of the irrefutably true axiom of human action. According to Mises, economic theory is not concerned with psychology, but with the implications of the axiom of human action.
The Law of Diminishing Marginal Utility The law of diminishing marginal utility can be logically deduced from the axiom of human action. To show this, let us start with some remarks on utility.
Utility is a subjective concept. It denotes "satisfaction" (or "happiness" or "contentment"). It rises if and when an individual increases his or her state of satisfaction. Conversely, if and when someone considers himself in a worse state of affairs, his utility decreases.
What is more, utility is an ordinal concept, meaning that utility cannot be measured in terms of higher or lower utility from the viewpoint of an individual; and changes in utility among different people cannot be measured. All one can say is that utility is higher or lower from the viewpoint of an individual.
Rothbard explained why this is:
In order for any measurement to be possible, there must be an eternally fixed and objectively given unit with which other units may be compared. There is no such objective unit in the field of human valuation. The individual must determine subjectively for himself whether he is better or worse off as a result of any change.[2]
Marginal utility means the utility of increments of goods; it means the utility of enjoying an additional good. Marginal utility does not mean increments of utility — which would imply measurability of utility.[3] So what does the law of diminishing marginal utility say?
The law says, first, that the marginal utility of each (homogenous) unit decreases as the supply of units increases (and vice versa); second, that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa). The first law denotes the law of diminishing marginal utility, the second law the law of increasing total utility.
These two dimensions of the law of diminishing marginal utility follow directly from the axiom of human action; they can be logically deduced from it, and they do not in any way depend on psychology or any behavioral assumption. This will be shown in what follows.
The A Priori Nature of the Law of Diminishing Marginal Utility A priorism denotes a theory that yields true propositions without the need to take recourse to empirically derived knowledge: its truth value can be established a priori, independent of (sensual) experience.
Praxeology, resting on the axiom of human action, asserts something about reality and can be validated without taking recourse to experience; it is an a priori science. Furthermore, the law of diminishing marginal utility follows logically from the irrefutably true axiom of human action, and as such it is also a priori true; this conclusion doesn't have anything to do with psychology.
To show this, we must remind ourselves of the obvious and less-obvious implications of the axiom of human action.
The axiom of human action implies that humans act, and that human action is purposeful, aiming at certain ends. Human action is distinguishable from those types of human behavior that are purposeless or purely reflexive. To assume the contrary would result in an insoluble intellectual contradiction.[4]
The axiom of human action implies substituting a more satisfactory state of affairs for a less satisfactory one. For if there were perfect contentment (and thus full satisfaction), no human action would result — which is, as noted earlier, unthinkable.
Human action implies employing means to the fulfillment of ends, and the axiom of human action implies that means are scarce. For if they were not scarce, means would not serve as objects of human action; and if means were not scarce, there would be no action — and that is unthinkable.
Because means are scarce — with respect to the ends that they could possibly serve — they must therefore be economized. As a result of scarcity, the actor has to allocate scarce means to serve the most desired ends, and so certain ends will have to remain unsatisfied. From this it follows that the larger the supply of means is, the more ends can be satisfied.
As means are scarce, human action implies that individual actors must rank their alternative ends. Human action is therefore indicative of judgment and valuation — or, as Rothbard said, demonstrated preferences: the highest-ranking ends are those which the actor values most highly.
Against this backdrop it becomes obvious that the law of diminishing marginal utility follows from the axiom of human action.
First, given the supply of a good, a rise in the supply of the good leads to a decline in the marginal utility of the unit: the more goods are available, the more of the less-urgent ends can be satisfied. People thus value goods at the margin: If, for instance, someone has to give up one of his goods serving the fulfillment of his ends, he will give up the lowest ranking end, that is, the marginal unit. It is the latter that determines the good's valuation from the viewpoint of the actor.
Second, the total utility of a greater supply of goods is always greater than the utility of a smaller supply of goods — as the former allows the satisfaction of more ends than the latter.
Mises summarizes the law of diminishing marginal utility succinctly:
In treating marginal utility we deal neither with sensuous enjoyment nor with saturation and satiety. We do not transcend the sphere of praxeological reasoning in establishing the following definition: We call that employment of a unit of a homogeneous supply which a man makes if his supply is n units, but would not make if, other things being equal, his supply were only n-1 units, the least urgent employment or the marginal employment, and the utility derived from it marginal utility. In order to attain this knowledge we do not need any physiological or psychological experience, knowledge, or reasoning. It follows necessarily from our assumptions that people act (choose) and that in the first case acting man has n units of a homogeneous supply and in the second case n-1 units. Under these conditions no other result is thinkable. Our statement is formal and aprioristic and does not depend on any experience.[5]
Three Applications of the Law of Diminishing Marginal Utility Finally, let us consider three economic aspects in which the irrefutably true law of diminishing marginal utility plays an important role — something, however, that is all too often ignored by mainstream economics. Such faulty economics thereby support — intentionally or unintentionally — destructive policies.
(1) A rise in the money stock. A rise in the money stock must, for logical reasons, reduce the exchange value of a money unit. This is because the additional money unit can be used to satisfy an additional end that is necessarily less urgent than the satisfaction of the preceding end. A rise in the money stock will thus necessarily lead to a decrease in the marginal utility of the money unit (compared to the situation in which the money stock had remained unchanged).
As a result, a rise in the money stock can never be "neutral" in economic terms. It necessarily leads to a decline in its exchange value — when compared with a situation in which the money stock had remained unchanged; and it should also be noted here that a rise in the money stock affects different market agents differently (the "Cantillon Effect").
A monetary policy of increasing the money supply is therefore never "neutral": It necessarily lowers the exchange value of the money unit, and it necessarily benefits some people (namely the first receivers of the new money) at the expense of others (namely the late receivers of the new money).
(2) A lowering of the market interest rate. The pure market interest rate reflects societal time preference — which, in turn, is also implied in the axiom of human action. Time preference means that market agents value goods available today (present goods) more highly than goods available in the future (future goods).
And the more that present goods (out of current income) are exchanged against future goods (as is typically illustrated by the positive slope of the savings schedule in the savings/investment and interest-rate space), the higher will be the valuation assigned to present goods relative to future goods — and this is a result of the irrefutably true law of diminishing marginal utility. The pure rate of interest is thus expressive of the relation between the valuations of present goods and the valuations of future goods.
If government intervenes in the time market — by, for instance, increasing the supply of bank circulation credit and fiat money — it necessarily causes a deviation of the market interest rate from the pure interest rate (namely pushing the market interest rate below the pure market interest rate), which subsequently must lead to malinvestment and boom-and-bust.
$20 $15
(3) Violating individuals' property rights.[6] Violations of individual property rights (for instance through government taxation, regulations, etc.) will make property owners value present goods increasingly more highly than future goods — a conclusion which follows from the law of diminishing marginal utility.
Violations of individual property rights thus raise peoples' time preference, increasing consumption at the expense of savings and investment, thereby reducing (or even reverting) the pace of capital accumulation. An interventionist-socialist societal order will therefore necessarily lead to impoverishment relative to a free market societal order, in which there are no systematic violations of individuals' property rights.
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Notes
[1] For an in-depth explanation, see Hoppe, H.-H. (2007 [1995]), "Praxeology and Economic Science," in Economic Science and the Austrian Method, Ludwig von Mises Institute, pp. 7–48.
[2] See Rothbard, M. N. (2007 [1962]), Man, Economy, and State, Scholar's edition, Ludwig von Mises Institute, pp. 21–33.
[3] See in this context Rothbard, M. N. (1959), "Towards a Reconstruction of Utility in Welfare Economics," originally published in On Freedom and Free Enterprise: The Economics of Free Enterprise, May, Sennholz, H. F., ed., Princeton, N.J: D. Van Nostrand, 1956; reprinted in The Logic of Action One: Method, Money, and the Austrian School by Murray N. Rothbard, London: Edward Elgar, 1997, pp. 211–255.
[4] Mises, L. (2007 [1957]), Theory and History, Ludwig von Mises Institute, p. 3, notes: "it would simply be silly to deny the fact that man manifestly behaves as if he were really aiming at definite ends. Thus the denial of purposefulness in man's attitudes can be sustained only if one assumes that the choosing both of ends and of means is merely apparent and that human behavior is ultimately determined by physiological events which can be fully described in the terminology of physics and chemistry.
Even the most fanatical champions of the 'Unified Science' sect shrink from unambiguously espousing this blunt formulation of their fundamental thesis. There are good reasons for this reticence. So long as no definite relation is discovered between ideas and physical or chemical events of which they would occur as the regular sequel, the positivist thesis remains an epistemological postulate derived not from scientifically established experience but from a metaphysical world view."
[5] Mises (1996), Human Action, 4th ed., Fox & Wilkes, San Francisco, p. 124.
[6] See in this context, for instance, Hoppe, H.-H. (2010), Theory of Socialism and Capitalism, Ludwig von Mises Institute.
Kinsella and Tinsley (2004) is beautifully written, infused with keen insights, in some ways solidly predicated upon libertarianism and praxeology, and yet, and yet, much as I enthusiastically agree with goodly portions of it and am even inspired by them, I cannot see my way clear to accepting all of their insights.
The present paper is devoted to a critique of those parts of the paper with which I cannot agree.
Volume 22, Number 1 (2011)
[This speech was delivered at the offices of the Mises Institute, September 14, 1999, the date on which Human Action was published 50 years ago. The Mises Institute published the pocket paperback edition in November 2010. ]
In a 1949 memo circulated within Yale University Press, the publicity department expressed astonishment at the rapid sales of Ludwig von Mises's Human Action. How could such a dense tome, expensive by the standards of the day, written by an economist without a prestigious teaching position or any notable reputation at all in the United States, published against the advice of many on Yale's academic advisory board, sell so quickly that a second and third printing would be necessary in only a matter of months?Imagine how shocked these same people would be to find that the first edition, reissued 50 years later as the Scholar's Edition of Human Action, would sell so quickly again.
How can we account for the continuing interest in this book? It is unquestionably the single most important scientific treatise on human affairs to appear in this century. But given the state of the social sciences, and the timelessness of Mises's approach to economics, I believe it will have an even greater impact on the next century. Indeed, it is increasingly clear that this is a book for the ages.
Human Action appeared in the midst of ideological and political turmoil. The world war had only recently ended, and the United States was attempting to reshape the politics of Europe with a new experiment in global foreign aid. The Cold War was just beginning.
Virtually overnight, Russia went from ally to enemy — a shocking transition considering that nothing much had changed in Russia. It had been a prison camp since 1918 and its largest imperial advances in Europe had taken place with the full complicity of FDR. But in order to sustain wartime economic planning in the United States, and all the spending that entailed, it became necessary for the United States to find another foreign foe. By 1949, the United States began to fight socialism abroad by imposing it at home.
Indeed, on this day 50 years ago, the old idea of the liberal society was gone, seemingly forever. It was a relic of a distant age, and certainly not a model for a modern industrial society. The future was clear: the world would move toward government planning in all aspects of life and away from the anarchy of markets. As for the economic profession, the Keynesian School had not yet reached its height, but that was soon to come.
Socialist theory enthralled the profession to the extent that Mises and Hayek were thought to have lost the debate over whether socialism was economically possible. Labor unions had been delivered a setback with the Taft-Hartley Act, but it would be many years before the dramatic declines in membership would take place. In academia, a new generation was being raised to believe that FDR and World War II saved us from the Depression, and that there were no limits to what the state could do. Ruling the land was a regime characterized by regimentation in intellectual, social, and political life.
Human Action appeared in this setting not as polite suggestion that the world take another look at the merits of free enterprise. No, it was a seamless and uncompromising statement of theoretical purity that was completely at odds with the prevailing view. Even more than that, Mises dared to do what was completely unfashionable then and now, which is to build a complete system of thought from the ground up. Even Mises's former students were taken aback by the enormity of his argument and the purity of his stand. As Hans Hoppe has explained, some of the shock that greeted the book was due to its integration of the full range of philosophy, economic theory, and political analysis.
When you read Human Action, what you get is not a running commentary on the turmoil of the time, but rather a pristine theoretical argument that seems to rise above it all. To be sure, Mises addresses the enemies of freedom in these pages — and they happen to be the same enemies of freedom that surround us today. But much more remarkable is the way he was able to detach himself from the rough-and-tumble of daily events and write a book restating and advancing a pure science of economic logic, from the first page to the last. It contains not a word or phrase designed to appeal to the biases of the world around him. Instead, he sought to make a case that would transcend his generation.
"Mises dared to do what was completely unfashionable then and now, which is to build a complete system of thought from the ground up."To appreciate how difficult this is to do as a writer, it is useful to look back at essays we may have written last year or 10 years ago. Quite often, they have all the feel of their time. If any of us have written anything that can hold up 5 years later, much less 50, we should feel extremely happy at our accomplishment. And yet Mises sustained a 1,000-page book on politics and economics that doesn't feel dated in the least — or at least that was the consensus of the students we recently had in our offices to reread the entire work.
Consider Samuelson's Economics, which made its first appearance in 1948. It's no accident that it's in its 16th edition. It had to be continually updated to fix the theories and models that events rendered anachronistic in only a few years. Even as late as 1989, the book was predicting that the Soviets would surpass the Unitd States in production in a few years. Needless to say, that had to go. Last year, a publisher brought out the first edition — as a kind of museum piece, the way you might reproduce an old phonograph record. In any case, it didn't sell well.
Incidentally, when John Kenneth Galbraith reviewed Human Action in the New York Times, he called it a nice piece of intellectual nostalgia. Interesting. Does anyone read any of Galbraith's books today for any other reason? Our purpose in reissuing the first edition, on the other hand, was not nostalgia: it was to introduce a new generation to what it means to think clearly about the problems of social order. We still have so much to learn from Mises.
I think we need to reflect on what it required of Mises personally to write the book. He had been uprooted from his homeland, and much of his beloved Europe was in tatters. Well past midlife, Mises had to start over, with a new language and a new setting. It would have been so easy for him to look around at the world and conclude that freedom was doomed and that his life had been a waste.
Try to imagine the intellectual courage it required for him to sit down and write, as he did, an all-encompassing apologia for the old liberal cause, giving it a scientific foundation, battling it out with every enemy of freedom, and ending this huge treatise with a call for the entire world to change direction from its present course onto an entirely new one.
I'm sometimes accused of having an excessively pious devotion to the man Mises, but it is impossible not to notice, in the thicket of his dense argument, that he was also a singular character in the history of ideas, a man of uncommon vision and courage.
When we honor Human Action on this great anniversary of the book's publication, we must also honor the fighting spirit that led him to write it in the first place, and to see it through to its miraculous publication.
What are the political and economic trends that have come to pass in the last 50 years? The rise of new technologies, whose existence are best explained through a Misesian theory. The collapse of the Soviet Union and its client states, for the reasons explained in this book. The failure of the welfare state, again foretold in these pages. The widespread disappointment in the results of positivist methods in the social sciences, also addressed here.
Indeed, if we look at the failure of the welfare state, the persistence of the business cycle, the hyperinflation in Asia, the collapse of currencies in South America, the benefits we've derived from deregulation in our own country, and the meltdown of social-insurance schemes, we'll see that each is addressed and predicted in Human Action. Again, each is discussed in terms of timeless principles.
But none of these issues touch on what I find to be the most encouraging trend of our time: the decline in the moral and institutional status of the central state itself. Quite often in the press these days, pundits decry the rise of cynicism and antigovernment feeling among the public. But what does this really mean? Surely not that Misesian theory has come to capture the imagination of the masses. We are a long way from that. What they are decrying is the end of the old intellectual and political regime that was just coming into its own when Mises's book appeared in 1949, and has been breaking apart since at least 1989.
The same level of respect is not shown to leaders in Washington as it was in those years. Involvement in politics or the civil service is not valued as highly. In those days, the state got the best and brightest. These days, it gets those who have no other job prospects. The public sector is not the place to look for bandwidth. Moreover, hardly anyone believes that central planners are capable of miracles anymore, and the public tends to distrust those who claim otherwise. The political rhetoric of our time must account for the rise of markets and private initiative, and acknowledge the failure of the state.
Now, there are exceptions. There is the Bill Bradley campaign, which, as far as I can tell, is driven by the idea that Clinton has cut the government too much! And then there are the conservatives at the Weekly Standard. Last week's issue called for something new: what they have dubbed "One Nation Conservatism." The idea is to combine the conservative domestic statism of George W. with the conservative foreign-policy statism of John McCain. This is what might be called the politics of the worst of all worlds.
The entire approach fails to come to terms with a central insight of Mises's treatise: namely, that reality imposes limits on how expansive our vision of government can be. You can dream about the glories of a society without freedom all you want, but no matter how impressive the plans look on paper, they may not be achieved in the real world because economizing behavior requires, most fundamentally, private property, which is the institutional basis of civilization.
"When we honor Human Action, we must also honor the fighting spirit that led him to write it in the first place."Government is the enemy of private property, and for that reason becomes the enemy of civilization when it attempts to perform anything but the most minimal functions. And even here, Mises says, if it were possible to permit individuals freedom from the state altogether, it should be done.
People were not ready for that message then but they are more ready for it now, because we live in times when government routinely confiscates one-half or more of the profits associated with entrepreneurship and labor. Politics consists of 100,000 pressure groups trying to get their hands on the loot. Why would anyone believe that it would be a good idea to expand this system?
Let me read you the rationale for this One-Nation Conservatism. It will inspire people to throw themselves into what they call public service. Public service has four main merits in their view: it "forces people to develop broader judgment, sacrifice for the greater good, hear the call of duty, and stand up for their beliefs."
These are all desirable traits. But I fail to see how they have anything to do with politics. Rather, a politicized society tends to produce the opposite: narrow judgment, selfishness, petty graft, and compromise. And that's putting the best-possible spin on it.
Who are the real visionaries today? They are software developers, communications entrepreneurs, freedom-minded intellectuals, homeschoolers, publishers who take risks, and businessmen of every variety who have mastered the art of serving the public through excellence — and doing it despite every obstacle that the state places in their way.
The real visionaries today are the people who continue to struggle to live normal lives — raising children, getting a good education, building healthy neighborhoods, producing beautiful art and music, innovating in the world of business — despite the attempt by the state to distort and destroy most of what is great and good in our world today.
One of the great rhetorical errors of Mises's time and ours has been to reverse the meaning of public and private service. As Murray Rothbard pointed out, private service implies that your behavior and your motivation is about helping no one but yourself. If you want an example, tour the halls of a random bureaucratic palace in DC.
Public service, on the other hand, implies a voluntary sacrifice of our own interests for the sake of others, and I suggest to you that this the most overlooked feature of a free society. Whether it is entrepreneurs serving their customers, parents serving their children, teachers serving their students, pastors serving the faithful, or intellectuals serving the cause of truth and wisdom, we find an authentic public ethic and a real broadness of judgement; it is in the voluntary nexus of human action where we find the call of duty being acted on. It is here we find people standing up for their beliefs. It is here we find true idealism.
It was Mises's firm conviction that ideas, and ideas alone, can bring about a change in the course of history. It is for this reason that he was able to complete his great book and live a heroic life despite every attempt to silence him.
"Our purpose in reissuing the first edition was to introduce a new generation to what it means to think clearly about the problems of social order."The scholarly followers of Mises in our own time exhibit these traits, and inspire us every day with their innovative, principled, and radical approach to remaking the world of ideas. In their work for the Quarterly Journal of Austrian Economics, in their books, and in their teaching we see the ideals of Mises being fulfilled.
At a low point in his life, Mises wondered if he had become nothing but a historian of decline. But he quickly recalled his motto from Virgil: "Do not give in to evil, but proceed ever more boldly against it." With Human Action, Mises did just that. He was to die around the time that Nixon went off the gold standard and imposed wage and price controls, to Republican cheers. He didn't live to see what we see today — nothing short of the systematic unraveling of the statist enterprise of our century — but he did foresee that hope was not lost for the flourishing of human liberty. For that great virtue of hope, we must all be very grateful.
Let me also say how grateful I am to everyone involved in the production of the Scholar's Edition on this 50th anniversary, from our members to our faculty to our staff. Mises smiles today.
[This speech was delivered at the offices of the Mises Institute, September 14, 1999, the date on which Human Action was published 50 years ago. The Mises Institute published the pocket paperback edition in November 2010. ]
In a 1949 memo circulated within Yale University Press, the publicity department expressed astonishment at the rapid sales of Ludwig von Mises's Human Action. How could such a dense tome, expensive by the standards of the day, written by an economist without a prestigious teaching position or any notable reputation at all in the United States, published against the advice of many on Yale's academic advisory board, sell so quickly that a second and third printing would be necessary in only a matter of months?
Imagine how shocked these same people would be to find that the first edition, reissued 50 years later as the Scholar's Edition of Human Action, would sell so quickly again.
How can we account for the continuing interest in this book? It is unquestionably the single most important scientific treatise on human affairs to appear in this century. But given the state of the social sciences, and the timelessness of Mises's approach to economics, I believe it will have an even greater impact on the next century. Indeed, it is increasingly clear that this is a book for the ages.
Human Action appeared in the midst of ideological and political turmoil. The world war had only recently ended, and the US was attempting to reshape the politics of Europe with a new experiment in global foreign aid. The Cold War was just beginning.
Virtually overnight, Russia went from ally to enemy — a shocking transition considering that nothing much had changed in Russia. It had been a prison camp since 1918 and its largest imperial advances in Europe had taken place with the full complicity of FDR. But in order to sustain wartime economic planning in the US, and all the spending that entailed, it became necessary for the US to find another foreign foe. By 1949, the US began to fight socialism abroad by imposing it at home.
Indeed, on this day 50 years ago, the old idea of the liberal society was gone, seemingly forever. It was a relic of a distant age, and certainly not a model for a modern industrial society. The future was clear: the world would move toward government planning in all aspects of life, and away from the anarchy of markets. As for the economic profession, the Keynesian School had not yet reached its height, but that was soon to come.
Socialist theory enthralled the profession to the extent that Mises and Hayek were thought to have lost the debate over whether socialism was economically possible. Labor unions had been delivered a setback with the Taft-Hartley Act, but it would be many years before the dramatic declines in membership would take place. In academia, a new generation was being raised to believe that FDR and World War II saved us from the Depression, and that there were no limits to what the State could do. Ruling the land was a regime characterized by regimentation in intellectual, social, and political life.
Human Action appeared in this setting not as polite suggestion that the world take another look at the merits of free enterprise. No, it was a seamless and uncompromising statement of theoretical purity that was completely at odds with the prevailing view. Even more than that, Mises dared to do what was completely unfashionable then and now, which is to build a complete system of thought from the ground up. Even Mises's former students were taken aback by the enormity of his argument and the purity of his stand. As Hans Hoppe has explained, some of the shock that greeted the book was due to its integration of the full range of philosophy, economic theory, and political analysis.
When you read Human Action, what you get is not a running commentary on the turmoil of the time, but rather a pristine theoretical argument that seems to rise above it all. To be sure, Mises addresses the enemies of freedom in these pages — and they happen to be the same enemies of freedom that surround us today. But much more remarkable is the way he was able to detach himself from the rough-and-tumble of daily events and write a book restating and advancing a pure science of economic logic, from the first page to the last. It contains not a word or phrase designed to appeal to the biases of the world around him. Instead, he sought to make a case that would transcend his generation.
"Mises dared to do what was completely unfashionable then and now, which is to build a complete system of thought from the ground up."To appreciate how difficult this is to do as a writer, it is useful to look back at essays we may have written last year or 10 years ago. Quite often, they have all the feel of their time. If any of us have written anything that can hold up 5 years later, much less 50, we should feel extremely happy at our accomplishment. And yet Mises sustained a 1,000-page book on politics and economics that doesn't feel dated in the least — or at least that was the consensus of the students we recently had in our offices to reread the entire work.
Consider Samuelson's Economics, which made its first appearance in 1948. It's no accident that it's in its 16th edition. It had to be continually updated to fix the theories and models that events rendered anachronistic in only a few years. Even as late as 1989, the book was predicting that the Soviets would surpass the US in production in a few years. Needless to say, that had to go. Last year, a publisher brought out the first edition — as a kind of museum piece, the way you might reproduce an old phonograph record. In any case, it didn't sell well.
Incidentally, when John Kenneth Galbraith reviewed Human Action in the New York Times, he called it a nice piece of intellectual nostalgia. Interesting. Does anyone read any of Galbraith's books today for any other reason? Our purpose in reissuing the first edition, on the other hand, was not nostalgia: it was to introduce a new generation to what it means to think clearly about the problems of social order. We still have so much to learn from Mises.
I think we need to reflect on what it required of Mises personally to write the book. He had been uprooted from his homeland, and much of his beloved Europe was in tatters. Well past midlife, Mises had to start over, with a new language and a new setting. It would have been so easy for him to look around at the world and conclude that freedom was doomed and that his life had been a waste.
Try to imagine the intellectual courage it required for him to sit down and write, as he did, an all-encompassing apologia for the old liberal cause, giving it a scientific foundation, battling it out with every enemy of freedom, and ending this huge treatise with a call for the entire world to change direction from its present course onto an entirely new one.
I'm sometimes accused of having an excessively pious devotion to the man Mises, but it is impossible not to notice, in the thicket of his dense argument, that he was also a singular character in the history of ideas, a man of uncommon vision and courage.
When we honor Human Action on this great anniversary of the book's publication, we must also honor the fighting spirit that led him to write it in the first place, and to see it through to its miraculous publication.
What are the political and economic trends have come to pass in the last 50 years? The rise of new technologies, whose existence are best explained through a Misesian theory. The collapse of the Soviet Union and its client states, for the reasons explained in this book. The failure of the welfare state, again foretold in these pages. The widespread disappointment at the results of positivist methods in the social sciences, also addressed here.
Indeed, if we look at the failure of the welfare state, the persistence of the business cycle, the hyperinflation in Asia, the collapse of currencies in South America, the benefits we've derived from deregulation in our own country, and the meltdown of social insurance schemes, we'll see that each is addressed and predicted in Human Action. Again, each is discussed in terms of timeless principles.
But none of these issues touch on what I find to be the most encouraging trend of our time: the decline in the moral and institutional status of the central state itself. Quite often in the press these days, pundits decry the rise of cynicism and antigovernment feeling among the public. But what does this really mean? Surely not that Misesian theory has come to capture the imagination of the masses. We are a long way from that. What they are decrying is the end of the old intellectual and political regime that was just coming into its own when Mises's book appeared in 1949, and has been breaking apart since at least 1989.
The same level of respect is not shown to leaders in Washington as it was in those years. Involvement in politics or the civil service is not valued as highly. In those days, the State got the best and brightest. These days, it gets those who have no other job prospects. The public sector is not the place to look for band width. Moreover, hardly anyone believes that central planners are capable of miracles anymore, and the public tends to distrust those who claim otherwise. The political rhetoric of our time must account for the rise of markets and private initiative, and acknowledge the failure of the State.
Now, there are exceptions. There is the Bill Bradley campaign, which, as far as I can tell, is driven by the idea that Clinton has cut the government too much! And then there are the conservatives at the Weekly Standard. Last week's issue called for something new: what they have dubbed "One Nation Conservatism." The idea is to combine the conservative domestic statism of George W. with the conservative foreign-policy statism of John McCain. This is what might be called the politics of the worst of all worlds.
The entire approach fails to come to terms with a central insight of Mises's treatise: namely, that reality imposes limits on how expansive our vision of government can be. You can dream about the glories of a society without freedom all you want, but no matter how impressive the plans look on paper, they may not be achieved in the real world because economizing behavior requires, most fundamentally, private property, which is the institutional basis of civilization.
"When we honor Human Action, we must also honor the fighting spirit that led him to write it in the first place."Government is the enemy of private property, and for that reason becomes the enemy of civilization when it attempts to perform anything but the most minimal functions. And even here, Mises says, if it were possible to permit individuals freedom from the State altogether, it should be done.
People were not ready for that message then, and they are more ready for it now, because we live in times when government routinely confiscates one half or more of the profits associated with entrepreneurship and labor. Politics consists of 100,000 pressure groups trying to get their hands on the loot. Why would anyone believe that it would be a good idea to expand this system?
Let me read you the rationale for this One-Nation Conservatism. It will inspire people to throw themselves into what they call public service. Public service has four main merits in their view: it "forces people to develop broader judgment, sacrifice for the greater good, hear the call of duty, and stand up for their beliefs."
These are all desirable traits. But I fail to see how they have anything to do with politics. Rather, a politicized society tends to produce the opposite: narrow judgment, selfishness, petty graft, and compromise. And that's putting the best possible spin on it.
Who are the real visionaries today? They are software developers, communications entrepreneurs, freedom-minded intellectuals, home schoolers, publishers who take risks, and businessmen of every variety who have mastered the art of serving the public through excellence, and doing it despite every obstacle that the State places in their way.
The real visionaries today are the people who continue to struggle to live normal lives — raising children, getting a good education, building healthy neighborhoods, producing beautiful art and music, innovating in the world of business — despite the attempt by the State to distort and destroy most of what is great and good in our world today.
One of the great rhetorical errors of Mises's time and ours has been to reverse the meaning of public and private service. As Murray Rothbard pointed out, private service implies that your behavior and your motivation is about helping no one but yourself. If you want an example, tour the halls of a random bureaucratic palace in DC.
Public service, on the other hand, implies a voluntary sacrifice of our own interests for the sake of others, and I suggest to you that this the most overlooked feature of a free society. Whether it is entrepreneurs serving their customers, parents serving their children, teachers serving their students, pastors serving the faithful, or intellectuals serving the cause of truth and wisdom, we find an authentic public ethic and a real broadness of judgement; it is in the voluntary nexus of Human Action where we find the call of duty being acted on. It is here we find people standing up for their beliefs. It is here we find true idealism.
It was Mises's firm conviction that ideas, and ideas alone, can bring about a change in the course of history. It is for this reason that he was able to complete his great book and live a heroic life despite every attempt to silence him.
"Our purpose in reissuing the first edition was to introduce a new generation to what it means to think clearly about the problems of social order."
The scholarly followers of Mises in our own time exhibit these traits, and inspire us every day with their innovative, principled, and radical approach to remaking the world of ideas. In their work for The Quarterly Journal of Austrian Economics, in their books, and in their teaching we see the ideals of Mises being fulfilled.
At a low point in his life, Mises wondered if he had become nothing but a historian of decline. But he quickly recalled his motto from Virgil: Do not give in to evil, but proceed ever more boldly against it. With Human Action, Mises did just that. He was to die around the time that Nixon went off the gold standard and imposed wage and price controls, to Republican cheers. He didn't live to see what we see today — nothing short of the systematic unraveling of the statist enterprise of our century — but he did foresee that hope was not lost for the flourishing of human liberty. For that great virtue of hope, we must all be very grateful.
Let me also say how grateful I am to everyone involved in the production of the Scholar's Edition on this 50th anniversary, from our Members to our faculty to our staff. Mises smiles today.
[Excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]
Weighing in on the side of John Locke, not only on interest rates but also in a general and comprehensive vision of economic laissez-faire that even surpassed Locke, were two brothers, Dudley and Roger North, who came from a distinguished Tory family. Here was a fascinating convergence of views of a radical Whig and high Tories and zealous subjects of Charles and James II. This juncture presaged a later meeting of minds of "extreme Left" and "extreme Right" during the 18th century, when the imperialist-Whig-mercantilist one-party establishment, from 1715 to the 1750s, was opposed on the Left by radical libertarian Commonwealthmen and on the Right by the anti-imperialist, Catholic or proto-Catholic opposition, all agreeing on denunciations of the mercantilistic, high-tax, high–public debt, central-banking state.A complicating point is that the Whig establishment was run at the top by Robert Walpole and the Pelham family, who were really laissez-faire, pro-peace liberals trying to run a Whig Party of totally contrasting principles. Walpole managed this feat in the 1720s through the 1740s, and the Pelhams continued for some years after, largely by brilliant political manipulation and by tactical management of what both Left and Right denounced as "corruption." The main device by which Walpole managed to placate the Whig magnates temporarily was to pass the mercantilist measures in Parliament (e.g., restricting American colonial trade and production) and then simply failing to enforce them. See Murray N. Rothbard, Conceived in Liberty, Vol. II: "Salutary Neglect" (New Rochelle, NY: Arlington House, 1975), Part III.
Dudley and Roger North were sons of the fourth Baron North. Showing little aptitude for schooling, Dudley (1641–1691) went to Turkey and became a prominent trader as well as a director of both the Levant Company, which had been granted a monopoly of English trade with the Middle East, and the African Company, which enjoyed a monopoly of trade with that continent. Dudley North returned to London from Turkey in 1681, just in time to aid King Charles and his elder brother, Francis, Lord Guilford (1637–1685), in the patriotic cause of trying to indict John Locke's patron, Lord Shaftesbury, on the charge of treason. Francis, a distinguished jurist, had risen swiftly from solicitor general to attorney general, to Lord Chief Justice of the Common Pleas, and finally, in 1682 at the age of 45, to Lord Keeper of the Great Seal, the highest law office in England. Indictments for treason had to be handed down by grand juries appointed by sheriffs of London, and so Dudley North, in a famous and irregular election, ran for and was elected sheriff, after which he and his juries became scourges of the Whig party.
At the end of the year, Dudley North was knighted by the king for his services, and soon rose in appointive office, becoming commissioner of the customs, MP, and manager for King James II of all revenue matters in Parliament.
Toward the end of his brief but distinguished term in government service, Sir Dudley was inspired to think deeply about the two main monetary and financial questions agitating Parliament: the 1690 law to push down the rate of interest, and the recoinage question. Dudley wrote two Discourses upon Trade in 1691, one on interest and one on coinage, along with a postscript that was scheduled for publication as a pamphlet when Dudley North died unexpectedly on December 31. His younger brother Roger (1653–1734), who was helping Dudley edit the booklet, then revised the draft, added a preface, and published it anonymously in early 1692. Despite the booklet's brilliance, and its systematic devotion to laissez-faire and hard-money views, the tract sank without a trace and was not at all influential in the development of 18th-century economic thought or in monetary or financial policy.
Roger North was not only the youngest of the brothers, but he outlived them all by decades. Himself a queen's attorney general, he spent much of his life defending his brothers' reputations. He wrote voluminously in his lifetime on music, accounting, law, the English constitution, and on numerous philosophic and scientific subjects, but natural reticence led him to keep all these writings unpublished. A decade after Roger's death, his biographies, or Lives, of three of his eminent brothers were published, in two volumes, in 1742 and 1744.The 1742 Life was of Francis, Baron Guilford, and the 1744 Lives were biographies of Dudley, and of Dudley's younger brother, John (1645–1683), who in his brief life became professor of Greek and master of Trinity College, Cambridge. The first and eldest brother, Charles North (1630–1690), lived a retired life and little is known of him.
Even the publication of these two well-written volumes, however, made no dent in the history of economic thought until resurrected and praised by James Mill and by John Ramsay McCulloch in the early 19th century.For an excellent discussion of the contributions of Dudley and Roger North, see W. Letwin, The Origins of Scientific Economics (Garden City, NY: Doubleday, 1965), note 2, pp. 196–220, 271–94.
Roger North, who in his preface explained the groundwork and methodology of his brother and made his conclusions more consistent, pointed out the innovation in Dudley's method of economic analysis. For Dudley pioneered, at least in the history of English thought, the method which would later be adopted by Cantillon and Say and Senior, and which Ludwig von Mises would, in the 20th century, call "praxeology." Praxeology is economic theory resting on a few broad, self-evident axioms grounded in apprehension of reality, then logically deducing the implications of these emphatically true axioms. But if A implies B, C, etc., and A is definitely true, the deductions can be accepted as truths as well.
Roger wrote of Dudley's method in his preface: "I find trade here treated at another rate than usually has been; I mean philosophically; for … he begins at the quick, from principles indisputably true."Letwin, op. cit., note 2, p. 204. Italics added by Letwin. The older method of reasoning, Roger North added, "dealt in abstracts more than truths," in "forming hypotheses to fit abundance of precarious and insensible principles." In contrast, the new method, which North attributed to Descartes, builds knowledge "upon clear and evident truths."
"There can be no trade unprofitable to the public, for if it prove so, men leave off; and wherever the trades thrive, the public, of which they are part, thrives also."
Roger NorthIn addressing trade and its problems, Dudley North began in his first discourse by setting forth the clear and simple general axiom or principle: "Trade is nothing else but a commutation of superfluities." In other words, as Buridan and the Scholastics had emphasized but the world had forgotten, men only "commute" or exchange goods or services because each benefits more from the good he receives than from the good he gives up in exchange (his "superfluity"). Trade, therefore, whether intranational or international, benefits both parties; trade is not a Montaigne-mercantilist form of warfare where one party or nation exploits, or benefits at the expense of the other trader. Wealth and riches, then, are the goods that people are able to produce and accumulate, and not the money, the gold or silver, that enables them to buy those goods. Dudley North concludes that
he who is most diligent, and raises most fruits or makes most of manufactory, will abound most in what others make or raise, and consequently be free from want and enjoy most conveniences, which is truly to be rich, although there were no such thing as gold, silver or the like.
There is no magic, then, to gold or silver; they are simply commodities selected by the market for their special qualities to be monies; as Dudley North says, gold and silver, in contrast to other market metals, are "by nature very fine, and more scarce than others," and "imperishable, as well as convenient for easy storage."
Proceeding from there, North rediscovers the Scholastic analysis of money. If gold and silver are commodities, their value is determined, as are all other commodities on the market, by supply and demand.
Having laid the groundwork in systematic and general analysis, Dudley North proceeds to the vexed question of the rate of interest. In the market, North points out, some people, in consequence of hard work and judgment, are able to accumulate property. If the property is accumulated in the form of land, the landowners will rent out some of the land to those who wish to cultivate it. Similarly, those who accumulate property in terms of money will "rent out" their money, charging a rate of interest. And just as the rental price of land on the market will be determined by the supply and demand of land, so the interest rate — the price of loans — will be determined by the supply and demand for credit.
Since interest is a market price, government control will have consequences as injurious as the control of any price. Interest is low because the supply of capital is high; low interest itself does not create abundance of capital. As Letwin paraphrases North, "Nothing can lower interest rates except an increased supply of capital and as no law can by fiat increase the community's supply of capital, the proposed law is futile and injurious."Letwin, op. cit., note 2, p. 209. Furthermore, North pointed out, usury laws will reduce the supply of savings and capital and thereby raise instead of lower the market rate of interest, and the quantity of trade will diminish. Moreover, intervention to reduce interest rates is unjust, because all prices should be treated alike, and be equally free.
In his discourse on coinage, North did not really deal with the recoinage question, but he anticipated Smith, Ricardo, and the classical economists in his keen and principled hard-money analysis. Everyone cries about a "shortage of money," North noted, but what they really want is more goods, or, in the case of merchants, what they really mean is that the prices for their goods are not satisfactory. Analyzing the components of the demand for money and its supply, North traced transactions and emergency demands, as well as the different aspects of money supply. Unfortunately, he faltered when discussing how much money a nation really needed, failing to realize that any supply on the market is optimal; he believed that an increase in trade required an increase in the supply of money, not understanding that an increased demand for money could simply raise the market value of money (i.e., lowering prices), thereby increasing the value of each unit of currency.
Despite this failure, however, North ended up in the right laissez-faire place, for he pioneered breaking down the supply of money into coin and bullion. He demonstrated that coin, being more suitable for exchange, would tend to command a market premium over bullion. However, the coin premium is regulated by the respective supplies and demands for coin and bullion. Thus, if there is an increase in the stock of coin, the premium over bullion would fall, and coin would tend to be melted down into bullion. If, on the other hand, there is a shortage of coin, the coin premium would rise, and more people would mint bullion into coin. In this way, coin and bullion would tend to be kept in equilibrium. North likened the process to two "buckets": "Thus the buckets work alternately; when money is scarce, bullion is coined; when bullion is scarce money is melted."
So although Dudley North never reached the point of saying that the supply of money, compared to trade, is always optimal, he arrived at a similar laissez-faire, or market-equilibrating, conclusion by saying that no one has to worry about the supply of coin, which will always be kept optimal on the market.
As a result of his systematic, praxeological analysis, Dudley North arrived at firm, principled laissez-faire conclusions across the board. He opposed any usury laws: "It will be found best for the nation to leave the borrower and the lender to make their own bargains." He opposed any sumptuary laws; he denounced laws trying to keep gold and silver inside a country as doomed to failure. Government laws and decrees could only diminish, and never promote human energy, thrift and ingenuity.
But it was Dudley's brother Roger who took the final step, not only in explaining his brother's methodology, but also in expounding consistent laissez-faire conclusions. Attacking government intervention across the board, Roger North declared,
There can be no trade unprofitable to the public, for if it prove so, men leave off; and wherever the trades thrive, the public, of which they are part, thrives also. No law can set prices in trade, the rates of which must and will make themselves. But when such laws do happen to lay any hold, it is so much impediment to trade…. All favour to one trade or interest against another is an abuse.
Therefore, concluded Roger, "Laws to hamper trade, whether foreign or domestic, relating to money or other merchandises, are not the ingredients to make a people rich."
What can government do for a prosperous economy? "If peace be procured, easy justice maintained, the navigation not clogged, the industrious encouraged," in short, wrote North, "It is peace, industry and freedom that brings trade and wealth, and nothing else."Letwin, op. cit., note 2, pp. 215–16.
This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.
[Excerpted from chapter 12 of Theory and History.]
History tries to describe past events as they really happened. It aims at faithful representation. Its concept of truth is correspondence with what was once reality.
Epic and dramatic fiction depict what is to be considered true from the point of view of thymological insight, no matter whether the story told really happened or not. It is not our task to deal with the effects the author wants to bring about by his work and with its metaphysical, aesthetic, and moral content. Many writers seek merely to entertain the public. Others are more ambitious. In telling a story, they try to suggest a general view of man's fate, of life and death, of human effort and suffering, of success and frustration. Their message differs radically from that of science as well as from that of philosophy.
Science, in describing and interpreting the universe, relies entirely upon reason and experience. It shuns propositions that are not open to demonstration by means of logic (in the broadest sense of the term, which includes mathematics and praxeology) and experience. It analyzes parts of the universe without making any statements about the totality of things. Philosophy tries to build upon the foundations laid by science a comprehensive worldview. In striving after this end, it feels itself bound not to contradict any of the well-founded theses of contemporary science. Thus its path too is confined by reason and experience.
Poets and artists approach things and problems in another mood. In dealing with a single aspect of the universe they are always dealing with the whole. Narration and description, the portrayal of individual things and of particular events, is for them only a means. The essential feature of their work is beyond words, designs, and colors. It is in the ineffable feelings and ideas that activated the creator and move the reader and spectator.
When Konrad Ferdinand Meyer described a Roman fountain and Rainer Maria Rilke a caged panther, they did not simply portray reality. They caught a glimpse of the universe. In Flaubert's novel it is not Madame Bovary's sad story that is of primary concern; it is something that reaches far beyond the fate of this poor woman. There is a fundamental difference between the most faithful photograph and a portrait painted by an artist. What characterizes a work of literature and art as such is not its reporting of facts but the way it reveals an aspect of the universe and man's attitude toward it. What makes an artist is not experience and knowledge as such. It is his particular reaction to the problems of human existence and fate. It is erlebnis, a purely personal response to the reality of his environment and his experience.
Poets and artists have a message to tell. But this message refers to ineffable feelings and ideas. It is not open to utterance in an unambiguous way precisely because it is ineffable. We can never know whether what we experience — erleben — in enjoying their work is what they experienced in creating it. For their work is not simply a communication. Apart from what it communicates, it stirs up in the reader and spectator feelings and ideas that may differ from those of its author.
It is a hopeless task to interpret a symphony, a painting, or a novel. The interpreter at best tries to tell us something about his reaction to the work. He cannot tell us with certainty what the creator's meaning was or what other people may see in it. Even if the creator himself provides a commentary on his work, as in the case of program music, this uncertainty remains. There are no words to describe the ineffable.
What history and fiction have in common is the fact that both are based on knowledge concerning the human mind. They operate with thymological experience. Their method of approach is the specific understanding of human valuations, of the way people react to the challenge of their natural and social environment. But then their ways part. What the historian has to tell is completely expressed in his report. He communicates to the reader all he has established. His message is exoteric. There is nothing that would go beyond the content of his book as intelligible to competent readers.
It may happen that the study of history, or for that matter also the study of the natural sciences, rouses in the mind of a man those ineffable thoughts and views of the universe as a whole that are the mark of the empathic grasp of totality. But this does not alter the nature and character of the historian's work. History is unconditionally the search after facts and events that really happened.
Fiction is free to depict events that never occurred. The writer creates, as people say, an imaginary story. He is free to deviate from reality. The tests of truth that apply to the work of the historian do not apply to his work.
Yet his freedom is limited. He is not free to defy the teachings of thymological experience. It is not a requirement of novels and plays that the things related should really have happened. It is not even necessary that they could happen at all; they may introduce heathen idols, fairies, animals acting in human manner, ghosts, and other phantoms. But all the characters of a novel or a play must act in a thymologically intelligible way. The concepts of truth and falsehood as applied to epic and dramatic works refer to thymological plausibility. The author is free to create fictitious persons and plots but he must not try to invent a thymology — psychology — different from that derived from the observation of human conduct.
Fiction, like history, does not deal with average man or man in the abstract or general man — homme généralP. Lacombe, De l'histoire considérée comme science (2d ed. Paris, 1930), pp. 35–41. — but with individual men and individual events. Yet even here, there is a conspicuous difference between history and fiction.
The individuals with whom history deals may be and often are groups of individuals, and the individual events with which it deals are events that affected such groups of individuals. The single individual is a subject of the historian's interest primarily from the point of view of the influence his actions exercised upon a multitude of people or as a typical specimen representative of whole groups of individuals. The historian does not bother about other people. But for the writer of fiction it is always only the individual as such that counts, no matter what his influence upon other people or whether or not he is to be considered typical.
This has been entirely misunderstood in some doctrines about literature developed in the second part of the 19th century. The authors of these doctrines were misled by contemporary changes in the treatment of history. While older historians wrote chiefly about great men and affairs of state, modern historians shifted to the history of ideas, institutions, and social conditions. At a time when the prestige of science far surpassed that of literature, and positivist zealots sneered at fiction as a useless pastime, writers tried to justify their profession by representing it as a branch of scientific research.
In the opinion of Émile Zola the novel was a sort of descriptive economics and social psychology, to be based upon punctilious exploration of particular conditions and institutions. Other authors went even further and asserted that only the fate of classes, nations, and races — not that of individuals — is to be treated in novels and plays. They obliterated the distinction between a statistical report and a "social" novel or play.
The books and plays written in compliance with the precepts of this naturalistic aesthetics were clumsy pieces of work. No outstanding writer paid more than lip service to these principles. Zola himself was very restrained in the application of his doctrine.
The theme of novels and plays is individual man as he lives, feels, and acts, and not anonymous collective wholes. The milieu is the background of the portraits the author paints; it is the state of external affairs to which the characters respond by moves and acts. There is no such thing as a novel or play whose hero is an abstract concept such as a race, a nation, a caste, or a political party. Man alone is the perennial subject of literature: individual, real man as he lives and acts.
The theories of the aprioristic sciences — logic, mathematics, and praxeology — and the experimental facts established by the natural sciences can be viewed without reference to the personality of their authors. In dealing with the problems of Euclidian geometry, we are not concerned with the man Euclid and may forget that he ever lived.
The work of the historian is necessarily colored by the historian's specific understanding of the problems involved, but it is still possible to discuss the various issues implied without referring to the historical fact that they originated from a definite author. No such objectivity is permitted in dealing with works of fiction. A novel or a play always has one hero more than the plot indicates. It is also a confession of the author and tells no less about him than about the persons in the story. It reveals his innermost soul.
It has sometimes been asserted that there is more truth in fiction than in history. Insofar as the novel or play is looked upon as a disclosure of the author's mind, this is certainly correct. The poet always writes about himself, always analyzes his own soul.
[Excerpted from chapter 11 of Theory and History.]
Modern collectivist philosophy is a coarse offshoot of the old doctrine of conceptual realism. It has severed itself from the general philosophical antagonism between realism and nominalism and hardly pays any attention to the continued conflict of the two schools. It is a political doctrine and as such employs a terminology that is seemingly different from that used in the scholastic debates concerning universals as well from that of contemporary neorealism. But the nucleus of its teachings does not differ from that of the medieval realists. It ascribes to the universals objective, real existence, even an existence superior to that of individuals, sometimes even flatly denying the autonomous existence of individuals, the only real existence.
What distinguishes collectivism from conceptual realism as taught by philosophers is not the method of approach but the political tendencies implied. Collectivism transforms the epistemological doctrine into an ethical claim. It tells people what they ought to do. It distinguishes between the true collective entity to which people owe loyalty and spurious pseudo entities about which they ought not to bother at all. There is no uniform collectivist ideology, but many collectivist doctrines. Each of them extols a different collectivist entity and requests all decent people to submit to it. Each sect worships its own idol and is intolerant of all rival idols. Each ordains total subjection of the individual; each is totalitarian.
The particularist character of the various collectivist doctrines could easily be ignored because they regularly start with the opposition between society in general and individuals. In this antithesis there appears only one collective comprehending all individuals. There cannot therefore arise any rivalry among a multitude of collective entities. But in the further course of the analysis a special collective is imperceptibly substituted for the comprehensive image of the unique great society.
Let us first examine the concept of society in general.
Men cooperate with one another. The totality of interhuman relations engendered by such cooperation is called society. Society is not an entity in itself. It is an aspect of human action. It does not exist or live outside of the conduct of people. It is an orientation of human action. Society neither thinks nor acts. Individuals in thinking and acting constitute a complex of relations and facts that are called social relations and facts.
The issue has been confused by an arithmetical metaphor. Is society, people asked, merely a sum of individuals or is it more than this and thereby an entity endowed with independent reality? The question is nonsensical. Society is neither the sum of individuals nor more nor less. Arithmetical concepts cannot be applied to the matter.
Another confusion arises from the no less empty question whether society is — in logic and in time — anterior to individuals or not. The evolution of society and that of civilization were not two distinct processes but one and the same process. The biological passing of a species of primates beyond the level of a mere animal existence and their transformation into primitive men implied already the development of the first rudiments of social cooperation. Homo sapiens appeared on the stage of earthly events neither as a solitary food-seeker nor as a member of a gregarious flock, but as a being consciously cooperating with other beings of his own kind. Only in cooperation with his fellows could he develop language, the indispensable tool of thinking. We cannot even imagine a reasonable being living in perfect isolation and not cooperating at least with members of his family, clan, or tribe. Man as man is necessarily a social animal. Some sort of cooperation is an essential characteristic of his nature. But awareness of this fact does not justify dealing with social relations as if they were something else than relations or with society as if it were an independent entity outside or above the actions of individual men.
Finally there are the misconstructions caused by the organismic metaphor. We may compare society to a biological organism. The tertium comparationis is the fact that division of labor and cooperation exist among the various parts of a biological body as among the various members of society. But the biological evolution that resulted in the emergence of the structure-function systems of plant and animal bodies was a purely physiological process in which no trace of a conscious activity on the part of the cells can be discovered. On the other hand, human society is an intellectual and spiritual phenomenon. In cooperating with their fellows, individuals do not divest themselves of their individuality. They retain the power to act antisocially, and often make use of it. Its place in the structure of the body is invariably assigned to each cell. But individuals spontaneously choose the way in which they integrate themselves into social cooperation. Men have ideas and seek chosen ends, while the cells and organs of the body lack such autonomy.
Gestalt psychology passionately rejects the psychological doctrine of associationism. It ridicules the conception of "a sensory mosaic which nobody has ever observed" and teaches that "analysis if it wants to reveal the universe in its completeness has to stop at the wholes, whatever their size, which possess functional reality."K. Koffka, "Gestalt," Encyclopaedia of the Social Sciences, 6, 644. Whatever one may think about Gestalt psychology, it is obvious that it has no reference at all to the problems of society. It is manifest that nobody has ever observed society as a whole. What can be observed is always actions of individuals. In interpreting the various aspects of the individual's actions, the theorists develop the concept of society. There cannot be any question of understanding "the properties of parts from the properties of wholes."Ibid., p. 645. There are no properties of society that cannot be discovered in the conduct of its members.
In contrasting society and the individual and in denying to the latter any "true" reality, the collectivist doctrines look upon the individual merely as a refractory rebel. This sinful wretch has the impudence to give preference to his petty, selfish interests as against the sublime interests of the great god society. Of course, the collectivist ascribes this eminence only to the rightful social idol, not to one of the pretenders.
But who pretender is, and who is king,God bless us all — that's quite another thing.
When the collectivist extols the state, what he means is not every state but only that regime of which he approves, no matter whether this legitimate state exists already or has to be created. For the Czech irredentists in the old Austria and the Irish irredentists in the United Kingdom the states whose governments resided in Vienna and in London were usurpers; their rightful state did not yet exist. Especially remarkable is the terminology of the Marxians. Marx was bitterly hostile to the Prussian state of the Hohenzollern. To make it clear that the state which he wanted to see omnipotent and totalitarian was not that state whose rulers resided in Berlin, he called the future state of his program not state but society. The innovation was merely verbal. For what Marx aimed at was to abolish any sphere of the individual's initiative action by transferring the control of all economic activities to the social apparatus of compulsion and repression, which is commonly called state or government. The hoax did not fail to beguile lots of people. Even today there are still dupes who think that there is a difference between state socialism and other types of socialism.
The confusion of the concepts of society and of state originated with Hegel and Schelling. It is customary to distinguish two schools of Hegelians: the left wing and the right wing. The distinction refers only to the attitude of these authors toward the Kingdom of Prussia and the doctrines of the Prussian Union Church. The political creed of both wings was essentially the same. Both advocated government omnipotence. It was a left-wing Hegelian, Ferdinand Lassalle, who most clearly expressed the fundamental thesis of Hegelianism: "The State is God."Gustav Mayer, Lassalleana, Archiv für Geschichte der Sozialismus, 1, 196. Hegel himself had been a little more cautious. He only declared that it is "the course of God through the world that constitutes the State" and that in dealing with the state one must contemplate "the Idea, God as actual on earth."Hegel, Philosophy of Right, sec. 258.
The collectivist philosophers fail to realize that what constitutes the state is the actions of individuals. The legislators, those enforcing the laws by force of arms, and those yielding to the dictates of the laws and the police constitute the state by their behavior. In this sense alone is the state real. There is no state apart from such actions of individual men.
[This excerpt from Literature and the Economics of Liberty: Spontaneous Order in Culture discloses some plot details of Joseph Conrad's novel The Secret Agent]
Like Willa Cather, Joseph Conrad was a great economic novelist who maintained a contemptuous distance from the "economic" novel. Cather asked the rhetorical question, "[W]ho wants any more detail as to how Carmencita and her fellow factory-girls made cigars?"[1] Not Cather; not Conrad, either. Both were interested in a deeper and broader subject: the vast field of exploration that surrounds and includes economics. Ludwig von Mises called this field "the general theory of human action, praxeology."[2]
That is a preposterously unliterary word, a word that neither Conrad nor Cather would ever want to see, let alone use. Probably neither of them ever got the chance to see it. They lacked the word — but they had the thing. They understood economic relationships, and they saw that such economic concepts as scarcity, price, profit, and investment have implications that go far beyond the scope of economic behavior as ordinarily represented in works of "economic" or "social" fiction. They tracked those implications far into the praxeological hinterland, mapping the points where economics encounters fundamental principles of human action.
The fullest, indeed the virtually inexhaustible, expression of Conrad's praxeology is his novel The Secret Agent (1907). Cather thought that her era was characterized by "the revolt against individualism."[3] Conrad saw something larger: a revolt against human action as it really is. The Secret Agent attempts to explain both the revolt and what it revolts against.
I.The praxeology of The Secret Agent emerges from Conrad's interest in a certain group of characters — political radicals — who are engaged in plotting, or at least in ardently desiring, the downfall of the capitalist system. These people have their own theories about human action, theories that Conrad finds enticing targets for ridicule. From the ruins of their ideologies, he retrieves much that is useful by an opposing system of thought.
One of the easiest theories for Conrad to dismantle is economic and historical materialism, the belief that all human action, even intellectual action, is determined by material conditions. What is material or "economic" in this sense would also be "collective" in its operation and effect. The association of materialism with collectivism is especially attractive to Conrad's revolutionaries, all but one of whom want to replace bourgeois-individualist society with some form of collectivism. They call themselves "anarchists," but they would be more accurately described as communists. Materialism gives them the opportunity to ground collectivist politics in larger ideas about reality.
To refute the materialist theory of action, Conrad provides an example of the theory in action, trying to explain itself. His example is the radical ideologue Michaelis, who maintains that "the material side of life" is the source of "all ideas."[4] History, he believes, is "dominated and determined" by "the force of economic conditions." Mere "consciousness" is not a significant factor. "Moralists" can think and talk all they want, but they can never change history. Their subjective "phantasies" (unlike material "conditions") lack all "objective value."[5]
There is nothing unprecedented about Michaelis's ideas — they are garden-variety Marxism — and there is nothing inappropriate about Conrad's choice of Michaelis as their exponent. In contrast to Marx and Engels, he can actually boast of working-class origins. But can his materialist theory explain its own discourse?
It would certainly have a hard time with his attack on moralism as irrelevant to human action. Everything he says and does is inspired by moral concerns. His "objective" analysis of capitalism is just a sermon about the "inherent viciousness" of "all private property."[6] The discourse of Marx himself was moralistic in the same way. But the more important thing (and here is the central thrust of Conrad's satire) is that moralism is an essential ingredient of this kind of discourse. People become revolutionaries not because they experience certain material "conditions," but because they regard those conditions as morally wrong. Revolutionaries are made by moral judgments.
And that is the problem: Michaelis's discourse is wrong by its own rationale. There is no material reason for him to talk as he does. To Conrad, the idea of a material motivation is a joke, and the source of other jokes — easy, obvious, enormously effective jokes. One of them has to do with the tremendous materiality of Michaelis himself. He is not exactly one of the "prisoners of starvation" invoked by the Internationale. He was imprisoned, indeed, because of his revolutionary activity, but
[h]e had come out of a highly hygienic prison round like a tub, with an enormous stomach and distended cheeks of a pale, semitransparent complexion, as though for fifteen years the servants of an outraged society had made a point of stuffing him with fattening foods in a damp and lightless cellar. And ever since he had never managed to get his weight down as much as an ounce.[7]
Michaelis is the reductio ad absurdum of the materialist philosophy. He is drowning in matter, but his consciousness keeps on breathing moralistic ideals.
The oddest thing is that someone who can scarcely move should feel so confident about his ability to explain human action. Yet that is the way it is. Imprisoned, first within a jail, then within himself, Michaelis discovers that "confined space, seclusion, and solitude" are the only conditions "favourable to his inspiration." Marx, as we know, was not a busy traveler to factories and stock exchanges. He was nevertheless inspired to theorize very copiously about capitalist industry and finance. Michaelis, following the master, confidently expects to produce, from his own isolation, a masterpiece of collectivist thought, "a book of Revelation in the history of mankind."[8]
If he tried to square his personal expectations with his materialist theory, he would have to say that confinement in solitude — a kind of enforced individualism — has a surprising amount of objective and material value for collectivism. But materialist theory is never very good at assimilating the surprises of human action, as experienced by particular human beings. In this case, personal experience directly refutes the theory. The value of Michaelis's confinement isn't objective at all. It is purely subjective, purely a matter of his individual response to material conditions, not of the conditions themselves.
At the moment, those conditions are provided by a wealthy woman whom Conrad calls Michaelis's "Lady Patroness." She is an aristocrat of leftist sympathies, a type that recurs pretty frequently in the history of collectivist movements. As an aristocrat, the Lady Patroness nurses a class hatred for "parvenu" capitalists who engage in making money instead of inheriting and keeping it. Capitalism undermines the social authority of people like her; she therefore welcomes the specter of communism, believing that the "disappearance of the last piece of money" will somehow "leave the social values untouched": "She could not conceive how it could affect her position, for instance."[9]
Just as Marx and Michaelis would predict, the material circumstances of the Lady Patroness have an influence on her political values. What a materialist would find hard to explain is the bizarre result of that influence, the aristocrat's easy embrace of communism. To explain this effect, not unprecedented, to be sure, and yet grotesquely personal, one must consider such individual factors as ignorance, vanity, and spite. The Lady Patroness hates capitalism and wants to get back at it, so she seizes the heaviest weapon she can find, not bothering to consider that it might possibly destroy her, too. Like Michaelis, she takes so much pleasure in hearing herself talk that she mistakes her own discourse for "incontrovertible demonstration."[10] Like him, she lives in a world of words, an arbitrary state of consciousness that transcends all barriers of economic class. That is why she and Michaelis, two people who are obsessed with their own, quite different, class positions, get along so well together. Michaelis, at least, might find this a problem, if he ever tried to test his praxis against his theory. Fortunately for his material circumstances, he never tries.
II.As a radical materialist, Michaelis objects to mere individual speculations about the future; material forces will decide what happens.[11] But the culmination and payoff of his theory is the prophecy of a new, more truly "social" world. Of that world he is certain. No political-materialist theory has ever left room for doubt regarding the possibility of such a world, and little regarding its inevitability. If materialism lacked the promise of a better world, there would be small emotional or political profit in materialism.
Michaelis's theory is typical of materialist theory in another respect. Its new world of the future will be produced by "conditions," but it will be the kind of world that can be maintained only by a great deal of conscious planning. Constant social engineering will be needed to ensure that what is contributed by "each according to his ability" actually gets distributed to "each according to his need." This is a contradiction, but it is a traditional and predictable one. The servants of destiny have always (to quote Albert Camus) submitted "destiny to a plan" — their own individual plan.[12] Without individual determiners, determinism might not work. The determinist philosophy arrives at its payoff only by tacitly incorporating crucial elements of a rival system of ideas that emphasizes the significance of human choice and direction. The determinists are, like Shelley's poets, unacknowledged legislators of the world, unacknowledged even by themselves.
Michaelis is such a poet. His "book of Revelation" — the writing of which was prompted by a capitalist publisher who offered to pay the modern equivalent of $50,000[13] for the privilege of selling it — contains a defense of determinism and the blueprints for large-scale social engineering. According to the scornful comments of "the Professor," one of Michaelis's fellow radicals, the book elaborates "the idea of a world planned out like an immense and nice hospital, with gardens and flowers, in which the strong are to devote themselves to the nursing of the weak."[14] The Professor, who is Conrad's only intellectually alert revolutionist, finds this ridiculous. It is ridiculous.
But in case you're wondering, the Professor's idea of the great society is even less credible (or creditable). He dreams "of a world like shambles, where the weak would be taken in hand for utter extermination."[15] Who would want either kind of world? And that brings us back to the reason for Conrad's emphasis on the bizarre and ridiculous extremes of anticapitalist thought. Only a mind that was, shall we say, somewhat eccentric could harbor such ideas as the Professor's. But this is another sign that the materialists are wrong when they say that ideas are determined by general economic conditions. To be sure, even the radicals in The Secret Agent are affected by very general conditions. They make judgments of value, pay prices, and try to maximize utilities. In this, they behave like everyone else. Yet they have their own idea of what constitutes a utility. Such ideas indicate that particular economic values are subjective and relational, not "objective" and intrinsic to economic "conditions."
A well-known Marxist literary critic has argued that The Secret Agent is caught in a contradiction: it represents the external conditions of capitalist society as natural and unchangeable, while emphasizing the importance of the internal and subjective.[16] But there is no contradiction here. The objective ("external") conditions of capitalist society, or any other frame of human action, require people to choose one good, one goal, one course of goal-directed action over another; and the choices that they make are internal, individual, and "subjective." The radicals understand quite naturally that they have to make decisions, and they demonstrate the very individual and subjective quality of their judgments when they decide that the greatest possible utility will come from the ending of all messy subjective differences (and objective conditions, too, but we'll get to that).
The radicals can reach their goal only if other people can be brought to share their values, especially the value they assign to their own efforts and abilities. These goods are woefully undervalued by the free market, and the radicals are incapable of viewing this as a mere aspect of materially determined reality. They view it, instead, as a grievous injustice. For all their supposedly advanced ideas, they retain the medieval notion of the "just price." They know they are not getting that price. So they consider themselves entitled to destroy the market.
The Professor is a good example of their way of thinking. He once respected the capitalist system and hoped to find his place in it. What attracted him was the possibility of winning ample rewards for himself. He was not attracted by the necessity of earning these rewards by offering other people something that they valued enough to give him what he wanted in return. In other words, he was attracted by myth, not reality: "[H]is imagination had been fired early by the tales of men rising from the depths of poverty to positions of authority."[17] Such Horatio Alger tales are usually thought to embody a myth of capitalism. They do offer an idealization of modern capitalist society. But Conrad identifies the real source of their attractiveness, which has nothing in particular to do with capitalism. These tales are attractive because they reiterate the oldest and most reassuring of all economic theories, the labor theory of value, and they give it a decidedly moralized form. This is, however, the form most likely to produce disappointments, moral grievances, and demands for political retribution.
The Professor's experience shows how that happens. His theory is that "hard work" is valuable in itself and reveals intrinsic "merit," and that "merit" will be rewarded with "authority and affluence." He has the "puritanism of ambition" — a greedy but unworldly faith that is bound to be destroyed by events. Yet the Professor discovers that the market does not value him as he values himself. It stubbornly refuses to pay him what he considers the just price of his labor. In his opinion, therefore, he has
been treated with revolting injustice. His struggles, his privations, his hard work to raise himself in the social scale, had filled him with such an exalted conviction of his merits that it was extremely difficult for the world to treat him with justice — the standard of that notion depending so much upon the patience of the individual.[18]
Like Cather's Frank Shabata, the Professor is the victim of an arbitrary sense of entitlement resulting from the application of an arbitrary standard of value. Having once "considered himself entitled to undisputed success,"[19] he continues to demand that he be paid what is owed him, with interest. He has no idea that he might owe anything in exchange. Like the other radicals, he wants to control both the prices of the commodities he receives (setting them as low as possible) and the prices of the commodities he purveys (keeping them as high as possible). This, in practice, is what economics means to him. Obviously, as Conrad says, most "revolutionary reformers of a given social state" are not in
revolt against the advantages and opportunities of that state, but against the price which must be paid for the same in the coin of accepted morality, self-restraint, and toil. … There are natures too, to whose sense of justice the price exacted looms up monstrously enormous, odious, oppressive, worrying, humiliating, extortionate, intolerable. Those are the fanatics.[20]
Marxist theorist Fredric Jameson has noticed Conrad's emphasis on ressentiment as a political motivation and has (somewhat resentfully) dismissed it as a product of Conrad's own ressentiment. As far as Jameson is concerned, this Conradian form of psychologizing has no value at all as an explanation of political action. He writes disparagingly of "the fiction of the individual subject" in "so-called bourgeois individualism."[21] But without the individual subject, how shall we explain the political revolt against the marketplace, so widespread and yet so varied in the modern world? To put the matter plainly: people revolt in different ways, and far from everyone revolts; the poorest are commonly not in the vanguard, or even near. Conrad gives a crucial role to the individual "fanatic," and surely that figure is worth trying to account for.
The very existence of the fanatic, a person whose values are permanently at odds with those of the rest of the world, shows the predominance of individual economic "convictions" over general economic "conditions." The Professor, indeed, is an extreme "individualist by temperament."[22] But if individualism implies a special interest in asserting private convictions against public conditions, then poor, obtuse Michaelis and his aristocratic patron are individualists, too, and so are most of the other politically engaged characters. The eccentric feature — to their minds, the truly social and progressive feature — of their individualism is its unwillingness to accommodate any individuality but their own. Standing firmly on their private standard of economic justice, they will allow no rewards but the rewards they desire, no prices but the prices they decree, no payments but the payments they require of others.
The Professor wants to exterminate "the multitude" of "weak" people who nevertheless "have power" — the power to ignore his demands for justice.[23] Michaelis and the Lady Patroness have more modest goals; they merely envision "the complete economic ruin of the system," "the annihilation of all capital" and the abolition of "all the multitude" of capitalists who have the "profound unintelligence" to scorn their "humanitarian hopes."[24] Despite such comparatively petty differences, all the revolutionaries in The Secret Agent — even Michaelis, whose ideal is a worldwide hospital state — somehow believe that their aim is freedom. Its real aim is control. The revolutionaries are not rebelling against the capitalist system because they want people to be free to do as they please. They are rebelling because they want the power to create a social system that is congenial to themselves, a system that will give them the respect and authority they could never obtain in any imaginable free market in such commodities. The payment they seek can be secured only in a world that they have the power to plan.
In this regard, Conrad's characters are not isolated political cranks or members of a "nonexistent" movement[25] that Conrad, for reasons best known to himself, decided to satirize at the length of 100,000 words. The revolutionaries are actuated by commonplace ideas and ideals, which they carry to picturesque and exemplary extremes. They want justice, measured by an instinctively precapitalist theory of value. They want freedom, defined as the power to do and possess certain things. Nothing is more common in the 20th century than this conjunction of ideas and motives.
John Dewey, with his admirable ability to expound the tendencies of his time, defined "liberty" as the "effective power to do specific things"; he said that "the demand for liberty is [the] demand for power."[26] Dewey was hardly a radical in any crude sense. He was certainly no advocate of the Professor's program or even of Michaelis's. But when you start to identify freedom with power, you may find it hard to know where to stop. You may think that because people have a right to freedom, they also have a right to commensurate degrees of power.
"The revolutionaries are not rebelling against the capitalist system because they want people to be free to do as they please. They are rebelling because they want the power to create a social system that is congenial to themselves, a system that will give them the respect and authority they could never obtain in any imaginable free market in such commodities." All modern political movements, even those of the fascists and Stalinists, have held that they are struggling for "freedom" of some kind. Their adherents have held, in fact, that they are struggling for economic justice. They have rejected the idea of defining freedom as the absence of coercion and referring economic questions to the marketplace. To embrace that idea would be to surrender their power to plan a better world, "better" being defined in accordance with the particular economic values of the would-be planners. To give up the power to plan human action — that is a steep price to pay. To modern intellectuals, the "socialists of all parties," as Friedrich Hayek called them,[27] the price of political self-restraint "looms up monstrously enormous, odious, oppressive, worrying, humiliating, extortionate, intolerable." They will not pay that price; they revolt against it. An unplanned, spontaneously functioning society appears to them primitive, irrational, inhuman.
The Professor is the archetype and extremity of this revolt. He looks at a busy commercial street, full of people intent on their private purposes, and he sees them as so many insects: "They swarmed numerous like locusts, industrious like ants, thoughtless like a natural force, pushing on blind and orderly and absorbed. "[28] Their activity, which seems to lack all conscious planning because it is not planned by him, is monstrous, repulsive, thoughtless.
He is wrong, of course. As Conrad indicates in the final sentence of the novel, things are just the other way around: the Professor himself is "a pest" in a "street full of men."[29] But the reader, who is one of the alleged insects, already knew that the Professor's theory was wrong. The people in the street are not "thoughtless like a natural force"; that is simply a determinist fantasy. It has nothing to do with the way in which human action takes place. The people in the street, the readers of Conrad's book, the readers of this essay, are constantly making individual choices of values and pursuing individual rewards. That is why they act; that is how they are "industrious"; that is what human action is.
Further, human action is not an anarchic mess; whenever permitted to do so, it constantly evolves new forms of spontaneous order (as the classical-liberal praxeologists call it), social systems, large and small, in which people cooperate chiefly because they want to do so and need to do so in order to realize their private purposes. That kind of order is what the Professor fears and hates. To him, other people are just so many entities that are not obeying him, entities that have achieved, somehow, a nightmarish solidarity, like that of ants: "What if nothing could move them?"[30]
The verb is well chosen — "move." The Professor wants people to be inspired or "moved," but only by himself. If they will not be moved by him — and they won't — then all motion must be stopped: "Exterminate, exterminate! That is the only way of progress."[31] The Professor's idea of progress is the indiscriminate use of dynamite, the property of which is to make all motion cease. But isn't that what power means: the ability to stop anything that won't obey?
"To give up the power to plan human action — that is a steep price to pay." Action to arrest action: the irony is everywhere in The Secret Agent. It is a praxeological irony that runs much deeper than the novel's numerous political and economic ironies. To be sure, the Professor's specific way of acting-to-arrest-action fails to win endorsement by all the other revolutionaries. For many of them, action consists of endless talk about the impersonal movements of history. That is their way of making sure that nothing happens. But every major character enlists, in one way or another, in the revolt against human action. All of them act so as to bring the varied, unpredictable, individually conducted and misconducted actions of life to a halt.
To such apparently simple, if preposterous, pursuits the plot of The Secret Agent is wholly given up. That may be what Conrad had in mind when he called the work "A Simple Tale." But that subtitle is merely the first of the novel's million ironies, for the plot of this little book is one of the most complicated in modern literature. The complications stem from the characters' apparently simple aim of controlling all complications. Each character's attempts to master or even to know the dense surrounding plot merely multiply its branches and render them less knowable by anyone. It makes no difference why the characters want to change, control, and stop human action. Some are revolutionaries, some are reactionaries, some are apolitical. Their specific aims are different, but they all revolt against praxeological principles; and they produce, as a result, a full exposition of praxeological principles, concretized as a novel's plot.
We need to look closely at that plot.
III.Action begins not with impersonal "conditions" but with the personal and private aims of Adolf Verloc, the Secret Agent. Verloc could be placed in any of the three political categories: he is simultaneously a revolutionary, a reactionary, and a man with no ideological commitments. Political terms can be confusing here; praxeological terms are better. What matters for praxeology is, of course, action; what people do, in preference to every possible alternative choice. The ultimate praxeological fact about Adolf Verloc is his quest for immobility. It expresses an individual preference "as profound as inexplicable and as imperious as the impulse which directs a man's preference for one particular woman in a given thousand."[32] Verloc is a man who will choose any job, enlist in any cause, so long as it helps him evade action.
So highly does he value immobility that he secures two jobs in which immobility is the principal occupation. He is hired both by the English police and by the embassy of a reactionary foreign government to infiltrate anarchist organizations and make sure that the anarchist movement never actually moves. These jobs are easy. The anarchists with whom Verloc does his "work" ordinarily choose talk over action anyway. In fact, they spend a lot of time complaining about how anarchists almost always choose talk over action. These people may not have the power to immobilize the capitalist system, but they certainly have the power to immobilize themselves.
Unfortunately, Verloc's success at making nothing happen appears insufficient in the eyes of Mr. Vladimir, a new official of the embassy. Vladimir's opposition to human action is — incredible to say — even stronger than Verloc's. Verloc wants to make sure that nothing happens while he himself is around; Vladimir wants to make sure that nothing ever happens. He wants to see revolutionaries totally suppressed. He wants to lead Great Britain into a confederacy of reactionary powers that will end any hope of political change. He demands that Verloc contrive a bomb outrage that will make the British public face the facts about anarchism and force the government to crack down on it. Should Verloc fail to perform that mission, he will lose his "job."
Vladimir's plan for a bomb attack is a symbolic assault on progress. He commands Verloc to bomb Greenwich Observatory, which is associated, in the public's mind, with forward movement in science and therefore with forward movement in general. The observatory has a more fundamental symbolic association: it is the point from which all motion on the earth is measured. When Vladimir tells Verloc to "[g]o for the first meridian,"[33] he proposes, in effect, an attack on human action of any kind.[34]
He introduces his idea with a lengthy theoretical argument intended to demonstrate the necessity of using revolutionary means for conservative ends. His theory is almost as comprehensive as Michaelis's, and just as self-assured. But Vladimir, like everyone else who tries to command human action on a truly broad front, has a serious intellectual weakness: he has no idea what he's talking about. If he had any understanding of human action, he would be much less confident about his ability to command it. Only people who fail to comprehend the enormous complexity of a real society can confidently expect to make it reverse its course and conform to their plans. Verloc is astonished at Vladimir's ignorance of political facts, even facts about the anarchist movement. Verloc is far from an intellectual, but he can see that the bomb plot is absurd; Vladimir, the fountainhead of social theory, has no worries at all. This sort of thing very frequently signals the difference between members of the intelligentsia and everyone else. But Vladimir is right about one matter: Verloc will do almost anything to maintain his career of doing nothing. He will assault the prime meridian.
To do so, he requires two things: an explosive device and someone to carry it. He gets the first necessity from the Professor, whose occupation is making bombs and who is more than happy to help destroy Greenwich Observatory or any other feature of bourgeois life. As to the second necessity, Verloc certainly doesn't want to carry the bomb himself. So he enlists his brother-in-law Stevie. Stevie — young, retarded, maladroit — advances toward the observatory, bomb in hand, and manages to destroy himself instead of the prime meridian.
"Only people who fail to comprehend the enormous complexity of a real society can confidently expect to make it reverse its course and conform to their plans." This is the great, indeed the sole, public event of the novel; but its causes and most of its effects are lost to public view. They are hidden in a complex of individual choices and preferences that no one in the novel ever fully understands. Who would guess that a terrorist bombing was intended for the conservative purpose of making sure that no social change will occur? Vladimir knows this intention; it was his own. But he fails to realize that a number of other people are trying to stop things, too, and that their intentions are of considerable importance to the story that he believes he can control.
One of these people is Verloc's very unrevolutionary wife, Winnie. To Winnie, any unexpected movement, even a cab ride to the other side of town, seems to result from a "mania for locomotion."[35] Her goal is to keep her brother Stevie from contracting any such disease. She is wholly devoted to Stevie's welfare, and she knows that he requires a controlled environment. That is why she made the otherwise inexplicable decision to marry Adolf Verloc. She cherished few illusions about Verloc's character, but his very inertness was appealing; it gave good promise of an inertly protective home life. The promise appears to have been fulfilled. Stevie is comfortably immobilized in the Verlocs' living quarters, where he passes his time with a compass and a piece of paper, drawing "circles, circles, circles; innumerable circles" — concrete forms of stasis and enclosure.[36]
But somehow, when you see them all together, those innumerable, intersecting circles, "concentric, eccentric," suggest something else, too — they suggest a "cosmic chaos"; they suggest, perhaps … a bomb explosion. That is what happens. Winnie's attempt to keep Stevie tucked firmly inside the family circle is sickeningly self-defeating. Immured in Verloc's home, Stevie overhears the violent propaganda of the radicals who hold their meetings there. Not being very bright, Stevie "believes it's all true."[37] His doom is secured when Winnie tries to anchor him more deeply in her husband's affections by encouraging them to do more things together. Verloc acts on her encouragement. He uses his tête-à-têtes with Stevie to enlist him in the bomb plot. Inspired by an impulse of humanitarian revolt against the world of suffering and oppression that he has heard the anarchists describe, Stevie tries to bring it to a stop. He attacks the observatory and — in a gruesome overfulfillment of his sister's desire to immobilize him permanently — is blown into a thousand pieces.
His destruction is also hers. To prevent him from getting lost, she has carefully labeled his clothing with his address. The address survives. With amazing speed, it brings the police to Winnie's door. She learns that her brother is dead and that her husband is responsible for his death. Now the action of the novel — the action initiated by Stevie's, Winnie's, Verloc's, Vladimir's, and the Professor's variously motivated attempts to bring things to a stop — approaches its secret climax. Alone with her husband in the depths of the family circle, Winnie reaches for the carving knife and plunges it into her husband's heart. He dies as he had hoped to live, "without stirring a limb," his final action a faint verbal revolt against action. "Don't," he says.[38]
For Winnie, that word quickly develops a special significance: "Don't let them hang me … !"[39] But to keep that from happening, she can think of no other way than to get to the river and drown herself. She is planning the final preventive action of a life devoted to preventing action. As we will see, she accomplishes her purpose, in a way. But this is not the only line of action that Conrad is developing.
While these misfortunes befall Mr. and Mrs. Verloc, other people are becoming agitated by the explosion at Greenwich. The revolutionary establishment is distressed to find that someone has actually done something. Police Inspector Heat is distressed to find that Verloc, who has been working as Heat's spy as well as Vladimir's, is implicated in the affair. Heat's superior, the Assistant Commissioner of Police, is distressed by Heat's attempt to cover up what happened. He is even more distressed when he discovers that Verloc has been involved with a foreign embassy. All these dignitaries want the many-branching sequence of events to stop before it causes serious embarrassment to themselves.
The Assistant Commissioner succeeds in lopping one branch. He visits Vladimir and lets him know that somehow, in some way that remains mysterious to this brilliant theoretician of human action, his attempted meddling in British politics has been discovered. Vladimir is now finished in the London diplomatic corps. His attempt to suppress the anarchists has resulted in his own suppression. So much for his part of the story. He has stopped.
But events keep developing in other directions. Simply by investigating and attempting to manage the sequence of actions, the Assistant Commissioner extends it into areas that he can neither understand nor control. His investigation calls Heat's competence into question and activates his self-protective desire to keep things as they are. Heat revolts against his superior, or at least against his superior's way of suppressing revolt. He discovers that the Assistant Commissioner plans to use Verloc as evidence, thereby inviting unwelcome revelations about the "system of supervision" by which Heat monitors the anarchists.[40] Heat tries to procure Verloc's silence. He tells him to skip town.
Verloc resists. Afraid that the anarchists will try to kill him, he looks to the Assistant Commissioner to preserve his life. He wants protective incarceration. Characteristically, he doesn't want to move. But now it is his turn, and Heat's, to experience a gruesome overfulfillment of desire. Verloc will be still and silent, all right, because Winnie has overheard his conversation with Heat and has gathered the truth about her brother's death. She makes sure that Verloc will engage in no future conversations. She kills him.
These plot lines suggest that the Professor was right. The only way to command human action is to "exterminate" all the "swarming," "industrious," "thoughtless" human insects.
IV.But what kind of story is this?
Literary critics often regard The Secret Agent as an anatomy of bourgeois society and a diagnosis of its chronic, perhaps fatal ills.[41] A century after the diagnosis, the patient appears more alive than ever. Who is mistaken: Conrad or the critics?
In fact, the physicians have read the wrong chart. The Secret Agent neither anatomizes nor diagnoses society, if by "society" one means that aggregation of economic and occupational classes so minutely catalogued by the ordinary "social" or "economic" novelist. Conrad's characters have extraordinarily diverse social origins, but that is not enough to make them a cross-section of society. For one thing (has anybody noticed?), none of the major participants in this tragedy of capitalist society is engaged in any kind of capitalistic enterprise.[42] None of them makes anything, except the Professor; he makes bombs. And none of them sells anything, in the normal way of selling, except Verloc; he keeps a store that dispenses soft-core pornography. But his enterprise runs at a loss; it is just a front for his real business, which is spying. There are "no commercial reasons" for it.[43] What unites the characters in this book is the fact that they either work for the government or work by opposing the government — or both, in Verloc's case. They are perfectly innocent of the commercial or "consumerist" mentality that the literary segment of the intelligentsia has always regarded as the sickness of bourgeois society.
That does not mean (to return to an earlier point) that they are immune to economic considerations. Their behavior is thoroughly economic; they make investments, encounter risks, exchange goods, pay prices (which they generally regard as "enormous" and "extortionate"), enjoy profits, conclude contracts, and so forth. But their behavior shows that economics is not confined to financial transactions. In this novel, as in the real world, economic values and incentives extend far beyond the financial band of the spectrum.
To Michaelis, for example, dialectical materialism is a compelling, though a wholly nonmaterial, business occupation. He has paid for his interest in the enterprise with fifteen years in prison, and he regards himself as profiting by the exchange. Because he has paid so much for materialism, he feels justified in treating it as his private property, doling out rations of theory as if he were sole owner of the franchise. He finds this gratifying. Materialism is worth at least as much to him as Inspector Heat's pay envelope is worth to Heat — more proof that Mises was right when he argued that economic values are individual and subjective.
Heat himself notices that materialist ideas of profit and loss do not apply very well to the revolutionaries' pursuit of their "morbid ideals."[44] He would like to think that revolutionaries are the only eccentrics he has to deal with, the only people who are driven by nonmaterial incentives. But a chance meeting with the Professor establishes the fact that despite Heat's pay envelope, his own chief incentives are as nonmaterial, and perhaps as eccentric, as those of his adversaries. As the Professor suggests, Heat is inspired by a love of intrigue, a desire to win, and a desire to be seen as a winner. Next to his love of life, he loves "[t]he game."[45] Heat can bluster all he wants, but the Professor is as right as Mises was about the unpredictable and subjective nature of values.
And Conrad's critics are also right, righter than they know. They have worried a good deal about the defects of capitalist society, as revealed in its effects on the characters in this novel, but none of them imagines that Winnie, Stevie, Vladimir, Michaelis, the Professor, or the Assistant Commissioner is chasing the almighty pound. All of these people are, for want of a better term, idealists. Verloc might seem the great exception to the rule that nonmaterial motives prevail; his relationship to his jobs is purely mercenary. Yet money in itself is not his object. Money has value for him only as a means of purchasing idleness, the nonmaterial, the spiritual commodity to which he is "devoted … with a sort of inert fanaticism" or "fanatical inertness."[46] After his fashion, Verloc is an idealist, too; even a fanatic.
The central group of characters is surrounded by a penumbra of other, chiefly anonymous folk — the people in the street, the people who have nothing to do with revolution, the people whom the Professor scorns as subhuman. These people may be more influenced by material rewards than those who dwell within the novel's deep umbra of political intrigue. That, anyway, is what Mr. Vladimir thinks. He believes that the typical member of bourgeois society worships "material prosperity" and is virtually innocent of ideas.[47] But Vladimir's theories are of doubtful reliability. If he ever met Inspector Heat, for example, he would surely assume that the hypothesis applied to him; but we know better. Vladimir's ideas are a helpful contrast to Conrad's own. Material interests, Conrad suggests, are not without importance, but they are only one aspect of a larger marketplace than the materialists can imagine. The marketplace embraces everyone, even people who, for nonmaterial reasons, want to destroy it.
Because The Secret Agent is praxeological, rather than social or economic in the narrow sense, it includes in its marketplace everything that people are willing to buy, every kind of thing that provides a motive for human action — including the idea of ending human action as we know it. The novel identifies the existence of markets in every kind of good and service. It illustrates the curious ways in which markets establish costs and prices and organize human action across all barriers of social class and status and political affiliation.
Consider Adolf Verloc as a site of market activity. Verloc has things to sell, mainly nonmaterial things: his political and social services, such as they are. These things have value; other people are willing to pay for them. In the "exchange" process, he gets commodities that are "worth something to him."[48] Vladimir pays him with cash, Heat with police protection, Michaelis with revolutionary solidarity and credulity, Winnie with conjugal toleration of his shady operations, Stevie with doglike obedience, the Professor with explosives. Each person expects, in return, to get something that he or she regards as valuable: clandestine information, a place for political meetings, a good home, a bomb outrage.
These expectations of profit are as diverse as the various individuals' social origins and psychologies. Markets — legal and illegal — have a strong tendency to unite all the weirdly assorted strands of society in "a causal web of high complexity."[49] They do so, not by imposing common pursuits or common values, but by allowing shared access to the many types of goods on sale. The result is not a static but a dynamic set of relationships.
We see this in the Verloc affair. Verloc's local market, like any other, is an arena of rising and falling prices, rigorously subject, in its fluctuations, to the law of marginal utility.[50] When Vladimir indicates that the embassy is reluctant to pay the same price for the next unit of Verloc's "work" that it paid for the last few units, Verloc suddenly has to provide a lot more service to keep himself in business. He renegotiates his contract, strikes a new bargain: if Vladimir insists, he will go so far as to blow up Greenwich Observatory. At some point, however, it is useless to bargain, because no one wants any more of what you have to sell. Verloc reaches that point when the bomb plot miscarries. Thereafter, the Assistant Commissioner is the only person who sets any value on Verloc, and the only thing that interests him is Verloc's testimony, which he can get for practically nothing. He doesn't value Verloc enough to lodge him immediately in a safe jail cell. Tomorrow, he decides, will be soon enough; but by that time, Winnie has intervened and destroyed the merchandise.
Once she was willing to pay an enormous price for Verloc. She was even willing to marry him. He, and the home he made for Stevie, represented "[h]er contract with existence."Secret Agent, p. 189. Like virtually all agreements by which people spontaneously structure their lives, Winnie's contract was only implicit.Discussing the transition from precapitalist to capitalist economies, Ian Watt comments, "Our civilisation as a whole is based on individual contractual relationships, as opposed to the unwritten, traditional and collective relationships of previous societies" (The Rise of the Novel: Studies in Defoe, Richardson and Fielding [Berkeley: University of California Press, 1957], p. 63). This is somewhat misleading. Capitalism does give ideological significance to contracts and multiplies occasions for them by multiplying economic relationships. Capitalist societies have been called "contract societies" because contracts are the legal stiffening of their spontaneous economic order. But contracts need not be written; most are not, even in the most advanced capitalist societies. Neither a capitalist nor a pre-capitalist society could last a moment without the operation of implicit contracts. It was real and significant nonetheless. Winnie agreed to marry Verloc and fulfill all the duties normally regarded as part of marriage; Verloc agreed to give Stevie a protective home. But Verloc ceased to fulfill the terms of the contract. He ceased to give Stevie protection. He caused Stevie's death. Winnie's "bargain" has therefore ended.Secret Agent, p. 196.
"Markets — legal and illegal — have a strong tendency to unite all the weirdly assorted strands of society in 'a causal web of high complexity'." That is how Winnie sees it, at any rate. But the difficulty about implicit contracts is that people are so prone to misinterpret them. Ever since John Locke published his unguarded statements about implicit contracts as a basis of people's obligations to government,John Locke, Second Treatise of Government, especially par. 119. the possibility of over- or underinterpretation of contracts has vexed liberal social theory. Winnie encounters this problem in the domestic sphere. She believes that her contract with her husband is broken and that she is free. But Verloc's interpretation is evidently not the same as hers. Certain disturbingly sexual signs in his behavior indicate that he believes the marriage contract is still in force. He still expects to be obeyed, even loved. Now that he has "murdered Stevie," Winnie concludes, he will "want to keep her for nothing."Secret Agent, p. 192. Naturally, she refuses to renegotiate the contract on such unfavorable terms. She wants no further units of Verloc's life; in fact, she has a fluctuating, though a generally declining, interest in further units of her own life. By the end of the novel, she has liquidated both investments. For good or ill, all of this is explicable in market terms; in materialist terms, little or none of it makes sense.
V.Winnie is not the only person who wants to liquidate an investment. Inspector Heat, the embassy, and the anarchists have all made losing investments in Verloc, and none of them is anxious to maintain the connection. Nobody has lost as much as Winnie, but everybody has paid something for failing to see just how shaky Verloc's enterprise was. But what went wrong?
Part of the problem was the simple stupidity of Verloc and his investors. But part of it (to be scrupulously fair) was the peculiar nature of his business. Here the analogy between Verloc's establishment and a commercial enterprise breaks down. Verloc & Co. is not a satire on free enterprise; it is a satire on political attempts to control or destroy free enterprise.
Verloc's most potent investors — Vladimir, Heat, the "anarchists" — have dealings with him because they want either to manage the political marketplace or replace it, substituting a tyranny or a police superintendency or a collectivist utopia. Because the investors are motivated by mutually intolerant political ideas, each can ultimately profit from his investment only if the others do not profit from theirs. This is not a normal business. The best that the management can do is nothing; and although Verloc is the right man for that job, he is finally forced into action because one investor, Vladimir, insists on taking his profits now. That insistence destroys the enterprise.
But (again to be fair) the enterprise always presented difficulties for the investors as well as for the entrepreneur. The investors always had to deal with what economists call high information costs. If you want to invest or continue to invest in an enterprise, you have to pay some price in time, energy, or money to find out how well it is doing. Money itself is usually the cheapest source of information. In most cases, you can ask, "How much money does this company make?" and find the answer in a financial report. In this respect, as in others, money is not a problem for human action but a partial solution to its problems — as classical-liberal praxeology has always maintained.
But Verloc is not running a typical capitalistic enterprise. His business is strictly political; it can even be called nonprofit, as nonprofit enterprises are usually defined. Its dividends, if any, are nonmaterial. Investors in such enterprises can have a very hard time finding out if any dividends are being paid. Investors in specifically political enterprises, whether these are states or parties or little spy shops like Verloc's, often have to pay extraordinary prices for any information they can get. And that is what Verloc's associates have to do.
For Heat and the anarchists, the final price of information is a distinct loss of professional prestige: they trusted Verloc, and he made fools of them. For Vladimir, it is loss of prestige coupled with loss of a job. For Winnie, who is the least connected with politics and knows the least about it, the cost is higher still. Instinctively understanding that information can come at too high a price, she has "wasted no portion of this transient life in seeking" it — a policy that Conrad's narration describes as "a sort of economy," a saving of information costs.Ibid., p. 130. When Winnie finally does get reasonably full information about Verloc's business affairs, the cost is life itself. What happens to her is a parable of power politics in the modern world, a parable of what happens to the small investor, not in Toyota or Microsoft, but in the political apparatus.Hawthorn, one of the many critics of The Secret Agent who has been influenced by the Marxist ideology, sees even the behavior of Conrad's anarchists as "symptomatic" of capitalist society, although he can find little capitalist work, or work of any kind, going on: "Few people work in any real way in the novel" (Joseph Conrad, pp. 82, 85). He does not consider that the chief problem may not be the pursuit of private business but the pursuit of power. Indeed, he confu++++ses the "privacy" of specifically capitalist pursuits with the "secrecy" of political manipulations (pp. 77–78). Both involve "mediated," indirect, and unpredictable relationships, but it is not true, as Hawthorn suggests, that the system of market exchange is especially hostile to "public accountability and responsibility" (p. 79). Market exchange exists in every society, and the information that makes for public accountability is always more or less expensive. It tends to be cheaper in market-based than in power-based societies.
VI.Information has a cost, however, in any social or economic system. Conrad dramatizes this axiom by making The Secret Agent a peculiarly inconclusive novel of detection, a novel in which everyone is too enmeshed in the web of causation to see to the end of more than one short strand.
This is praxeological realism. Everyone is connected by the transactions of daily life with the lives of countless other people, most of them total strangers. The web of relationships is woven by an uncountable number of invisible hands. It transcends all social barriers; it eludes all attempts to direct or destroy it. These attempts, indeed, ordinarily redouble its complexity by redoubling the relationships that constitute it.
How can a novel capture this complexity? Part of Conrad's solution is an unusually realistic arrangement of characters. Novels are usually written about groups of people who either know one another or are well known by some one person. In The Secret Agent, knowledge is harder for characters to organize, and the narrative pattern enforces the sense of difficulty. The general pattern is this: the reader is introduced to character A, who knows character B; then to character C, who is also known to character B;This pattern is also adduced by Stanton De Voren Hoffman, Comedy and Form in the Fiction of Joseph Conrad (The Hague: Mouton, 1969), p. 120, to somewhat different purpose; to Hoffman, it suggests "a kind of La Ronde of disorder." but C and A know nothing of each other, despite the fact that C may exert a crucial influence on A by means of their mutual transactions with B.
Begin, for example, with Mr. Vladimir. We see him in chapter 2 transacting business with Verloc. He orders Verloc to blow up Greenwich Observatory. We next see Verloc at home with Stevie and Winnie. They know nothing about Vladimir, and Vladimir knows only that Verloc is somehow, inexplicably, married. But before the story ends, Vladimir's bright idea will have caused the deaths of all three people in the Verloc household, and these people will have somehow, inexplicably, caused him to lose his job.
"This is praxeological realism. Everyone is connected by the transactions of daily life with the lives of countless other people, most of them total strangers. The web of relationships is woven by an uncountable number of invisible hands. It transcends all social barriers; it eludes all attempts to direct or destroy it." In chapter 3, Verloc introduces us to the anarchist Ossipon, whom we follow into chapter 4, where Ossipon introduces us to the Professor, who by this time has supplied Verloc with the explosives for Vladimir's bomb plot. Both Vladimir and the Professor would be amused to learn that they had cooperated in the production of a revolutionary (or counterrevolutionary) act, but neither of them knows of the other's existence, and the Professor can only speculate about Verloc's affairs. Leaving Ossipon, the Professor enters chapter 5 and accidentally encounters Inspector Heat, who happens to be investigating the bomb outrage. Heat knows nothing about the Professor's role in the bombing, and he learns nothing from the Professor himself. After an exchange of insults, Heat goes to confer with the Assistant Commissioner, his boss, who by the time we reach chapter 7 is on his way to confer with his own boss, Sir Ethelred, the Home Secretary. It goes without saying that Sir Ethelred is wholly unacquainted with the Verloc household, and vice versa; neither does he appear to be acquainted with Mr. Vladimir, who started this sequence of actions.
In just a few steps, we have journeyed from a point near the top of the social hierarchy (the cultivated Mr. Vladimir) to a point near the bottom (Comrade Ossipon, who lives as a parasite on poor working girls), and then to a point near the top again (the aristocratic Sir Ethelred). Yet the shape of the staircase is largely invisible to the people who are on it. At each step, conversation takes place and information is exchanged, as much information as each individual considers profitable to exchange; but it is never sufficient to provide any of them with anything like a prospect of the whole. They are all intimately involved in the same affair, but none of them can see more than one or two steps away from his or her own position. In ways that the characters do not understand, for all their theorizing, they are united in a spontaneous order, an order woven by their most private transactions but extending throughout society.
In this great web of relationships, invisible and informal hierarchies are often more potent than visible and formal ones. That is the hidden significance of Michaelis's Lady Patroness. When she finally appears in the novel, it is because of her relationship with the Assistant Commissioner, not her relationship with Michaelis. The revolutionary and the head policeman have no dealings with each other, but they happen to have the same Patroness. While Michaelis profits from her public charity, the Assistant Commissioner profits from her private ministrations to yet another of the novel's third parties, his wife: "Her influence upon his wife, a woman devoured by all sorts of small selfishnesses, small envies, small jealousies, was excellent."Secret Agent, p. 88. In exchange for this excellent influence on his wife, the Assistant Commissioner is willing to flatter the old lady's pride. He goes farther. He is willing to protect her friend Michaelis from the machinations of Inspector Heat, who plans to blame him for the bomb blast at Greenwich.
Such a charge would be nonsense. Michaelis knows nothing about bombs, because he knows nothing about anything. But Heat could easily take advantage of his ignorance and frame him. Crime control of that kind, carried on by the Assistant Commissioner's subordinate, would have a distinctly unfavorable effect on the Assistant Commissioner's relationship with the Lady Patroness and, consequently, with his wife. That possibility makes the Assistant Commissioner more interested than he would otherwise be in investigating Verloc and tracing the crime to him rather than Michaelis. He does so immediately and successfully, using the address that Winnie so providently sewed into Stevie's clothing. With the confession of Verloc, the case is closed, the profit made, so far as the Assistant Commissioner is concerned — and so far as Michaelis is concerned, too, if he only knew it.
But this is one of the many things he never learns. The Lady Patroness finds out about it because the Assistant Commissioner makes sure to tell her, so that he can gain the extra profit of her gratitude. But only the Assistant Commissioner knows why Michaelis has been spared. Only he knows the extent of the influence exerted on public business by a certain kind of private business. And, naturally, the Lady Patroness, that great humanitarian, remains sublimely unaware of the fact that Michaelis's freedom has been bought with Verloc's life — and Winnie's. The Lady Patroness has never heard of Winnie Verloc.
Every hierarchy has a top and a bottom — the exploiters and the exploited, as the political materialists would have it. But in a complex society, characterized by many types of human action, top and bottom can be variously defined. In strictly economic terms, the top of the pyramid, at the end of this novel, seems to be Michaelis. In the action of the book, Michaelis is the person who pays least and profits most. Everyone works for his benefit. It is for the benefit of Michaelis, the enemy of all markets, profits, and hierarchical relationships, that aristocrats, police officials, publishers, spies, and women who are simply trying to gain a measure of security for their families all contrive or suffer.
Here is a praxeological irony that the Assistant Commissioner presumably would not find amusing, if he perceived it. But even he, the novel's best detective, cannot see the full extent of the tragicomedy in which he has been acting. There is too much human action standing in the way.
At 10:30 p.m. on the day that began with the bomb outrage, the Assistant Commissioner believes that he does see all the significant things. He has discovered who carried the bomb, and whose idea it was that there should be a bomb; he has obtained Verloc's confession, and he has put Vladimir on notice that his career as a diplomatic terrorist is over. Having accomplished all this, and it is a lot to accomplish, the Assistant Commissioner looks at his watch and congratulates himself on "a very full evening."Ibid., p. 173 He cannot know how full it has been. He cannot know that by pursuing Verloc he has stopped one sequence of events, only to start other sequences. He cannot know that because of his investigation, Winnie has killed Verloc and is now attempting to escape from England. At precisely 10:30 p.m., while the Assistant Commissioner is relishing what he regards as his perfect command of the facts, Winnie is leaving Waterloo Station on a train that will carry her to death by drowning in the English Channel.
This is a detective novel that has room for the tragedy of paying too much and the comedy of getting by without paying much at all, but it does not have room for a really conclusive act of detection. That is another of Conrad's jokes, for which he has to pay comparatively little. He merely has to represent the real conditions of human action — although, as Cather wrote, "The stupid believe that to be truthful is easy; only the artist, the great artist, knows how difficult it is."Cather, The Song of the Lark (Boston: Houghton Mifflin, 1943), p. 571.
VII.Few stories are more intricately and obviously contrived than The Secret Agent. But "contrived" is not synonymous with "false." Any reader who thinks that this novel is false to human action has failed to notice that the only implausible element is the reader. It has well been said that most of the mysteries of The Secret Agent "remain ultimately unresolved — for the characters, that is, not for the readers."[62] Every exchange in the marketplace of a complex society results from so many causes and generates so many effects that only that curious literary invention, the omniscient reader, could possess all the relevant information about it. Even authors are not omniscient until their stories are finished and they read the final product. A novel that allows omniscience to any participant in human action is, to that degree, unrealistic.
But again, every kind of information has its costs, and even godlike readers have to pay. For them — for us — knowledge of human action is purchased at the price of an inability to affect its course. Human action in a work of art is knowable, in a way that other forms of human action are not, because it is permanently frozen. Its economy is finished; it is over before we, the observers, start on it.
We are used to paying this price; it is customary, and like many other customary economic obligations, it has become invisible. But things might have been different. One can imagine a society in which it is customary for audiences to walk on stage and revise the action of King Lear. What would happen? Quite probably, Gloucester's eyes would not be put out. But that is a guess. Every intervention would unsettle the economy of the text; every intervention would provide new occasions for choice and action by both the characters and the audience. Gloucester might lose his eyes in some other way.
The reader's omniscience is made possible by the author's omnipotence, the author's ability to plan the text and finish it. There can be no power of this kind in the economy of the world.Hawthorn believes that The Secret Agent requires an omniscient narrator to reveal the "total workings" of "social relations" in a capitalist society that lacks any "public determining centre of authority" (p. 78). But no society has an authority that could do that job. The text of the world is a spontaneous collaboration that none of its human authors can conclude, despite any delusions of grandeur they may have. As Hayek's work maintains, the "fatal conceit" of our century is the idea that someone could actually know enough to design a world while living and acting inside it.F.A. Hayek, The Fatal Conceit: The Errors of Socialism (Chicago: University of Chicago Press, 1988). "Conceit," with its literary associations, is a good word for this delusion, which is essentially a delusion of authorship.
It appears as such in The Secret Agent. Conrad's intellectuals (or those who pass for intellectuals) cast themselves as omniscient plotters of human action, deriving their inspiration from literary sources that lead them to believe that the shape of history's narrative can be perceived by the genius of certain characters within it — perceived (as if from a distance) and, paradoxically, created.
"As Hayek's work maintains, the 'fatal conceit' of our century is the idea that someone could actually know enough to design a world while living and acting inside it. 'Conceit,' with its literary associations, is a good word for this delusion, which is essentially a delusion of authorship." For Michaelis, the guiding light is Marx's historical romances, in which the unnamed but obvious hero is the genius of Marx himself. Marx believed that he was changing history while charting its predestined course. Michaelis believes that about himself. He sees himself as a hero of authorship. He follows an even stricter principle of literary economy than Marx: his book of revolutionary theory, the Autobiography of a Prisoner, doubles as the story of his own life. It represents the history of the "prisoner's" ideas as the history of the world, a history that the book itself will help to write.
The anarchist Alexander Ossipon ("nicknamed the Doctor") has also been reading and writing works of self-aggrandizing social "science."Secret Agent, pp. 40–41. He despises Michaelis, but he does not despise the genre of omniscient social theory in which Michaelis operates. "[A]fter all," Ossipon says, "Michaelis may not be so far wrong. In two hundred years doctors will rule the world. Science reigns already. It reigns in the shade maybe — but it reigns. And all science must culminate at last in the science of healing."Ibid., p. 227. Ossipon does his best to write himself into that story. His imagination transforms him from a failed medical student into a member of the future ruling class, scientists for whom knowledge will truly be power. He thus acquires "that glance of insufferable, hopelessly dense sufficiency which nothing but the frequentation of science can give to the dulness of common mortals."Ibid., p. 41. Ossipon, who has written such pamphlets as "The Corroding Vices of the Middle Classes,"Ibid. surveys the world as if he had been put in charge of it.
The Professor has been reading somewhat different material. His attitudes owe something to Marx but more to Max Stirner, Friedrich Nietzsche, and Herbert Spencer. A strange assemblage: but the Professor does what imaginative people usually do with their sources; he makes them his own, adding and subtracting and using tricks of emphasis to obscure the contradictions. It is not fidelity that matters; it is literary effect. What emerges is a proto-fascist narrative about a world in which the strong will revolt against the weak and subject them to "utter extermination."Ibid., p. 226. The Professor refuses to specify the details of this interesting plan; he even denies that he has a "plan." Nevertheless, he knows (as Michaelis knows, and Marx once knew) that the climax of the story will be an entirely "new conception of life." Once that is in place, he will generously allow the "future" to "take care of itself."Ibid., pp. 60–61.
At the other side of the political spectrum are Vladimir's fantasies about "international action," "universal repressive legislation," and a total "cure" for anarchism.Ibid., pp. 27, 28, 25. For these imaginings there is no specific, readily identifiable literary source, but there is a strong odor of decaying words. Vladimir's social theory is a collection of literary stereotypes. "The imbecile bourgeoisie"; "the damned professors"; "the boot blacks in the basement of Charing Cross Station"; moronic tradesmen, as interpreted by comic fiction: these are the substance of his theory. Nothing suggests that he has any substantial knowledge of the kinds of people he discusses, but he has evidently read enough to absorb some useful images, which he recreates as if communing with the muse — "from on high, with scorn and condescension."Ibid., pp. 28, 30, 26, 32. He enforces his opinions (his soi-disant "philosophy") in self-consciously literary ways. He tells stories, asks rhetorical questions, cracks little jokes, mobilizes symbols ("Go for the first meridian"), and personally enacts a series of dramatic roles: British aristocrat, Cockney, Eastern despot, social scientist.Ibid., pp. 24–33. Again, what counts is the impression, not the truth — in this case, the truth about human action. The purely verbal text is worth more to Vladimir than the praxeological one.
When his grip on concrete evidence fails him, which it does not take long to do, he retreats to the modern intellectual's last refuge, dialectic — a literary means of turning hopeless contradictions into helpful paradoxes, "droll connections between incongruous ideas."Ibid., p. 20. Other characters practice this method, too. Michaelis's dialectical theory begins with an observation that is unusually accurate, for him: "No one can tell what form the social organisation may take in the future." But it ends with the very different idea of "a world planned out."Ibid., pp. 37, 225. And by whom is that world to be planned, if not by people like Michaelis? The most useful paradoxes are those that allow the greatest scope for authorial power.
Vladimir tries to perform the same kind of dialectical parlor trick. He describes a world cursed by revolutionary violence and the disorganized minds of the bourgeoisie, and from this chaotic world he proposes to create an unyieldingly firm social order. His tools? The same revolutionary violence, reacting on the same disorganized minds. Perhaps the books that lurk behind his ideas are Marxist books, after all. Vladimir, famed for his wit, has found an amusing way to get the Marxist narrative of "social contradictions" to operate in reverse. It is a demonstration of literary skill, a quality that Vladimir, like Conrad's other ideologues, would like to transform into political control.
Vladimir's complaint against the English middle class is that it has "no imagination" and no sense of defining form; it simply wants to continue its spontaneous ways of thinking and feeling. Hence the "sentimental regard for individual liberty" shown by this "imbecile bourgeoisie"; hence its refusal to embrace his version of "finality."Ibid., pp. 28, 25. This is the kind of political grievance that one expects to hear from a literary artist. It is characteristic of all those men and women of letters who have turned against bourgeois liberalism, not because bourgeois society has broken down or failed in its competition with its adversaries, but because it lacks a satisfying artistic shape, an ability to banish every ugly problem. Such critics were right, to this extent: the liberal social order can never achieve a final form. It is not a work of art. It is not planned by anyone. It is a collaboration of everyone involved in its sphere of human action, a collaboration of immense and indefinite extent, the form of which is constantly subject to change by the unpredictable actions of every collaborator.
VIII.Modern left-liberals have been as dissatisfied as anyone else with the sloppiness of the liberal order. That is one of the major reasons, as Hayek suggested, for the prevalence of the "fatal conceit" of power and planning.See, for example, the first four chapters of Hayek's The Road to Serfdom. The embodiment of modern left-liberal ideas in The Secret Agent is the Home Secretary, Sir Ethelred, an enthusiastic social planner. Sir Ethelred appears at the point in British history at which the old liberalism of laissez-faire was yielding to the new liberalism of the welfare state. It was a revolution, and like many other revolutions it was directed from the top down, by men of established social position and power. Sir Ethelred is such a man. He can be compared to Vladimir and the Lady Patroness, highly placed personalities who also believe that their social position entitles them to see to the needs of the lower orders. They are all Patrons; they are all people who want to lay hands upon the world and confer upon it the benefits of their own social stability.
In a novel that is full of heavy, controlling people, Sir Ethelred is one of the heaviest and most controlling. But this is not enough; he even appears to be "expanding."Secret Agent, p. 105. Certainly he wants expanded powers. His current project is a Bill for the Nationalization of Fisheries. This is "a revolutionary measure," according to his well-born private secretary Toodles, "the revolutionary Toodles"; and as you might expect, "[t]he reactionary gang" in Parliament considers it "the beginning of social revolution."Ibid., pp. 112–13. They're right.Fleishman (Conrad's Politics, p. 213), who likes Sir Ethelred, observes that Sir William Harcourt, after whom he seems to be modeled, was an apostle of "quasi-socialism." It's not exactly Bolshevism, but it represents something equally powerful, the rebellion of the new liberalism of social planning against the old, "reactionary" liberalism of limited government. And from Conrad's point of view it is susceptible to some of the same difficulties. Like Michaelis and everyone else who wants to manage the world, Sir Ethelred just doesn't know enough to do it.
True, his office has access to economic information of some kind. Toodles has some statistics, since he claims to know that the reactionaries have "shamelessly cooked" their own. But the important thing is Sir Ethelred's private meditations, the ideas that he comes up with when, as Toodles says, he is "sitting all alone" in a dark room, "thinking of all the fishes of the sea."Secret Agent, p. 162. Paul Cantor (private communication) has observed that Sir Ethelred is the typical social planner, "trying to know something that can't be known." This solitude does not inspire confidence. Toodles says that his boss has a "massive intellect," but that is what somebody named Toodles would say about his boss.Ibid., p. 113. Sir Ethelred's conversations with the Assistant Commissioner offer more evidence of mass than of intellect, so far as Sir Ethelred is concerned. Regarding mere information as beneath his notice, he refuses to hear the Assistant Commissioner's report on the Greenwich explosion unless all the annoying particulars are excluded.Ibid., pp. 106–10. In the absence of facts, he shows a tendency to jump (if that's the right word for a man who can barely walk) to entirely wrong conclusions. The Assistant Commissioner needs considerable skill to keep him from ruining the investigation by imposing ideas of his own, ideas that are commanding but inadequate to the situation they would command.
Sir Ethelred exemplifies the fact that intellectual incompetence is not confined to avowed enemies of the state. He is one more illustration of the affinity between scarcity of knowledge and pretensions to power.Hay (The Political Novels of Joseph Conrad, pp. 243, 247) misses the web of associations and parallels that gives significance to both Sir Ethelred and the Lady Patroness. Hay believes that "[t]here is nothing in the least offensive" about either one of them: their political projects "come across in a spirit of pure fun"; their "political sentimentalities" are "harmless." What, then, is Conrad's purpose for including them in this novel? He has another function, too. He helps Conrad address the general problem of scarcity — scarcity of knowledge, scarcity of time, scarcity of means of every type — that is embedded in every form of human action. Sir Ethelred is in rebellion against the very idea that anything he needs should be scarce and costly.
This is a reaction against something more fundamental than the liberalism of laissez-faire. It is a reaction against the nature of the world itself. When the Assistant Commissioner happens to mention the fact that "this is an imperfect world," Sir Ethelred hastily cuts him off: "Be lucid, please."Secret Agent, p. 108. The offending remark was extremely lucid; Sir Ethelred merely resents having to hear it. To be more specific, he resents having to take the time to hear either it or any other elucidation of fact. The price of facts is enormous, odious, oppressive, worrying. "Don't go into details," he says. "I have no time for that."Ibid., p. 106.
The world that Sir Ethelred longs for, the world that he tries to create in the isolation of his room, is a world in which he has fully sufficient means to command such grossly imperfect things as terrorists, policemen, fish, and time. To some degree, he succeeds in his assault on time; at least he creates the impression of success, which is valuable for political as well as artistic purposes. In either case, an impression carries its own weight and authority. The Assistant Commissioner has to hurry through his report while Sir Ethelred, the "great Personage," stands as massively portentous as power itself. The tableau suggests an audience granted by an eternal "oak" to a frail mortal "reed."Ibid., pp. 106–07. The current of time that bore the Assistant Commissioner into Sir Ethelred's office, where he dared to imply that the great man lacked perfect knowledge of a (nearly) perfect world, will soon bear the intruder out again, leaving Sir Ethelred still glaring down from his high place in the forest.
Among the furnishings of Sir Ethelred's perpetually darkened room is a clock, "a heavy, glistening affair of massive scrolls in the same dark marble as the mantelpiece."Ibid., p. 107. In the presence of old Sir Ethelred, time itself seems to age and grow heavy, almost too heavy to squirm out of his control. But any attempt to subdue time is ultimately as futile as Stevie's attempt on Greenwich Observatory. Time is the counterrevolutionary that always wins. While Sir Ethelred is haughtily not looking, "the ponderous marble time piece with the sly, feeble tick … take[s] the opportunity to steal through no less than five and twenty minutes behind his back."Ibid., p. 111. The tick of Sir Ethelred's clock is the tiny, unobtrusive, yet decisive evidence that even he is mortal.
To put this in a more praxeological way, the tick of the clock is decisive evidence that all human action — even the Home Secretary's brief chat with his Assistant Commissioner — takes place under the sign of imperfection and scarcity. Scarcity is part of the objective framework of human action. It necessitates choice, it evokes subjective preferences, but it cannot be mastered by choice or preference, no matter how strongly it incites them to express themselves. No matter what Sir Ethelred tries to do or not to do, his clock slyly confirms this fact.
Sir Ethelred can react to the scarcity of time in many ways: he can look at his clock or turn his back on it; he can break his clock or sell it; he can become a mystic and transcend the normal human concern with clocks. The objective conditions of human action require only that he make some choice and assign some preference at each moment of his limited time. He cannot be, do, have, and control everything, all at once; at each moment he has to prefer one course of action to all others, and he has to risk the possibility that his choice may be wrong, that he may never get the profit he expects from it. These are the requirements of all human action, and as such, they are the requirements of every attempt to do without requirements. Sir Ethelred makes an attempt of this nature when he tries to cheat time and deny the imperfections of his knowledge and control. But the clock is still moving; its sly, feeble tick can still be heard.
IX.Scarcity is the basis of choice and action. This is not a particularly cheerful fact. The modern age has been marked by many attempts to thrust that ponderous detail into the background, to create a world in which scarcity will no longer be regarded as a condition of human action. Freedom from scarcity has been considered both a human right and a technological possibility.The locus classicus of American ideas on this subject is Franklin Roosevelt's Four Freedoms, which include "freedom from fear" and "freedom from want" — that is, freedom from risk and freedom from scarcity of needed material goods. An international application can be found in the United Nations' Universal Declaration of Human Rights, which guarantees, among some rights of clearer and sharper definition, an ensemble of rights that amounts to an insurance of success, including the right to "just and favourable remuneration," to "social security," and to "realization... of the economic, social and cultural rights indispensable for [a person's] dignity and the free development of his personality." The idea that "machines," "the machine," or "technology" can easily create enough resources to fulfill such rights, and would certainly do so if the wastefulness of the market system were only curtailed, is common to all socialist and many liberal movements of the industrial age. It was confidently asserted by such philosophers of technocracy as Thorstein Veblen (in, e.g., [1921]). During the 1960s and 1970s, the idea of people's right and power to be free from scarcity was prominent all along the spectrum of left-liberal opinion. The title of Post-Scarcity Anarchism, Murray Bookchin's once-famous book, speaks for itself (Berkeley, Calif.: Ramparts Press, 1971). The distinguished historian William Appleman Williams thought that the United States had begun "to master the traditional economic scarcity" and should move on to conquer "the scarcity of humaneness in human relationships" (The Great Evasion [Chicago: Quadrangle, 1964], p. 53). John Kenneth Galbraith concluded his very influential book, The Affluent Society (1958), by saying that "we have solved" "the problem of producing goods" and must now "proceed... to the next task" (2nd ed. [Boston: Houghton Mifflin, 1971], p. 317). The comparatively conservative Democratic Party platform of 1960, more mundane in its interests, insisted upon such alleged rights and powers as that of "every farmer to raise and sell his products at a return which will give him and his family a decent living" (National Party Platforms, compiled by Donald Bruce Johnson [Urbana: University of Illinois Press, 1978], vol. 2, p. 585). Slightly later, President Johnson developed plans for a quick and total elimination of "poverty" (definition uncertain), as a matter of right and duty.
Of course, a world without scarcity would be a world in which there would be no incentive for human action, and thus no human action. In response to this tritely obvious reflection, exponents of a postscarcity economy have usually restricted the definition of "economy" to the production and distribution of material goods, and the definition of "scarcity" to the lack of certain necessary goods that modern technology can (and therefore should) provide for everyone. The ideal of a society in which all material necessities are supplied to everyone has decisively shaped modern concepts of economic justice and personal entitlement. It has inspired countless political movements of the left, right, and center. It has provided a source of high inspiration for people throughout the world. Every practical frustration of the ideal has thrust it back into the seedbed of political hopes, thence to flower in renewed efforts at social planning. It is obscurely felt that the ideal must, somehow, be realizable.
Marxist critics of ideology show imaginative insight when they postulate the existence of a "political unconscious" that can be marvelously resistant to reason and experience. Some of the best evidence for the hypothesis can be found in their own adherence to the postscarcity ideal as a standard by which to measure the failings of bourgeois society. But who will decide what is "necessary" for any other individual's life? Who, precisely, will decide what is just for everyone to demand from the economy, when the standard of economic justice "depend[s] so much" (as Conrad indicates) "upon the patience of the individual"?Secret Agent, p. 62. Who will judge these matters, and how will the judgments be enforced?
To make plans for the allocation of material things is hard enough. Every successive attempt to guarantee an "abundant" distribution of these goods through taxation, rationing, welfare and social security plans, or outright nationalization (the older methods), or "sanctions," "incentives," and "guidelines" (the newer ones) testifies to their persistent scarcity. But how shall we remedy the chronic scarcity of such nonmaterial things as courage, competence, and common sense, without which even the largest supply of material goods may be worth exactly nothing to the possessors?
And this is a mere detail, compared with the failure of postscarcity idealists to answer (or even, in most cases, to ask) one other question. Assume that everyone can agree on some definition of necessity and justice; assume that "necessities" can be equated with "material necessities"; assume that "technology" can be guaranteed to supply all necessities of this kind, to everyone. What will guarantee that the technological necessities will be supplied? Tools do not spontaneously generate themselves. They can be provided only by heavy investments of such resources as time, energy, and intelligence. These resources are necessities, but they are always scarce. Ours is a world in which people do everything that they do only by not doing everything else. It is a world in which Cather's Alexandra Bergson can "write" her story only by taking "a big chance," only by giving up on all the other possible stories.Willa Cather, O Pioneers!, in Early Novels and Stories (New York: Library of America, 1987), pp. 170–72, 289. It is a world in which Alexandra, and everyone else, must die.
Efforts have been made to ignore such commonplaces of human action. But to ignore them is to deny what may be called the metaphysical basis, the final facts, of praxeology. Albert Camus, who made "metaphysical rebellion" a central part of his explanation of the past two centuries of human behavior, defined that kind of revolt as a "claim against the suffering of life and death and a protest against the human condition both for its incompleteness, thanks to death, and its wastefulness, thanks to evil." It is a rebellion against scarcity in general. Metaphysical rebels, Camus says, respond to this fact about the world by trying to plan the world anew, to reconstruct it wholesale "according to their own concepts."Camus, The Rebel, pp. 24, 100.
Fortunately or unfortunately — for the rebellions in Camus's book range from romantic attempts to live without boredom to Marxist attempts to live without real economics — the attempt always fails.Ibid., pp. 49, 223. It has to fail, because it is a rebellion against the conditions of all human action. That is how both Camus and the classical-liberal praxeologists frame the problem. They emphasize the idea that all subjective "claims" are situated within objective conditions — objective because they are both real and readily apparent. If attempts are made to deny them, they will make themselves known.
Certain permanently true things can be said even about such subjective things as economic valuation. This too has been denied by philosophers like Michaelis, who preaches the great truth that "everything is changed by economic conditions — art, philosophy, love, virtue — truth itself!"Secret Agent, p. 43. But time, space, and matter, all of them agents of scarcity and therefore of choice and valuation, are not social constructions that will be replaced by other social constructions. Conrad evidently believes that this virtually self-evident truth needs to be insisted upon. He therefore repeatedly shows his characters in revolt against the metaphysical framework of human action, and he pictures their revolt as tragically and comically self-defeating.
This is the final meaning of the attempt to destroy the prime meridian, which is the beginning and the end of the world's measurements of time, space, and matter. "Nothing easier," Vladimir says, as if he had not been driven to concoct his plan by the hard facts of scarcity.Ibid., p. 33. Time is running out; there will soon be a conference of diplomats who will need to be impressed by an act of terrorism; if they are not impressed, then the reactionary age that Vladimir envisions will not come to be. Under these circumstances, no better project comes to mind than the destruction of Greenwich Observatory, and no better tool than Adolf Verloc. Vladimir, hurrying, orders Verloc to attack the prime meridian. Verloc, hurrying, finds no better tool than his brother-in-law, Stevie. Stevie, hurrying, takes the bomb and, stumbling with it, perishes. Or perhaps, as the Professor thinks, Verloc underestimated the speed of the detonator and "ran the time too close."Ibid., pp. 72, 63. Anyhow, Stevie is dead, a victim of time and the scarcity of time. The human technology that would be necessary to produce either revolution or reaction is just too scarce to do the job. The prime meridian endures and triumphs, a symbol of the imperturbable context that surrounds and provokes all human action: scarcity of time, scarcity of means, scarcity of life itself.
"Conrad therefore repeatedly shows his characters in revolt against the metaphysical framework of human action, and he pictures their revolt as tragically and comically self-defeating." These are heavy burdens for anyone to bear. They seem especially heavy to Conrad's revolutionists, who make especially heavy demands on reality. Ossipon, the scientific revolutionist, emerges as their archetype. He encounters Winnie soon after she kills her husband. She sees him as her last hope to escape the police without the necessity of suicide. She pleads with him to help her, and he agrees; he wants her money. He would probably say that he needs her money. But he has a greater and more basic need, the need for time; his mind is fixed on "the shortcomings of time-tables." He realizes that it may be too late to catch the last boat-train to France. In his view, this scarcity of time and poverty of means is manifestly unjust; it is a form of political oppression. "The insular nature of Great Britain obtruded itself upon his notice in an odious form. 'Might just as well be put under lock and key every night,' he thought irritably."Ibid., p. 212. Ossipon considers it unfair that islands should be surrounded by water. Like Conrad's other rebels, he will accept no scarcity; he must have what he wants. All he requires to satisfy his needs is that there should be no such thing as objective reality.
X.On his characters' political rebellions Conrad lavishes all the "indignant scorn" of which he speaks in his author's note.Ibid., p. 8. The note was added in 1920. Yet he is willing to make certain rebellions almost succeed. If time is a chief source of resentment, he will oblige time's adversaries by "stopping" time. Then he can show what would happen if that could happen, albeit … momentarily. He "stops" time twice in The Secret Agent.
The first moment of timelessness occurs during a cab ride. The cab has been hired to convey Winnie's stout, crippled old mother from Mr. Verloc's residence in Soho to a charity home on the far side of the Thames. The journey is macabre in every way. The old lady's destination is a place that resembles "the straitened circumstances of the grave."Ibid., p. 124. This is her "last cab ride"; she is riding in the "Cab of Death."Ibid., pp. 123, 131. Her purpose in thus evacuating the world of human action is to relieve Verloc of financial responsibility for her, in the hope that he will then be more likely to continue supporting Stevie. She has decided, in effect, to bring her life to a stop so that Stevie's life can stop where it is.
Acting, in this way, to arrest action, she gets into the cab; and Winnie and Stevie go along to assist her. Sure enough, time appears to be shuddering to a stop. The "Cab of Death" moves with such funereal solemnity that when it reaches Whitehall, "all visual evidences of motion" are rendered "imperceptible": "The rattle and jingle of glass went on indefinitely in front of the long Treasury building — and time itself seemed to stand still."Ibid., p. 121. What remains of time is just that faint rattle and jingle of time's inseparable opponent, action, and not much of that.
Has the progress of death been arrested, or is this death itself? A metaphysical question — but not one that occurs to Winnie Verloc, whose mind is on other matters. A woman of "unfathomable reserve" who has spent her life maintaining a decorous silence and inertness, she is scandalized by her mother's strange desire to go somewhere.Ibid., p. 11. Yet once involved in the cab's weak but stubborn confrontation with the inertness of the Treasury Building, Winnie becomes concerned. Her concern is practical and (in broad terms) economic. She wants to get something for the three-and-sixpence fare; she wants to go somewhere. She wants action; she wants the horse to move. In her inert way, she even protests. "This isn't a very good horse," she says.Ibid., p. 121. And it isn't. The poor animal, which seems prepared to die even before it can remove Winnie's mother to her place of death, is an apt symbol for every kind of scarcity in this "imperfect world."
This is something that Stevie can intuitively understand. He knows that if human action is to continue, the horse must be whipped. He feels the horse's suffering, but he recognizes the scarcity of alternatives. The cabman raises his whip; Stevie has to choose what he himself will do. He must do or not do something. He chooses to protest the motion of the cab. "Don't whip," he orders the cabman. "You mustn't … it hurts."Ibid., p. 122.
Now it is the cabman's turn to contemplate a world of scarce alternatives and the choices that they require: "'Mustn't whip?' queried the other in a thoughtful whisper, and immediately whipped."Ibid. But Stevie has one means of protest left. He jumps down from the cab, hoping to lighten its load and his own sense of responsibility. The driver hastily pulls up. The cab finally, definitely, stops. The timeless moment is complete.
Or is it? Before the wheels have ceased their motion, action has already resumed. The driver is cursing, people are running forward, people are shouting, Winnie is giving commands… time is visibly moving forward, and the cab is soon moving forward also, with Stevie back on board. His protest has merely contributed to the onward motion of events.
Part of that motion is an intensification of his revolt against the conditions of life. He learns that the problem is much bigger than he thought. The horse is not the only victim of a scarcity of needful resources. The cabman who whips the horse is a victim too. "This ain't an easy world," he remarks, when his passengers finally arrive at their Hades-like destination. "'Ard on 'osses, but dam' sight 'arder on poor chaps like me." The cabman's idea of consolation is a stroll to a nearby pub.Ibid., pp. 129, 130. But this is a purely individual solution. Stevie needs something more general.
Letting his thought expand into the highest reaches of dialectic, he reaches the conclusion that the conditions of reality necessitate a total change in the conditions of reality. Michaelis envisions "a world planned out like an immense and nice hospital"; Stevie's idea is similar: he wants to create "a heaven of consoling peace" where he can take both horse and driver "to bed with him." The idea is absurd, but not quite as absurd as Michaelis's idea; Stevie, unlike Michaelis, is capable (for the moment, at least) of a degree of self-criticism. He is able to see that his scheme is "impossible. For Stevie was not mad."Ibid., p. 129.
He is, however, rapidly becoming as angry and aggrieved as any professional revolutionist. He has always been the kind of person who feels "that somebody should be made to suffer" for the fact that he himself has scarce resources to relieve other people's suffering.Ibid., p. 141. Fleishman (Conrad's Politics, p. 196) suggests that Stevie is the only character who allows himself to be aware of suffering. This is remarkably untrue. Stevie's revolt against suffering is exemplary, but virtually all the other characters revolt, too, and some of them ruthlessly. The anarchists revolt against the suffering of the working class, Sir Ethelred revolts against the suffering of unnationalized fishermen, Verloc revolts against the suffering occasioned by the necessity of work, Winnie revolts against Stevie's own suffering. His pity now transforms itself into "pitiless rage." His "universal charity" makes him feel that this is a "bad world," and that "[s]omebody … ought to be punished for it — punished with great severity."Ibid., pp. 130, 132. He has limited means of punishing anyone. But like many other people of generous ambitions and limited means, he quickly thinks of supplementing them with political power.
His first political idea is more reformist than revolutionary. He wants to call the police. Their job, he believes, is to annihilate "evil," so it is clearly their duty to wage war on poverty.Ibid., pp. 132–33. But he discovers — as other humanitarians have discovered — that bourgeois institutions are simply not up to comprehensive purposes of reform. When Winnie hears his idea about using the police to promote his vision of social justice, she tells him flatly that "[t]he police aren't for that." Well, Stevie asks, "What for are they then, Winn? What are they for?" Her answer is chilling: "Don't you know what the police are for, Stevie? They are there so that them as have nothing shouldn't take anything away from them who have."Ibid.
This is a terrible blow to Stevie's respect for legally constituted authority. He is surprised to find that the police have limited powers and that their powers are limited to imposing limitations. They are dreadfully implicated in the world of scarcity. At one time, before Stevie learned what the police are for, he cherished an "ideal conception" of them. Now he realizes that ideals are not the same as realities, and he suffers a loss of confidence — not in himself but in the institutions of bourgeois society. He adopts the ideology of suspicion that is customary with modern intellectuals who are concerned about "the problem of the distribution of wealth": he decides that the police were just "pretending" to play a benevolent social role.Ibid., p. 133. Wishing "to go to the bottom of the matter," he is now prepared to listen when Verloc invites him to join the "humanitarian enterprise" of demolishing the bourgeois system.Ibid., pp. 133, 200. He is ready to go for the prime meridian.
The momentary stoppage of time that followed Stevie's "don't" (the command that in this novel comes so easily to people's lips) has been followed, in turn, by an explosion of activity — activity devoted, like his mother's "mania for locomotion," to the futile task of bringing human action to a stop. Stevie goes for the prime meridian, and is killed there.
XI.The second occasion on which Conrad "stops" time is one of the many unpredictable results of the first occasion. When it happens, Winnie is standing motionless. Her husband is lying motionless before her. He is not merely motionless; he is dead. She has killed him. In response to Stevie's fatal development of political ideas, Winnie's own political ideas have also developed. They have led to a seizure of power. With one stroke of her carving knife, she has destroyed what she regarded as an outmoded "contract with existence." As a consequence, action has stopped. Time has stopped. She is "free":
She had become a free woman with a perfection of freedom which left her nothing to desire and absolutely nothing to do. … [S]he did not think at all. And she did not move. She was a woman enjoying her complete irresponsibility and endless leisure, almost in the manner of a corpse. She did not move, she did not think.Ibid., p. 198.
Winnie has achieved the condition to which every political figure in The Secret Agent aspires. She has abolished scarcity. She has nothing left to "desire," and nothing, therefore, to "do." She is beyond the world of human action. She might just as well be dead; and that, of course, is the significance of this moment in her life. A really successful metaphysical rebellion would entail the elimination of human action. It would mean something more than stopping the Cab of Death; it would mean death.
But Winnie has not yet arrived at the condition of her husband. He is dead and can remain that way without doing anything more about it. That is an objective fact. Winnie, however, cannot remain as she is without taking some action. That is an irony. It is also an objective fact. No matter what anyone thinks about the evolution of social and economic conditions, no condition of human existence will allow people to repudiate their contract with human existence itself, and live to enjoy the effects. So far as human beings are concerned, existence means action; we are, in Mises's words, not merely homo sapiens but homo agens.Mises, Human Action, p. 14. And all human action occurs in a context of scarcity.
A historian of economic thought has said that before the development of marginal utility theory, economists "never fully assimilated" scarcity into their systems.Eric Roll, A History of Economic Thought, 5th ed., rev. (London: Faber and Faber, 1992), p. 354. Strange: one might have expected them to start with that concept and its implications. Scarcity provides the basic terms of the praxeological contract on which all economic and social contracts are based. Only by ceasing to exist can one withdraw from that original contract, which is more primitive and authentic than any marriage contract, or any social contract in Locke, Rousseau, or Hume.
Winnie discovers this philosophical truth in a curious manner. Resting in silence and immobility, "car[ing] nothing for time," she nevertheless discovers a sign of motion. There is a sound: "Tic, tic, tic." It picks up speed; it comes "fast and furious"; it becomes "a continuous sound of trickling"; it is "blood!" Verloc's body is leaking blood "like the pulse of an insane clock."Secret Agent, pp. 198–99. With that realization, the world of time, space, and matter — the whole context of human action — comes rushing back around her, all its features as real and permanent as Greenwich Observatory or Sir Ethelred's clock. The context is completely objective and inescapably knowable. Winnie cannot ignore it; if she tries, it will return to her. It has done so.
"So far as human beings are concerned, existence means action; we are, in Mises's words, not merely homo sapiens but homo agens. And all human action occurs in a context of scarcity." With it comes a perception of the world of economics that exists inside the world of praxeology. This economic world is full of subjective desires and valuations, and hence of unpredictably fluctuating scarcities and surpluses. A few minutes ago, Verloc was worth something, at least to Winnie and himself. Now, as she thinks, he is "nothing. He [is] not worth looking at."Ibid., p. 200. His worth, in fact, is less than nothing. There is far too much of him on hand. He is a liability from which she would like to escape. No doubt she would pay a good price to have him quietly removed.
Too much of one thing usually means too little of another. It seems to Winnie that her environment contains far too much matter of every kind — that body over there, this "maze" of London buildings that surrounds and imprisons her — and far too little time to get away from it. Where can she go? Even if her mother could help her, she is miles away: "too far"!Ibid., pp. 203, 202. Too little time, too much space; and, from another, admittedly subjective, point of view, too little space. Winnie remembers what the newspapers say about the hangman's procedures: "The drop given was fourteen feet."Ibid., p. 201.
As she returns to the world of action, and therefore to the world of relative valuations and marginal utilities, the value that she places on the successive moments of her life increases dramatically. Moments are precious to her again, because they offer the faint but all-important hope of doing something to save herself from what she fears the most. For the same reason, even Comrade Ossipon, whom she formerly loathed and attempted to avoid, begins to seem enormously valuable. When, by accident, Ossipon appears, she seizes the moment and binds herself to a new contract: if he will help her escape from England, she will give herself to him. That is the bargain she is now willing to strike.
But Ossipon keeps his contract with Winnie no more faithfully than Verloc kept his. Ossipon is sincere about only one thing, his devotion to the collectivist program of extracting wealth from people who have it and distributing it to people who don't. Implementing this program in the most direct way possible, he takes Winnie's money and gives it to himself. He also abandons her, just at the moment when she is leaving on the last train for the Channel. The walls of scarcity contract; Winnie has no help, no money, and almost no time. She uses the little time she has to buy a last measure of freedom, freedom from the hangman. She finds her way onto the Channel steamer and, in mid-journey, drowns herself.
This praxeological parable is similar to the parable of Stevie and the cab. The moment at which Winnie kills Verloc is a moment in which time and action seem to stop; its result is an explosion of action and an implosion of time. By denying her "contract with existence," she succeeds only in confirming her contract with the fundamental conditions of existence. Like her brother, she can withdraw from those conditions only by surrendering the full price of withdrawal, existence itself.
XII.If Conrad's purpose is to vindicate the existence of an objective framework of human action against all metaphysical objections and rebellions, he has certainly accomplished that purpose. But that is only one of his aims. He has something more to say about freedom of choice, which he has made to appear, in Winnie's case, such a pathetically limited thing.So limited that one can understand the mainstream critical view, as expressed, for example, by Jan Verleun and Jetty de Vries (Conrad's The Secret Agent and the Critics: 1965–1980 [Groningen: Bouma's Boekhuis, 1984], p. 253), who say that the novel "almost completely denies" Winnie the "possibility of free choice," that it pictures her as "predominantly a creature of milieu and circumstance." But this kind of generalization breaks down when the specifics of Winnie's actions and decisions are observed. An author who is sensitive to Conrad's dislike of certain bourgeois values has said that "Conrad does not sentimentalize freedom. … Still, he shows freedom as clearly preferable to its lack."Najder, Conrad in Perspective, pp. 150, 132. Freedom is also, in Conrad's view, an essential part of any explanation of human action. He makes the final action of his story an argument for the existence and importance of individual freedom, for the ability of individuals to do what Cather said they could do — write their own stories.
The last chapter of The Secret Agent emphasizes this point. Ten days have passed since Winnie's death, but Ossipon is still meditating on a newspaper report of her suicide: "An impenetrable mystery seems destined to hang for ever over this act of madness or despair."iSecret Agent, p. 228. Nobody but Ossipon knows the identity of the woman who disappeared from the Channel steamer; nobody but he can guess her motives; and as we know, even he sees only a fraction of the story that his decisions helped create. But, oddly enough, considering his earlier air of insufferable self-sufficiency, he understands enough to regret his dogmatism about the force of material conditions.
That dogmatism was pronounced. While Winnie hysterically expressed her feelings about the prospect of being hanged, Ossipon's "sagacity" had been "busy in other directions. Women's words fell into water, but the shortcomings of timetables remained. The insular nature of Great Britain obtruded itself upon his notice in an odious form."Ibid., p. 212. Women's words are merely the signs of their personal intentions, and what do intentions matter? Ossipon was above such individual and subjective considerations. They had no economic or scientific relevance. Only the material context counted, the world of the time-table. But Winnie was not killed by a time-table. She died by her own intention. Constrained by circumstances, constrained still more by the scarcity of something entirely individual and subjective — hope — Winnie yet retained the power to write her own death scene.
The image of women's words falling into water turns out to be ironic. Winnie's body fell into the English Channel, but her words did not. Those faint verbal signs of her intentions, her consciousness, her existence as something more than a body, survived her death. They linger as unwelcome guests in Ossipon's mind. He escaped from the shortcomings of time-tables by getting Winnie to the train station, taking her money, and running away. He thus escaped from certain forms of scarcity. But he could not escape from consciousness. He could not expel the memory of his conscious choice to betray a woman who chose to trust him. His thinking has changed in unpredictable ways. It's marginal utility again: he no longer values additional units of his life; he doesn't really want any more. And he has learned that even the value of money is dependent on individual states of mind. He no longer sees the cash that he liberated from Winnie as an asset; he tries to give it away. What matters is the private economy of his mind. The state of that economy can easily be summarized in business terms: "It was ruin."Ibid., p. 231.
Winnie's suicide was a sad, residual demonstration of her freedom of choice. Ossipon makes a similar demonstration. He chooses death — preceded, in his case, by drunkenness and the closest thing to slavery that the capitalist system has to offer, "the leather yoke of the sandwich board."Ibid. He thus demonstrates that the individual consciousness, that deeply economic thing, is a permanently significant, though a permanently mysterious, fact; and that consciousness has very efficient means of producing other significant facts, such as death. How this happens is often as mysterious as anything else. Through their choices, Ossipon and Winnie decide their fates, and only omniscient readers can fully understand the effects of their collaboration. But Ossipon has seen enough to know that human action results from choice, not determination, and that choice can entail responsibility.
The last chapter of the novel is mainly concerned, however, with the choices of the Professor. From the beginning, he has prided himself on his ability to face the facts about human action. He has a boundless contempt for people who refuse to face them. He considers Michaelis particularly contemptible. As he explains to Ossipon, he saw the manuscript of Michaelis's great book, and he dismissed it at a glance: "The poverty of reasoning is astonishing."Ibid., p. 225. The Professor tries to be objective about his own work as a revolutionist. He knows that it depends on hard choices, the assumption of risks, and what he calls "character."Ibid., p. 56. He believes that the police will hesitate to arrest him if they think he has enough of that commodity to blow himself up — and, more to the purpose, blow them up — if he is ever threatened with arrest. So he carries explosives with him at all times, and a detonator. He is gambling, so far successfully, on the importance of individual differences and subjective states of mind. Because he has more "character" than the police, he has a chance of survival. So far, his praxeological insights have proven sound. He is still alive.
His program of self-insurance was introduced in his conversation with Ossipon in chapter 4. There he cold-bloodedly described the process of self-explosion. He would simply press a little rubber ball, which would activate a detonator, which would produce certain other effects:
"It is instantaneous, of course?" murmuredOssipon, with a slight shudder.
"Far from it … A full twenty seconds must elapsefrom the moment I press the ball till the explosiontakes place."
"Phew!" whistled Ossipon, completely appalled."Twenty seconds! Horrors! You mean to say that youcould face that? I should go crazy — "
"Wouldn't matter if you did."Ibid.
Perhaps it wouldn't. At certain moments, a slight scarcity or surplus of something in the material world — a scarcity of time to escape from a bomb explosion, a surplus of time to wait for it to happen — may be enough to make personal reactions and valuations seem irrelevant.
Nevertheless, this particular combination of surplus and scarcity would still be the product of the Professor's personal choice, just as Ossipon's abundance of guilt and scarcity of means to assuage it are products of his preceding, quite personal choices. Choices matter, despite the fact that this is an "imperfect world" in which consequences cannot be certainly predicted.
Unlike Sir Ethelred, the Professor is capable of admitting that fact. No detonator, he concedes, can be "absolutely fool proof," especially when entrusted to a fool like Adolf Verloc. Perfection is something "[y]ou can't expect."Ibid., p. 63. And yet — here is the contradiction in the Professor's applied praxeology — he is spending his time trying to invent "a perfect detonator," a little machine that will allow him to transcend the limitations decreed by time and space and the risks of other people's meddling.Ibid., p. 57. His scientific objectivity is clearly not complete, unless you mean by "objectivity" a complete independence from normal human life.
It is that latter kind of "objectivity" that permits him to experiment without any moral compunctions. Stevie died in one of the Professor's experiments with detonators: "They must be tried, after all."Ibid., p. 61. They must be tried, because the Professor feels a personal need to try them. He has the freedom to make that kind of moral choice. Yet his own special concept of freedom remains controversial. Its status needs to be clarified. The only kind of freedom that the Professor recognizes is the freedom actually to satisfy his self-defined needs. To Conrad, however, this is freedom that has been confused with power, absolute power over human action. Give the Professor a detonator, or — as he tells Ossipon in their final conversation — a terroristic "lever" of "madness and despair," and he will use it to "move the world."Ibid., p. 230. Conrad's last chapter shows the defects of this conception of freedom-as-power.
Consider the Professor's image: the lever. It is a hackneyed image. It is as old as Archimedes, and its use has not been confined to geometry texts. It has appealed, in one way or another, to every solitary theorist who has ever advocated a comprehensive change in the conditions of life. All the profound political thinkers in The Secret Agent amuse themselves with this conceit. Viewing the world from a distance, they decide that its course must be changed and that all they need to effect the mighty alteration is a political tool that will multiply their power over other individuals. The chosen instrument may be "history" or "science" or "terror." In any event, a lever will descend from the sky, and the world will be changed. The authors of the transformation will then be permanently free from the burden of other people's imperfect judgments and valuations. They will have what they believe they are entitled to.
But there are other kinds of levers, and other ways of regarding them. When Cather thinks about the means of gaining leverage on life, she thinks of the pen and the plow, the archetypal tools of individual skill. She thinks, indeed, of occasions when an author's pen is "fitted to [his] matter as the plough is to the furrow."Cather, My Ántonia, in Early Novels and Stories (New York: Library of America, 1987), p. 877. She values the kind of human action that responds to the challenges of circumstance, not the kind that tries to decree their end. Anybody who has ever plowed a field can tell you that plowing is not an exercise of political or social power. Neither is it an effect of material forces or (strange as this may seem) of mere "labor." It consists of countless individual decisions about risks and opportunities, about the limitations and advantages of equipment and terrain — decisions whose success is never guaranteed but that may, despite the risks, succeed.
The Professor's image of the one lever that will move the world is a great deal simpler. It is brutally simple. It does not even suggest that the tools meant to transform human action should be fitted to human action itself. It implies that they must be operated from someplace outside, beyond this earth. And it complacently accepts the consequence of using such tools. The consequence would not be evolution, reform, or somebody's idea of social democracy. It would be the removal of the earth from its orbit. This is indeed a fatal conceit, and the Professor knows it. He raises his glass and offers a toast. "To the destruction of what is," he says "calmly."Secret Agent, p. 228.
The Professor has particularly advanced views, but his desire to make the world stop and obey him establishes his similarity to the other politicians in The Secret Agent. The problem for all of them is how to make the world stop without being stopped oneself, how to engineer a decisive change without being destroyed by the crash that follows. The Professor's literary image neatly dispenses with that problem. He himself will be standing at the far end of the lever, the end that is beyond the world. He will not be hurt. Only one difficulty remains: there is no such place.
Certainly the Professor does everything he can to get beyond the world of other people. But he can oppose himself to their system of action only by acting within it. In reality, he has no tools that exist apart from it. In the final chapter, Ossipon emphasizes that irritating fact. His opportunity comes when the Professor announces that he needs just one thing to complete his work: "The time! Give me time!"Ibid., p. 226. But time is a condition of this world; if the Professor needs it, he must be in this world too, and unable to live in any other — as Ossipon tauntingly points out.
Suppose, Ossipon says, that science eventually attains the ability to lengthen the human lifespan:
Just now you've been crying for time — time. Well! The doctors will serve you out your time — if you are good. You profess yourself to be one of the strong — because you carry in your pocket enough stuff to send yourself and, say, twenty other people into eternity. But eternity is a damned hole. It's time that you need. You — if you met a man who could give you for certain ten years of time, you would call him your master.Ibid., p. 227.
The Professor denies it. Besides, he suggests, that is merely a hypothetical situation. He is wavering. He confesses disappointment at his inability to get any leverage with the "mediocre" people who surround him. Every one of them — Ossipon, Verloc, "everybody" — is too mediocre to do anything.Ibid., pp. 226, 230. At this point, the Professor is merely rebelling against one form of scarcity rather than another — scarcity of allies rather than scarcity of time; and rebellion against one leads very naturally to rebellion against the other. If enough people shared his values, he could do what he wanted without further loss of time. There would be no scarcity. But "[t]ime is pressing," as Camus says. "Persuasion demands leisure … thus terror remains the shortest route to immortality.”Camus, The Rebel, p. 247. That is why the Professor's chosen lever is "madness and despair." It's quicker that way.
If he can just get that tool! Then he will have the right leverage on the praxeological material. He retains his hope. Ossipon, however, knows more than the Professor about madness and despair. He knows that human emotions are exactly like time in one respect: they are an inextricable part of the web of human action. They cannot simply be abstracted from the lives of individuals and used as tools for some external purpose. Winnie died of despair, the last victim of the explosion that the Professor helped to engineer. But her suicide was irrelevant to the Professor's goal; it was a fatal reflex of her will to self-preservation, and its effects were wholly unpolitical. He himself has no information about the matter.
"Mankind," he declares in a "self-confident" way, "does not know what it wants." He thinks that mankind needs to be told. But Winnie proved him wrong. She knew what she wanted. That is why Ossipon can say with authority, "Mankind wants to live — to live."Secret Agent, p. 227. Yet Winnie's suicide, the suicide of someone who wanted to live, but only upon her own terms, shows that Ossipon isn't entirely correct. "Mankind" isn't one thing, and it doesn't want any one thing. If it did, it might actually be able to provide people like the Professor with a tool that would be simple and strong enough to accomplish some of their aims. But mankind wants an uncountable number of things, because mankind consists of an uncountable number of individuals responding to an uncountable number of situations. Their diversity of wants and needs is a fundamental praxeological fact. One of Conrad's commentators has said that "the central theme of The Secret Agent" is the "contrast between what is fully human and affirmative toward life and what is wretchedly less than human and revolted by life" — meaning the Professor.Hay, The Political Novels of Joseph Conrad, p. 252 True; but human life, as the action of the novel shows, is always the life of individuals. It does not exist en masse.
This is not a thought that the Professor wants to entertain. He prefers to think of other people as an undifferentiated mass. It is a terrible thought, but less terrible than the thought of their individuality. After arguing with Ossipon, he vaingloriously toasts "the destruction of what is"; then he considers how hard the existing course of human action is to destroy.
The thought of a mankind as numerous as the sands of the seashore, as indestructible, as difficult to handle, oppressed him. The sound of exploding bombs was lost in their immensity of passive grains without an echo. For instance, this Verloc affair. Who thought of it now?Secret Agent, p. 228
He envisions himself surrounded by millions of passive, interchangeable grains of sand, as determined by "conditions" as any inert physical target.
But that's not right. That's merely the arrogant way in which he chooses to visualize all those human lives that are immune to his dream of total power. What he hates and fears is precisely the spontaneous, unpredictable freedom of human action. What drives him to madness and despair is the fact that other people are active instead of passive, planning instead of planned. The variety of their plans and motives denies him control, imprisons him in a world that is always being shaped by a multitude of levers of its own invention — far too many levers for him to "handle." That is why he wants to bring it all to a stop.
XIII.The Professor leaves his debate with Ossipon before it can pose more danger to his morale. We see him receding into the perspective of a busy street, "averting his eyes from the odious multitude of mankind" that surrounds him:
He walked frail, insignificant, shabby, miserable — and terrible in the simplicity of his idea calling madness and despair to the regeneration of the world. Nobody looked at him. He passed on unsuspected and deadly, like a pest in the street full of men.Ibid., p. 231.
And that is the end of The Secret Agent. It is a striking end for a novel that has been focused on the Professor and his fellow revolutionaries (of both left- and right-wing varieties) as if they were anything but "insignificant," as if, indeed, the big story were about them and not about the world that they want to "regenerate," the process of human action that they struggle to dominate or destroy. The final moment comes with the force of a revelation: what is most significant is the life of the busy street, of the multitude whom the Professor is pleased to consider "odious," and not the Professor himself, or anyone like him. He is "deadly," but the street is alive; he can kill, but it can heal; he is a "pest," but it is "men."Fleishman, in Conrad's Politics, agrees rather oddly with my assumption of a favorable ending of the novel — oddly because he regards the ending as a vision of "the value of human community" (p. 212), not the value of individual human action, and because he previously interpreted the Professor's vision of people swarming like industrious insects as Conrad's own vision of "whatever is inimical to genuine social life" (pp. 200–201).
Compare The Secret Agent with a contemporary political novel that also has an unexpectedly epiphanic end: Frank Norris's The Octopus (1901). Both authors are interested in the principles of human action, but they see them differently. Norris's novel is an attempt at a comprehensive realization of a collectivist philosophy. For 650 pages, it details the complicated and, to Norris, sinister methods by which capitalism works. Using the example of wheat farmers beset by banks and railroads, Norris shows the money power monopolizing land, despoiling labor, killing its individual opponents, trampling all collective opposition. He shows the people victimized by a bourgeois government that will do nothing to stop these depredations. He describes these things as if they happened naturally and in accordance with the laws of economic history. He shows an essentially hopeless situation. If ever there was a novel that begged for some final, redemptive irony, some dramatic revelation of the multitude's self-regenerative power, that novel is The Octopus.
And the redemptive irony comes; but when it does, it is not about people at all; it's about an economic product. Norris suddenly, triumphantly, announces that regardless of anything his characters may have done or had done to them, "the WHEAT remained. Untouched, unassailable, undefiled, that mighty world-force, that nourisher of nations, wrapped in Nirvanic calm, indifferent to the human swarm, gigantic, resistless, moved onward in its appointed grooves."Frank Norris, The Octopus: A Story of California (New York: Double-day, 1901), p. 651.
It is one of the great sentences of modern literature, the grandest effect of Norris's remarkable powers of abstraction and intensification. He has spent his whole novel trying to demonstrate that the means by which the wheat is produced and distributed are vicious, oppressive, and destructive; now he declares, in that thrilling final sentence, that the wheat is good, its production is good, its distribution is good. Compared with the godlike wheat, so active and yet so nirvanically calm, the people whom one had supposed to be the heroes of the novel amount to nothing more than a "little, isolated group of human insects," bugs in the human "swarm."Ibid., p. 651. This is not the only place where Norris's people become insects; see also p. 180.
We have arrived at a destination far beyond the realm of human action. In this strange, modern Eleusis, the priest holds up the miraculous stalk of wheat and tells the initiates … what? Not that they have been reborn after their symbolic deaths, but that they are and always will be the nothings that they were before.
Meanwhile, Norris makes sure that his embodiment of evil, an investment capitalist, is drowned like a bug in the miracle wheat. He bought it, and it kills him. But his death is not a comment on the risks of doing business; it is something more — a judgment handed down from an abstract court of moral justice, a court that is preoccupied with the transactions of this world but that operates at an "unassailable" distance above it. A lever descends from the courts of theory, and the vile S. Behrman is no more.
The end of The Secret Agent involves no such revelation of a priori powers. No economic values are imposed from a location beyond economics. No "grooves" of enterprise are "appointed" without human beings to appoint them. Here we discover no material objects that possess the power to transcend risk, banish scarcity, triumph over space and time. We discover only people, the same people who perform, in their imperfect, non-nirvanic way, whatever actions take place in this world, and who feel the effects of their actions. These people are the plow and the furrow, the authors and the story, the means of action and the shape of action — and, in their capacity for enjoyment, the goal of action, too. They are "the wheat."
Comment on the blog.
This article is excerpted from Literature and the Economics of Liberty: Spontaneous Order in Culture.
Notes[1] Willa Cather, "The Novel Démeublé," in Stories, Poems, and Other Writings (New York: Library of America, 1992), p. 835.
[2] Ludwig von Mises, Human Action: A Treatise on Economics, 3rd ed., rev. (1966; rpt. Chicago: Contemporary Books, n.d.), p. 3.
[3] Willa Cather, "Escapism," in Stories, Poems, and Other Writings, p. 971.
[4] Joseph Conrad, The Secret Agent, Bruce Harkness and S.W. Reid, eds. (Cambridge, U.K.: Cambridge University Press, 1990), p. 40.
[5] Ibid., p. 37.
[6] Ibid., p. 38.
[7] Ibid., p. 37.
[8] Ibid., p. 94.
[9] Ibid., p. 88.
[10] Ibid., p. 87.
[11] Ibid., p. 37.
[12] Albert Camus, The Rebel: An Essay on Man in Revolt, Anthony Bower, trans. (New York: Vintage, 1956), p. 240.
[13] "Five hundred pounds" in the money of Conrad's time (Secret Agent, p. 94).
[14] Secret Agent, p. 225.
[15] Ibid., p. 226.
[16] Terry Eagleton, Against the Grain: Essays 1975–1985 (London: New Left Books, 1986), especially pp. 24–25.
[17] Secret Agent, p. 66.
[18] Ibid., pp. 62, 66.
[19] Ibid., p. 66.
[20] Ibid., p. 45.
[21] Fredric Jameson, The Political Unconscious: Narrative as a Socially Symbolic Act (Ithaca, N.Y.: Cornell University Press, 1981), pp. 202, 268, 271, 221.
[22] Secret Agent, p. 66.
[23] Ibid., p. 226.
[24] Ibid., p. 88.
[25] Eloise Knapp Hay, The Political Novels of Joseph Conrad: A Critical Study, 2nd ed. (Chicago: University of Chicago Press, 1981), p. 247.
[26] John Dewey, "Liberty and Social Control," Social Frontier (November 1935): 41; cited in Friedrich Hayek's salient work, The Road to Serfdom (Chicago: University of Chicago Press, 1944, 1976), p. 26, as exemplifying "[t]he characteristic confusion of freedom with power."
[27] Hayek dedicated The Road to Serfdom to "the socialists of all parties."
[28] Secret Agent, p. 67.
[29] Ibid., p. 231.
[30] Ibid., p. 67.
[31] Ibid., p. 226. Cf. the famous adage, "Exterminate all the brutes!," penned by that other great proponent of progress, Mr. Kurtz in Conrad's Heart of Darkness. Like the Professor, Kurtz is a leftist reformer of an eccentric kind. As "a journalist" wistfully remarks to the narrator of Kurtz's story, his "proper sphere ought to have been politics ‘on the popular side’" (Joseph Conrad, Heart of Darkness, rev. ed., Robert Kimbrough, ed. [New York: Norton, 1971], p. 74). This, like almost everything else that is said in Heart of Darkness, is true, in its way.
[32] Secret Agent, p. 16.
[33] Ibid., p. 33.
[34] The significance of Greenwich as a symbol of space and time has been emphasized by Conrad critics ever since R.W. Stallman's essay, "Time and The Secret Agent," in The Art of Joseph Conrad: A Critical Symposium, R.W. Stallman, ed. (East Lansing: Michigan State University Press, 1960), pp. 234–54. Stallman observed that Verloc's attack on time is an attack on "life itself" (p. 236). He was not concerned, however, with Conrad's hypotheses about how life manifests itself in processes of human action. Avrom Fleishman, Conrad's Politics: Community and Anarchy in the Fiction of Joseph Conrad (Baltimore: Johns Hopkins Press, 1967), p. 205, aptly says that "the effort to destroy time is symbolically an effort to end history — thereby theoretically achieving the revolutionary goal of a world beyond history and without time."
[35] Secret Agent, p. 118.
[36] Ibid., pp. 14, 40.
[37] Ibid., p. 50.
[38] Ibid., p. 197.
[39] Ibid., p. 216.
[40] Ibid., p. 159.
[41] Fleishman, an intelligent, influential, and comparatively moderate interpreter of the novel's politics, says that when Conrad's anarchists talk about the cannibalism of modern society they are basically right (Conrad's Politics, p. 202). He discusses "the decay of the social order through the widespread ignorance, secrecy, and madness of its members" (p. 194) and associates this decay with (among other things) "private property" (pp. 198, 199). Eagleton (Against the Grain, passim) describes the novel as reenacting the dismal contradictions of capitalist society, while offering no "solution." Apparently, Conrad is at fault for declining to announce a redemptive central plan.
[42] Jeremy Hawthorn, Joseph Conrad: Language and Fictional Self-Consciousness (London: Edward Arnold, 1979), p. 85, comes close to noticing this. But see note 57, below.
[43] Secret Agent, p. 46.
[44] Ibid., pp. 74–75.
[45] Ibid., pp. 75–76.
[46] Ibid., p. 16.
[47] Ibid., p. 30.
[48] Ibid., p. 102.
[49] David Hackett Fischer, The Great Wave: Price Revolutions and the Rhythm of History (New York: Oxford University Press, 1996), p. 86.
[50] On marginal utility, see section IV of my essay on Willa Cather, "Willa Cather's Capitalism."
What differentiates the realm of the natural sciences from that of the sciences of human action is the categorial system resorted to in each in interpreting phenomena and constructing theories. The natural sciences do not know anything about final causes; inquiry and theorizing are entirely guided by the category of causality. The field of the sciences of human action is the orbit of purpose and of conscious aiming at ends; it is teleological.
Both categories were resorted to by primitive man and are resorted to today by everybody in daily thinking and acting. The most simple skills and techniques imply knowledge gathered by rudimentary research into causality. Where people did not know how to seek the relation of cause and effect, they looked for a teleological interpretation. They invented deities and devils to whose purposeful action certain phenomena were ascribed. A god emitted lightning and thunder. Another god, angry about some acts of men, killed the offenders by shooting arrows. A witch's evil eye made women barren and cows dry.
Such beliefs generated definite methods of action. Conduct pleasing to the deity, offering of sacrifices and prayer were considered suitable means to appease the deity's anger and to avert its revenge; magic rites were employed to neutralize witchcraft. Slowly people came to learn that meteorological events, disease, and the spread of plagues are natural phenomena and that lightning rods and antiseptic agents provide effective protection while magic rites are useless. It was only in the modern era that the natural sciences in all their fields substituted causal research for finalism.
The marvelous achievements of the experimental natural sciences prompted the emergence of a materialistic metaphysical doctrine, positivism. Positivism flatly denies that any field of inquiry is open for teleological research. The experimental methods of the natural sciences are the only appropriate methods for any kind of investigation. They alone are scientific, while the traditional methods of the sciences of human action are metaphysical, that is, in the terminology of positivism, superstitious and spurious. Positivism teaches that the task of science is exclusively the description and interpretation of sensory experience. It rejects the introspection of psychology as well as all historical disciplines. It is especially fanatical in its condemnation of economics.
Auguste Comte, by no means the founder of positivism but merely the inventor of its name, suggested as a substitute for the traditional methods of dealing with human action a new branch of science, sociology. Sociology should be social physics, shaped according to the epistemological pattern of Newtonian mechanics.
The plan was so shallow and impractical that no serious attempt was ever made to realize it. The first generation of Comte's followers turned instead toward what they believed to be biological and organic interpretation of social phenomena. They indulged freely in metaphorical language and quite seriously discussed such problems as what in the social "body" should be classed as "intercellular substance." When the absurdity of this biologism and organicism became obvious, the sociologists completely abandoned the ambitious pretensions of Comte. There was no longer any question of discovering a posteriori laws of social change. Various historical, ethnographical, and psychological studies were put out under the label sociology. Many of these publications were dilettantish and confused; some are acceptable contributions to various fields of historical research.
Without any value, on the other hand, were the writings of those who termed sociology their arbitrary metaphysical effusions about the recondite meaning and end of the historical process which had been previously styled philosophy of history. Thus, Émile Durkheim and his school revived under the appellation group mind the old specter of romanticism and the German school of historical jurisprudence, the Volksgeist.
In spite of this manifest failure of the positivist program, a neopositivist movement has arisen. It stubbornly repeats all the fallacies of Comte. The same motive inspires these writers that inspired Comte. They are driven by an idiosyncratic abhorrence of the market economy and its political corollary: representative government, freedom of thought, speech, and the press. They long for totalitarianism, dictatorship, and the ruthless oppression of all dissenters, taking, of course, for granted that they themselves or their intimate friends will be vested with the supreme office and the power to silence all opponents.
Comte without shame advocated suppression of all doctrines he disliked. The most obtrusive champion of the neopositivist program concerning the sciences of human action was Otto Neurath, who, in 1919, was one of the outstanding leaders of the short-lived Soviet regime of Munich and later cooperated briefly in Moscow with the bureaucracy of the Bolsheviks.Otto Neurath, "Foundations of the Social Sciences," International Encyclopedia of Unified Science, Vol. 2, No. 1. Knowing they cannot advance any tenable argument against the economists' critique of their plans, these passionate communists try to discredit economics wholesale on epistemological grounds.
The two main varieties of the neopositivistic assault on economics are panphysicalism and behaviorism. Both claim to substitute a purely causal treatment of human action for the — as they declare unscientific — teleological treatment.
Panphysicalism teaches that the procedures of physics are the only scientific method of all branches of science. It denies that any essential differences exist between the natural sciences and the sciences of human action. This denial lies behind the panphysicalists' slogan "unified science." Sense experience, which conveys to man his information about physical events, provides him also with all information about the behavior of his fellow men.
"The applied science of social physics, social engineering, can deal with man in the same way technology deals with copper and hydrogen." Study of the way his fellows react to various stimuli does not differ essentially from study of the way other objects react. The language of physics is the universal language of all branches of knowledge, without exception. What cannot be rendered in the language of physics is metaphysical nonsense. It is arrogant pretension in man to believe that his role in the universe is different from that of other objects. In the eyes of the scientist all things are equal. All talk about consciousness, volition, and aiming at ends is empty. Man is just one of the elements in the universe. The applied science of social physics, social engineering, can deal with man in the same way technology deals with copper and hydrogen.
The panphysicalist might admit at least one essential difference between man and the objects of physics. The stones and the atoms reflect neither upon their own nature, properties, and behavior nor upon those of man. They do not engineer either themselves or man. Man is at least different from them insofar as he is a physicist and an engineer. It is difficult to conceive how one could deal with the activities of an engineer without realizing that he chooses between various possible lines of conduct and is intent upon attaining definite ends. Why does he build a bridge rather than a ferry? Why does he build one bridge with a capacity of ten tons and another with a capacity of twenty tons? Why is he intent upon constructing bridges that do not collapse? Or is it only an accident that most bridges do not collapse?
If one eliminates from the treatment of human action the notion of conscious aiming at definite ends, one must replace it by the — really metaphysical — idea that some superhuman agency leads men, independently of their will, toward a predestined goal: that what put the bridge-builder into motion was the preordained plan of Geist or the material productive forces which mortal men are forced to execute.
To say that man reacts to stimuli and adjusts himself to the conditions of his environment does not provide a satisfactory answer. To the stimulus offered by the English Channel some people have reacted by staying at home; others have crossed it in rowboats, sailing ships, steamers, or, in modern times simply by swimming. Some fly over it in planes; others design schemes for tunneling under it. It is vain to ascribe the differences in reaction to differences in attendant circumstances such as the state of technological knowledge and the supply of labor and capital goods. These other conditions too are of human origin and can only be explained by resorting to teleological methods.
The approach of behaviorism is in some respects different from that of panphysicalism, but it resembles the latter in its hopeless attempt to deal with human action without reference to consciousness and aiming at ends. It bases its reasoning on the slogan "adjustment." Like any other being, man adjusts himself to the conditions of his environment. But behaviorism fails to explain why different people adjust themselves to the same conditions in different ways. Why do some people flee violent aggression while others resist it? Why did the peoples of Western Europe adjust themselves to the scarcity of all things on which human well-being depends in a way entirely different from that of the Orientals?
Behaviorism proposes to study human behavior according to the methods developed by animal and infant psychology. It seeks to investigate reflexes and instincts, automatisms and unconscious reactions. But it has told us nothing about the reflexes that have built cathedrals, railroads, and fortresses, the instincts that have produced philosophies, poems, and legal systems, the automatisms that have resulted in the growth and decline of empires, the unconscious reactions that are splitting atoms. Behaviorism wants to observe human behavior from without and to deal with it merely as reaction to a definite situation. It punctiliously avoids any reference to meaning and purpose. However, a situation cannot be described without analyzing the meaning which the man concerned finds in it. If one avoids dealing with this meaning, one neglects the essential factor that decisively determines the mode of reaction. This reaction is not automatic but depends entirely upon the interpretation and value judgments of the individual, who aims to bring about, if feasible, a situation which he prefers to the state of affairs that would prevail if he were not to interfere. Consider a behaviorist describing the situation which an offer to sell brings about without reference to the meaning each party attaches to it!
"A situation cannot be described without analyzing the meaning which the man concerned finds in it." In fact, behaviorism would outlaw the study of human action and substitute physiology for it. The behaviorists never succeeded in making clear the difference between physiology and behaviorism. Watson declared that physiology is "particularly interested in the functioning of parts of the animal… Behaviorism, on the other hand, while it is intensely interested in all of the functioning of these parts, is intrinsically interested in what the whole animal will do."John B. Watson, Behaviorism (New York, W. W. Norton, 1930), p. 11. However, such physiological phenomena as the resistance of the body to infection or the growth and aging of an individual can certainly not be called behavior of parts. On the other hand, if one wants to call such a gesture as the movement of an arm (either to strike or to caress) behavior of the whole human animal, the idea can only be that such a gesture cannot be imputed to any separate part of the being.
But what else can this something to which it must be imputed be if not the meaning and the intention of the actor or that unnamed thing from which meaning and intention originate? Behaviorism asserts that it wants to predict human behavior. But it is impossible to predict the reaction of a man accosted by another with the words "you rat" without referring to the meaning that the man spoken to attaches to the epithet.
Both varieties of positivism decline to recognize the fact that men aim purposefully at definite ends. As they see it, all events must be interpreted in the relationship of stimulus and response, and there is no room left for a search for final causes. Against this rigid dogmatism it is necessary to stress the point that the rejection of finalism in dealing with events outside the sphere of human action is enjoined upon science only by the insufficiency of human reason. The natural sciences must refrain from dealing with final causes because they are unable to discover any final causes, not because they can prove that no final causes are operative. The cognizance of the interconnectedness of all phenomena and of the regularity in their concatenation and sequence, and the fact that causality research works and has enlarged human knowledge, do not peremptorily preclude the assumption that final causes are operative in the universe.
The reason for the natural sciences' neglect of final causes and their exclusive preoccupation with causality research is that this method works. The contrivances designed according to the scientific theories run the way the theories predicted and thus provide a pragmatic verification for their correctness. On the other hand the magic devices did not come up to expectations and do not bear witness to the magic world view.
It is obvious that it is also impossible to demonstrate satisfactorily by ratiocination that the alter ego is a being that aims purposively at ends. But the same pragmatic proof that can be advanced in favor of the exclusive use of causal research in the field of nature can be advanced in favor of the exclusive use of teleological methods in the field of human action. It works, while the idea of dealing with men as if they were stones or mice does not work. It works not only in the search for knowledge and theories but no less in daily practice.
The positivist arrives at his point of view surreptitiously. He denies to his fellow men the faculty of choosing ends and the means to attain these ends, but at the same time he claims for himself the ability to choose consciously between various methods of scientific procedure. He shifts his ground as soon as it comes to problems of engineering, whether technological or "social." He designs plans and policies which cannot be interpreted as merely being automatic reactions to stimuli. He wants to deprive all his fellows of the right to act in order to reserve this privilege for himself alone. He is a virtual dictator.
As the behaviorist tells us, man can be thought of as "an assembled organic machine ready to run."Watson, p. 269. He disregards the fact that while machines run the way the engineer and the operator make them run, men run spontaneously here and there. "At birth human infants, regardless of their heredity, are as equal as Fords."Horace M. Kallen, "Behaviorism," Encyclopaedia of the Social Sciences, 2, 498. Starting from this manifest falsehood, the behaviorist proposes to operate the "human Ford" the way the operator drives his car. He acts as if he owned humanity and were called upon to control and to shape it according to his own designs. For he himself is above the law, the godsent ruler of mankind.Karl Mannheim developed a comprehensive plan to produce the "best possible" human types by "deliberately" reorganizing the various groups of social factors. "We," that is Karl Mannheim and his friends, will determine what "the highest good of society and the peace of mind of the individual" require. Then "we" will revamp mankind. For our vocation is "the planned guidance of people's lives." Mannheim, Man and Society in an Age of Reconstruction (London, Routledge & Kegan Paul, 1940), p. 222. The most remarkable thing about such ideas is that in the thirties and forties they were styled democratic, liberal, and progressive. Joseph Goebbels was more modest than Mannheim in that he wanted only to revamp the German people and not the whole of mankind. But in his approach to the problem he did not differ essentially from Mannheim. In a letter of April 12, 1933, to Wilhelm Furtwangler he referred to the "we" to whom "the responsible task has been entrusted, to fashion out of the raw stuff of the masses the firm and well-shaped structure of the nation (denen die verantwortungsvolle Aufgabe anvertraut ist, aus dem rohen Stoff der Masse das feste und gestalthafte Gebilde des Volkes zu formen)." Berta Geissmar, Musik im Schatten der Politik (Zürich, Atlantis Verlag, 1945), pp. 97–9. Unfortunately neither Mannheim nor Goebbels told us who had entrusted them with the task of reconstructing and re-creating men.
As long as positivism does not explain philosophies and theories, and the plans and policies derived from them, in terms of its stimulus-response scheme, it defeats itself.
This article is excerpted from chapter 11 of Theory and History. An audio version of this article, excerpted from the forthcoming audiobook version, read by John Pruden.
[From Anything That's Peaceful: The Case for the Free Market, 1964]
As I sat contemplating the miraculous make-up of an ordinary lead pencil, the thought flashed in mind: I'll bet there isn't a person on earth who knows how to make even so simple a thing as a pencil.
If this could be demonstrated, it would dramatically portray the miracle of the market and would help to make clear that all manufactured things are but manifestations of creative-energy exchanges, that these are, in fact, spiritual phenomena. The lessons in political economy this could teach!
There followed that not-to-be-forgotten day at the pencil factory, beginning at the receiving dock, covering every phase of countless transformations, and concluding in an interview with the chemist.
Had you seen what I saw, you, also, might have struck up a warm friendship with that amazing character, I, PENCIL.His official name is "Mongol 482." His many ingredients are assembled, fabricated, and finished by Eberhard Faber Pencil Company, Wilkes-Barre, Pennsylvania.
Being a writer in his own right, let I, PENCIL speak for himself:
I am a lead pencil — the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.
Writing is both my vocation and my avocation; that's all I do.
You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery — more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, the wise G.K. Chesterton observed, "We are perishing for want of wonder, not for want of wonders."
I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me — no, that's too much to ask of anyone — if you can become aware of the miraculousness that I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because — well, because I am seemingly so simple.
Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn't it? Especially when it is realized that there are about one and one-half billion of my kind produced in the United States each year.
Pick me up and look me over. What do you see? Not much meets the eye — there's some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser.
Innumerable AntecedentsJust as you cannot trace your family tree back very far, so is it impossible for me to name and explain all my antecedents. But I would like to suggest enough of them to impress upon you the richness and complexity of my background.
My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!
The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.
Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant, which supplies the mill's power!
Don't overlook the ancestors present and distant who have a hand in transporting 60 carloads of slats across the nation.
Once in the pencil factory — $4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine — each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop — a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this "wood-clinched" sandwich.
My "lead" itself — it contains no lead at all — is complex. The graphite is mined in Ceylon. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth — and the harbor pilots.
The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow — animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions — as from a sausage grinder — cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture that includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.
My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are. Why, even the processes by which the lacquer is made a beautiful yellow involve the skills of more persons than one can enumerate!
Observe the labeling. That's a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black?
My bit of metal — the ferrule — is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain.
Then there's my crowning glory, inelegantly referred to in the trade as "the plug," the part man uses to erase the errors he makes with me. An ingredient called "factice" is what does the erasing. It is a rubberlike product made by reacting rapeseed oil from the Dutch East Indies with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment that gives "the plug" its color is cadmium sulfide.
No One KnowsDoes anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?
Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field — paraffin being a byproduct of petroleum.
Here is an astounding fact: neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.
No MastermindThere is a fact still more astounding: the absence of a mastermind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.
It has been said that "only God can make a tree." Why do we agree with this? Isn't it because we realize that we ourselves could not make one? Indeed, can we even describe a tree? We cannot, except in superficial terms. We can say, for instance, that a certain molecular configuration manifests itself as a tree. But what mind is there among men that could even record, let alone direct, the constant changes in molecules that transpire in the life span of a tree? Such a feat is utterly unthinkable!
I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles that manifest themselves in nature an even-more-extraordinary miracle has been added: the configuration of creative human energies — millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.
The above is what I meant when writing, "If you can become aware of the miraculousness that I symbolize, you can help save the freedom mankind is so unhappily losing." For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand — that is, in the absence of governmental or any other coercive masterminding — then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.
Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely. And here is the reason: each one acknowledges that he himself doesn't know how to do all the things incident to mail delivery. He also recognizes that no other individual could do it. These assumptions are correct. No individual possesses enough know-how to perform a nation's mail delivery any more than any individual possesses enough know-how to make a pencil. Now, in the absence of faith in free people — in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity — the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental "masterminding."
Testimony GaloreIf I, Pencil, were the only item that could offer testimony on what men and women can accomplish when free to try, then those with little faith would have a fair case. However, there is testimony galore; it's all about us and on every hand. Mail delivery is exceedingly simple when compared, for instance, to the making of an automobile or a calculating machine or a grain combine or a milling machine or to tens of thousands of other things.
Delivery? Why, in this area where men have been left free to try, they deliver the human voice around the world in less than one second; they deliver an event visually and in motion to any person's home when it is happening; they deliver 150 passengers from Seattle to Baltimore in less than four hours; they deliver gas from Texas to one's range or furnace in New York at unbelievably low rates and without subsidy; they deliver each four pounds of oil from the Persian Gulf to our Eastern Seaboard — halfway around the world — for less money than the government charges for delivering a one-ounce letter across the street!
The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society's legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.
This article appears in Anything That's Peaceful: The Case for the Free Market, 1964.
[Excerpted from chapter 10 of Theory and History.]
As historicism sees it, the essential error of economics consists in its assumption that man is invariably egoistic and aims exclusively at material well-being.
According to Gunnar Myrdal, economics asserts that human actions are "solely motivated by economic interests" and considers as economic interests "the desire for higher incomes and lower prices and, in addition, perhaps stability of earnings and employment, reasonable time for leisure and an environment conducive to its satisfactory use, good working conditions, etc." This, he says, is an error. One does not completely account for human motivations by simply registering economic interests. What really determines human conduct is not interests alone but attitudes. "Attitude means the emotive disposition of an individual or a group to respond in certain ways to actual or potential situations." There are "fortunately many people whose attitudes are not identical with their interests."Gunnar Myrdal, The Political Element in the Development of Economic Theory, trans, by P. Streeten (Cambridge, Harvard University Press, 1954), pp. 199–200.
Now, the assertion that economics ever maintained that men are solely motivated by the striving after higher incomes and lower prices is false. Because of their failure to disentangle the apparent paradox of the use-value concept, the classical economists and their epigones were prevented from providing a satisfactory interpretation of the conduct of the consumers. They virtually dealt only with the conduct of the businessmen who serve the consumers and for whom the valuations of their customers are the ultimate standard.
When they referred to the principle of buying on the cheapest market and selling on the dearest market, they were trying to interpret the actions of the businessman in his capacity as a purveyor of the buyers, not in his capacity as a consumer and spender of his own income. They did not enter into an analysis of the motives prompting the individual consumers to buy and to consume. So they did not investigate whether individuals try only to fill their bellies or whether they also spend for other purposes, e.g., to perform what they consider to be their ethical and religious duties. When they distinguished between purely economic motives and other motives, the classical economists referred only to the acquisitive side of human behavior. They never thought of denying that men are also driven by other motives.
The approach of classical economics appears highly unsatisfactory from the point of view of modern subjective economics. Modern economics rejects as entirely fallacious also the argument advanced for the epistemological justification of the Classical methods by their last followers, especially John Stuart Mill. According to this lame apology, pure economics deals only with the "economic" aspect of the operations of mankind, only with the phenomena of the production of wealth "as far as those phenomena are not modified by the pursuit of any other object." But, says Mill, in order to deal adequately with reality "the didactic writer on the subject will naturally combine in his exposition, with the truth of pure science, as many of the practical modifications as will, in his estimation, be most conducive to the usefulness of his work."John Stuart Mill, Essays on Some Unsettled Questions of Political Economy (3d ed. London, 1877), pp. 140–1. This certainly explodes Mr. Myrdal's assertion, so far as classical economics is concerned.
Modern economics traces all human actions back to the value judgments of individuals. It never was so foolish, as Myrdal charges, as to believe that all that people are after is higher incomes and lower prices. Against this unjustified criticism which has been repeated a hundred times, Böhm-Bawerk already in his first contribution to the theory of value, and then later again and again, explicitly emphasized that the term "well-being" (Wohlfahrtszwecke) as he uses it in the exposition of the theory of value does not refer only to concerns commonly called egoistic but comprehends everything that appears to an individual as desirable and worthy of being aimed at (erstrebenswert).Böhm-Bawerk, "Grundzüge der Theorie des wirtschaftlichen Güterwerts," Jahrbücher fiir Nationalökonomie und Statistik, N.F., 13 (1886), 479, n. 1; Kapital und Kapitalzins (3d ed. Innsbruck, 1909), 2, 316–17, n. 1.
In acting, man prefers some things to other things and chooses between various modes of conduct. The result of the mental process that makes a man prefer one thing to another thing is called a judgment of value. In speaking of value and valuations economics refers to such judgments of value, whatever their content may be. It is irrelevant for economics, up to now the best developed part of praxeology, whether an individual aims like a member of a labor union at higher wages or like a saint at the best performance of religious duties. The "institutional" fact that most people are eager to get more tangible goods is a datum of economic history, not a theorem of economics.
All brands of historicism — the German and the British historical schools of the social sciences, American institutionalism, the adepts of Sismondi, Le Play, and Veblen, and many kindred "unorthodox" sects — emphatically reject economics. But their writings are full of inferences drawn from general propositions about the effects of various modes of acting. It is, of course, impossible to deal with any "institutional" or historical problem without referring to such general propositions. Every historical report, no matter whether its theme is the conditions and events of a remote past or those of yesterday, is inevitably based on a definite kind of economic theory. The historicists do not eliminate economic reasoning from their treatises. While rejecting an economic doctrine they do not like, they resort in dealing with events to fallacious doctrines long since refuted by the economists.
The theorems of economics, say the historicists, are void because they are the product of a priori reasoning. Only historical experience can lead to realistic economics. They fail to see that historical experience is always the experience of complex phenomena, of the joint effects brought about by the operation of a multiplicity of elements. Such historical experience does not give the observer facts in the sense in which the natural sciences apply this term to the results obtained in laboratory experiments. (People who call their offices, studies, and libraries "laboratories" for research in economics, statistics, or the social sciences are hopelessly muddle-headed.) Historical facts need to be interpreted on the ground of previously available theorems. They do not comment upon themselves.
The antagonism between economics and historicism does not concern the historical facts. It concerns the interpretation of the facts. In investigating and narrating facts a scholar may provide a valuable contribution to history, but he does not contribute to the increase and perfection of economic knowledge.
Let us once more refer to the often-repeated proposition that what the economists call economic laws are merely principles governing conditions under capitalism and of no avail for a differently organized society, especially not for the coming socialist management of affairs. As these critics see it, it is only the capitalists with their acquisitiveness who bother about costs and about profit. Once production for use has been substituted for production for profit, the categories of cost and profit will become meaningless. The primary error of economics consists in considering these and other categories as eternal principles determining action under any kind of institutional conditions.
However, cost is an element in any kind of human action, whatever the particular features of the individual case may be. Cost is the value of those things the actor renounces in order to attain what he wants to attain; it is the value he attaches to the most urgently desired satisfaction among those satisfactions which he cannot have because he preferred another to it. It is the price paid for a thing. If a young man says: "This examination cost me a week end with friends in the country," he means: "If I had not chosen to prepare for my examination, I would have spent this week end with friends in the country." Things it costs no sacrifice to attain are not economic goods but free goods and as such no objects of any action. Economics does not deal with them. Man does not have to choose between them and other satisfactions.
Profit is the difference between the higher value of the good obtained and the lower value of the good sacrificed for its obtainment. If the action, due to bungling, error, an unanticipated change in conditions, or to other circumstances, results in obtaining something to which the actor attaches a lower value than to the price paid, the action generates a loss. Since action invariably aims to substitute a state of affairs which the actor considers as more satisfactory for a state which he considers less satisfactory, action always aims at profit and never at loss.
This is valid not only for the actions of individuals in a market economy but no less for the actions of the economic director of a socialist society.
[An MP3 audio file of this article, read by Donna Orlando, is available for download.]
It's over. There can be no hope for the state now. Its time has finally come to an end. If you think this is irrationally optimistic, click here and watch the video. You will see the state's raison d'être smashed asunder.
How often do you hear the minarchist say, "Well, I don't like government, but we at least need things like traffic laws. We need a government to keep us safe"? For all those who call libertarians crazy for wanting to abolish the Federal Reserve, how much more dangerous and criminal would they accuse us of being if we actually began to publicly advocate the abolition of traffic regulations? Yet, here it is, on video, for the entire world to see, that Hobbes was wrong.
Martin Cassini, a photographer and advocate for road deregulation, has produced a marvelous series of videos documenting the results of the Cabstand Junction Trial that started in September of 2009 in North Somerset, in Great Britain. The videos, which can be viewed on his website Equality StreetsEquality Streets and on YouTube, show the remarkable before and after results of the experiment.
Without traffic lights regulating intersections, congestion has disappeared and accidents are virtually nonexistent. With the exception of a few who still assume right of way, drivers are courteous and give way to pedestrians and other drivers.
This may come as a shock to those who believe in the state, but not to Austrians. This phenomenon can be explained by applying the principles developed in Hans-Hermann Hoppe's theory of argumentation ethics. Both cooperation and empathy are not only part of human nature but are things that must exist within any rational being. It is, as Murray Rothbard put it, the unification of "is" and "ought," of economics and ethics, of the actions that people do perform for their own selfish desires and the actions they should perform for the good of others.
In order for any rational person to act, one must accept the principle of first user. The first one to make use of anything previously unowned becomes the exclusive owner of that thing. This includes not only our bodies but also the space our bodies occupy.
Any attempt to argue the contrary would bring the arguer into immediate self-contradiction. In the very act of arguing, the arguer not only acknowledges his own right to exclusive use over his body and the space it occupies but also that the person he is arguing with has the same right. The act of trying to convince someone of anything acknowledges not only the other person's ability to agree or disagree, but his right to exclusive self-ownership, because the person must have ownership over his own body to even engage in the act of agreement or disagreement. In argumentation there is also an implied preference for nonviolence. Were that not the case, they would not bother arguing at all, but proceed to kill each other.
In the case of an intersection, where people encounter one another in an area neither of them owns, a conflict arises. This conflict is the desire of several people to occupy the same space — the intersection — at the same time. When faced with this problem outside the realm of government regulation, people naturally solve it through the first-user principle.
Before anyone else enters the intersection, the first person to have already entered is allowed to leave. It is the same principle that applies to elevators and subways. Those already occupying the vehicle wishing to leave are allowed to. This first-come–first-served, filter-through method is precisely what takes place at these unregulated intersections.
It is a clear-cut case of what is known in Austrolibertarian circles as spontaneous order. Rational human beings organize themselves and cooperate voluntarily without the need for government. It is not government, but people that build a civilized society. All government can do is destroy civilized behavior through its violent coercion.
What these examples of regulated and unregulated intersections show is about as close to a perfectly controlled social-behavioral experiment as one can possibly get, and they demonstrate concretely the truth of the libertarian position on the nature of man and society. In addition, they show the problem of "transition" from a socialist society to a free one is a rather insignificant problem. Were the state to completely disappear tomorrow, people would immediately begin to adapt and thrive in the new situation.
What this also demonstrates is yet another example of how government decivilizes people. The Austrolibertarian is aware of a plethora of government interventions into the free conduct of human beings, done in the name of safety, that either make us all less safe or simply create more daily annoyances. Such things include gun laws, airport security armed with naked-body scanners, the invasion of third-world countries, and even the regulation of household plumbing. None of these things make us safe. At best, they treat people more like animals than rational human beings. On average, they are harbingers of death.
"Rational human beings organize themselves and cooperate voluntarily without the need for government. It is not government, but people that build a civilized society." There is no exception in the case of traffic regulations. In "Traffic Control: An Exercise in Self-Defeat," Kenneth Todd shows that traffic lights, though erected by the state for the sake of "public safety," encourage dangerous and aggressive behavior, contradict other laws at the expense of justice, and are responsible for the loss of vast amounts of wealth and countless lives. The traffic light is perhaps the most destructive machine yet to be devised by man.
Most often, the installation of a traffic light is the state's response to an earlier failed policy of "road priority." Under this system, certain roads are given priority over others by being granted the title of "major road" as opposed to "minor road." On the minor road, stop signs are placed at each intersection. The drivers on the minor road must stop and wait for it to be clear to go, while drivers on the major road are permitted to drive without obstruction.
The most frequent and most severe type of accident at a major/minor road intersection is the right-angle collision, generally blamed on the side-street driver's right-of-way violation. The major road makes motorists go fast without looking left or right, while the side-street drivers are given a highly complex task. They have to look left and right for pedestrians on two crosswalks, one on the near side and one on the far side, and also for two vehicle streams, one from the left and one from the right. The left-turner has to deal with yet another traffic stream, the one from the opposite direction — seven conflicts in all. Safety advocates have long said that complex tasks should be avoided. They distract our attention from one conflict while we concentrate on another; road users should have to deal with only one conflict at a time. (Todd, "Traffic Control," pp. 2–3)
The saying is well-known in almost any rural town: "They never put up a light until someone gets killed." The tragic reality is, however, that the traffic light and crosswalk does not solve the problem of the deadly intersection.
An accident risk arises whenever a vehicle gets obstructed from leaving an intersection. Consider the driver who is turning left when a pedestrian steps onto the far-side crosswalk. The driver stops for the pedestrian, as required by law, and now sits broadside across the path of vehicles from the opposite direction. Going fast in the belief that no one would get in their way, these drivers are forced to a sudden, unexpected stop. If an accident happens, the left-turner get[s] the blame, even though it was the law that created the dilemma.
To escape the dilemma, many a left-turner disregards the pedestrian's right-of-way and puts them at risk by failing to stop. At signalized intersections, where this problem is particularly severe, left turns were found to be four times as hazardous to pedestrians as right turns.
How do pedestrians get across a busy road? While side-street drivers must wait at the stop sign until it is safe to cross, the law gives the opposite instruction to the pedestrians. Their right-of-way on crosswalks encourages them to do what is forbidden to the side-street driver: get in the way of fast-moving traffic. Pedestrians who put their trust in the law are struck by drivers who are unprepared to stop, thinking that the major road was meant to let them travel without interference. Many drivers are reluctant to stop for fear of getting rear-ended. Like the green light, marked crosswalks put pedestrians at risk by giving them a false sense of security. Reliance on the law has been called the greatest traffic hazard of all. The safer people feel, the less they look out for hazards, and the less road sense they develop. (p. 3, emphasis added)
It is the green light that encourages speed. The driver, being an acting individual whose actions are governed by time preference, wants to avoid the red light because he is compelled to stop at the red light against his will, regardless of the circumstances. The result is streets that are very dangerous, if not impossible for pedestrians to cross without a crosswalk.
With the crosswalk and laws against jaywalking, the pedestrian is forced to cross the street at the most dangerous part of the road: the intersection. When drivers have their eyes on the traffic light, they are not looking out for pedestrians. "That signals did not improve pedestrian safety was known 70 years ago. As many get run down walking with the green light as get run down walking against red" (p. 4).
In addition to all the deaths and injuries that traffic lights are responsible for, they have also caused a tremendous loss of time, wealth, and efficiency. Traffic lights force the motorist to stop, and often stop short, even when it is safe to go. This, coupled with the encouragement to speed, causes massive wear and tear on the vehicle, especially on the tires and break system, resulting in breakdowns and loss of capital value that would otherwise never have happened.
Traffic lights are also the greatest cause of delay, because they force motorists to stop and wait for the light to turn green. This results in large numbers of vehicles queuing up at the intersection, finally being allowed to move at a green light, only to be caught in the very same problem at the next intersection. When drivers crossing the intersection during a green light misjudge whether or not their vehicle will fit on the other side, they get caught in the middle of the intersection. When this happens, the drivers in streets perpendicular to the trapped driver are now unable to cross, even when they have the green light. This is how congestion and major traffic jams are formed.
When one really thinks about it, it truly is Orwellian how one mindless machine can dominate and control the lives of hundreds of millions of rational human beings through willing, blind obedience.
The evidence is clear. Road signs and lights that regulate driver behavior at intersections are an abominable menace to society that must be abolished and followed by the complete deregulation of intersections. With the end of traffic control, we can see the end of dangerous roads forever. Once the state is no longer policing the roads, we will soon see an end to all the other ludicrous invasions into our private lives: drunk-driving laws, vehicle inspections and registrations, and driver's licenses.
All libertarian efforts on the national level have been a failure. Every time a corrupt regime gets voted out, an even more corrupt one get put in its place. The more heads we chop off, the more heads sprout up; the more government agencies are spawned. Yet, the Leviathan is not immortal. We simply need a new strategy. We start by chopping off its legs.
In the age of the Internet, ideas can spread like wildfire. Show Cassini's videos to everyone you know and show them that freedom really does work. We have the opportunity to strike a fatal blow to the monstrous parasite of government in the realm of ideas. People will begin to see clearly that even small local government creates nothing but death and destruction, and its elimination can bring about a new age of untold peace and prosperity. Once that happens, the state doesn't stand a chance.
We have room for but one language in this country, and that is the English language, for we intend to see that the crucible turns our people out as Americans, of American nationality, and not as dwellers in a polyglot boarding house.
— Theodore Roosevelt[1]
There are 6,909 languages alive in the world today. Seventy-four are indigenous to California alone — languages like Hupa, Kawaiisu, and Shoshone — while Papua New Guinea has over 800, with a median of just 1,200 speakers per language.
As astonishing as these figures seem, they obscure a stark reality: potentially half of these languages are set to vanish in the next century. Don't believe me? Consider that in North America, out of 296 known languages at the time of European contact, only 33 are being actively passed down to the next generation. The rest will become extinct upon the death of their last speakers (if they haven't already), probably sometime this century.[2]
Many people have no problem with this. After all, doesn't linguistic unity promote economic efficiency and cultural amity? Maybe so, but I won't address that issue here. Linguists like David Harrison (When Languages Die), Nicholas Evans (Dying Words), and Daniel Nettle and Suzanne Romaine (Vanishing Voices) have already argued the case for linguistic diversity, and I find some (not all) of their arguments to be lacking, prone to a conflation of language and cultural knowledge (see especially Harrison).[3]
But while there are good reasons for preserving languages, I'm interested in something else entirely: how language policy is a perfect example of the socialist-calculation problem. Governments necessarily adopt nonoptimal language policies. They are incentivized to violate the rights of minority language speakers and support fewer languages rather than more. In grounding the issue of language death in praxeology, it's easy to see how, to a large extent, language decline results directly from the trespasses and perverse incentives of the state, leaving the state of language diversity far worse off than it would have been otherwise.
In the same way that there are market forces and there are socialist-planning schemes for determining the value and existence of commodities in a market — and thus for eliminating commodities of little worth — there are market-driven and state-driven causes of language decline. In any economy, entrepreneurs invest and speculate based on what they expect future prices or values to be. Similarly, people learn languages in expectation of their future value, e.g., learning French for a trip to Paris; learning Chinese for the inevitable collapse of the dollar; or learning your native or local language(s) so as to communicate your basic wants in society. In this way language is a type of social capital, subject to all the same market forces (and government distortions) as any other good.
Natural Language DeathNow let's apply these market concepts to language decline. Like any good in the market, languages disappear as demand for their use declines. There are two ways this happens: the natural growth of speech communities, and crowding out by the state.
The historical growth of languages parallels the growth of human societies. At the dawn of the Agrarian Revolution, ca. 10,000 BC, speech communities were extremely small, between 500 and 1,000 people. Assuming the classic population estimate of 10 million,[4] there may have been as many as 10,000–20,000 languages in existence. With the rise of settled societies that could support larger communities, the size of speech communities grew accordingly, and the number of languages declined.[5]
This is a clear case of free-market language decline, and globalization is another. Today there are strong incentives for learning English. It provides access to lucrative markets, whether you own a tourist shop in Kenya or a multinational corporation in China. It is requisite for higher education, certain types of jobs, emigration to English-speaking countries, and it has great psychic value as a language of prestige, wealth, and media. As the number of people and media sources we interact with on a daily basis continues to increase, the number of languages in the world will steadily decrease. Just as the introduction of new production technologies allows producers to make more with less, globalization allows speakers to fulfill more of their socioeconomic needs with fewer languages. In fact, most people in America and England fulfill all those socioeconomic needs with precisely one language — English.
"Adopting a national language is essentially the nationalization of the language industry."These are not bad reasons for language shift, just as a farmer is not wrong for abandoning toil in the field in favor of a paying factory job. After all, "The right to language choice includes the right to choose against a language."[6] The difference is that the adoption of a second language doesn't require the loss of the first: "Healthy bilingualism is a state in which two languages are seen as complementary, not in competition."[7] Language is a nonscarce resource.[8]
In fact, the majority of the world is actively multilingual, speaking four or five languages, due to the fact that different languages are required for the fulfillment of different ends. In Kenya, for example, one must know a local mother tongue to fulfill social needs, a regional lingua franca (Swahili) for commercial needs, and English for media-based and educational needs. In Arnhem Land, Australia, by contrast, one must marry outside one's clan, and each clan speaks a different language.[9] So the social uses for language vary from culture to culture. Languages are a commodity, which people both value and create demand for. Like free markets, language communities are self-organizing, emergent systems, meaning we cannot predict how languages (the social capital) will be used on the market. And like any spontaneous order, language communities can be quickly disrupted by the intrusions of the state.
Globalization does not explain why, for example, there were approximately 1,500 languages spoken in South America at the time of European contact, while today there are only 350. The cause is more obviously Spanish colonialism — it's difficult for a language to survive when all its speakers are dead or enslaved.
But while many linguists happily blame colonialism for language extinction and end the story there, few appreciate an obvious fact: languages are dying today just as fast as they ever have in history. For many languages, the only remaining speakers are elderly and have but a handful of years left. Globalization does not adequately account for this fact. Nor do the colonizing, massacring tendencies of the 17th and 18th centuries explain why languages are still dying today. Our culprit, as it tends to be, is the nation-state.
Language Policy and the Socialist-Calculation ProblemEach nation must at some point address the question, "What is the optimal number of languages for the state?" The answer that states tend to give is simply "one." For a long time, states could actively pursue this goal as a part of their campaign to kill or remove any indigenous population that became a nuisance. The United States was particularly adept at this, waging a series of wars against Native Americans from the 17th through the 19th centuries, and enacting the Indian Removal Act in 1830 under Andrew Jackson.
Starting with the late 1800s and WWII, however, the killing of innocent indigenous populations by the state fell somewhat into disfavor. So once again, states faced the question of how to get to their preferred number of spoken languages. This time, schools for indigenous populations were designed in the Americas, Russia, and Africa, often with the explicit intent of assimilating the masses:
The Indian boarding schools were modeled on the pioneering efforts of General Richard Henry Pratt at his Carlisle Indian School, founded in Pennsylvania in 1878. Pratt believed the role of education was to wean the Indian from his native traditions and replace them with the "civilizing" influences of white American culture. He strongly favored the total assimilation of the American Indian into the dominant culture, and he felt that the best and most efficient way to do this was to take Indian children away from their families and culture and immerse them in the language and culture of middle-class American society.[10]
One wonders what a general was doing creating school curricula in the first place.
The impact of such policies is rarely immediate. People see children being taken from their homes and educated. What is unseen, following the tradition of Hazlitt and Bastiat, is that the destruction of a language and its enveloping culture gradually erodes the social institutions established to handle social strife and incentivize proper behavior among the general populace. Thus it is no surprise that rates of alcoholism and alcohol-related deaths on Native lands are higher than anywhere else in the country.
Also unseen is the fact that language decline does not happen overnight. It typically takes three generations: the first generation is punished for using the language in school, internalizes the idea that the language is worthless, and will not teach it to their children; although the second generation knows some of the language, they are "semilinguals," able to understand but not speak the language themselves; by the third generation, the language is effectively gone. So it is that today we are suffering the delayed effects of what was unseen in the late 19th and early 20th centuries.
"States do not cope well with diversity or decentralization."In response to this, disenfranchised minorities have recently begun to assert their linguistic rights, and the optimal-language question has become one of the hot topics of the past two decades. As Native American communities moved toward greater self-determination during the civil rights movement of the '60s and '70s, there arose a growing awareness of linguistic rights issues on both the national and international scale. In 1990 the US Congress passed the Native American Languages Act (NALA), meant to "preserve, protect, and promote the rights and freedom of Native Americans to use, practice and develop Native American languages." The Universal Declaration of Linguistic Rights, signed by UNESCO, followed in 1996. Of course, governments usually interpret these as positive rights.
Accordingly, today many states are considering adopting 2 or even 3 national languages. Some truly enlightened states have adopted even more — as many as 11 languages in South Africa (out of about 20), and 22 in India (out of 415).
We begin to see the socialist-calculation problem at work. How does the state determine the optimal number of languages to support? The answer, of course, is that it cannot. The "ideal" number of languages and the "optimal" level of linguistic diversity can only be found, if at all, through the coordination of human action in the market (i.e., the social sphere of interaction). The state, by contrast, follows a number of perverse incentives, which tend toward supporting fewer, rather than more languages.
We ought to ask two questions regarding language policy, one Misesian, one Hayekian. The Misesian question is, even if nations were incentivized to support greater linguistic diversity rather than less, how do they know this is efficient? On what criteria do they base the optimal-language decision? In contrast, Hayek would ask why nation-states are incentivized to treat fewer languages rather than more.
Of course, we have already answered the Misesian question of why it is impossible for states to set an "ideal" language policy. As we have seen, language choice is the result of a multitude of factors, including anthropological, sociological, and economic ones. Each individual takes all these factors into consideration (consciously or subconsciously) when choosing which language to learn or pass on to their kids. Moreover, the individual has a variety of feedback mechanisms for evaluating these choices, such as social pressures or economic advantages gained by knowing a certain language. The state, however, lacks both the inputs and the feedback mechanisms required to set a language policy that is adequate for each individual. These individuals, because of the various socioeconomic factors which come into play when making decisions regarding language, will place different values on each language; that is, individuals value language subjectively. The state has no way of accessing these valuations.
"Individuals value language subjectively. The state has no way of accessing these valuations."This is apparent in the way that states set language policies in real life. The state has immense difficulty adopting language policies that adequately address the sociolinguistic needs of its people. Feltman and Sherley-Appel note that "Language policies are often designed to accomplish tangible goals in the political and educational spheres; to encourage assimilation or discourage immigration; to integrate citizens of disparate backgrounds, or to restrict definitions of citizenship and confer advantage on citizens meeting certain demographic requirements."[11] The authors go on to illustrate ways in which such legislation is often counterproductive to those very ends. It is an excellent illustration of the "random and piecemeal" nature of language policy in the United States "composed of multiple trends with contradictory aims."[12] It becomes rapidly evident that national language policies are rarely based on linguistic or economic factors, but rather political ones.
The Hayekian question is, why do nation-states opt for fewer languages rather than more? Here we can say that the focus on a single language is the state's attempt to bring together the information and resources needed to run an economy. The task is made much easier when the state has only one or two factors it must consider. States do not cope well with diversity or decentralization. Here I take a page from Navajo history:
The Americans, accustomed to thinking of all Indian tribes as savage bands ruled over by a hereditary chief — a political organization not unlike that of most contemporary European states in a more simple form — would fail to recognize the fact that a treaty with a Navajo "chief," to be effective, had to be agreed upon by the entire nation much as the same treaty had to be ratified by the United States Senate. This lack of understanding of the Navajo tribal structure would eventually lead the Americans to think of the Dineh [Navajo] as the most treacherous, treaty-breaking tribe with whom the westward-expanding Americans had yet come into contact. As a result the Navajos, who looked upon the Americans as allies at first, soon found themselves faced with the most formidable foe they had ever encountered and one who would, within less than two decades [from 1840], conquer and all but destroy them.[13]
The Navajo were not one centralized tribe, but a collection of ethnically and culturally similar bands. States, however, must have a centralized point of authority to interact with, or else they cannot coordinate (thus the success of the persistent anarchist nature of Pennsylvania in warding off statist power grabs in the 1680s and '90s).[14] As such, states are highly incentivized to promote homogeneity when it comes to culture, and standardization when it comes to language.
Furthermore, the state is not highly incentivized to recognize minority languages. Running a multilingual government is a logistical nightmare (just ask India), and multilingualism is a direct affront to the ideas of national identity and standard education. Misconceived patriotism has given rise to many attempts at English-only legislation over the years, and the professed intent of the education system has always been assimilatory rather than appreciative.[15] This is, of course, the type of policy most harmful to minority languages. The exaltation of English in schools does not, as has been professed, open the gateway to well-paying jobs, but rather actively contributes to the impoverishment of those who don't speak it. As shown in Growing Up Bilingual, interrupting the learning and socialization process of one's first language and replacing it with another (at the time when an immigrant or Native American child enters school) results in a child who is neither fully socialized nor competent in either language. If instead the child is allowed to focus on their primary language for a while longer, many researchers believe that they will be far more successful in the long run. Thus even when the state actively tries to promote multiple languages, it is done in a way that hinders their continued use.
Having answered both the Misesian and Hayekian questions, it's easy to see how the socialist-calculation problem ties into language. Adopting a national language is essentially the nationalization of the language industry. Like any good in the market, the state is unable to offer the same coordinating harmony that would otherwise be present in the free market, thus resulting in an overall distortion of the market and a greater scarcity of that good.
ConclusionLinguists on the whole have been slow to catch on to the broader incentives created and adhered to by central governments, and how these have contributed to the decline in language diversity. They use capitalism and vague notions of "Western society" as ready targets while underscoring environmental connections to language. As one author states,
Policies narrowly focused on economic development defined in Western terms have narrowed people's options and are then used to justify more economic development, usually in the form of mining natural resources such as gas and oil that the rest of Canada urgently needs, as the solutions to problems that were caused by the imposition of a Western economy in the first place. … More often than not, a human and ecological wasteland is left in the wake of Western economic and resource development schemes.[16]
Passages like this make clear the lack of understanding concerning market forces, property rights, and the government's role in obstructing both. Linguist Salikoko Mufwene offers a brilliant analysis of the problem:
Can most of the indigenous languages be maintained without changing the current socio-economic world order among both the victims and those who control it? The answer to this latter question is obviously negative. The embarrassment is that language rights advocates have given little thought to the revolution that is entailed by their discourse. They have provided no answer to the implicit question of what alternative socio-economic world order must be recommended to the victims to meet their new material and spiritual aspirations, which depend in part on languages of the workforce.[17]
In other words, language activists correctly identify the symptoms but not the causes. Yet the causes are simple to understand. There are natural, market forces that lead to language shift, and there are coercive, state-driven ones. Austrolibertarians already know what that alternative socioeconomic world looks like. Were it not for the state's incessant need to homogenize and its inability to cope with diversity, the languages of the world would not be in the dire situation they are today.
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Notes[1] Roosevelt, Theodore, Works (Memorial ed., 1926), vol. XXIV, p. 554 (New York: Charles Scribner's Sons).
[2] The preceding statistics are hotly contested. Linguists have leveled heavy criticism at the Ethnologue in particular for being either out of date or imprecise concerning distinctions between language and dialect. However, few linguists deny that we are experiencing a loss in linguistic diversity. The praxeological reasons why languages are disappearing obviate the need for any particular set of statistics, as we will see.
[3] Mufwene offers a fuller critique along these same lines. His paper carefully disentangles the many arguments in favor of linguistic diversity, and is well worth a read.
[4] Lee, R. B. and I. DeVore (eds). 1968. Man the Hunter. Chicago: Aldine.
[5] The situation is actually more complicated than this. Some linguists posit that there were as few as 3,000 languages at the dawn of the Neolithic. The adoption of farming resulted in a population boom in which the number of languages actually increased due to the drastic increase in the number of communities. However, because the size of speech communities was also growing during the Agrarian Revolution, the ratio of languages to people would have been decreasing, even as the number of languages increased.
[6] Hinton, Leanne. 2002. Commentary: Internal and External Advocacy. Journal of Linguistic Anthropology. Vol. 12, No. 2, pp. 150–156.
[7] Crystal, David. 2000. Language Death. Cambridge: Cambridge University Press, p. 81.
[8] In fact, many people draw parallels between language and intellectual property for this reason. It should come as no surprise that several Native American groups have actively tried to copyright their language so as to prevent outsiders from learning it.
[9] Evans, Nicholas. Dying Words: Endangered Languages and What They Have To Tell Us. Malden, MA: Wiley-Blackwell, p. 8.
[10] House, Deborah. 2002. Language Shift Among the Navajos: Identity Politics and Cultural Continuity. Tucson, AZ: University of Arizona Press.
[11] Feltman, Rachel and Clara Sherley-Appel. "Lawmakers and Language Policy for Immigrants." Language of Law: Pulling Together Different Strands. Seconda Università degli Studi di Napoli. Santa Maria Capua Vetere, Italy. 18 June.
[12] Hinton, Leanne. 2004. The Death and Rebirth of Native American Languages. Endangered Languages and Linguistic Rights: On the Margins of Nations. Proceedings of the Eighth FEL Conference. Barcelona: Foundation for Endangered Languages, p. 20.
[13] Locke, Raymond Friday. The Book of the Navajo. Los Angeles: Mankind Publishing, p. 200.
[14] Rothbard, Murray N. "'The Holy Experiment': The Founding of Pennsylvania, 1681–1990," Ch. 55 in Conceived in Liberty, Vol. I: A New Land, A New People: The American Colonies in The Seventeenth Century. Auburn, Alabama: Mises Institute.
[15] Marlow, Patrick E. "Bilingual Education, Legislative Intent, and Language Maintenance in Alaska." Endangered Languages and Linguistics Rights: On the Margins of Nations. Proceedings of the Eighth FEL Conference. Barcelona: Foundation for Endangered Languages, pp. 25–30.
[16] Romaine, Suzanne. 2008. "Linguistic Diversity, Sustainability, and Future of the Past" in Sustaining Linguistic Diversity: Endangered and Minority Languages and Language Varieties. Washington, DC: Georgetown University Press, p. 18.
[17] Mufwene, Salikoko S. 2005. "Globalization and the myth of killer languages." In Perspectives on Endangerment, ed. by Graham Huggan & Stephan Klasen, pp. 19-48. Hildesheim/New Yrok: Georg Olms Verlag.
- The Theory and the Data Catallactics, the theory of the market economy, is not a system of theorems valid only under ideal and unrealizable conditions and applicable to reality merely with essential restrictions and modifications. All the theorems of catallactics are rigidly and without any exception valid for all phenomena of the market economy, provided the particular conditions that they presuppose are present. It is, for instance, a simple question of fact whether there is direct or indirect exchange. But where there is indirect exchange, all the general laws of the theory of indirect exchange are valid with regard to the acts of exchange and the media of exchange. As has been pointed out, praxeological knowledge is precise or exact knowledge of reality.See above, p. 39.
All references to the epistemological issues of the natural sciences and all analogies derived from comparing these two radically different realms of reality and cognition are misleading. There is, apart from formal logic, no such thing as a set of "methodological" rules applicable both to cognition by means of the category of causality and to that by means of the category of finality.
Praxeology deals with human action as such in a general and universal way. It deals neither with the particular conditions of the environment in which man acts nor with the concrete content of the valuations that direct his actions. For praxeology, data are the bodily and psychological features of the acting men, their desires and value judgments, and the theories, doctrines, and ideologies they develop in order to adjust themselves purposively to the conditions of their environment and thus to attain the ends they are aiming at. These data, although permanent in their structure and strictly determined by the laws controlling the order of the universe, are perpetually fluctuating and varying; they change from instant to instant.Cf. Strigl, Die ökonomischen Kategorien und die Organisation der Wirtschaft (Jena, 1923), pp. 18 ff.
The fullness of reality can be mentally mastered only by a mind resorting both to the conception of praxeology and to the understanding of history; and the latter requires command of the teachings of the natural sciences. Cognition and prediction are provided by the totality of knowledge. What the various single branches of science offer is always fragmentary; it must be complemented by the results of all the other branches. From the point of view of acting man, the specialization of knowledge and its breaking up into the various sciences is merely a device of the division of labor. In the same way in which the consumer utilizes the products of various branches of production, the actor must base his decisions on knowledge brought about by various branches of thought and investigation.
It is not permissible to disregard any of these branches in dealing with reality. The Historical School and the Institutionalists want to outlaw the study of praxeology and economics and to occupy themselves merely with the registration of the data or, as they call them nowadays, the institutions. But no statement concerning these data can be made without reference to a definite set of economic theorems. When an institutionalist ascribes a definite event to a definite cause, e.g., mass unemployment to the alleged deficiencies of the capitalist mode of production, he resorts to an economic theorem. In objecting to the closer examination of the theorem tacitly implied in his conclusions, he merely wants to avoid the exposure of the fallacies of his argument.
There is no such thing as a mere recording of unadulterated facts apart from any reference to theories. As soon as two events are recorded together or integrated into a class of events, a theory is operative. The question whether there is any connection between them can only be answered by a theory, i.e., in the case of human action by praxeology. It is vain to search for coefficients of correlation if one does not start from a theoretical insight acquired beforehand. The coefficient may have a high numerical value without indicating any significant and relevant connection between the two groups.Cf. Cohen and Nagel, An Introduction to Logic and Scientific Method (New York, 1939), pp. 316–322.
- The Role of Power The Historical School and Institutionalism condemn economics for disregarding the role that power plays in real life. The basic notion of economics, viz., the choosing and acting individual, is, they say, an unrealistic concept. Real man is not free to choose and to act. He is subject to social pressure, to the sway of irresistible power. It is not the individuals' value judgments but the interactions of the forces of power that determine the market phenomena.
These objections are no less spurious than all other statements of the critics of economics.
Praxeology in general and economics and catallactics in particular do not contend or assume that man is free in any metaphysical sense attached to the term "freedom." Man is unconditionally subject to the natural conditions of his environment. In acting he must adjust himself to the inexorable regularity of natural phenomena. It is precisely the scarcity of the nature-given conditions of his welfare that enjoins upon man the necessity to act.Most social reformers, foremost among them Fourier and Marx, pass over in silence the fact that the nature-given means of removing human uneasiness are scarce. As they see it, the fact that there is not an abundance of all useful things is merely caused by the inadequacy of the capitalist mode of production and will therefore disappear in the "higher phase" of communism. An eminent Menshevik author who could not help referring to the nature-given barriers to human well-being, in genuinely Marxian style, calls Nature "the most relentless exploiter." Cf. Mania Gordon, Workers Before and After Lenin (New York, 1941), pp. 227, 458.
"Praxeology in general and economics and catallactics in particular do not contend or assume that man is free in any metaphysical sense attached to the term 'freedom'." In acting, man is directed by ideologies. He chooses ends and means under the influence of ideologies. The might of an ideology is either direct or indirect. It is direct when the actor is convinced that the content of the ideology is correct and that he serves his own interests directly in complying with it. It is indirect when the actor rejects the content of the ideology as false, but is under the necessity of adjusting his actions to the fact that this ideology is endorsed by other people. The mores of their social environment are a power that people are forced to consider. Those recognizing the spuriousness of the generally accepted opinions and habits must in each instance choose between the advantages to be derived from resorting to a more efficient mode of acting and the disadvantages resulting from the contempt of popular prejudices, superstitions, and folkways. The same is true with regard to violence. In choosing, man must take into account the fact that there is a factor ready to exercise violent compulsion upon him.
All the theorems of catallactics are valid also with regard to actions influenced by such social or physical pressure. The direct or indirect might of an ideology and the threat of physical compulsion are merely data of the market situation. It does not matter, for instance, what kind of considerations motivate a man not to offer a higher bid for the purchase of a commodity than the one he really makes without obtaining the good concerned. For the determination of the market price it is immaterial whether he spontaneously prefers to spend his money for other purposes or whether he is afraid of being looked upon by his fellow men as an upstart, or as a spendthrift, afraid of violating a government-decreed ceiling price or of defying a competitor ready to resort to violent revenge. In any case his abstention from bidding a higher price contributes to the same extent to the emergence of the market price.The economic consequences of the interference of external compulsion and coercion with the market phenomena are dealt with in the sixth part of this book,
It is customary nowadays to signify the position the owners of property occupy on the market as economic power. The expediency of this terminology is questionable. The term is at any rate inappropriate as far as it is intended to imply that under the impact of economic power the determination of the market phenomena is controlled by laws other than those dealt with by catallactics.
- The Historical Role of War and Conquest Many authors glorify war and revolution, bloodshed and conquest. Carlyle and Ruskin, Nietzsche, Georges Sorel, and Spengler were harbingers of the ideas that Lenin and Stalin, Hitler and Mussolini put into effect.
The course of history, say these philosophies, is not determined by the mean activities of materialistic peddlers and merchants, but by the heroic deeds of warriors and conquerors. The economists err in abstracting from the experience of the short-lived liberal episode a theory to which they ascribe universal validity. This epoch of liberalism, individualism, and capitalism; of democracy, tolerance, and freedom; of the disregard of all "true" and "eternal" values; and of the supremacy of the rabble is now vanishing and will never return. The dawning age of manliness requires a new theory of human action.
However, no economist ever ventured to deny that war and conquest were of utmost importance in the past and that Huns and Tartars, Vandals and Vikings, Normans and conquistadors played an enormous part in history. One of the determinants of the present state of mankind is the fact that there were thousands of years of armed conflicts. Yet, what remains and is the essence of human civilization, is not the legacy inherited from the warriors. Civilization is an achievement of the "bourgeois" spirit, not of the spirit of conquest. Those barbarian peoples who did not substitute working for plundering disappeared from the historical scene. If there is still any trace left of their existence, it is in the achievements they accomplished under the influence of the civilization of the subdued peoples. Latin civilization survived in Italy, France, and the Iberian peninsula in defiance of all barbarian invasions. If capitalist entrepreneurs had not succeeded Lord Clive and Warren Hastings, British rule in India might one day become such an insignificant historical reminiscence as are the one hundred and fifty years of Turkish rule in Hungary.
It is not the task of economics to enter into an examination of the endeavors to revive the ideals of the Vikings. It has merely to refute the statements that the fact that there are armed conflicts reduces its teachings to naught. With regard to this problem there is need to emphasize again the following:
"One of the determinants of the present state of mankind is the fact that there were thousands of years of armed conflicts. Yet, what remains and is the essence of human civilization, is not the legacy inherited from the warriors. Civilization is an achievement of the "bourgeois" spirit, not of the spirit of conquest." The teachings of catallactics do not refer to a definite epoch of history, but to all actions characterized by the two conditions private ownership of the means of production and division of labor. Whenever and wherever, in a society in which there is private ownership of the means of production, people not only produce for the direct satisfaction of their own wants but also consume goods produced by other people, the theorems of catallactics are strictly valid.
If, apart from the market and outside of the market, there is robbing and plundering, these facts are a datum for the market. The actors must take into account the fact that they are threatened by murderers and robbers. If killing and robbing become so prevalent that any production appears useless, it may finally happen that productive work ceases and mankind plunges into a state of war of every man against every other man.
In order to seize booty, something to be plundered must be available. The heroes can only live if there are enough "bourgeois" to be expropriated. The existence of producers is a condition for the survival of conquerors. But the producers could do without the plunderers.
There are, of course, other imaginable systems of a society based on the division of labor besides the capitalist system of private ownership of the means of production. Champions of militarism are consistent in asking for the establishment of socialism. The whole nation should be organized as a community of warriors in which the noncombatants have no other task than that of supplying the fighting forces with all they need. (The problems of socialism are dealt with in the fifth part of this book.)
- Real Man as a Datum Economics deals with the real actions of real men. Its theorems refer neither to ideal nor to perfect men, neither to the phantom of a fabulous economic man (homo œconomicus) nor to the statistical notion of an average man (homme moyen). Man with all his weaknesses and limitations, every man as he lives and acts, is the subject matter of catallactics. Every human action is a theme of praxeology.
The subject matter of praxeology is not only the study of society, societal relations, and mass phenomena, but the study of all human actions. The term "the social sciences" and all its connotations are in this regard misleading.
There is no yardstick that a scientific investigation can apply to human action other than that of the ultimate goals the acting individual wants to realize in embarking upon a definite action. The ultimate goals themselves are beyond and above any criticism. Nobody is called upon to establish what could make another man happy. What an unaffected observer can question is merely whether or not the means chosen for the attainment of these ultimate goals are fit to bring about the results sought by the actor. Only in answering this question is economics free to express an opinion about the actions of individuals and groups of individuals, or of the policies of parties, pressure groups, and governments.
It is customary to disguise the arbitrariness of the attacks launched against the value judgments of other people by converting them into a critique of the capitalist system or of the conduct of entrepreneurs. Economics is neutral with regard to all such statements.
To the arbitrary statement that "the balance between the production of different goods is admittedly faulty under capitalism,"Cf. Albert L. Meyers, Modern Economics (New York, 1946), p. 672. the economist does not oppose the statement that this balance is faultless. What the economist asserts is that in the unhampered market economy this balance is in agreement with the conduct of the consumers as displayed in the spending of their incomes.This is the general feature of democracy whether political or economic. Democratic elections do not provide the guarantee that the man elected is free from faults, but merely that the majority of the voters prefer him to other candidates. It is not the task of the economist to censure his fellow men and to call the result of their actions faulty.
The alternative to the system in which the individual's value judgments are paramount in the conduct of production processes is autocratic dictatorship. Then the value judgments of the dictators alone decide although they are not less arbitrary than those of other people.
Man is certainly not a perfect being. His human weakness taints all human institutions and thus also the market economy.
This article is excerpted from chapter 23 of Human Action: The Scholar's Edition.
Critics condemn economic theory for disregarding the role that power plays in real life. Real man, they say, is not free to choose and to act: it is not his value judgments but the forces of power that determine market phenomena. These objections are no less spurious than all other statements of the critics of economics, writes Ludwig von Mises (1881–1973).
This audio Mises Daily is narrated by Jeff Riggenbach.
[Excerpted from The Economics and Ethics of Private Property.]
I will first state this general theory of property as a set of rulings applicable to all goods, with the goal of helping to avoid all possible conflicts by means of uniform principles, and I will then demonstrate how this general theory is implied in the nonaggression principle. According to the nonaggression principle, a person can do with his body whatever he wants as long as he does not thereby aggress against another person's body. Thus, that person could also make use of other scarce means, just as one makes use of one's own body, provided these other things have not already been appropriated by someone else but are still in a natural unowned state. As soon as scarce resources are visibly appropriated — as soon as somebody "mixes his labor" with them, as John Locke phrased it,John Locke, To Treatises on Government, ed. Peter Laslett (Cambridge: Cambridge University Press, 1970), esp. vols. II, V. and there are objective traces of this — then property (the right of exclusive control), can only be acquired by a contractual transfer of property titles from a previous to a later owner, and any attempt to unilaterally delimit this exclusive control of previous owners or any unsolicited transformation of the physical characteristics of the scarce means in question is, in strict analogy with aggressions against other people's bodies, an unjustifiable action.On the nonaggression principle and the principle of original appropriation see also Rothbard, For A New Liberty, chap. 2; idem, The Ethics of Liberty, chaps. 6–8.
The compatibility of this principle with that of nonaggression can be demonstrated by means of an argumentum a contrario. First, it should be noted that if no one had the right to acquire and control anything except his own body (a rule that would pass the formal universalization test), then we would all cease to exist, and the problem of the justification of normative statements simply would not exist. The existence of this problem is only possible because we are alive, and our existence is due to the fact that we do not, indeed cannot, accept a norm outlawing property in other scarce goods next to and in addition to that of one's physical body. Hence, the right to acquire such goods must be assumed to exist. Now, if this is so, and if one does not have the right to acquire such rights of exclusive control over unused, nature-given things through one's own work (by doing something with things with which no one else has ever done anything before), and if other people have the right to disregard one's ownership claim to things which they did not work on or put to some particular use before, then this is only possible if one can acquire property titles not through labor (i.e., by establishing some objective, intersubjectively controllable link between a particular person and a particular scarce resource), but simply by verbal declaration, by decree.This is the position taken by Jean-Jacques Rousseau, when he asks us to resist attempts to privately appropriate nature-given resources by, for example, fencing them in. He says in his famous dictum; "Beware of listening to this impostor, you are undone if you once forget that the fruits of the earth belong to us all, and the earth itself to nobody" ("Discourse upon the Origin and Foundation of Inequality Among Mankind," in Jean-Jacques Rousseau, The Social Contract and Discourses, ed. G.D.H. Cole [New York: 1950], p. 235). However, to argue so is only possible if it is assumed that property claims can be justified by decree. How else could "all" (even those who never did anything with the resources in question) or "nobody" (not even those who made use of it) own something unless property claims were founded by mere decree? However, the position of property titles being acquired through declaration is incompatible with the above-justified nonaggression principle regarding bodies. For one thing, if one could indeed appropriate property by decree, this would imply that it would also be possible for one to simply declare another person's body to be one's own. Clearly enough, this would conflict with the ruling of the nonaggression principle, which makes a sharp distinction between one's own body and the body of another person. Furthermore, this distinction can only be made in such a clear-cut and unambiguous way because for bodies, as for anything else, the separation between "mine and yours" is not based on verbal declarations, but on action. The observation is based on some particular scarce resource that had in fact — for everyone to see and verify because objective indicators for this existed — been made an expression or materialization of one's own will or, as the case may be, of somebody else's will. More importantly, to say that property could be acquired not through action but through a declaration would involve an obvious practical contradiction, because nobody could say and declare so unless his right of exclusive control over his body as his own instrument of saying anything was in fact already presupposed, in spite of what was actually said.
As I intimated earlier, this defense of private property is essentially also Murray Rothbard's. In spite of his formal allegiance to the natural-rights tradition, Rothbard, in what I consider his most crucial argument in defense of a private-property ethic, not only chooses essentially the same starting point — argumentation — but also gives a justification by means of a priori reasoning almost identical to the one just developed. To prove the point I can do no better than simply quote:
Now, any person participating in any sort of discussion, including one on values, is, by virtue of so participating, alive and affirming life. For if he were really opposed to life, he would have no business continuing to be alive. Hence, the supposed opponent of life is really affirming it in the very process of discussion, and hence the preservation and furtherance of one's life takes on the stature of an incontestable axiom.Rothbard, The Ethics of Liberty, p. 32; on the method of a priori reasoning employed in the above argument see also, idem, Individualism and the Philosophy of the Social Sciences (San Francisco: Cato Institute, 1979); Hans-Hermann Hoppe, Kritik der kausalwissenschaftlichen sozialforschung. Untersuchungen zur Grundlegung von Soziologie und Ökonomie (Opladen: Westdeutscher Verlag 1983); idem, "Is Research Based on Causal Scientific Principles Possible in the Social Sciences? Ratio (1983); supra chap. 7; idem, A Theory of Socialism and Capitalism, chap. 6.
So far it has been demonstrated that the right of original appropriation through actions is compatible with and implied by the nonaggression principle as the logically necessary presupposition of argumentation. Indirectly, of course, it has also been demonstrated that any rule specifying different rights cannot be justified. Before entering a more detailed analysis, though, of why it is that any alternative ethic is indefensible, a discussion which should throw some additional light on the importance of some of the stipulations of the libertarian theory of property — a few remarks about what is and what is not implied by classifying these latter norms as justified is in order. In making this argument, one would not have to claim to have derived an "ought" from an "is." In fact, one can readily subscribe to the almost generally accepted view that the gulf between "ought" and "is" is logically unbridgeable.On the problem of deriving "ought" from "is" see W.D. Hudson, ed., The Is-Ought Question (London: Macmillan 1969). Rather, classifying the rulings of the libertarian theory of property in this way is a purely cognitive matter. It no more follows from the classification of the libertarian ethic as "fair" or "just" that one ought to act according to it, than it follows from the concept of validity or truth that one should always strive for it. To say that it is just also does not preclude the possibility of people proposing or even enforcing rules that are incompatible with this principle. As a matter of fact, the situation with respect to norms is very similar to that in other disciplines of scientific inquiry. The fact, for instance, that certain empirical statements are justified or justifiable and others are not does not imply that everybody only defends objective, valid statements. On the contrary, people can be wrong, even intentionally. But the distinction between objective and subjective, between true and false, does not lose any of its significance because of this. Instead, people who would do so would have to be classified as either uninformed or intentionally lying. The case is similar with respect to norms. Of course there are people, lots of them, who do not propagate or enforce norms that can be classified as valid according to the meaning of justification I have given above. However, the distinction between justifiable and nonjustifiable norms does not dissolve because of this, just as that between objective and subjective statement does not crumble because of the existence of uninformed or lying people.
Rather, and accordingly, those people who would propagate and enforce such different, invalid norms would again have to be classified as uninformed or dishonest, insofar as one had made it clear to them that their alternative norm proposals or enforcements cannot and never will be justifiable in argumentation. There would be even more justification for doing so in the moral case than in the empirical one, since the validity of the nonaggression principle and that of the principle of original appropriation through action as its logically necessary corollary must be considered to be even more basic than any kind of valid or true statements. For what is valid or true has to be defined as that upon which everyone — acting according to this principle — can possibly agree. As I have just shown, at least the implicit acceptance of these rules is the necessary prerequisite to being able to be alive and argue at all.
Why is it then that other nonlibertarian property theories fail to be justifiable? First, it should be noted, as will become clear shortly, that all of the practiced alternatives to libertarianism and most of the theoretically proposed nonlibertarian ethics would not even pass the first formal universalization test and would fail for this fact alone! All these versions contain norms within their framework of legal rules that have the form, "some people do, and some people do not." However, such rules that specify different rights or obligations for different classes of people have no chance of being accepted as fair by every potential participant in an argument for simply formal reasons. Unless the distinction made between different classes of people happens to be such that it is acceptable to both sides as grounded in the nature of things, such rules would not be acceptable because they would imply that one group is awarded legal privileges at the expense of complementary discriminations against another group. Some people, either those who are allowed to do something or those who are not, would not be able to agree that these were fair rules.See Rothbard, The Ethics of Liberty, p. 45. Since most alternative ethical proposals, as practiced or preached, have to rely on the enforcement of rules such as "some people have the obligation to pay taxes, and others have the right to consume them," or "some people know what is good for you and are allowed to help you get these alleged blessings even if you do not want them, but you are not allowed to know what is good for them and help them accordingly," or "some people have the right to determine who has too much of something and who too little, and others have the obligation to accept that," or even more plainly, "the computer industry must pay to subsidize the farmers, the employed for the unemployed, the ones without kids for those with kids," or vice versa. They all can be discarded as serious contenders to the claim of being a valid theory of norms qua property norm, because they all indicate by their very formulation that they are not universalizable. What is wrong with a nonlibertarian ethic if this is resolved and there is indeed a theory formulated that contains exclusively universalizable norms of the type "nobody is allowed to" or "everybody can"? Even then the validity of such proposals could never hope to be proven — not because of formal reasons but because of their material specifications. Indeed, while the alternatives that can be refuted easily as regards their claim to moral validity on simple formal grounds can at least be practiced, the application of those more sophisticated versions that would pass the universalization test would prove for material reasons to be fatal: even if one tried to, they simply could never be implemented.
There are two related specifications in the libertarian property theory with at least one of which any alternative theory comes into conflict. According to the libertarian ethic, the first such specification is that aggression is defined as an invasion of the physical integrity of other people's property.On the importance of the definition of aggression as physical aggression see also Rothbard, ibid., chaps. 8–9; idem, "Law, Property Rights and Air Pollution," Cato Journal (Spring, 1982).Download PDF There are popular attempts to define it as an invasion of the value or psychic integrity of other people's property. Conservatism, for instance, aims at preserving a given distribution of wealth and values and attempts to bring those forces that could change the status quo under control by means of price controls, regulations, and behavioral controls. Clearly, in order to do so, property rights to the value of things must be assumed to be justifiable, and an invasion of values, mutatis mutandis, would have to be classified as unjustifiable aggression. Not only does conservatism use this idea of property and aggression; redistributive socialism does too. Property rights to values must be assumed to be legitimate when redistributive socialism allows me, for instance, to demand compensation from people whose chances or opportunities negatively affect mine. The same is true when compensation for committing psychological, or "structural violence" is requested.On the idea of structural violence as distinct from physical violence see Dieter Senghass, ed., Imperialismus und strukturelle Gewalt (Frankfurt/M.: Suhrkamp, 1972). The idea of defining aggression as an invasion of property values also underlies both the theories of justice of John Rawls and Robert Nozick, however different these two authors may have appeared to be to many commentators. For how could Rawls think of his so-called difference-principle (“Social and economic inequalities are to be arranged so that they are reasonably expected to be to everyone’s—including the least advantaged ones—advantage or benefit,” John Rawls, A Theory of Justice [Cambridge, Mass.: Harvard University Press 1971], pp. 60–83, 75ff.), as justified unless he believes that simply by increasing his relative wealth a more fortunate person commits an aggression, and a less fortunate one then has a valid claim against the more fortunate person only because the former’s relative position in terms of value has deteriorated?! And how could Robert Nozick claim it to be justified for a “dominant protection agency” to outlaw competitors, regardless of what their actions would have been like? (Robert Nozick, Anarchy, State, and Utopia [New York: Basic Books, 1974], pp. 55f.) Or how could he believe it to be morally correct to outlaw so-called nonproductive exchanges, i.e., exchanges where one party would be better off if the other one did not exist at all or at least had nothing to do with it (as, for instance, in the case of a blackmailee and a blackmailer), regardless of whether or not such an exchange involved physical invasion of any kind (ibid., pp. 83–86) unless he thought that the right to have the integrity of one’s property values (rather than its physical integrity) preserved existed? For a devastating critique of Nozick’s theory in particular see Rothbard, The Ethics of Liberty, chap. 29; on the fallacious use of the indifference curve analysis, employed both by Rawls and Nozick, idem, Toward a Reconstruction of Utility and Welfare Economics (New York: Center for Libertarian Studies, Occasional Paper Series, No. 3, 1977). In order to be able to ask for such compensation, what one must have done, namely affect my opportunities, my psychic integrity, or my feeling of what is owed to me, would have to be classified as an aggressive act.
Why is this idea of protecting the value of property unjustifiable? First, while every person, at least in principle, can have full control over whether or not his actions cause the physical characteristics of something to change and hence can also have full control over whether or not those actions are justifiable, control over whether or not one's actions affect the value of somebody else's property does not rest with the acting person but rather with other people and their subjective evaluations. Thus, no one could determine ex ante if his actions would be qualified as justifiable or unjustifiable. One would first have to interrogate the whole population to make sure that one's planned actions would not change another person's evaluations regarding his own property. Even then, nobody could act until universal agreement was reached on who is supposed to do what with what, and at which point in time. Clearly, because of all the practical problems involved, everyone would be long dead and nobody could argue any longer, well before agreement could be reached.See also Rothbard, The Ethics of Liberty, p. 46. Even more decisively, this position regarding property and aggression could not even be effectively argued because arguing in favor of any norm implies that there is conflict over the use of some scarce resources; otherwise there would simply be no need for discussion. However, in order to argue that there is a way out of such conflicts it must be presupposed that actions must be allowed prior to any actual agreement or disagreement because if they were not, one could not even argue so. Yet if one can do this (and, insofar as it exists as an argued intellectual position, the position under scrutiny must assume that one can), then this is only possible because of the existence of objective borders of property — borders which anyone can recognize as such on his own without having to agree first with anyone else with respect to his system of values and evaluations. Such a value-protecting ethic, too, in spite of what it says, must in fact presuppose the existence of objective property borders rather than of borders determined by subjective evaluations, if only in order to have any surviving persons who can make its moral proposals.
The idea of protecting value instead of physical integrity also fails for a second related reason. Evidently, one's value, for example on the labor or marriage market, can be and indeed is affected by other people's physical integrity or degree of physical integrity. Thus, if one wanted property values to be protected, one would have to allow physical aggression against people.
However, it is only because of the very fact that a person's borders — that is the borders of a person's property in his own body as his domain of exclusive control, which another person is not allowed to cross unless he wishes to become an aggressor — are physical borders (intersubjectively ascertainable, and not just subjectively fancied borders) that everyone can agree on anything independently (and agreement means agreement among independent decision-making units!). Only because the protected borders of property are objective (i.e., fixed and recognizable as fixed prior to any conventional agreement), can there be argumentation and possibly agreement of and between independent decision-making units. Nobody could argue in favor of a property system defining borders of property in subjective, evaluative terms because simply to be able to say so presupposes that, contrary to what theory says, one must in fact be a physically independent unit saying it.
The situation is no less dire for alternative ethical proposals when one turns to the second essential specification of the rulings of the libertarian theory of property. The basic norms of libertarianism are characterized not only by the fact that property and aggression are defined in physical terms; it is of no less importance that property is defined as private, individualized property, and that the meaning of original appropriation, which evidently implies making a distinction between prior and later, has been specified. It is with this additional specification as well that alternative, nonlibertarian ethics come into conflict. Instead of recognizing the vital importance of the prior-later distinction in deciding between conflicting property claims, they propose norms which in effect state that priority is irrelevant for making such a decision and that late-comers have as much of a right to ownership as first-comers. Clearly, this idea is involved when redistributive socialism makes the natural owners of wealth and/or their heirs pay a tax so that the unfortunate late-comers can participate in its consumption. It is also involved when the owner of a natural resource is forced to reduce (or increase) its present exploitation in the interest of posterity. Both times it only makes sense to do what one does when it is assumed that the person accumulating wealth first, or using the natural resource first, has thereby committed an aggression against some late-comers. If they had done nothing wrong, then the late-comers should have no such claim against them.For an awkward philosophical attempt to justify a late-comer ethic see James P. Sterba, The Demands of Justice(Notre Dame, Ind.: Notre Dame University Press, 1980), esp. pp. 58ff., 137ff.; on the absurdity of such an ethic see Rothbard, Man, Economy, and State, p. 427.
What is wrong with this idea of dropping the prior-later distinction as morally irrelevant? First, if the late-comers (those who did not do something with some scarce goods), indeed had as much of a right to them as the first-comers (those who did do something with the scarce goods), then nobody would ever be allowed to do anything with anything, as one would have to have all of the late-comers' consent prior to doing what one wanted to do. Indeed, as posterity would include one's children's children — people who come so late that one could not possibly ask them — to advocate a legal system that does not make use of the prior-later distinction as part of its underlying property theory is simply absurd, because it implies advocating death but must presuppose life to advocate anything. Neither we, nor our forefathers, nor our progeny could, do, or will survive and say or argue anything if one followed this rule. In order for any person — past, present or future — to argue anything it must be possible to survive now. Nobody can wait and suspend acting until everyone of an indeterminate class of late-comers happens to come around and agree to what one wants to do. Rather, insofar as a person finds himself alone, he must be able to act, to use, to produce, and to consume goods straightaway, prior to any agreement with people who are simply not around (and perhaps never will be). Insofar as a person finds himself in the company of others and there is conflict over how to use a given scarce resource, he must be able to resolve the problem at a definite point in time with a definite number of people instead of having to wait unspecified periods of time for unspecified numbers of people. Simply in order to survive, then, which is a prerequisite to arguing in favor or against anything, property rights cannot be conceived of as being timeless and nonspecific regarding the number of people concerned. Rather, they must be thought of as originating through acting at definite points in time for definite acting individuals.It should be noted here that only if property rights are conceptualized as private-property rights originating in time does it then become possible to make contracts. Clearly enough, contracts are agreements between enumerable physically independent units which are based on the mutual recognition of each contractor's private ownership claims to things acquired prior in time to the agreement and which then concern the transfer of property titles to definite things from a definite prior to a definite later owner. No such thing as contracts could conceivably exist in the framework of a late-comer ethic!
Furthermore, the idea of abandoning the prior-later distinction would simply be incompatible with the nonaggression principle as the practical foundation of argumentation. To argue and possibly agree with someone (if only on the fact that there is disagreement) means to recognize the prior right of exclusive control over one's own body. Otherwise, it would be impossible for anybody to say anything at a definite point in time and for someone else to be able to reply, for neither the first nor the second speaker would be a physically independent decision-making unit anymore at any time. Eliminating the prior-later distinction, then, is tantamount to eliminating the possibility of arguing and reaching agreement. However, as one cannot argue that there is no possibility for discussion without the prior control of every person over his own body being recognized and accepted as fair, a late-comer ethic that does not make this distinction could never be agreed upon by anyone. Simply saying that it could be would imply a contradiction, for one's being able to say so would presuppose one's existence for an independent decision-making unit at a definite point in time.
Hence, one is forced to conclude that the libertarian ethic not only can be justified and justified by means of a priori reasoning, but that no alternative ethic can be defended argumentatively.
Excerpted from The Economics and Ethics of Private Property.
Unlike most black markets, the black market for information is characterized by peace and stability. There is a near-perfect harmony between the supply and the demand for movies, music, songs, and other digital content that falls under the control of intellectual-property legislation.
In the market for information, we do not see the kinds of conflicts that are rampant in other black markets. There are no turf wars between gangs for the right to offer the latest pop hit or blockbuster movie; there are no robberies committed by would-be users who need the money to get their fix. The vast majority of copyright violators go about their business without harming anyone.
In fact, those who upload, host, and share illegal content are not in any significant danger at all. What sets the black market in information apart from other black markets? Why is it nonviolent?
TechnologyPerhaps the most easily recognizable reason why we do not see violence associated with sharing illegal content has to do with technology. Let's briefly examine the most common method for downloading illegal content: BitTorrent. BitTorrent works, not by hosting the vast amounts of downloadable content in a single place, but merely by connecting users with the thousands of others who are sharing the file.
Searching for desired content takes only a few moments. There are numerous websites that host torrent files, including many that can boast high community standards of quality and security.
Because the torrent files are themselves very small, users download them instantaneously. How quickly the content is obtained is a function of how many "seeders" there are to share the file(s), as well as the speed of the user's internet connection. Combine a popular (and therefore well-seeded) file with good bandwidth, and it takes a user only seconds to acquire a song, and only minutes to acquire an entire film.
In other words, the black market for information is generally efficient, anonymous, convenient, and safe. The costs to the user are negligible: Bandwidth and hard drive space are cheap and plentiful. BitTorent websites, and the content they make available, are free to access. Labor is but a few clicks and keystrokes, and — as was mentioned above — it hardly takes any time.
Determining the quality of the digital product is usually a trivial afterthought, especially for that content in greatest demand. The community at large serves as a guard against broken files or malware, with certain torrent communities offering layers of security by restricting membership or verifying content before it is offered to the public. Products in other black markets, in contrast, are notoriously inconsistent with respect to their quality — with many such products posing serious health risks.For an excellent discussion on the effect criminalization has on the quality of goods, see Mark Thornton, The Economics of Prohibition (Auburn: Ludwig von Mises Institute, 2007). Checking for quality is itself an inconvenient or even dangerous task, since the mere possession of the good is a crime and users must keep their consumption a secret.
Another important feature of the black market in digital content is its flat hierarchy. Most black markets are characterized by the importance placed on power and rank. These hierarchies distort by exaggeration the importance — and profits — of suppliers and well-positioned middlemen, while those lower in rank suffer most of the hardships for far less pay. Money flows "up" the chain of command to those with the most power, while the grittier aspects of the business flow "down" to those on the streets: dealers, users, money collectors, and the like.
Those dealing with illegal information need not hazard the same power games. The Internet provides the means to move the data around relatively anonymously, and few distinctions are made among users so long as they are part of the system and contribute to the community by their activity. Torrents work in part because of this homogeneity, by making suppliers and consumers peers. For any given file, you could be uploading to or downloading from anyone. In most cases, the user uploads the file to others while he is still in the process of downloading it.
"The purpose of the market is to make useful things relatively less scarce. With information, that goal is already here."Finally, one of the chief advantages enjoyed by consumers of illegal information is the connectivity of the Internet, which ensures that distribution costs are minimized. There is no place of business for those offering the latest movie, and therefore there are no turf wars. There is no distribution network to finance, and therefore no middlemen looking for a cut of profits. There are no palms to grease. There are no equivalents to pimps or pushers. Entering or leaving the trade poses no risk to the person from rival dealers or angry consumers.
When one compares all of the above technological advantages to the black markets in virtually every other good, it is no wonder that the latter are dangerous, seedy enterprises. Far from enjoying negligible costs and few risks, there are substantial costs and life-threatening risks associated with doing business in other illegal goods. The state has made it so that these black-market entrepreneurs risk everything to participate. Not only must they evade or bribe government agents, and live under the constant threat of being caught, but because competition cannot be done openly, would-be black-market entrepreneurs face the threat of violence from their competition — and even colleagues — as well.
Information and PraxeologyThe technological advantages of sharing information point us to an important praxeological principle that also explains the nonviolence of this black market. Unlike the goods people exchange money for, information is nonscarce. Being nonscarce, it is a nonrivalrous good and, as such, it is free.
In fact, as Rothbard points out, nonscarce goods cannot even be economized — that is, they cannot be made the object of human action.Murray Rothbard, Man, Economy, and State (Auburn: Ludwig von Mises Institute, 2001), p. 4. To see the relevance of this point to illegal movie downloads, consider another nonscarce good: air. For the most part, air remains only a part of the general conditions of human action and does not factor into the economizing of means to achieve ends. One can breathe as much air as he likes without exhausting its supply or decreasing the amount (or quality) of air left for everyone else.
It takes special circumstances to make air a scarce good and thus something that acting man must economize. For example, one might decide to dive to the bottom of the sea with the assistance of oxygen tanks — and thus face decisions on what to do with the limited amount of air available. Or, if the earth were to become polluted enough, the world's breathable air supply could itself become a scarce good and an ongoing concern in human affairs.
We should observe that air, since it is a physical good, is scarce in principle but may be considered nonscarce insofar as its supply and ubiquity exceeds all of the potential uses to which acting persons can put it. But ideas and information are not physical goods, and therefore they are not only nonscarce in practice but also nonscarce in principle. It is impossible to diminish their supply or reduce their quality.
"The black market in information is simply individuals cooperating in order to manipulate their own private property."If information cannot be made the object of human action, and illegal digital content is but information, how is it possible for there to be a black market for it? What is it that really happens when users obtain illegal digital content? It is clear that no ideas are altered, exchanged, or diminished. Instead, the black market in information is simply individuals cooperating in order to manipulate their own private property — namely, altering the physical state of their computers in certain patterns. We term these patterns "songs," "movies," and the like, informally treating them like physical objects. But at no point does copying a pattern inhibit anyone else's ability to enjoy that same pattern. It turns out that copying is not theft.
If the content in question were not merely information — if the content was itself only a scarce, physical good — then there is no doubt the black market for that good would look radically different. Suppose that there was no way to copy DVDs or transfer their contents to another medium. Any illegal copies of films would have to be sold on the black market. But with this reimagined black market would come all of the limitations we have already discussed: the restricted number and quality of goods, the need to avoid authorities, the inevitable establishment of turf and turf wars, and so on. The market for illegal movies would quickly resemble that for other black markets: shady, marginalized, and dangerous.
Yet hubs of pirated content on the Internet do not function like the streets and back alleys of other black markets. A user need not pay money to acquire some quantity of a forbidden good. Indeed, the user's own private property remains secure throughout his interaction with others. The only thing being exchanged between dealers and consumers is access to certain patterns of information — in the case of torrents, the file that coordinates downloads and uploads.
What is nonscarce cannot itself be homesteaded or owned. Since the use of a pattern requires a consumer to already possess the proper media, people entering the black market for information have no need to fight with others, because there is no scarce thing to fight over.
And so we have reached the crux of the matter: the black market in information is nonviolent primarily because its goods are of a different kind than those of all other black markets. All of the technological advantages enjoyed within the black market for information stem from this feature of its products. The information is nonscarce, free, and easy to share — one need not even give over any property to participate. Should it be so surprising if there is a flourishing supply to meet the demand?
Conclusion: Intellectual Property and the StateIn this article, we have avoided speaking of the state as much as possible in order to examine the nature of digital content in its own right. We have seen that it is nonscarce and free, and thus easy to share and consume.
Unfortunately, the state will not — to use a cliché — let information be free. But can legislation alter the laws of the universe? Ideas are not scarce, and neither can one make them scarce by claiming they are "protected." Nothing but chaos has emerged from the onslaught of intellectual-property laws.
Intellectual-property legislation attempts to turn nonscarce, unownable information into a scarce, ownable thing. It imputes to information a government-mandated and regulated property right that is then assigned, by bureaucratic means, to individuals and corporations. All of this, as Stephan Kinsella explains, violates legitimate rights (including the rights of innocent third parties).
The purpose of the market is to improve the human condition in the most effective way possible. Through improvements in technology and resource management, we manage to produce more with less. In other words, the purpose of the market is to make useful things relatively less scarce. With information, that goal is already here.
Indeed, in information and ideas we possess the "holy grail" of the economy: a universal, free good. Sadly, the state has taken this magnificent human triumph away from us via intellectual-property laws. Intellectual property is thus a tragic regression in human affairs.
- Methodological DualismMortal man does not know how the universe and all that it contains may appear to a superhuman intelligence. Perhaps such an exalted mind is in a position to elaborate a coherent and comprehensive monistic interpretation of all phenomena. Man — up to now, at least — has always gone lamentably amiss in his attempts to bridge the gulf that he sees yawning between mind and matter, between the rider and the horse, between the mason and the stone. It would be preposterous to view this failure as a sufficient demonstration of the soundness of a dualistic philosophy. All that we can infer from it is that science — at least for the time being — must adopt a dualistic approach, less as a philosophical explanation than as a methodological device.
Methodological dualism refrains from any proposition concerning essences and metaphysical constructs. It merely takes into account the fact that we do not know how external events — physical, chemical, and physiological — affect human thoughts, ideas, and judgments of value. This ignorance splits the realm of knowledge into two separate fields, the realm of external events, commonly called nature, and the realm of human thought and action.
Older ages looked upon the issue from a moral or religious point of view. Materialist monism was rejected as incompatible with the Christian dualism of the Creator and the creation, and of the immortal soul and the mortal body. Determinism was rejected as incompatible with the fundamental principles of morality as well as with the penal code. Most of what was advanced in these controversies to support the respective dogmas was unessential and is irrelevant from the methodological point of view of our day. The determinists did little more than repeat their thesis again and again, without trying to substantiate it. The indeterminists denied their adversaries' statements but were unable to strike at their weak points. The long debates were not very helpful.
The scope of the controversy changed when the new science of economics entered the scene. Political parties which passionately rejected all the practical conclusions to which the results of economic thought inevitably lead, but were unable to raise any tenable objections against their truth and correctness, shifted the argument to the fields of epistemology and methodology. They proclaimed the experimental methods of the natural sciences to be the only adequate mode of research, and induction from sensory experience the only legitimate mode of scientific reasoning. They behaved as if they had never heard about the logical problems involved in induction. Everything that was neither experimentation nor induction was in their eyes metaphysics, a term that they employed as synonymous with nonsense.
- Economics and MetaphysicsThe sciences of human action start from the fact that man purposefully aims at ends he has chosen. It is precisely this that all brands of positivism, behaviorism, and panphysicalism want either to deny altogether or to pass over in silence. Now, it would simply be silly to deny the fact that man manifestly behaves as if he were really aiming at definite ends. Thus the denial of purposefulness in man's attitudes can be sustained only if one assumes that the choosing both of ends and of means is merely apparent and that human behavior is ultimately determined by physiological events which can be fully described in the terminology of physics and chemistry.
"It is impossible to group men into classes whose members always react in the same way."Even the most fanatical champions of the "Unified Science" sect shrink from unambiguously espousing this blunt formulation of their fundamental thesis. There are good reasons for this reticence. So long as no definite relation is discovered between ideas and physical or chemical events of which they would occur as the regular sequel, the positivist thesis remains an epistemological postulate derived not from scientifically established experience but from a metaphysical world view.
The positivists tell us that one day a new scientific discipline will emerge which will make good their promises and will describe in every detail the physical and chemical processes that produce in the body of man definite ideas. Let us not quarrel today about such issues of the future. But it is evident that such a metaphysical proposition can in no way invalidate the results of the discursive reasoning of the sciences of human action. The positivists for emotional reasons do not like the conclusions that acting man must necessarily draw from the teachings of economics. As they are not in a position to find any flaw either in the reasoning of economics or in the inferences derived from it, they resort to metaphysical schemes in order to discredit the epistemological foundations and the methodological approach of economics.
There is nothing vicious about metaphysics. Man cannot do without it. The positivists are lamentably wrong in employing the term "metaphysics" as a synonym for nonsense. But no metaphysical proposition must contradict any of the findings of discursive reasoning. Metaphysics is not science, and the appeal to metaphysical notions is vain in the context of a logical examination of scientific problems. This is true also of the metaphysics of positivism, to which its supporters have given the name of antimetaphysics.
- Regularity and PredictionEpistemologically the distinctive mark of what we call nature is to be seen in the ascertainable and inevitable regularity in the concatenation and sequence of phenomena. On the other hand the distinctive mark of what we call the human sphere or history or, better, the realm of human action is the absence of such a universally prevailing regularity. Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these regular patterns of reacting, and we can make use of this knowledge in directing our actions toward definite goals. Our classification of natural objects and our assigning names to these classes is an outcome of this cognition. A stone is a thing that reacts in a definite way. Men react to the same stimuli in different ways, and the same man at different instants of time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way.
This is not to say that future human actions are totally unpredictable. They can, in a certain way, be anticipated to some extent. But the methods applied in such anticipations, and their scope, are logically and epistemologically entirely different from those applied in anticipating natural events, and from their scope.
- The Concept of the Laws of NatureExperience is always experience of past happenings. It refers to what has been and is no longer, to events sunk forever in the flux of time.
The awareness of regularity in the concatenation and sequence of many phenomena does not affect this reference of experience to something that occurred once in the past at a definite place and time under the circumstances prevailing there and then. The cognition of regularity too refers exclusively to past events. The most experience can teach us is this: in all cases observed in the past there was an ascertainable regularity.
From time immemorial all men of all races and civilizations have taken it for granted that the regularity observed in the past will also prevail in the future. The category of causality and the idea that natural events will in the future follow the same pattern they showed in the past are fundamental principles of human thought as well as of human action. Our material civilization is the product of conduct guided by them. Any doubt concerning their validity within the sphere of past human action is dispelled by the results of technological designing. History teaches us irrefutably that our forefathers and we ourselves up to this very moment have acted wisely in adopting them. They are true in the sense that pragmatism attaches to the concept of truth. They work, or, more precisely, they have worked in the past.
Leaving aside the problem of causality with its metaphysical implications, we have to realize that the natural sciences are based entirely on the assumption that a regular conjunction of phenomena prevails in the realm they investigate. They do not search merely for frequent conjunction but for a regularity that prevailed without exception in all cases observed in the past and is expected to prevail in the same way in all cases to be observed in the future. Where they can discover only a frequent conjunction — as is often the case in biology, for example — they assume that it is solely the inadequacy of our methods of inquiry that prevents us temporarily from discovering strict regularity.
The two concepts of invariable and of frequent conjunction must not be confused. In referring to invariable conjunction people mean that no deviation from the regular pattern — the law — of conjunction has ever been observed and that they are certain, as far as men can be certain about anything, that no such deviation is possible and will ever happen. The best elucidation of the idea of inexorable regularity in the concatenation of natural phenomena is provided by the concept of miracles. A miraculous event is something that simply cannot happen in the normal course of world affairs as we know it, because its happening could not be accounted for by the laws of nature.
If nonetheless the occurrence of such an event is reported, two different interpretations are provided, both of which, however, fully agree in taking for granted the inexorability of the laws of nature. The devout say: "This could not happen in the normal course of affairs. It came to pass only because the Lord has the power to act without being restricted by the laws of nature. It is an event incomprehensible and inexplicable for the human mind, it is a mystery, a miracle." The rationalists say: "It could not happen and therefore it did not happen. The reporters were either liars or victims of a delusion." If the concept of laws of nature were to mean not inexorable regularity but merely frequent connection, the notion of miracles would never have been conceived. One would simply say: A is frequently followed by B, but in some instances this effect failed to appear.
Nobody says that stones thrown into the air at an angle of 45 degrees will frequently fall down to earth or that a human limb lost by an accident frequently does not grow again. All our thinking and all our actions are guided by the knowledge that in such cases we are not faced with frequent repetition of the same connection, but with regular repetition.
- The Limitations of Human KnowledgeHuman knowledge is conditioned by the power of the human mind and by the extent of the sphere in which objects evoke human sensations. Perhaps there are in the universe things that our senses cannot perceive and relations that our minds cannot comprehend. There may also exist outside of the orbit we call the universe other systems of things about which we cannot learn anything because, for the time being, no traces of their existence penetrate into our sphere in a way that can modify our sensations. It may also be that the regularity in the conjunction of natural phenomena we are observing is not eternal but only passing, that it prevails only in the present stage (which may last millions of years) of the history of the universe and may one day be replaced by another arrangement.
Such and similar thoughts may induce in a conscientious scientist the utmost caution in formulating the results of his studies. It behooves the philosopher to be still more restrained in dealing with the a priori categories of causality and the regularity in the sequence of natural phenomena.
The a priori forms and categories of human thinking and reasoning cannot be traced back to something of which they would appear as the logically necessary conclusion. It is contradictory to expect that logic could be of any service in demonstrating the correctness or validity of the fundamental logical principles. All that can be said about them is that to deny their correctness or validity appears to the human mind nonsensical and that thinking, guided by them, has led to modes of successful acting.
"Human scientific inquiry cannot proceed beyond the limits drawn by the insufficiency of man's senses and the narrowness of his mind."Hume's skepticism was the reaction to a postulate of absolute certainty that is forever unattainable to man. Those divines who saw that nothing but revelation could provide man with perfect certainty were right. Human scientific inquiry cannot proceed beyond the limits drawn by the insufficiency of man's senses and the narrowness of his mind. There is no deductive demonstration possible of the principle of causality and of the ampliative inference of imperfect induction; there is only recourse to the no-less-indemonstrable statement that there is a strict regularity in the conjunction of all natural phenomena. If we were not to refer to this uniformity, all the statements of the natural sciences would appear to be hasty generalizations.
- Regularity and ChoosingThe main fact about human action is that in regard to it there is no such regularity in the conjunction of phenomena. It is not a shortcoming of the sciences of human action that they have not succeeded in discovering determinate stimulus-response patterns. What does not exist cannot be discovered.
If there were no regularity in nature, it would be impossible to assert anything with regard to the behavior of classes of objects. One would have to study the individual cases and to combine what one has learned about them into a historical account.
Let us, for the sake of argument, assume that all those physical quantities that we call constants are in fact continually changing and that the inadequacy of our methods of inquiry alone prevents us from becoming aware of these slow changes. We do not take account of them because they have no perceptible influence upon our conditions and do not noticeably affect the outcome of our actions. Therefore one could say that these quantities established by the experimental natural sciences may fairly be looked upon as constants since they remain unchanged during a period of time that by far exceeds the ages for which we may plan to provide.
But it is not permissible to argue in an analogous way with regard to the quantities we observe in the field of human action. These quantities are manifestly variable. Changes occurring in them plainly affect the result of our actions. Every quantity that we can observe is a historical event, a fact which cannot be fully described without specifying the time and geographical point.
The econometrician is unable to disprove this fact, which cuts the ground from under his reasoning. He cannot help admitting that there are no "behavior constants." Nonetheless he wants to introduce some numbers, arbitrarily chosen on the basis of a historical fact, as "unknown behavior constants." The sole excuse he advances is that his hypotheses are "saying only that these unknown numbers remain reasonably constant through a period of years."See the Cowles Commission for Research in Economics, Report for Period, January 1, 1948–June 30, 1949 (University of Chicago), p. 7. Now whether such a period of supposed constancy of a definite number is still lasting or whether a change in the number has already occurred can only be established later on.
In retrospect it may be possible, although in rare cases only, to declare that over a (probably rather short) period an approximately stable ratio — which the econometrician chooses to call a "reasonably" constant ratio — prevailed between the numerical values of two factors. But this is something fundamentally different from the constants of physics. It is the assertion of a historical fact, not of a constant that can be resorted to in attempts to predict future events.
"Nonhuman entities react according to regular patterns; man chooses."Leaving aside for the present any reference to the problem of the human will or free will, we may say, nonhuman entities react according to regular patterns; man chooses. Man chooses first ultimate ends and then the means to attain them. These acts of choosing are determined by thoughts and ideas about which, at least for the time being, the natural sciences do not know how to give us any information.
In the mathematical treatment of physics the distinction between constants and variables makes sense; it is essential in every instance of technological computation. In economics there are no constant relations between various magnitudes. Consequently all ascertainable data are variables, or what amounts to the same thing, historical data. The mathematical economists reiterate that the plight of mathematical economics consists in the fact that there are a great number of variables. The truth is that there are only variables and no constants. It is pointless to talk of variables where there are no invariables.
- Means and EndsTo choose is to pick one out of two or more possible modes of conduct and to set aside the alternatives. Whenever a human being is in a situation in which various modes of behavior, precluding one another, are open to him, he chooses. Thus life implies an endless sequence of acts of choosing. Action is conduct directed by choices.
The mental acts that determine the content of a choice refer either to ultimate ends or to the means to attain ultimate ends. The former are called judgments of value. The latter are technical decisions derived from factual propositions.
In the strict sense of the term, acting man aims only at one ultimate end, at the attainment of a state of affairs that suits him better than the alternatives. Philosophers and economists describe this undeniable fact by declaring that man prefers what makes him happier to what makes him less happy, that he aims at happiness.There is no need to refute anew the arguments advanced for more than two thousand years against the principles of eudaemonism, hedonism, and utilitarianism. For an exposition of the formal and subjectivistic character of the concepts "pleasure" and "pain" as employed in the context of these doctrines, see Mises, Human Action (New Haven, Yale University Press, 1949, pp. 14–15), and Ludwig Feuerbach, Eudämonismus, in Sämmtliche Werke, ed. Bolin and Jodl (Stuttgart, 1907), 10, 230–93. Of course, those who recognize no "happiness" but that given by the orgasm, alcohol, and so forth continue to repeat the old errors and distortions. Happiness — in the purely formal sense in which ethical theory applies the term — is the only ultimate end, and all other things and states of affairs sought are merely means to the realization of the supreme ultimate end. It is customary, however, to employ a less precise mode of expression, frequently assigning the name of ultimate ends to all those means that are fit to produce satisfaction directly and immediately.
The characteristic mark of ultimate ends is that they depend entirely on each individual's personal and subjective judgment, which cannot be examined, measured, still less corrected by any other person. Each individual is the only and final arbiter in matters concerning his own satisfaction and happiness.
As this fundamental cognition is often considered to be incompatible with the Christian doctrine, it may be proper to illustrate its truth by examples drawn from the early history of the Christian creed. The martyrs rejected what others considered supreme delights, in order to win salvation and eternal bliss. They did not heed their well-meaning fellows who exhorted them to save their lives by bowing to the statue of the divine emperor, but chose to die for their cause rather than to preserve their lives by forfeiting everlasting happiness in heaven.
What arguments could a man bring forward who wanted to dissuade his fellow from martyrdom? He could try to undermine the spiritual foundations of his faith in the message of the Gospels and their interpretation by the Church. This would have been an attempt to shake the Christian's confidence in the efficacy of his religion as a means to attain salvation and bliss. If this failed, further argument could avail nothing, for what remained was the decision between two ultimate ends, the choice between eternal bliss and eternal damnation. Then martyrdom appeared the means to attain an end which in the martyr's opinion warranted supreme and everlasting happiness.
As soon as people venture to question and to examine an end, they no longer look upon it as an end but deal with it as a means to attain a still higher end. The ultimate end is beyond any rational examination. All other ends are but provisional. They turn into means as soon as they are weighed against other ends or means.
Means are judged and appreciated according to their ability to produce definite effects. While judgments of value are personal, subjective, and final, judgments about means are essentially inferences drawn from factual propositions concerning the power of the means in question to produce definite effects. About the power of a means to produce a definite effect there can be dissension and dispute between men. For the evaluation of ultimate ends there is no interpersonal standard available.
Choosing means is a technical problem, as it were, the term "technique" being taken in its broadest sense. Choosing ultimate ends is a personal, subjective, individual affair. Choosing means is a matter of reason, choosing ultimate ends a matter of the soul and the will.
[This article is excerpted from chapter 18 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach.]
Every part of economics is open to intentional misrepresentation and misinterpretation on the part of people eager to excuse or to justify fallacious doctrines underlying their party programs. To prevent such misuse as far as possible, it seems expedient to add some explanatory remarks to the exposition of the time-preference theory.
There are schools of thought that flatly deny that men differ with regard to innate characteristics inherited from their ancestors.About the Marxian attack against genetics, cf. T.D. Lysenko, Heredity and Variability (New York, 1945). A critical appraisal of this controversy is provided by J.R. Baker, Science and the Planned State (New York, 1945), pp. 71–76. In the opinion of these authors the only difference between the white men of Western civilization and Eskimos is that the latter are in arrears in their progress toward modern industrial civilization. This merely temporal difference of a few thousand years is insignificant when compared with the many hundreds of thousands of years that were absorbed by man's evolution from the simian state of his apelike forebears to the conditions of present-day homo sapiens. It does not support the assumption that racial differences prevail between the various specimens of mankind.
Praxeology and economics are foreign to the issues raised by this controversy. But they must take precautionary measures lest they become implicated by partisan spirit in this clash of antagonistic ideas. If those fanatically rejecting the teachings of modern genetics were not entirely ignorant of economics, they would certainly try to turn the time-preference theory to their advantage. They would refer to the circumstance that the superiority of the Western nations consists merely in their having started earlier in endeavors to save and to accumulate capital goods. They would explain this temporal difference by accidental factors, the better opportunity offered by environment.
Against such possible misinterpretations one must emphasize the fact that the temporal head start gained by the Western nations was conditioned by ideological factors, which cannot be reduced simply to the operation of environment. What is called human civilization has, up to now, been a progress from cooperation by virtue of hegemonic bonds to cooperation by virtue of contractual bonds. But while many races and peoples were arrested at an early stage of this movement, others kept on advancing. The eminence of the Western nations consisted in the fact that they succeeded better in checking the spirit of predatory militarism than the rest of mankind and that they thus brought forth the social institutions required for saving and investment on a broader scale.
Even Marx did not contest the fact that private initiative and private ownership of the means of production were indispensable stages in the progress from primitive man's penury to the more satisfactory conditions of 19th-century Western Europe and North America. What the East Indies, China, Japan, and the Mohammedan countries lacked were institutions of safeguarding the individual's rights. The arbitrary administration of pashas, kadis, rajahs, mandarins, and daimios was not conducive to large-scale accumulation of capital. The legal guarantees effectively protecting the individual against expropriation and confiscation were the foundations upon which the unprecedented economic progress of the West came into flower. These laws were not an outgrowth of chance, historical accidents, and geographical environment. They were the product of reason.
We do not know what course the history of Asia and Africa would have taken if these peoples had been left alone. What happened was that some of these peoples were subjected to European rule and others — like China and Japan — were forced by the display of naval power to open their frontiers. The achievements of Western industrialism came to them from abroad. They were ready to take advantage of the foreign capital lent to them and invested in their territories. But they were rather slow in the reception of the ideologies from which modern industrialism had sprung. Their assimilation to Western ways of life is superficial.
We are in the midst of a revolutionary process that will very soon do away with all varieties of colonialism. This revolution is not limited to those countries that were subject to the rule of the British, the French, and the Dutch. Even nations that, without any infringement of their political sovereignty, had profited from foreign capital are intent upon throwing off what they call the yoke of foreign capitalists. They are expropriating the foreigners by various devices — discriminatory taxation, repudiation of debts, undisguised confiscation, foreign exchange restrictions. We are on the eve of the complete distintegration of the international capital market. The economic consequences of this event are obvious; its political repercussions are unpredictable.
In order to appreciate the political consequences of the disintegration of the international capital market, it is necessary to remember what effects were brought about by the internationalization of the capital market. Under the conditions of the later 19th century, it did not matter whether or not a nation was prepared and equipped with the required capital in order to utilize adequately the natural resources of its territory. There was practically free access for everybody to every area's natural wealth. In searching for the most advantageous opportunities for investment, capitalists and promoters were not stopped by national borderlines. As far as investment for the best possible utilization of the known natural resources was concerned, the greater part of the earth's surface could be considered as integrated into a uniform, world-embracing market system. It is true that this result was attained in some areas, like the British and the Dutch East Indies and Malaya, only by colonial regimes and that autochthonous governments of these territories would probably not have created the institutional setting indispensable for the importation of capital. But Eastern and Southern Europe and the Western Hemisphere had of their own accord joined the community of the international capital market.
The Marxians were intent upon indicting foreign loans and investments for the lust for war, conquest, and colonial expansion. In fact, the internationalization of the capital market, together with free trade and the freedom of migration, was instrumental in removing the economic incentives to war and conquest.
It no longer mattered for a man where the political boundaries of his country were drawn. The entrepreneur and the investor were not checked by them. Precisely those nations that in the age preceding the First World War were paramount in foreign lending and investment were committed to the ideas of peace-loving “decadent” liberalism. Of the foremost aggressor nations, Russia, Italy, and Japan were not capital exporters; they themselves needed foreign capital for the development of their own natural resources. Germany's imperialist adventures were not supported by its big business and finance.Cf. Mises, Omnipotent Government (New Haven, 1944), p. 99 and the books quoted there.
The disappearance of the international capital market alters conditions entirely. It abolishes the freedom of access to natural resources. If one of the socialist governments of the economically backward nations lacks the capital needed for the utilization of its natural resources, there will be no means to remedy this situation. If this system had been adopted a hundred years ago, it would have been impossible to exploit the oil fields of Mexico, Venezuela, and Iran, to establish the rubber plantations in Malaya, or to develop the banana production of Central America. It is illusory to assume that the advanced nations will acquiesce in such a state of affairs. They will resort to the only method which gives them access to badly needed raw materials; they will resort to conquest. War is the alternative to freedom of foreign investment as realized by the international capital market.
The inflow of foreign capital did not harm the receiving nations. It was European capital that accelerated considerably the marvelous economic evolution of the United States and the British dominions. Thanks to foreign capital, the countries of Latin America and Asia are today equipped with facilities for production and transportation that they would have had to forego for a very long time if they had not received this aid. Real wage rates and farm yields are higher today in those areas than they would have been in the absence of foreign capital. The mere fact that almost all nations are vehemently asking today for American credit explodes the fables of the Marxians and the nationalists.
However, the mere lust for imported capital goods does not resuscitate the international capital market. Investment and lending abroad are only possible if the receiving nations are unconditionally and sincerely committed to the principle of private property and do not plan to expropriate the foreign capitalists at a later date. It was such expropriations that destroyed the international capital market.
Intergovernmental loans are no substitute for the functioning of an international capital market. If they are granted on business terms, they presuppose no less than private loans the full acknowledgment of property rights. If they are granted, as is usually the case, as virtual subsidies without any regard for payment of principal and interest, they impose restrictions upon the debtor nation's sovereignty. In fact such “loans” are for the most part the price paid for military assistance in coming wars. Such military considerations already played an important role in the years in which the European powers prepared the great wars of our age. The outstanding example was provided by the huge sums which the French capitalists, pressed hard by the government of the Third Republic, lent to Imperial Russia. The Tsars used the capital borrowed for armaments, not for an improvement of the Russian apparatus of production. They did not invest it; they consumed a great part of it.
This article is excerpted from chapter 18 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach.
From the introductory undergraduate to the advanced PhD courses in microeconomics, most students are taught that the concept of an indifference curve is very useful in analyzing individual choice. I emphasize the term "useful" for a reason. No professor I have asked about the concept ever said it was literally true. I don't think anyone who understands the concept would ever try to claim that this is how humans actually make choices. Rather, we have been instructed to treat the microeconomic models only as tools for prediction of phenomena.
Murray Rothbard and other economists of the Austrian School have rejected the concept of indifference and have developed an approach based on Menger's law of diminishing marginal utility and Mises's axiom of action. This approach, built upon ordinal rankings of human ends, is formulated in Rothbard's treatise Man, Economy, and State as the value-scale concept. Professor Rothbard used this concept to derive the laws of diminishing marginal utility and of demand and supply, and he used it to explain price formation and other economic phenomena.
However, Bryan Caplan, a George Mason University professor, claims that this value-scale approach is inadequate for explaining the so-called income and substitution effects of a price change. Caplan claims that, while Rothbard's consumer theory is not capable of explaining the distinction between the income and the substitution effects of a price change, Rothbard still uses these terms in his work. Professor Caplan goes on to argue that Professor Rothbard has "borrowed" these terms from mainstream neoclassical theory.
This claim is based on the observation that the mainstream neoclassical derivations of the income and substitution effects are based on the use of indifference curves and the constrained-optimization framework. The implicit assumption here is that that the derivation of the income and substitution effects in general is somehow dependent on the concept of indifference, and thus not possible within Rothbard's theoretical framework.
The thesis of the following article is that Caplan is wrong. It can be shown that a price change does indeed have its income and substitution effects within Rothbard's theoretical framework. A clear indication that Professor Rothbard was aware of this, although he did not go through the steps of explicitly demonstrating the two effects, is the following paragraph of his Man, Economy, and State:
All consumers' goods are, on the other hand, partial substitutes for one another. When a man ranks in his value scale the myriad of goods available and balances the diminishing utilities of each, he is treating them all as partial substitutes for one another. A change in ranking for one good by necessity changes the rankings of all the other goods, since all the rankings are ordinal and relative. A higher price for one good (owing, say, to a decrease in stock produced) will tend to shift the demand of consumers from that to other consumers' goods, and therefore their demand schedules will tend to increase.Man, Economy, and State, p. 282.
Thus, Rothbard notes that individual value scales are formed using one's knowledge of the relevant money prices and that a change in prices will change the ordering of different items on one's value scale. Consequently, a price change will have its substitution effect. Moreover, the idea that money prices are the key element of individual value scales is also at the root of Mises's regression theorem, which Rothbard elaborated at some length.
It also may be obvious that, given a fixed stock of money, an increase (or decrease) in the money price of an item reduces (or increases) the purchasing power of that stock, and thus reduces (or increases) the quantities of different items that can be purchased. Essentially, this is the economic meaning of the income effect of a price change.
However, given the claims that the value-scale approach is somehow inadequate for defining the income and substitution effects, it seems that there are still some benefits to going through the steps of the value-scale approach. I will demonstrate how and why a price change affects the purchasing power of a stock of money, and how and why substitution between different items takes place.
In the following sections, I will first present the mainstream neoclassical framework for deriving the income and substitution effects of a price change, and then develop an example of how Rothbard's value-scale approach could be applied to the problem.
The Indifference-Curve ApproachThe mainstream neoclassical consumer theory rests on the concept of an indifference curve. Within this framework, an indifference curve depicts all combinations (or bundles) of quantities of two goods that are associated with exactly the same level of utility. It is said that, without money prices attached to any of the two goods, an individual would be indifferent among all these bundles — he or she does not prefer any of the bundles.
Next, some assumptions about the properties of the individual utility function and the associated indifference curves are adopted to facilitate mathematical operations, namely, finding a unique solution using calculus. I will not go into the details of these assumptions, as they are elaborated elsewhere at great length. Instead, I will use an example to demonstrate how the effect of a price change is analyzed within this framework.
Suppose that figure 1 represents preferences for apples and oranges, and the budget constraint of a hypothetical consumer, Jim, in a two-dimensional coordinate system.
Figure 1
A graphical representation of a two-good constrained-optimization problem when the price of one of the goods changesJim faces the initial price of $1 per apple and $1 per orange, and he has some fixed budget to spend on apples and oranges. Budget line 1 shows all the combinations of apples and oranges that Jim can buy using his entire budget.
The indifference curve U1 depicts all bundles of apples and oranges to which Jim attaches exactly the same level of utility, U1. Any indifference curve closer to the origin of this coordinate system is associated with a lower level of utility. Similarly, any indifference curve further away from the origin is associated with a higher level of utility.
Jim will not want to buy any old combination of apples and oranges but the one that he values the most. This bundle is depicted by the point where his budget line is tangent to the indifference curve U1 (point A). Any other point on Jim's budget line would be on an indifference curve that is closer to the origin than U1, and thus associated with a lower level of utility. Consequently, point A depicts the combination of apples and oranges that Jim would purchase had he decided to spend his entire budget on apples and oranges.
Next, let us examine what happens when the price of oranges increases from $1 to $2 per orange. Now, Jim's budget line is represented by budget line 2. Oranges are now more expensive. Thus, for any given quantity of apples, Jim can now buy fewer oranges, using up his entire budget. For example, if Jim's budget was $5, he was able to buy, say, 1 apple and 4 oranges before the price increase. Now he can buy only 2 oranges if he wants to buy 1 apple.
In order to determine his optimal bundle, Jim will now find the point at which his new budget line is tangent to another indifference curve, U2, (point C). Point C depicts the combination of apples and oranges that Jim would buy had he decided to spend his entire budget on apples and oranges, given the new price of oranges.
It is evident that Jim is buying more apples and fewer oranges now. Let us focus on his consumption of oranges to further examine the effects of the price increase. First, we can see that his consumption of oranges has decreased by Δ oranges. This decrease could next be decomposed into the income effect and the substitution effect.
Figure 2 illustrates this decomposition process. Point B divides the total price effect (Δ oranges) into the income effect (IE) and substitution effect (SE). Point B belongs to a hypothetical budget line (BL 3) tangent to the indifference curve U2. The slope of BL 3 is determined by the initial prices of apples and oranges ($1 per apple and $1 per orange).
Figure 2
A graphical representation of the income and substitution effects within the constrained-optimization frameworkThis line shows by how much the initial income would have to be reduced in order to bring Jim's utility down to U2. In a sense, this is intended to show that a price increase reduces individual utility in a similar way as does a reduction in income.
Another important characteristic of the point B is that this is a point of tangency between the hypothetical budget line BL 3 and the indifference curve U2. This means that if only the income-reducing effect was taken into account, with the relative prices staying unchanged, Jim's new optimal bundle would be B. Thus, the reduction in the quantity consumed between the points A and B can be attributed to the income-reducing effect of the price increase. This is the income effect of the price change.
However, in addition to the income-reducing effect, the increase in the price of oranges also makes apples more desirable relative to oranges. This is why Jim substitutes oranges with apples and "moves" from point B to point C as his budget line becomes steeper under the new price of oranges. This is the substitution effect (SE) of the price change.
Many neoclassical economists would argue that this is the end of the story and that nothing more or nothing different could be said. However, Murray Rothbard had important criticisms of the above-presented approach. In essence, these criticisms boil down to the fact that this is not how we, humans, actually make decisions.For more details, see Rothbard's Man, Economy, and State
Taken literally, this approach would imply that humans solve complicated mathematical problems, involving differentiation of functions and many other operations, without even being aware of doing so. The typical defence of this mechanistic approach goes along the lines that the approach is useful as long as we don't interpret it literally but interpret it as if the consumers were making their choices in this manner.Nicholson. 2005. Microeconomic Theory: Basic Principles and Extensions. 9th Edition. Thomson: Willard, OH.
However, Rothbard was not satisfied with this justification and thus developed a different approach based on Menger's law of diminishing marginal utility and Mises's axiom of action. The next section presents an application of this approach to individual purchasing decisions where the individual is put in a similar context as before.
The Value-Scale ApproachThe consumer, Jim, from the previous section, would, according to Rothbard's framework, rank his ends in the order of diminishing marginal importance or utility. Next, he would assess the means available to satisfy these ends. In this case, Jim's specific ends are unknown to us, but we know that whatever they may be, the only means to satisfy them are the money that he owns and the apples and oranges that can be bought using that money. In the same fashion, he would then rank all his means in the order of diminishing marginal importance. In fact, he orders his actions in time, with the most important being performed first.
In the example presented above, Jim has some stock of money, say $5, that he wants to exchange for apples and oranges. The price of both apples and oranges is $1. Jim's particular ordering of apples, oranges, and money on his value scale is an empirical question, known only to him, but suppose that it looks like the distribution in figure 3.
Figure 3
A hypothetical value scaleWe can see that he would exchange the first dollar for the first apple, since the first apple is more important to him than the first dollar. Similarly, he would exchange the second dollar for the second apple, and the third dollar for the third apple.
At this point, Jim would stop exchanging his money for apples. This is because acquiring the fourth apple is less important to him than owning the fourth dollar — the fourth apple is lower on his value scale compared to the fourth dollar.
Moreover, the first orange is more important than the fourth dollar. This is why Jim would benefit from exchanging the fourth dollar for the first orange. Finally, he would exchange his fifth dollar for the second orange.
Jim has now exchanged the entire stock of money that he allocated for purchasing apples and oranges. He bought 3 apples and 2 oranges. In mainstream neoclassical language, this would be his "optimal" bundle of apples and oranges.
The next question that needs to be answered is what happens when the price of oranges increases from $1 to $2.
Looking at Jim's value scale in figure 3, it can be seen that he would not be able to buy the second orange. This is because, after spending the third dollar on the third apple, Jim would need to pay 2 dollars for the first orange. This would exhaust his entire stock of money, and thus, Jim would now have 3 apples and only 1 orange.
But this analysis ignores the fact that Jim's value scale is price-dependent. Any change in the price would involve a reordering of different items, or, to reiterate Rothbard's words:
A higher price for one good (owing, say, to a decrease in stock produced) will tend to shift the demand of consumers from that to other consumers' goods, and therefore their demand schedules will tend to increase.Man, Economy, and State, p. 282.
In fact, what I have done here is to demonstrate that, ceteris paribus, due to the increase in the price of oranges, Jim would have less money to spend on other items that are ranked lower on his original value scale. This is the income effect of a price increase.
The next thing that needs to be done is to take into account the fact that Jim prefers paying less for the same thing. This is because paying less for the same thing leaves more money available for satisfying other ends. Since it is always better to satisfy more ends compared to less, it is also better to pay less for the same thing. Consequently, Jim would choose a $1 orange over a $2 orange, given the chance to do so.Except in the case that Jim has some peculiar need for paying a higher price for oranges. This would, in turn, imply that the act of paying a higher price for oranges is one of Jim's ends. This would imply that the act of exchange is an end to itself, which removes the conventional economic meaning of exchange. Thus, it is assumed that paying a higher price for oranges is not one of Jim's ends. This implies that the first $2 orange must be lower on his value scale compared to the first $1 orange.
We could extend this reasoning and conclude that the first $3 orange would be ranked lower than the first $2 orange; the first $4 orange would be ranked lower than the first $3 orange, etc. The same applies for the second, third, and so on. This reordering could be continued indefinitely. Consequently, there is no lower bound on how low an item can move down the value scale as its price increases.
Thus, it may well be that the first $2 orange ends up not only below the first $1 orange but also below the fifth apple. Again, where, exactly, different items will end up is an empirical question that depends entirely on Jim's subjective valuations of his means and ends. At this point, I will hypothesize that Jim's new value scale looks like figure 4.
Figure 4
A hypothetical value scale after a price increaseAccording to this value scale, Jim will still exchange the first 3 dollars for the first 3 apples. However, the $1 oranges are not available anymore, and the $2 oranges are placed below the fifth dollar. This means that the fourth dollar will be exchanged for the fourth apple, and the fifth dollar will be exchanged for the fifth apple, since each of these two consecutive dollars is valued less than each of the two apples.
Finally, Jim ends up exchanging his $5 for five apples. Consequently, the quantity of oranges bought dropped from the initial 2 to 0. This is the total effect of the increase in the price of oranges. This total effect can be decomposed into the income effect, where, as shown earlier, the quantity of oranges bought fell from 2 to 1, and the substitution effect where the quantity of oranges bought fell from 1 to 0. However, these two effects happen simultaneously. The purpose of the chronological presentation is just to indicate the elements of the two effects with more transparency.
A similar exercise could be done for a price decrease. Then, the amount of money available for all other goods, placed lower on the original value scale, would increase. In addition, the relative desirability of the good whose price decreased would then increase. Thus, the income and substitution effects work both ways within the value-scale framework.
In this particular example, the effect of a price change on the quantity of oranges purchased was observable. But it is also possible that we do not observe any change in the individual quantity purchased of some good whose price increased or decreased. In these cases, we would likely observe only the income effect on the purchased quantity of other goods.
Suppose Jim was a passionate smoker. Then, for him, an increase in the price of cigarettes would likely have an impact only on the quantity of other goods that he would buy, but not on the quantity of cigarettes. This is because cigarettes are very high on his value scale. The price change may not be sufficient to "push" some quantity of cigarettes down his value scale to become less important than the last dollar in his stock of money. Rather, the reduction in the purchasing power of his stock of money would bring about a change in, say, the number of haircuts Jim has, and/or the number of evenings out, etc.Neoclassical economists using the indifference-curve framework might approach this problem using a Leontief utility function. The interested reader is encouraged to see a depiction of this function here
Clearly, more-complicated examples involving not only quantity but also quality of goods could be thought of. But this would be outside of the scope of this article, where the purpose was to demonstrate the derivation of the income and substitution effects using the value-scale framework.
ConclusionThe value-scale concept, when applied with all its elements, is capable of explaining the income and the substitution effects of a price change. Caplan's claim that the value-scale approach is inadequate for explaining these effects is simply an incorrect interpretation of Professor Rothbard's theoretical framework.
Dear economics department chairman,
In all the formal economic study I have sat through, I have developed a growing concern for the direction of the economics profession in general, and economic education in particular. Let me explain — and challenge you.
What is knowledge? How is knowledge acquired? What do we know? How do we know what we know? These questions seem most fitting for a philosophy class in epistemology — however, they are also essential in the world of economics.
The discovery of knowledge can be broken down into two main approaches (excluding the category of divine revelation): inductive reasoning and deductive reasoning. Simply put, inductive reasoning is the discovery of knowledge through observation (as in the scientific method). Conversely, deductive reasoning is the discovery of knowledge done through logic. Or, said differently, deductive knowledge is gained in an a priori (knowledge before experience) fashion that follows naturally from stated axioms.
Importantly, knowledge gained through deductive means is no less valid than knowledge gained through inductive means.
The issue is that in the realm of mainstream economics today this is not recognized to be true. Deductive reasoning is sneered at, especially when it is not presented in the formality of Greek letters. Most economists label those that use deduction as "unscientific" and "imprecise." The emphasis on induction is so strong in economics PhD programs today that a grad student with a background in math or statistics can finish his or her PhD with superb grades and know literally nothing about cause-and-effect economics.
Let me be clear, having induction as the mainstream of economic thought is not the issue that I wish to bring up: the issue is having inductive analysis as the mainstream of economic discovery while deductive discovery is not only looked down upon — it is not even taught. Innovation in economic thought requires a dynamic debate by all. It must be a process that includes healthy academic discussion by those who favor inductive and those who favor deductive discovery.
At one time in economics' relatively short history, it was not so one-sided. The period from 1870 to 1920 saw the deductive-favoring Austrian School of economics and the inductive-favoring German School of economics in a pointed exchange of academic ideas. As the marginalist revolution in economics had just exploded, healthy economic debate was alive and well.
"Knowledge gained through deductive means is no less valid than knowledge gained through inductive means."Carl Menger introduced marginalism in his 1871 book, Principles of Economics, which also refuted work done by both Adam Smith and David Ricardo. Next, Karl Marx, working on the labor theory of value, was challenged heavily by Eugen von Böhm-Bawerk. Finally, the likes of Ludwig von Mises, Joseph Schumpeter, Friedrich von Hayek, John Maynard Keynes, and Alfred Marshall spent a generation at variance, debating ideas about the progress of economic theory and the basis upon which it began. The point is that both deductive- and inductive-favoring economists contributed and offered analysis in healthy academic debate.
Sadly, World War II broke up the primarily European dialogue. When the dust of war had settled, the result was that the deductive-favoring Austrian School was less prominent and the inductive-favoring German School was now the mainstream.[1]
As induction took root, the use of deduction was more and more looked down upon, until "acceptable" economic inquiry became the one-sided view that it is today: Use the scientific method on a dataset. Quantify. Infer.
Switching gears a bit, there are essentially three ways (in a free market) in which a business can get ahead of its competitors:
make a better product at a cheaper price;for the same price, make a better product; ordifferentiate yourself from your competitors.In some ways, graduate education can be looked at in the same light.
There are X number of schools offering schooling in a particular program and Y number of students in any given year, choosing among available schools. Parameters that can play a part in the student's decision include the following: What school leaves me the least in debt? What schools have a better reputation? What schools have strong programs in what I want to study? And most importantly, What schools do I have the grades to get into?
From the perspective of the school, however, the goal is to attract as many applications as possible. The more students that apply, the more a given department can be more selective in admitting students, as they are now drawing from a larger pool.
By offering one or two undergraduate or graduate courses in this vein, your school can pride itself on being one of the few programs in the nation that offer students an additional perspective to round out their education. It is even better if you oversee an agricultural- and applied-economics program. Then you may boast that you are the only school in the nation that offers any formal study of such economics based in deduction.[2]
$15 $10
Marketed in the right light, this could be a simple and effective way to differentiate your school in the minds of prospective students — particularly graduate students. And most importantly, from the point of view of academic honesty and freedom, adding an economics class or two based in deductive or "Austrian" analysis is the right thing to do. The discovery of knowledge is the literal foundation of the academic process, and dogmatically relegating one form of inquiry to obscurity is not only a bit academically dishonest — it's wrong.
I hope you will make the right decision.
Sincerely,
Sterling T. Terrell
[bio] See [AuthorName]'s [AuthorArchive].
Editorial note: Please see also "Austrians in Academia: A Battle Plan" by Walter Block.
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Notes[1] For a more eloquent portrayal of this time period, read Ludwig von Mises, "The Historical Setting of the Austrian School of Economics."
[2] Please let me know if I have overlooked one.
[This article is excerpted from chapter 18 of Human Action]
If one were to measure the length of the period of production spent in the fabrication of the various goods available now, one would have to trace back their history to the point at which the first expenditure of original factors of production took place. One would have to establish when natural resources and labor were first employed for processes that — besides contributing to the production of other goods — also contributed ultimately to the production of the good in question. The solution of this problem would require the solubility of the problem of physical imputation. It would be necessary to establish in quantitative terms to what extent tools, raw materials, and labor that directly or indirectly were used in the production of the good concerned contributed to the result. One would have to go back in these inquiries to the very origins of capital accumulation by saving on the part of people who previously lived from hand to mouth. It is not only practical difficulties that prevent such historical studies. The very insolubility of the problem of physical imputation stops us at the first step of such ventures.
Neither acting man himself nor economic theory needs a measurement of the time expended in the past for the production of goods available today. They would have no use for such data even if they knew them. Acting man is faced with the problem of how to take best advantage of the available supply of goods. He makes his choices in employing each part of this supply in such a way as to satisfy the most urgent of the not-yet-satisfied wants. For the achievement of this task, he must know the length of the waiting time that separates him from the attainment of the various goals among which he has to choose. As has been pointed out and must be emphasized again, there is no need for him to look backward to the history of the various capital goods available. Acting man counts waiting time and the period of production always from today on. In the same way in which there is no need to know whether more or less labor and material factors of production have been expended in the production of the products available now, there is no need to know whether their production has absorbed more or less time. Things are valued exclusively from the point of view of the services they can render for the satisfaction of future wants. The actual sacrifices made and the time absorbed in their production are beside the point. These things belong to the dead past.
It is necessary to realize that all economic categories are related to human action and have nothing at all to do directly with the physical properties of things. Economics is not about goods and services; it is about human choice and action. The praxeological concept of time is not the concept of physics or biology. It refers to the sooner or the later as operative in the actors' judgments of value. The distinction between capital goods and consumers' goods is not a rigid distinction based on the physical and physiological properties of the goods concerned. It depends on the position of the actors and the choices they have to make. The same goods can be looked upon as capital goods and as consumers' goods. A supply of goods ready for immediate enjoyment is capital goods from the point of view of a man who looks upon it as a means for his own sustenance and that of hired workers during a waiting time.
An increase in the quantity of capital goods available is a necessary condition for the adoption of processes in which the period of production and therefore waiting time are longer. If one wants to attain ends that are temporally further away, one must resort to a longer period of production because it is impossible to attain the end sought in a shorter period of production. If one wants to resort to methods of production with which the quantity of output is higher per unit of input expended, one must lengthen the period of production. For the processes with which output is smaller per unit of input have been chosen only on account of the shorter period of production they require. But on the other hand, not every employment chosen for the utilization of capital goods accumulated by means of additional saving requires a process of production in which the period of production from today on to the maturing of the product is longer than with all processes already adopted previously. It may be that people, having satisfied their more urgent needs, now want goods that can be produced within a comparatively short period. The reason why these goods have not been produced previously was not that the period of production required for them alone was deemed too long, but that there was a more urgent employment open for the factors required.
If one chooses to assert that every increase in the supply of capital goods available results in a lengthening of the period of production and of waiting time, one reasons in the following way: If a are the goods already previously produced and b the goods produced in the new processes started with the aid of the increase in capital goods, it is obvious that people had to wait longer for a and b than they had to wait for a alone. In order to produce a and b, it was not only necessary to acquire the capital goods required for the production of a but also those required for the production of b. If one had expended for an increase of immediate consumption the means of sustenance saved to make workers available for the production of b, one would have attained the satisfaction of some wants sooner.
The treatment of the capital problem customary with those economists who are opposed to the so-called "Austrian" view assumes that the technique employed in production is unalterably determined by the given state of technological knowledge. The "Austrian" economists, on the other hand, show that it is the supply of capital goods available at each moment that determines which of the many known technological methods of production will be employed.Cf. F.A. Hayek, The Pure Theory of Capital (London, 1941), p. 48. It is awkward indeed to attach to certain lines of thought national labels. As Hayek remarks pertinently (p. 47, n. 1), the classical English economists since Ricardo, and particularly J.S. Mill (the latter probably partly under the influence of J. Rae) were in some regards more "Austrian" than their recent Anglo-Saxon successors. The correctness of the "Austrian" point of view can easily be demonstrated by a scrutiny of the problem of scarcity of capital.
Let us look at the condition of a country suffering from scarcity of capital. Take, for instance, the state of affairs in Rumania about 1860. What was lacking was certainly not technological knowledge. There was no secrecy concerning the technological methods practiced by the advanced nations of the West. They were described in innumerable books and taught at many schools. The elite of Rumanian youth had received full information about them at the technological universities of Austria, Switzerland, and France. Hundreds of foreign experts were ready to apply their knowledge and skill in Rumania. What was wanting was the capital goods needed for a transformation of the backward Rumanian apparatus of production, transportation, and communication according to Western patterns. If the aid granted to the Rumanians on the part of the advanced foreign nations had consisted merely in providing them with technological knowledge, they would have had to realize that it would take a very long time until they caught up with the West. The first thing for them to have done would have been to save in order to make workers and material factors of production available for the performance of more time-consuming processes. Only then could they successively produce the tools required for the construction of those plants that in the further course were to produce the equipment needed for the construction and operation of modern plants, farms, mines, railroads, telegraph lines, and buildings. Scores of decades would have passed until they had made up for the time lost. There would not have been any means of accelerating this process than by restricting current consumption as far as physiologically possible for the intermediary period.
However, things developed in a different way. The capitalist West lent to the backward countries the capital goods needed for an instantaneous transformation of a great part of their methods of production. It saved them time and made it possible for them to multiply very soon the productivity of their labor. The effect for the Rumanians was that they could immediately enjoy the advantages derived from the modern technological procedures. It was as if they had started at a much earlier date to save and to accumulate capital goods.
Shortage of capital means that one is further away from the attainment of a goal sought than if one had started to aim at it at an earlier date. Because one neglected to do this in the past, the intermediary products are wanting, although the nature-given factors from which they are to be produced are available. Capital shortage is dearth of time. It is the effect of the fact that one was late in beginning the march toward the aim concerned. It is impossible to describe the advantages derived from capital goods available and the disadvantages resulting from the paucity of capital goods without resorting to the time element of sooner and later.Cf. W.S. Jevons, The Theory of Political Economy (4th ed. London, 1924), pp. 224–229.
To have capital goods at one's disposal is tantamount to being nearer to a goal aimed at. An increment in capital goods available makes it possible to attain temporally remoter ends without being forced to restrict consumption. A loss in capital goods, on the other hand, makes it necessary either to abstain from striving after certain goals that one could aim at before or to restrict consumption. To have capital goods means, other things being equal, a temporal gain.This implies also equality in the quantity of nature-given factors available. As against those who lack capital goods, the capitalist, under the given state of technological knowledge, is in a position to reach a definite goal sooner without restricting consumption and without increasing the input of labor and nature-given material factors of production. His head start is in time. A rival endowed with a smaller supply of capital goods can catch up only by restricting his consumption.
The start that the peoples of the West have gained over the other peoples consists in the fact that they have long since created the political and institutional conditions required for a smooth and by and large uninterrupted progress of the process of larger-scale saving, capital accumulation, and investment. Thus, by the middle of the 19th century, they had already attained a state of well-being that far surpassed that of poorer races and nations less successful in substituting the ideas of acquisitive capitalism for those of predatory militarism. Left alone and unaided by foreign capital, these backward peoples would have needed much more time to improve their methods of production, transportation, and communication.
It is impossible to understand the course of world affairs and the development of the relations between West and East in the last centuries if one does not comprehend the importance of this large-scale transfer of capital. The West has given to the East not only technological and therapeutical knowledge, but also the capital goods needed for an immediate practical application of this knowledge. These nations of Eastern Europe, Asia, and Africa have been able, thanks to the foreign capital imported, to reap the fruits of modern industry at an earlier date. They were to some extent relieved from the necessity of restricting their consumption in order to accumulate a sufficient stock of capital goods. This was the true nature of the alleged exploitation of the backward nations on the part of Western capitalism about which their nationalists and the Marxians lament. It was a fecundation of the economically backward nations by the wealth of the more advanced nations.
The benefits derived were mutual. What impelled the capitalists of the West to embark upon foreign investment was the demand of the consumers. Consumers asked for goods that could not be produced at all at home and for a cheapening of goods that could be produced at home only with rising costs. If the consumers of the capitalist West had behaved in a different way, or if the institutional obstacles to capital export had proved insurmountable, no capital export would have occurred. There would have been more longitudinal expansion of domestic production instead of lateral expansion abroad.
[This article is excerpted from chapter 18 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach.]
[Libertarian Forum, October 1974]
During the week of June 15–22, 1974, the quaint and rustic Vermont village of South Royalton came alive in a way that it probably hasn't since the Revolutionary War. Under the auspices of the Institute for Humane Studies, 50 professors and students from the United States, Australia, and England gathered for a conference on Austrian economics.
Slightly over 100 years ago, the Austrian School of Economics was founded by Carl Menger. One of the pathfinders to break asunder the myth of the labor theory of value, which had dominated economics from the time of Adam Smith, Menger developed the subjective theory of value. The value of a good, Menger explained, was not determined by the input of labor into the product, but rather the labor was given value by the intensity felt for the product by the individual who would finally consume it. And since individuals valued things differently and by different scales, there was no way to objectively determine value other than relating it back to the individual valuer.
Menger was soon followed by two disciples who refined Austrian theory to such a point that it became a major force in the world of ideas: first, Friedrich von Wieser, who explained the theory of imputation and opportunity cost, by which is meant that supply is, in reality, indirect demand, for we value the resources necessary for making a product in relation to the forgone uses (demands) that cannot now be carried out with them; and second, Eugen von Böhm-Bawerk, who expounded on the theory of subjective value and related it to the problems of capital and interest.
In this century, the Austrian approach was extended by Ludwig von Mises. Mises applied subjective value theory to the area of money and out of this developed the Austrian (or circulation-credit) theory of the trade cycle. Government manipulation of bank credit and the money supply disturbs the rate of interest (which acts as the allocator of goods between those produced in the present and those in the future), thus creating shifts in the ratio of consumer goods vs. capital goods and, therefore, causing the business cycle.
Mises also showed that socialism, the elimination of money and private ownership of the means of production, would put insurmountable barriers in the way of rational economic calculation. And, finally, Mises developed the methodology of praxeology, the science of human action. Praxeology declares that men carry out rational action to achieve ends through chosen means. Thus, unlike the natural sciences, the social sciences have as their subject matter the purposeful action of reasoning individuals.
Further developments in Austrian theory were the product of the versatile mind of Friedrich von Hayek. Besides adding his own contributions to business-cycle theory, methodology, and capital theory, Hayek presented a radically different theory of competition. Market activity was seen, not as a disturbance to equilibrium, but, rather as a never ending discovery process for knowledge as men pursue their ends.
The Institute for Humane Studies brought to Vermont three of the leading Austrian theorists living today: Professor Murray Rothbard of the Polytechnic Institute of Brooklyn, author of Man, Economy and State, America's Great Depression, and Power and Market; Professor Israel Kirzner of New York University, author of The Economic Point of View, Market Theory and Price System, and most recently Competition and Entrepreneurship. And Professor Ludwig M. Lachmann, of the University of Witwaterstrand, South Africa, author of Capital and its Structure and Macro-economic Thinking and the Market Economy. Also among the conference attendants were such notables as, Henry Hazlitt, W.H. Hutt, D.T. Armentano, Sudha R. Shenoy, Walter Block, Gary North, and William Peterson.
The first day was highlighted by an opening evening banquet. In the late afternoon, Milton Friedman, who resides in Vermont, arrived at the South Royalton Inn, the site of the conference. Surrounded by a multitude of people, he declared that the optimum government policy would be one to insure zero inflation. When someone asked if it wouldn't be more optimal for the money supply to be kept constant and allow prices to gently fall with greater productivity, Friedman grudgingly conceded that it probably would be the more optimal choice.
Soon afterward, Friedman led the group out to the hotel porch where he proceeded to wax eloquent over the merits of "indexing." (For a critique of indexing, see "Uncle Miltie Rides Again," Libertarian Forum, May, 1974). After listing economists from 1702 to the present who have supported an index program, someone asked if we could now see a pure application of the program in the military dictatorship of Brazil? To which Friedman conceded, yes. He was then asked if this verified what his son, David, said at a meeting of the Philadelphia Society, that he (Milton) had latent fascist tendencies. Friedman muttered that he felt that David had been unfair.
At the dinner that evening, Henry Hazlitt reminisced about how he first met Ludwig von Mises in the 1940s. W.H. Hutt talked about the contributions that Mises made to economics, and Murray Rothbard related some of the anecdotes Mises told during his graduate seminars at NYU. When Milton Friedman was asked to make a few comments, he admitted that Mises had made a few contributions, but that he was much too "extreme." And, besides which, Friedman added, there was no such thing as "Austrian economics," only good economics and bad economics. (A rather unusual statement, because just a few weeks before, he had been on public television and spent several minutes explaining the special characteristics of "Chicago Economics.")
Starting the next day, a week of rigorous and incisive lectures began dealing with every facet of "Austrian" theory. Professors Rothbard and Kirzner laid the foundation by explaining the implications of praxeology. The study, Rothbard pointed out, begins with the fundamental axiom that man acts, that conscious action is taken to achieve chosen goals. This also implies that all action is purposeful and rational from the point of view of the actor.
All action, besides which, occurs through time. Action is taken now with the expected attainment of some result in the future. It also means that man acts without omniscience, for if an individual knew what the future would be, then his action to replace one state of affairs with another would be pointless. With a guaranteed and certain future, action becomes worthless, because nothing can be changed in that future.
The fact that action is purposeful, chosen, and subjective also means that any statistical or historical studies that attempt to measure or predict human activity must be seen as worthless. Professor Kirzner used the example of a man from Mars looking down at the earth through a telescope. The Martian observes that out of a box every day comes an object that enters another rectangular box that then moves away through a maze of canals and intersections. The Martian notices that on certain days the object that comes from the first box moves rapidly to catch up to the second, rectangular box. He then draws up a statistical study showing that 1 out of 10 times the object will move rapidly to reach the rectangular box and uses this for predictions of "earthly" activities.
What has been totally overlooked by this method is that the first box happens to be an apartment building out of which comes an individual who goes to the street corner to catch the morning bus to work. The fact that on occasion the individual in question oversleeps and has to rapidly chase after the bus, so as not to miss it, does in no way guarantee that he may not get a better alarm clock, go to sleep earlier, or in the future, oversleep even more often. Nor does one individual's actions determine how another individual will act in the same circumstances. Thus, to base one's understanding of man on statistics and historical studies is to ignore that human action is volitional, purposeful, and changeable, dependent on the goals and means of the acting individual.
The inability of the economics profession to grasp the mainsprings of human action has resulted from the adoption of economic models totally outside of reality. In the models put forth as explanations of market phenomena, equilibrium — that point at which all market activities come to rest and all market participants possess perfect knowledge with unchanging tastes and preferences — has become the cornerstone of most economic theory.
"Unlike the natural sciences, the social sciences have as their subject matter the purposeful action of reasoning individuals."Professor Lachmann, in an illuminating lecture, explained that the market is not a series of equilibrium points on a curve, but rather, it's a constant process kept moving because the underlying currents of human action never rest. Men, lacking omniscience, integrate within their plans the information provided by a constant stream of knowledge about changes in resource availabilities, the relevant action of other men, and unexpected occurrences. But because each man's perspective and interpretation of this stream of knowledge will be different, what seems relevant to one individual will be discarded as insignificant by another.
The unknowableness of the future means that individuals draw conclusions based upon expectations of what will happen over time. Divergent expectations and unexpected change, therefore, results in potential inconsistency of interpersonal plans. And when errors become visible to individuals, each market participant will learn different lessons from the revised, available information. And, thus, we are again faced with the possibility of inconsistency of different market plans.
But if the plans of market participants can never be expected to smoothly and automatically mesh, what forces in the market tend toward an equilibrating, or dovetailing of human action? At this point, Professor Kirzner's follow-up lecture offered the clue. Acting man is not merely a blind "taker" of prices and resource offerings; rather, because of the fact that unexpected change occurs in an uncertain future, man is also "watchful."
Alertness to previously unseen opportunities serves as the key to the equilibrating market force. This human capacity for alertness, said Kirzner, is the entrepreneurial role. It is not merely the difficult task of knowing when to hire and where to place the worker. It's a much more subtle and rarified knowledge; it's the ability of knowing where to get knowledge, of picking up bits of information that others around you have passed up and seeing the value of it for bringing into consistency a human plan or plans that otherwise would have remained in disequilibrium. The chance to profit from information about market opportunities that others have failed to see acts as the incentive for people to keep their eyes open for inconsistencies in human plans.
This train of thought was continued the following day with lectures by Professors Lachmann and Kirzner on the Austrian theory of capital. Capital is the intermediate product used to produce a good for consumption. Yet the many attempts to measure and quantify "society's" capital stock fall apart when we once again emphasize the nature of purposeful action. For a good is seen as a production good only within the context of the human plan. That which is seen as a capital good in one instance may become totally worthless or shift to a consumer good, dependent upon the subjective valuation of the actor.
The elusiveness of market equilibrium often means, as well, that, as Lachmann pointed out, a tendency of structural integration of interpersonal plans may exist, but some combinations that are found not to fit within evaluated plans may result in a scrapping of certain goods and, therefore, are "not really capital," in the eyes of the valuer. Kirzner continued the discussion with an excellent critique of John Hicks's recent attempt to place all theorists either in the category of "materialists," e.g., those who measure the quantity of physical "capital" objects, or as "fundists," e.g., those who attempt to sum up market values to measure capital goods. Rather, pointed out Kirzner, capital is the complex of "half-baked cakes," the interim form the resource takes in the process of a human plan.
Professor Rothbard delivered an interesting and comprehensive lecture on the Austrian theory of money. It was Ludwig von Mises, Rothbard pointed out, who first applied the principles of marginal utility to money, showing how money originated and how exchange values were established on the market. Professor Rothbard suggested three areas for possible future research: (1) how to separate the state from money; (2) the question of free banking vs. 100-percent-gold dollars; and (3) the defining of the supply of money.
He followed up with a lecture on "New Light on the Pre-History of the Austrian School," and showed the development of marginal-utility theories through the Middle Ages in Spain and Italy.
"Milton Friedman was then asked about what his son, David, said at a meeting of the Philadelphia Society, that he (Milton) had latent fascist tendencies. Friedman muttered that he felt that David had been unfair."Professor Lachmann finished his series of lectures with critiques of macroeconomics and the recent neo-Ricardian counterrevolution. One of the errors, Lachmann suggested, was that macroeconomics too often assumes a Walras-Paretian long-run equilibrium price structure. But, the basis of national income statistics is not long-run market outcomes but the output flows of "market-day equilibrium" prices. Prices are affected by changing streams of knowledge and data that result in constantly shifting patterns of prices and equilibriums. The attempt to find consistent aggregate macro variables is impossible.
The inability to successfully explain the workings of the economy from a macro foundation has resulted in a counterrevolution of "Ricardian" economists. A redevelopment of cost of production theories, a "methodological egalitarianism" which overlooks the entrepreneurial contribution, and an ignoring of the nature of diversity and expectations are their main contributions. But, says Lachmann, the neoclassical establishment (e.g., Samuelson, Hicks, Halm, etc.) are unable to give a satisfactory response within the macro framework.
Here is where the Austrians must step forward and present the microeconomic solution. Our methodological individualism will enable an understanding of how the economic process unfolds through human action. Lachmann offered the conference participants the slogan of calling ourselves "radical subjectivists."
On the last day of the conference, Professors Kirzner and Rothbard summed up the Austrian approach within a consideration of the "Philosophical and Ethical Implications of Austrian Economic Theory." Kirzner restated the principle of wertfrei, value-free, economic analysis. As an economist, the Austrian theorist does not make judgments on ends chosen. Rather, following the lead of Mises, he says, suppose someone wishes to enhance the economic welfare of the community. The economist need take no stand on the end chosen, but he can say whether the means chosen for that end will be successful. And, thus, he can make a judgment of "good" or "bad" within the context of the goal chosen by the valuer.
While admitting this, Professor Rothbard wondered if the economist could be totally value-free in all instances. What if a politician has as his end the economic impoverishment of the nation so as to use demagoguery for gaining political power? Are we to tell him that this is a "good" means to achieve his end? Thus, Rothbard concluded, it may often be necessary to have certain value-laden principles to judge ends as well as means.
Some extremely interesting papers were delivered in informal sessions during the week by other conference participants as well. Edwin Dolan, S. Peyovich and E. Clayton discussed the changes from central planning to quasi markets in socialist countries. Roger Garrison delivered an interesting paper on "Technique Reswitching and Capital Reversing." In a very well received paper, Gerald O'Driscoll analyzed Austrian theories of competition and business cycles in a lecture on "F.A. Hayek and the Neo-Classical Synthesis." Other topics included "Empirical Testing of Austrian Models" by Art Carol, "Subjectivism, Marginal Utility and the Marginal Revolution," by M. Rizzo and H. Young, and the success of free trade in Hong Kong in a talk by Sudha R. Shenoy.
In 1892, Friedrich von Wieser stated that,
the actual calculation of the economic world constitutes an unsurpassable work of art in which nothing is isolated or unconnected, and it is not completely grasped by theory so long as anything in it seems to be without connection with other portions of the system.
It is perhaps because Austrian theorists have always taken Wieser's words to heart that while other economists were gaining notoriety with "tracts for the times," they were studiously building an edifice of economic theory to explain all human action.
While other economists were trying to find the origin of economic crises in sunspots and statistical comparisons, Austrian thinkers listened to Böhm-Bawerk that,
A theory of crises can never be an inquiry into just one single phase of economic phenomena. If it is to be more than an amateurish absurdity, such an inquiry must be the last, or the next to last, chapter of a written or unwritten economic system. In other words, it is the final fruit of knowledge of all economic events and their interconnected relationships.
The result was the building of a theory of money and credit on the foundation of subjective marginal utility by Ludwig von Mises.
In the United States, the Austrians have been in a theoretical underworld in an environment dominated by Keynesianism. But as the structure of establishment economics has fallen more and more into disrepute, individuals have discovered an alternative approach that explains more clearly the workings of reality. Building up momentum slowly, the Austrian School has silently been finding adherents around the country, as well as the world.
Sensing the rightness of the times, the conference on Austrian economics was planned as a catalyst for expanding interest in the praxeological approach. To this end, the conference must be declared a resounding success. It opened up lines of communication among individuals who were developing ideas along similar lines but did not know of each other's existence, let alone the work being done. It can probably be safely said that every participant, whether totally convinced of the Austrian method or not, went away desiring to give careful thought to this theoretical framework.
"The conference on Austrian economics was planned as a catalyst for expanding interest in the praxeological approach. To this end, the conference must be declared a resounding success."The Keynesian macro model has lost its credibility. Socialist economics has long ago proven itself defunct. Only the market economy can offer solutions to the economic problems the world faces. But its acceptance will be dependent on the case offered for its adoption. The Austrian framework offers such a case. Starting from the foundation of economic activity, the subjective choices of acting individuals, all economic phenomena cannot only be explained but easily comprehended. For all men act, all men choose, all men plan. It is a theoretical construction self evident to all thinking men.
As a further step in developing interest and understanding of Austrian theory, Percy L. Greaves has put together a comprehensive glossary of Ludwig von Mises's Human Action, entitled Mises Made Easier. As an added treat, an appendix has been included with a never-before-in-English critique by Mises of Böhm-Bawerk's time-preference theory. The volume is scheduled to be in print this fall.
Also, Bettina Bien Greaves, a senior staff member of the Foundation for Economic Education, has recently translated three works by Mises never before available in English.
The first of these translations, entitled "Stabilization of the Monetary Unit: Considered from the Point of View of Theory," was published in 1923, shortly before the total collapse of the German currency. In this essay, Mises explains the redistributing effects of inflation to those who first receive the new money at the expense of the others who face higher prices before their incomes rise. Also, he explains the fact that as the depreciation progresses, a "flight" from money becomes so general that "the monetary units available at the moment are not sufficient to pay the prices which correspond to the anticipated future demand for, and supply of, monetary units." This "phenomena of advanced inflation … is the other side of the 'crack-up boom.'"
Mises dissects the "balance of payments" doctrine and the "inflationist argument" that it is more painless to depreciate the currency than raise taxes. Finally, Mises declares that the "first condition of any monetary reform is to halt the printing presses" and "refrain from financing government deficits by issuing notes, directly or indirectly." Inflation, Mises concludes, is always the "product of human action and man-made policy." It is a part of the total politicoeconomic and sociophilosophical ideas of our time. A sound monetary system must firmly be "grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist and socialist ideas."
The second essay is his 1928 work, "Monetary Stabilization and Cyclical Policy." Mises states the problem of the day as the attempt to stabilize the value of money, the attempt to preserve the "price level." Mises explains at length that any goods that are the products of human action, like money, cannot have their value "fixed." "There is no such thing as a stable purchasing power, and never can be … only an economy in the final state of rest, where all prices remained unchanged, could have a money with fixed purchasing power." It also shows, says Mises, that measuring changes in purchasing power is impossible as well. Exchange ratios on the market are constantly subject to change, and for a measurement "we must imagine an unchanging man with never-changing values."
Mises then offers a critique of Fisher's index-number proposal for adjusting changes in purchasing power. Everything Mises says about Fisher's idea can equally be said about Friedman's indexation plan. Since purchasing power cannot be scientifically measured, points out Mises, any index program would become a political issue. Governments would be pressured to index purchasing power favorable to some groups at the expense of others.
Also, changes in money prices don't affect all commodities at the same time and to the same extent. Only gradually does the change in purchasing power work its way through the economy, and because the price changes will bring shifts in income distribution, the exchange ratios will be different from what they started. Even if the indexing attempts to be "precise" by measuring on a narrow month-to-month basis, "the step-by-step emergence of changes in purchasing power" are accruing during the month. Thus, the "adjustment calculated at that time is based on the index number of the previous month when the full extent of that month's monetary depreciation had not been felt because all prices had not yet been affected."
Mises, in the second half of this essay, develops in complete detail his famous trade-cycle theory. He explains why price stabilization results in a "destabilizing" of price ratios and brings about the imbalance of capital goods and consumer goods by credit expansion artificially lowering the rate of interest, and how the end result of such policies must be an eventual readjustment of the structure of production, representing the actual savings and consumption of market participants.
The third essay, entitled "Causes of the Economic Crisis: an Address," was delivered by Mises in 1931 and represents his analysis of the causes and prolonging of the depression. He gives an incisive critique of the mass unemployment problem, "easy money" policies, price supports, and tax policies. Mises concludes that the only lasting solution is to give "up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices, different from those the market indicates."
The essays have been organized under the title Money, Inflation and the Trade Cycle: Three Theoretical Studies by Ludwig von Mises.Editor's note: In 1978, these three essays were published in On the Manipulation of Money and Credit, together with Mises's "The Current Status of Business Cycle Research" (1933), and "The Trade Cycle and Credit Expansion" (1946). LvMI has newly edited and republished this book as Causes of the Economic Crisis. Besides being translated by Bettina Bien Greaves, they have been edited by Percy L. Greaves, and a special introduction to the volume is planned by him. Present plans are for the book to be published sometime next year.
With a conference on Austrian Economics, and with newly translated works by Ludwig von Mises soon to be available to the public, a turning point in the economics profession may be just before us.
This article originally appeared in the Libertarian Forum, October 1974, pp. 3–6.
[This essay is dedicated to the memory of John David Fernandez.]
"There is no inductive method which could lead to the fundamental concepts of physics … in error are those theorists who believe that theory comes inductively from experience."– Albert Einstein, The Method of Theoretical Physics, Oxford, 1933Science is united by its use of logic and deductive reasoning. It remains objective and formally governed by the principle that an argument based on true premises cannot yield a false conclusion.
It is, of course, possible to derive true conclusions from false premises. To give a simple example, we may say that pigs are birds, birds cannot fly, and hence pigs cannot fly. However, positivists in the economics profession have asserted that such derivations are the most common and useful method of inference employed by the natural sciences. In this, they are entirely wrong.
In the dispute between the once-supreme caloric theory, and the nascent kinetic theory, both sides claimed to have the correct explanation for the phenomenon of heat. The caloric theory claimed heat and combustion were caused by the emanation of a substance known as "caloric" from hot bodies. The kinetic theory claimed that there was a mechanical equivalence of heat and work, so that both are simply different forms of each other — later labeled "energy" by Thomas Young in 1807.
In this particular case, we are faced with the typical situation in the natural sciences: we cannot directly establish the truth of our premises. However, we may deductively infer the consequences following from either theory.
If either of these theories yields conclusions that can be shown to be false, then they are themselves falsified. This follows since from a true premise, only true conclusions can follow. Hence, if a conclusion following from a premise is shown to be false, the premise itself must be false as well and hence can be discarded.
The caloric theory was decisively rejected by Count Benjamin Rumford in 1798. He demonstrated via the friction induced by boring a hole in a cannon that one could heat water for hours and hours, just as long as the hole is bored.
Rumford noted that the amount of heat released from the cannon would have been more than sufficient to completely melt the metal, if the heat could be returned to the cannon somehow. This demonstrated that more heat was being released than could have originally been contained by the metal.
Furthermore, he was able to calculate the mechanical equivalent of heat for the work done, which was later used to establish the conservation-of-energy principle. From this followed the first law of thermodynamics, possibly the best way to sum up the kinetic theory of heat.
What we have seen here is that we have been able to rule out one proposition by demonstrating its conclusions to be false.
It should be clear to the reader now that to explain the scientific method of inference as a way of producing knowledge from false premises is patently absurd. The entire point of the scientific method is to rule out premises that are contradicted by observations. It has never meant beginning with premises you know to be false and absurd, tracing out whatever implications you can draw from there, and, when circumstantially finding congruence with your "predictions" and observed data, asserting the result of your machinations as "scientific knowledge."
The reader should now be able to note just how shaky and peculiar the methodological stance of positivist, or rather "positive," economics actually is. In Friedman's essay, "The Methodology of Positive Economics," he defends deriving consequences from clearly false premises with regard to the study of human action. He aptly states that hypotheses are not required to be "realistic" in their assumptions.
Unfortunately for him, a "hypothesis" that incorporates notions and assertions that are demonstrably false is not a hypothesis but a falsehood. Many of the falsehoods that are defended by him, like homo economicus, perfect competition, and perfect knowledge, are still applied in neoclassical economics today.
One can identify from Friedman's essay a confusion about the way in which assumptions are utilized in the natural sciences. Systems are never modeled according to assumptions that are fantastically flawed in describing them. As Lev Landau notes on the first page of his Course of Theoretical Physics, "the planets may be regarded as particles in considering their motion about the Sun, but not in considering their rotation about their axes." If physics is truly the science that modern neoclassical economists seek to emulate, it is unfortunate for them that they have utterly misunderstood its methodology. Much of what is labeled "economics" today therefore cannot correctly be described as a science.
Those who seek to justify reasoning from false premises as a reliable method for producing knowledge about the real world often use the grounds of its alleged utility in making predictions about the real world. They should consider the following story:
A few years ago, Western aid organizations and charities made the error of attempting to supplant local tribal customs and impose Western medical practices on certain African populations in order to help prevent the spread of infectious diseases. The strategy was a catastrophe; the locals did not easily take up and adopt these strange and foreign customs.
Moreover, the aid organizations completely misunderstood the way in which local practices were actually efficacious in helping prevent the spread of disease, despite being justified on grounds that were rather absurd and superstitious from a modern, scientific viewpoint. To isolate the "cursed" individual from the rest of society, and to restrict the use of the water supply in order to "repent" for collective sins, strikes us as nonsensical and superstitious. Yet the actual practices adopted on the basis of this reasoning were quite effective at preventing the spread of illness.
No sane person in Western society would attempt to describe these tribal practices as science, yet this is very similar to the reasoning used to justify Friedman's methodological stance in economics. In fact, these superstitions do actually display a pragmatic expediency and predictive power, and their premises are unsubstantiated hypotheses as opposed to false assertions — more than we can say for Friedmanite economics.
One may now wonder, could there be any scientific basis for the knowledge conveyed by economics? Ludwig von Mises provides the answer to this question. He did so, not by attempting to "revolutionize," but by revising and reflecting on the roots of a discipline he had studied and researched for a lifetime, and by improving on the thoughts and insights of his predecessors, such as Nassau Senior and Carl Menger.
The category of action and the praxeological theorems and statements developed from it are supposed to embody the most controversial aspect of modern "Austrian" economics. That other men act, aiming at ends and applying means while maintaining the same logical categories has been implied in social intercourse throughout human history. Despite the claims of racists and other polylogists to the contrary, no significant evidence has ever been provided that denies these propositions. Indeed, one who attempts to deny them must already assume their certainty in those whom he wishes to convince.
There are certainly epistemological problems with regard to our understanding of the behavior of others, no less perplexing than those associated with causality and induction. Yet those that ignore the philosophical problems associated with the methods of the natural sciences because of their demonstrated pragmatic expediency in technological application must similarly realize that the understanding of the actions of others as purposeful and conscious, sharing the same categories as oneself, has served us tremendously well, practically. No dialectical artifice can spirit away the fact that we begin our analysis of the actions of other human beings with the notion that they aim at ends and apply means to achieve them.
Praxeology is therefore based on the demonstrably true notion that we and other human beings act. Rather than utilizing the superstitious notion of collective action, praxeological actions are recognized to be made by individuals, one at a time connected together in a causal chain.
In the course of this essay, I have criticized certain applications of false premises. I have certainly not meant to criticize these as theoretical devices per se. They certainly have their uses. The evenly rotating economy is the device with which one can explain the source of profit and loss while demonstrating the equilibrating tendency prevalent and implied by market action. The counterfactual analysis of Bastiat's broken window certainly enhances our knowledge of the real world.
MP3CD$20 $15
Audiobook read by Jeff RiggenbachThe science of human action is mental and aprioristic, it is the product of a logical analysis of the categories implied in different modes of action. And yet it produces an empirically valid knowledge of the consequences of these actions, since they are carried out in the real world. In order to trace cause-and-effect relations affecting action in the real world, we must combine the conceptual, praxeological knowledge we can derive with an understanding of the whims and factors affecting the actions of our fellow man.
It would do humanity a great service if more engaged in a study of the real economics: praxeological economics. It could certainly help explain a lot more than the confused empiricism currently governing the ideas of the economics profession.
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ReferencesM.R. Cohen and E. Nagel, An Introduction to Logic, 2nd edition, edited and introduced by J. Corcoran (Hackett Publishing Company, Inc. Indianapolis, Indiana, 1993), Chapter 1.
L. von Mises, Human Action: A Treatise on Economics: The Scholar's Edition(Ludwig Von Mises Institute, Auburn, 2008).
M. Friedman, "The Methodology of Positive Economics" in Essays in Positive Economics (Chicago: Univ. of Chicago Press, 1966), pp. 3–41.
L.D. Landau and E.M. Lifshitz, Mechanics. English edition (Pergamon Press Ltd. Headington Hill Hall, Oxford, 1960), p. 1.
C.J. Adkins, Equilibrium Thermodynamics, 2nd edition (McGraw-Hill Book Company (UK) Ltd., London, 1975), pp. 31–33.
Science World, "Rumford, Benjamin Thompson."
[Excerpted from the Journal of Libertarian Studies]
I. The Comparative Economics of Private and Public Government OwnershipA government is a territorial monopolist of compulsion — an agency which may engage in continual, institutionalized property rights violations and the exploitation — in the form of expropriation, taxation and regulation — of private property owners. Assuming no more than self-interest on the part of government agents, all governments must be expected to make use of this monopoly and thus exhibit a tendency toward increased exploitation.On the theory of the state see M.N. Rothbard, For A New Liberty (New York: Macmillan, 1978); idem, The Ethics of Liberty (Atlantic Highlands: Humanities Press, 1982); idem, Power and Market(Kansas City: Sheed, Andrews & McMeel, 1977); H.H. Hoppe, Eigentum, Anarchie und Staat (Opladen: Westdeutscher Verlag, 1987); idem, A Theory of Socialism and Capitalism(Boston: Kluwer, 1989); idem, The Economics and Ethics of Private Property(Boston: Kluwer, 1993); also A.J. Nock, Our Enemy, the State(Delevan: Hallberg Publishing Co., 1983); F. Oppenheimer, The State (New York: Vanguard Press, 1914); idem, System der Soziologie. Vol.2: Der Staat (Stuttgart: G. Fischer, 1964).
However, not every form of government can be expected to be equally successful in this endeavor or to go about it in the same way. Rather, in light of elementary economic theory, the conduct of government and the effects of government policy on civil society can be expected to be systematically different, depending on whether the government apparatus is owned privately or publicly.See on the following also H.H. Hoppe, "Time Preference, Government, and the Process of De-Civilization — From Monarchy to Democracy," Journal des Economistes et des Etudes Humaines, Vol. V, No. 4, 1994.
The defining characteristic of private government ownership is that the expropriated resources and the monopoly privilege of future expropriation are individually owned. The appropriated resources are added to the ruler's private estate and treated as if they were a part of it, and the monopoly privilege of future expropriation is attached as a title to this estate and leads to an instant increase in its present value ("capitalization" of monopoly profit).
Most importantly, as private owner of the government estate, the ruler is entitled to pass his possessions onto his personal heir; he may sell, rent, or give away part or all of his privileged estate and privately pocket the receipts from the sale or rental; and he may personally employ or dismiss every administrator and employee of his estate.
In contrast, in a publicly owned government the control over the government apparatus lies in the hands of a trustee, or caretaker. The caretaker may use the apparatus to his personal advantage, but he does not own it. He cannot sell government resources and privately pocket the receipts, nor can he pass government possessions onto his personal heir. He owns the current use of government resources, but not their capital value.
Moreover, while entrance into the position of a private owner of government is restricted by the owner's personal discretion, entrance into the position of a caretaker-ruler is open. Anyone, in principle, can become the government's caretaker.
From these assumptions two central, interrelated predictions can be deduced:
A private government owner will tend to have a systematically longer planning horizon, i.e., his degree of time preference will be lower, and accordingly, his degree of economic exploitation will tend to be less than that of a government caretaker; andsubject to a higher degree of exploitation, the nongovernmental public will also be comparatively more present oriented under a system of publicly owned government than under a regime of private government ownership.(1) Government Owners' Time PreferencesA private government owner will predictably try to maximize his total wealth, i.e., the present value of his estate and his current income. He will not want to increase his current income at the expense of a more-than-proportional drop in the present value of his assets, and because acts of current-income acquisition invariably have repercussions on present asset values (reflecting the value of all future — expected — asset earnings discounted by the rate of time preference), private ownership in and of itself leads to economic calculation and thus promotes farsightedness.
In the case of the private ownership of government, this implies a distinct moderation with respect to the ruler's incentive to exploit his monopoly privilege of expropriation, for acts of expropriation are by their nature parasitic upon prior acts of production on the part of the nongovernmental public. Where nothing has first been produced, nothing can be expropriated; and where everything is expropriated, all future production will come to a shrieking halt.
Accordingly, a private government owner will want to avoid exploiting his subjects so heavily, for instance, as to reduce his future earnings potential to such an extent that the present value of his estate actually falls. Instead, in order to preserve or possibly even enhance the value of his personal property, he will systematically restrain himself in his exploitation policies. For the lower the degree of exploitation, the more productive the subject population will be; and the more productive the population, the higher will be the value of the ruler's parasitic monopoly of expropriation.
He will use his monopolistic privilege, of course. He will not exploit. But as the government's private owner, it is in his interest to draw parasitically on a growing, increasingly productive and prosperous nongovernment economy as this would effortlessly also increase his own wealth and prosperity — and the degree of exploitation thus would tend to be low.
Moreover, private ownership of government implies moderation and farsightedness for yet another reason. All private property is by definition exclusive property. He who owns property is entitled to exclude everyone else from its use and enjoyment; and he is at liberty to choose with whom, if anyone, he is willing to share in its usage. Typically, he will include his family and exclude all others, except as invited guests or as paid employees or contractors.
Only the ruling family — and to a minor extent its friends, employees and business partners — share in the enjoyment of the expropriated resources and can thus lead a parasitic life. Because of these restrictions regarding entrance into government and the exclusive status of the individual ruler and his family, private government ownership stimulates the development of a clear "class consciousness" on the part of the nongovernmental public and promotes opposition and resistance to any expansion of the government's exploitative power.
A clear-cut distinction between the (few) rulers on the one hand and the (many) ruled on the other exists, and there is little risk or hope of anyone of either class ever falling or rising from one class to the other. Confronted with an almost insurmountable barrier in the way of upward mobility, the solidarity among the ruled — their mutual identification as actual or potential victims of governmental property-rights violations — is strengthened, and the risk to the ruling class of losing its legitimacy as the result of increased exploitation is heightened.See also B. de Jouvenel, On Power (New York: Viking, 1949), esp. pp. 9–10.
In distinct contrast, the caretaker of a publicly owned government will try to maximize not total government wealth (capital values and current income), but current income (regardless, and at the expense, of capital values). Indeed, even if the caretaker wishes to act differently, he cannot. Because as public property government resources are not for sale, and without market prices economic calculation is impossible. Accordingly, it has to be regarded as unavoidable that public government ownership will result in continual capital consumption.
Instead of maintaining or even enhancing the value of the government estate, as a private owner would tend to do, a government's temporary caretaker will quickly use up as much of the government resources as possible, for what he does not consume now, he may never be able to consume.
In particular, a caretaker — as distinct from a government's private owner — has no interest in not ruining his country. For why should he not want to increase his exploitation if the advantage of a policy of moderation — the resulting higher capital value of the government estate — cannot be reaped privately, while the advantage of the opposite policy of increased exploitation — a higher current income — can be so reaped? To a caretaker, unlike to a private owner, moderation has only disadvantages and no advantages.See M.N. Rothbard, Power and Market, pp. 188–189; also G. Hardin & J. Baden, eds., Managing the Commons (San Francisco: W.H. Freeman, 1977); and M. Olson, "Dictatorship, Democracy, and Development," American Political Science Review 87, 3, 1993.
In addition, with a publicly owned government, anyone in principle can become a member of the ruling class or even the supreme power. The distinction between the rulers and the ruled as well as the class consciousness of the ruled become blurred. The illusion even arises that the distinction no longer exists: that with a public government no one is ruled by anyone, but everyone instead rules himself. Accordingly, public resistance against government power is systematically weakened.
While exploitation and expropriation before might have appeared plainly oppressive and evil to the public, they seem much less so, mankind being what it is, once anyone may freely enter the ranks of those who are at the receiving end. Consequently, not only will exploitation increase, whether openly in the form of higher taxes or discretely as increased governmental money "creation" (inflation) or legislative regulation. Likewise, the number of government employees ("public servants") will rise absolutely as well as relatively to private employment, in particular attracting and promoting individuals with high degrees of time preference, and low and limited farsightedness.
(2) Subjects' Time PreferencesIn contrast to the right to self-defense in the event of a criminal attack, the victim of government violations of private-property rights may not legitimately defend himself against such violations.In addition to the works quoted in fn.1 above, see L. Spooner, No Treason: The Constitution of No Authority (Larkspur: Pine Tree Press, 1966), p. 17.
The imposition of a government tax on property or income violates a property owner's and income producer's rights as much as theft does. In both cases, the owner-producer's supply of goods is diminished against his will and without his consent. Government money or "liquidity" creation involves no less a fraudulent expropriation of private-property owners than the operations of a criminal counterfeiting gang.
As well, any government regulation as to what an owner may or may not do with his property — beyond the rule that no one may physically damage the property of others and that all exchange and trade be voluntary and contractual — implies a "taking" of somebody's property, on a par with acts of extortion, robbery, or destruction. But taxation, the government's provision for liquidity, and government regulations, unlike their criminal equivalents, are considered legitimate, and the victim of government interference, unlike the victim of a crime, is not entitled to physically defend and protect his property.
Owing to their legitimacy, then, government violations of property rights affect individual time preferences in a systematically different and much more profound way than crime. Like crime, all government interference with private property rights reduces someone's supply of present goods and thus raises his effective time-preference rate. However, government offenses — unlike crime — simultaneously raise the time preference degree of actual and potential victims because they also imply a reduction in the supply of future goods (a reduced rate of return on investment).
Crime, because it is illegitimate, occurs only intermittently — the robber disappears from the scene with his loot and leaves his victim alone. Thus, crime can be dealt with by increasing one's demand for protective goods and services so as to restore or even increase one's future rate of investment return and make it less likely that the same or a different robber will succeed a second time.
In contrast, because they are legitimate, governmental property rights violations are continual. The offender does not disappear into hiding but stays around, and the victim does not "arm" himself but must (at least he is generally expected to) remain defenseless. The actual and potential victims of government property-rights violations respond by associating a permanently higher risk with all future production, and systematically adjusting their expectations concerning the rate of return on all future investment downward.
By simultaneously reducing the supply of present and expected future goods, then, governmental property-rights violations not only raise time preference rates (with given schedules) but also time-preference schedules. Because owner-producers are — and see themselves as — defenseless against future victimization by government agents, their expected rate of return on productive, future-oriented actions is reduced all-around, and accordingly, all actual and potential victims become more present-oriented.On the phenomenon and theory of time preference see in particular L. von Mises, Human Action. A Treatise on Economics (Chicago: H. Regnery, 1966), chs. XVIII, XIX; also W. St. Jevons, Theory of Political Economy (New York: A. Kelley, 1965); E.v. Böhm-Bawerk, Capital and Interest, 3 vols. (South Holland: Libertarian Press, 1959); F. Fetter, Capital, Interest, and Rent (Kansas City: Sheed, Andrews & McMeel, 1977); M.N. Rothbard, Man, Economy, and State (Los Angeles: Nash, 1970).
Moreover, because the degree of exploitation is comparatively higher under a publicly owned government, this tendency toward present-orientation will be significantly more pronounced if the government is publicly owned than if it is owned privately.See also H.H. Hoppe, Time Preference, Government, and the Process of Decivilization - From Monarchy to Democracy
II. Application: The Transition from Monarchy to Democracy (1789–1918)Hereditary monarchies represent the historical example of privately owned governments, and democratic republics that of publicly owned governments.
For most of its history, mankind, insofar as it was subject to any government control at all, was under monarchical rule. There were exceptions: Athenian democracy, Rome during its republican era until 31 BC, the republics of Venice, Florence and Genoa during the renaissance period, the Swiss cantons since 1291, the United Provinces from 1648 until 1673, and England under Cromwell from 1649 until 1660. Yet these were rare occurrences in a world dominated by monarchies. With the exception of Switzerland, they were short-lived phenomena.
Constrained by monarchical surroundings, all older republics satisfied the open-entry condition of public property only imperfectly, for while a republican form of government implies by definition that the government is not privately but publicly owned, and a republic can thus be expected to possess an inherent tendency toward the adoption of universal suffrage, in all of the earlier republics, entry into government was limited to relatively small groups of "nobles."
With the end of World War I, mankind truly left the monarchical age.See on this G. Ferrero, Peace and War (Freeport: Books for Libraries Press,1969), esp. ch. 3; idem, Macht (Bern: A. Francke, 1944); E. v. Kuehnelt-Leddihn, Leftism Revisited (Washington D.C.: H. Regnery, 1990); R. Bendix, Kings or People (Berkeley: University of California Press, 1978). In the course of the one-and-a-half centuries since the French Revolution, Europe, and in its wake the entire world, have undergone a fundamental transformation. Everywhere, monarchical rule and sovereign kings were replaced by democratic-republican rule and sovereign "peoples."
The first assault of republicanism and the idea of popular sovereignty on the dominating monarchical principle was repelled with the military defeat of Napoleon and the restoration of Bourbon rule in France. As a result of the revolutionary terror and the Napoleonic wars, republicanism was widely discredited for much of the 19th century.
However, the democratic-republican spirit of the French revolution left a permanent imprint. From the restoration of the monarchical order in 1815 until the outbreak of WWI in 1914, all across Europe popular political participation and representation was systematically expanded. The franchise was successively widened and the powers of popularly elected parliaments increased everywhere.For a detailed documentation see P. Flora, State, Economy, and Society in Western Europe 1815–1975, Vol. I (Frankfurt/M.: Campus, 1983), ch. 3; also R.R. Palmer & J. Colton, A History of the Modern World (New York: A. Knopf, 1992), esp. chs. XIV, XVIII.
From 1815 to 1830, the right to vote in France was still severely restricted under the restored Bourbons. Out of a population of some 30 million, the electorate included only France's very largest property owners — about 100,000 people (less than 0.5 percent of the population above the age of 20). As a result of the July Revolution of 1830, the abdication of Charles X and the ascension to the throne of the Duke of Orleans, Louis Philippe, the number of voters increased to about 200,000. As a result of the revolutionary upheavals of 1848, France again turned republican, and a universal and unrestricted suffrage for all male citizens above the age of 21 was introduced. Napoleon III was elected by nearly 5.5 million votes out of an electorate of more than 8 million.
In the United Kingdom after 1815, the electorate consisted of some 500,000 well-to-do property owners (about 4 percent of the population above age 20). The Reform Bill of 1832 lowered the property owner requirements and extended the franchise to about 800,000. The next extension, from about 1 million to 2 million, came with the Second Reform Bill of 1867. In 1884 property restrictions were relaxed even further, and the electorate increased to about 6 million (almost a third of the population above age 20 and more than three-fourths of all male adults).
In Prussia, as the most important of the 39 independent German states recognized after the Vienna Congress, democratization set in with the revolution of 1848 and the constitution of 1850. The lower chamber of the Prussian parliament was hence elected by universal male suffrage.
"In addition to increased exploitation and social decay, the transition from monarchy to democracy has brought a change from limited warfare to total war."However, until 1918 the electorate remained stratified into three estates with different voting powers. For example, the wealthiest people — those who contributed a third of all taxes — elected a third of the members of the lower house.
In 1867, the North German Confederation, including Prussia and 21 other German states, was founded. Its constitution provided for universal, unrestricted suffrage for all males above the age of 25. In 1871, after the victory over Napoleon III, the constitution of the North German Confederation was essentially assumed by the newly founded German Empire. Out of a total population of around 35 million, nearly 8 million people (or about a third of the population above 20) elected the first German Reichstag.
After Italy's political unification under the leadership of the Kingdom of Sardinia and Piedmont in 1861, initially the vote was only given to about 500,000 people out of a population of some 25 million (about 3.5 percent of the population above age 20). In 1882, the property requirements were relaxed, and the minimum age was lowered from 25 to 21 years. As a result, the Italian electorate increased to more than 2 million. In 1913, an almost universal and unrestricted suffrage for all males above 30 and minimally restricted suffrage for males above 21 was introduced, raising the number of Italian voters to more than 8 million (more than 40 percent of the population above 20).
In Austria, restricted and unequal male suffrage was introduced in 1873. The electorate, composed of four classes or curia of unequal voting powers, totaled 1.2 million voters out of a population of about 20 million (10 percent of the population above 20). In 1867 a fifth curia was added. And forty years later the curia system was abolished, and universal and equal suffrage for males above age 24 was adopted, bringing the number of voters close to 6 million (almost 40 percent of the population above 20).
Russia had elected provincial and district councils — zemstvos — since 1864; and in 1905, as a fallout of its lost war against Japan, it created a parliament — the Duma — which was elected by a near universal, although indirect and unequal, male suffrage. As for Europe's minor powers, universal or almost universal and equal male suffrage has existed in Switzerland since 1848, and was adopted between 1890 and 1910 in Belgium, the Netherlands, Norway, Sweden, Spain, Greece, Bulgaria, Serbia, and Turkey.
Although increasingly emasculated, the monarchical principle remained dominant until the cataclysmic events of WWI. Before 1914, only two republics existed in Europe — France and Switzerland. And of all major European monarchies, only the United Kingdom could be classified as a parliamentary system; that is, one where the supreme power was vested in an elected parliament.
Only four years later, after the United States — where the democratic principle implied in the idea of a republic had only recently been carried to victory as a result of the destruction of the secessionist Confederacy by the centralist Union governmentOn the aristocratic (undemocratic) character of the early United States, see Lord Acton, "Political Causes of the American Revolution" in: idem, The Liberal Interpretation of History (Chicago: University of Chicago Press, 1967); also, Ch. Woltermann, "Federalism, Democracy and the People," Telos, Vol. 26, 1, 1993. — had entered the European war and decisively determined its outcome, monarchies had all but disappeared, and Europe turned to democratic republicanism.On the US war involvement, see J.F.C. Fuller, The Conduct of War (New York: Da Capo, 1992), ch. IX; on the role of Woodrow Wilson, and his policy of wanting to 'make the world safe for democracy', see M.N. Rothbard, "World War I as Fulfillment; Power and the Intellectuals," Journal of Libertarian Studies, 9, no. 1, 1989; P. Gottfried, "Wilsonianism: The Legacy that Won't Die," Journal of Libertarian Studies, 9, no. 2, 1990; E.v. Kuehnelt-Leddihn, Leftism Revisited, ch. 15.
In Europe, the defeated Romanovs, Hohenzollerns, and Habsburgs had to abdicate or resign, and Russia, Germany, and Austria became democratic republics with universal — male and female — suffrage and parliamentary governments. Likewise, all of the newly created successor states — Poland, Finland, Estonia, Latvia, Lithuania, Hungary, and Czechoslovakia (with the sole exception of Yugoslavia) — adopted democratic-republican constitutions.
In Turkey and Greece, the monarchies were overthrown. Even where monarchies remained nominally in existence, as in Great Britain, Italy, Spain, Belgium, the Netherlands, and the Scandinavian countries, monarchs no longer exercised any governing power. Universal adult suffrage was introduced, and all government power was invested in parliaments and "public" officials. Interestingly, the Swiss Republic, which had been the first country to establish universal male suffrage (in 1848), was the last to expand the suffrage also to women (in 1971). Similarly, the French Republic, where universal male suffrage had existed since 1848, extended the franchise to women only in 1945. A new world order — the democratic-republican age, under the aegis of a dominating US government — had begun.
III. Evidence and Illustrations: Exploitation and Present-Orientedness under Monarchy and Democratic RepublicanismFrom the viewpoint of economic theory, the end of WWI can be identified as the point in time at which private government ownership was completely replaced by public government ownership, and whence a systematic tendency toward increased exploitation — government growth — and rising degrees of social time preference — present-orientedness — can be expected to take off. Indeed, this has been the grand, underlying theme of post-WWI Western history: from 1918 onward practically all indicators
of governmental exploitation andof rising time preferences have exhibited a systematic upward tendency.III.1. Indicators of ExploitationThere is no doubt that the amount of taxes imposed on civil society increased during the monarchical age.See H.J. Schoeps, Preussen. Geschichte eines Staates (Frankfurt/M.: Ullstein, 1981), p. 405 on data for England, Prussia, and Austria. However, throughout the entire period, the share of government revenue remained remarkably stable and low. Economic historian Carlo M. Cipolla concludes,
All in all, one must admit that the portion of income drawn by the public sector most certainly increased from the eleventh century onward all over Europe, but it is difficult to imagine that, apart from particular times and places, the public power ever managed to draw more than 5 to 8 percent of national income.
And he then goes on to note that this portion was not systematically exceeded until the second half of the 19th century.C.M. Cipolla, Before the Industrial Revolution. European Society and Economy, 1000–1700 (New York: W.W. Norton, 1980), p. 48. Until then, of all Western European countries only the United Kingdom had an income tax (from 1843 on). France first introduced some form of income tax in 1873, Italy in 1877, Norway in 1892, the Netherlands in 1894, Austria in 1898, Sweden in 1903, the United States in 1913, Switzerland in 1916, Denmark and Finland in 1917, Ireland and Belgium in 1922, and Germany in 1924.See P. Flora, State, Economy and Society in Western Europe, Vol. 1, pp. 258–259. Yet even at the time of the outbreak of WWI, total government expenditure as a percentage of Gross Domestic Product (GDP) typically had not risen above 10 percent and only rarely, as in the case of Germany, exceeded 15 percent. In striking contrast, with the onset of the democratic-republican age, total government expenditure as a percentage of GDP typically increased to 20 to 30 percent in the course of the 1920s and 1930s, and by the mid-1970s had generally reached 50 percent. Ibid, ch. 8.
There is also no doubt that total government employment increased during the monarchical age. But until the very end of the 19th century, government employment rarely exceeded 3 percent of the total labor force. In contrast, by the mid-1970s government employment as a percentage of the total labor force had typically grown to above 15 percent.Ibid, ch. 5. In fact, the share of government employment in present times must be considered systematically underestimated, for apart from excluding all military personnel it also excludes the personnel in hospitals, welfare institutions, social insurance agencies, and nationalized industries.
The same pattern emerges from an inspection of inflation and the money supply. The monarchical world was generally characterized by the existence of a commodity money — typically silver or gold. A commodity money standard makes it difficult, if not impossible, for a government to inflate the money supply.
There had been attempts to introduce an irredeemable fiat currency. But these fiat-money experiments, associated in particular with the Bank of Amsterdam, the Bank of England, and John Law and the Banque Royale of France, had been regional curiosities which ended quickly in financial disasters, such as the collapse of the Dutch "Tulip Mania" in 1637, and the "Mississippi Bubble" and the "South Sea Bubble" in 1720. As hard as they tried, monarchical rulers did not succeed in establishing monopolies of pure fiat currencies, i.e., of irredeemable government paper monies, which can be created virtually out of thin air, at practically no cost.
It was only under conditions of all-around democratic republicanism, after 1918, that this feat was accomplished. During WWI, as during earlier wars, belligerent governments went off the gold standard. Unlike earlier wars, however, WWI did not conclude with a return to the gold standard. Instead, from the mid-1920s until 1971, and interrupted by a series of international monetary crises, a pseudo-gold standard — the gold-exchange standard — was implemented. In 1971, the last remnant of the international gold standard was abolished. Since then, and for the first time in history, the entire world has adopted a pure fiat-money system of freely fluctuating government paper currencies.See also M.N. Rothbard, What Has Government Done to Our Money? (Auburn, Al.: Ludwig von Mises Institute, 1990); H.H. Hoppe, "How is Fiat Money Possible? or, The Devolution of Money and Credit," Review of Austrian Economics, Vol. 7, no. 2, 1994.
As a result, a seemingly permanent secular tendency toward inflation and currency depreciation has come into existence.
During the monarchical age, with a commodity money largely outside of government control, the "level" of prices had generally fallen and the purchasing power of money increased, except during times of war or new gold discoveries. Various price indices for Britain, for instance, indicate that prices were substantially lower in 1760 than they had been a hundred years earlier; and in 1860 they were lower than they had been in 1760.See B.R. Mitchell, Abstract of British Historical Statistics (Cambridge: Cambridge University Press, 1962), pp.468ff. Connected by an international gold standard, the development in other countries was similar.Idem, European Historical Statistics 1750–1970 (New York: Columbia University Press, 1078), pp. 388ff.
In sharp contrast, during the democratic-republican age, with the world financial center shifted from Britain to the United States, a very different pattern emerged. For instance, shortly after WWI, in 1921, the US wholesale-commodity price index stood at 113.1930 = 100; see R. Paul and L. Lehrmann, The Case for Gold. A Minority Report to the U.S. Gold Commission (Washington D.C.: Cato Institute, 1982), p. 165f. After WWII, in 1948, it had risen to 185. In 1971 it was 255, by 1981 it reached 658, and in 1991 it was near 1,000. During only two decades of irredeemable fiat money, the consumer price index in the United States rose from 40 in 1971 to 136 in 1991, in the United Kingdom it climbed from 24 to 157, in France from 30 to 137, and in Germany from 56 to 116.1983 = 100; see Economic Report of the President (Washington D.C.: Government Printing Office, 1992).
Similarly, during more than 70 years, from 1845 until the end of WWI in 1918, the British money supply had increased about 6-fold.See Mitchell, Abstract of British Historical Statistics, p. 444f. In distinct contrast, during the 73 years from 1918 until 1991, the US money supply increased more than 64-fold. See M. Friedman & A. Schwartz, A Monetary History of the United States,1867–1960 (Princeton: Princeton University Press, 1963), pp.704–722; and Economic Report of the President, 1992.
In addition to taxation and inflation, a government can resort to debt in order to finance its current expenditures. As with taxation and inflation, there is no doubt that government debt increased in the course of the monarchical age. However, as predicted theoretically, in this field monarchs also showed considerably more moderation and farsightedness than democratic-republican caretakers.
Throughout the monarchical age, government debts were essentially war debts. While the total debt thereby tended to increase over time, during peace time at least monarchs characteristically reduced their debts. The British example is fairly representative. In the course of the 18th and 19th centuries, government debt increased. It was 76 million pounds after the Spanish War in 1748, 127 million after the Seven Years' War in 1763, 232 million after the American War of Independence in 1783, and 900 million after the Napoleonic Wars in 1815. Yet during each peacetime period — from 1727–1739, from 1748–1756, and from 1762–1775, total debt actually decreased. From 1815 until 1914, the British national debt fell from a total of 900 to below 700 million pounds.
In striking contrast, since the onset of the democratic-republican age British debt only increased, in war and in peace. In 1920 it was 7.9 billion pounds, in 1938, 8.3 billion, in 1945, 22.4 billion, in 1970, 34 billion, and since then it has skyrocketed to more than 190 billion pounds in 1987. See S. Homer & R. Sylla, A History of Interest Rates (New Brunswick: Rutgers University Press, 1991), pp. 188, 437.
Likewise, US government debt has increased through war and peace. Federal government debt after WWI, in 1919, was about 25 billion dollars. In 1940 it was 43 billion, and after WWII, in 1946, it stood at about 270 billion. By 1970 it had risen to 370 billion, and since 1971, under a pure fiat-money regime, it has exploded. In 1979 it was about 840 billion, and in 1985 more than 1.8 trillion. In 1988 it reached almost 2.5 trillion, and by 1992 it exceeded 3 trillion dollars.See J. Hughes, American Economic History (Glenview: Scott, Foresman,1990), pp. 432, 498, 589.
Finally, the same tendency toward increased exploitation and present-orientation emerges upon examination of government legislation and regulation. During the monarchical age, with a clear-cut distinction between the ruler and the ruled, the king and his parliament were held to be under the law. They applied preexisting law as judge or jury.
They did not make law. Writes Bertrand de Jouvenel,
The monarch was looked on only as judge and not as legislator. He made subjective rights respected and respected them himself; he found these rights in being and did not dispute that they were anterior to his authority.… Subjective rights were not held on the precarious tenure of grant but were freehold possessions. The sovereign's right also was a freehold. It was a subjective right as much as the other rights, though of a more elevated dignity, but it could not take the other rights away. B. de Jouvenel, Sovereignty, pp. 172–173; p.189; see also F. Kern, Kingship and Law in the Middle Ages (London, 1939), esp. p. 151; B. Rehfeld, Die Wurzeln des Rechts (Berlin, 1951), esp. p. 67.
To be sure, the monopolization of law administration led to higher prices and/or lower product quality than those that would have prevailed under competitive conditions, and in the course of time kings employed their monopoly increasingly to their own advantage. But as late as the beginning of the 20th century, A.V. Dicey could still maintain that as for Great Britain, for instance, legislative law — public law — as distinct from preexisting law — private law — did not exist.See A.V. Dicey, Lectures on the Relation between Law and Public Opinion in England during the Nineteenth Century (London: Macmillan, 1903); also F.A. Hayek, Law, Legislation, and Liberty, Vol. 1 (Chicago: University of Chicago Press, 1973), chs. 4 and 6.
In striking contrast, under democracy, with the exercise of power shrouded in anonymity, presidents and parliaments quickly came to rise above the law. They became not only judge but legislator, the creator of "new" law.See R. Nisbet, Community and Power (New York: Oxford University Press,1962), pp. 110–111.Today, notes Jouvenel,
we are used to having our rights modified by the sovereign decisions of legislators. A landlord no longer feels surprised at being compelled to keep a tenant; an employer is no less used to having to raise the wages of his employees in virtue of the decrees of Power. Nowadays it is understood that our subjective rights are precarious and at the good pleasure of authority.B. de Jouvenel, Sovereignty, p. 189; see also R. Nisbet, Community and Power, ch. 5.
In a development similar to the democratization of money — the substitution of government paper money for private commodity money and the resulting inflation and increased financial uncertainty — the democratization of law and law administration has led to a steadily growing flood of legislation. Presently, the number of legislative acts and regulations passed by parliaments in the course of a single year is in the tens of thousands, filling hundreds of thousands of pages, affecting all aspects of civil and commercial life, and resulting in a steady depreciation of all law and heightened legal uncertainty.
As a typical example, the 1994 edition of the Code of Federal Regulations (CFR), the annual compendium of all US Federal Government regulations currently in effect, consists of a total of 201 books, occupying about 26 feet of library shelf space. The Code's index alone is 754 pages. The Code contains regulations concerning the production and distribution of almost everything imaginable: from celery, mushrooms, watermelons, watchbands, the labeling of incandescent light bulbs, hosiery, iron and steel manufacturing, and onion rings made out of diced onions, revealing the almost-totalitarian power of a democratic government. See D. Boudreaux, "The World's Biggest Government," Free Market, November 1994.
III.2. Indicators of Present-OrientednessThe phenomenon of social time preference is somewhat more elusive than that of expropriation and exploitation, and it is more complicated to identify suitable indicators of present-orientation. Moreover, some indicators are less direct — "softer" — than those of exploitation. But all of them point in the same direction and together provide as clear an illustration of the second theoretical prediction: that democratic rule also promotes shortsightedness (present-orientation) within civil society.See also T.A. Smith, Time and Public Policy (Knoxville: University of Tennessee Press, 1988).
The most direct indicator of social time preference is the rate of interest. The interest rate is the ratio of the valuation of present goods as compared to future goods. More specifically, it indicates the premium at which present money is traded against future money. A high interest rate implies more "present-orientedness" and a low rate of interest implies more "future-orientation."
Under normal conditions — that is, under the assumption of increasing standards of living and real-money incomes — the interest rate can be expected to fall and ultimately approach, yet never quite reach, zero. With rising real incomes, the marginal utility of present money falls relative to that of future money, and hence under the ceteris paribus assumption of a given time preference schedule,the interest rate must fall. Consequently, savings and investment will increase, future real incomes will be still higher, and so on.
In fact, a tendency toward falling interest rates characterizes mankind's suprasecular trend of development. Minimum interest rates on "normal safe loans" were around 16 percent at the beginning of Greek financial history in the 6th century BC, and fell to 6 percent during the Hellenistic period. In Rome, minimum interest rates fell from more than 8 percent during the earliest period of the Republic to 4 percent during the first century of the Empire. In 13th-century Europe, the lowest interest rates on 'safe' loans were 8 percent. In the 14th century they came down to about 5 percent. In the 15th century they fell to 4 percent. In the 17th century they went down to 3 percent. And at the end of the 19th century, minimum interest rates had further declined to less than 2.5 percent.See Homer & Sylla, A History of Interest Rates, pp. 557–558.
This trend was by no means smooth. It was frequently interrupted by periods, sometimes as long as centuries, of rising interest rates. However, such periods were associated with major wars and revolutions.
Furthermore, whereas high or rising minimum interest rates indicate periods of generally low or declining living standards, the overriding opposite tendency toward low and falling interest rates reflects mankind's overall progress — its advance from barbarism to civilization. Specifically, the trend toward lower interest rates reflects the rise of the Western World, its peoples' increasing prosperity, farsightedness, intelligence, and moral strength, and the unparalleled height of 19th-century European civilization.
Before this historical backdrop and in accordance with economic theory, then, it should be expected that 20th-century interest rates would have to be still lower than 19th-century rates. Indeed, only two possible explanations exist why this is not so. The first possibility is that 20th-century real incomes did not exceed, or even fell below, 19th-century incomes. However, this explanation can be ruled out on empirical grounds, for it seems fairly uncontroversial that 20th-century incomes are in fact higher.
Then only the second explanation remains. If real incomes are higher but interest rates are not lower, then the ceteris paribus clause can no longer be assumed true. Rather, the social time preference schedule must have shifted upward. That is, the character of the population must have changed. People on the average must have lost in moral and intellectual strength and have become more present-oriented. Indeed, this appears to be the case.
From 1815 onward, throughout Europe and the Western World, minimum interest rates steadily declined to an historic low of, on the average, well below 3 percent at the turn of the century. With the onset of the democratic-republican age, this earlier tendency came to a halt and seems to have changed direction, revealing 20th-century Europe and the United States as declining civilizations.
An inspection of the lowest decennial average interest rates for Britain, France, the Netherlands, Belgium, Germany, Sweden, Switzerland, and the United States, for instance, shows that during the entire post-WWI era interest rates in Europe were never as low or lower than they had been during the second half of the 19th century. Only in the United States, in the 1950s, did interest rates ever fall below late 19th-century rates. This was only a short-lived phenomenon, and US interest rates even then were not lower than they had been in Britain during the second half of the 19th century.
Instead, 20th-century rates were universally higher than 19th-century rates, and if anything they have exhibited a rising tendency. See Homer/Sylla, A History of Interest Rates, pp. 554–555. This conclusion does not substantially change, even when it is taken into account that modern interest rates, in particular since the 1970s, include a systematic inflation premium. After adjusting recent nominal interest rates for inflation in order to yield an estimate of real interest rates, contemporary interest rates still appear to be significantly higher than they were 100 years ago.
On the average, minimum long-term interest rates in Europe and the US nowadays seem to be well above 4 percent and possibly as high as 5 percent — that is, above the interest rates of 17th-century Europe and as high or higher than 15th-century rates. Likewise, current US savings rates of around 5 percent of disposable income are no higher than they were more than 300 years ago in a much poorer 17th-century England.See Cipolla, Before the Industrial Revolution, p. 39.
Parallel to this development and reflecting a more specific aspect of the same underlying phenomenon of high or rising social time preferences, indicators of family disintegration— "dysfunctional families" — have exhibited a systematic increase.
Until the end of the 19th century, the bulk of government spending — typically more than 50 percent — went to financing the military. Assuming government expenditures to be then about 5 percent of the national product, this amounted to military expenditures of 2.5 percent of the national product. The remainder went to government administration.
Welfare spending or "public charity" played almost no role. Insurance was considered to be in the province of individual responsibility, and poverty relief seen as the task of voluntary charity. In contrast, as a reflection of the egalitarianism inherent in democracy, from the beginning of the democratization in the late 19th century onward came the collectivization of individual responsibility.
Military expenditures have typically risen to 5–10 percent of the national product in the course of the 20th century. But with public expenditures currently making up 50 percent of the national product, military expenditures now only represent 10-20 percent of total government spending. The bulk of public spending — typically more than 50 percent of total expenditures (or 25 percent of the national product) — is now eaten up by public-welfare spending.See Cipolla, Before the Industrial Revolution, pp. 54–55; Flora, State, Economy, and Society in Western Europe, ch. 8; and p. 454.
Consequently, by increasingly relieving individuals of the responsibility of having to provide for their own health, safety, and old age, the range and temporal horizon of private provisionary action have been systematically reduced. In particular, the value of marriage, family, and children have fallen, because they are needed less as soon as one can fall back on 'public' assistance.
Thus, since the onset of the democratic-republican age the number of children has declined, and the size of the endogenous population has stagnated or even fallen. For centuries, until the end of the 19th century, the birth rate had been almost constant: somewhere between 30 to 40 per 1,000 population (usually somewhat higher in predominantly Catholic and lower in Protestant countries).
In sharp contrast, in the course of the 20th century all over Europe and the US birthrates have experienced a dramatic decline — down to about 15 to 20 per 1,000.See Mitchell, European Historical Statistics 1750–1970, pp. 16ff. At the same time, the rates of divorce, illegitimacy, single parenting, singledom, and abortion have steadily increased, while personal savings rates have begun to stagnate or even fall rather than rise proportionally with rising incomes.See A.C. Carlson, Family Questions. Reflections on the American Social Crises (New Brunswick: Transaction Publishers, 1992); idem, The Swedish Experiment in Family Politics (New Brunswick: Transaction Publishers, 1993);idem, "What Has Government Done to Our Families?" Essays in Political Economy, no. 13 (Auburn, Al.: Ludwig von Mises Institute, 1991); Ch. Murray, Losing Ground (New York: Basic Books, 1984); for an early diagnosis see J.A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper, 1942), ch.14.
Moreover, as a consequence of the depreciation of law resulting from legislation and the collectivization of responsibility effected in particular by social security legislation, the rate of crimes of a serious nature, such as murder, assault, robbery, and theft, has also shown a systematic upward tendency.
In the "normal" course of events — that is, with rising standards of living — it can be expected that the protection against social disasters such as crime will undergo continual improvement, just as one would expect the protection against natural disasters such as floods, earthquakes and hurricanes to become progressively better. Indeed, throughout the Western world this appears to have been the case by and large — until recently, during second half of the 20th century, when crime rates began to climb steadily upward.See J.Q. Wilson & R.J. Herrnstein, Crime and Human Nature (New York: Simon & Schuster, 1985), pp. 408–409; on the magnitude of the increase in criminal activity brought about by democratic republicanism and welfarism in the course of the last hundred years see also R.D. McGrath, Gunfighters, Highwaymen, and Vigilantes (Berkeley: University of California Press, 1984), esp. ch.13; idem, "Treat them to a Good Dose of Lead," Chronicles, January 1994.
To be sure, there are a number of factors other than increased irresponsibility and shortsightedness brought on by legislation and welfare that may contribute to crime. Men commit more crimes than women, the young more than the old, blacks more than whites, and city dwellers more than villagers. Accordingly, changes in the composition of the sexes, age groups, races, and the degree of urbanization can be expected to have a systematic effect on crime.
However, all of these factors are relatively stable and thus cannot account for any systematic change in the long-term downward trend of crime rates. As for European countries, their populations were and are comparatively homogeneous; and in the United States, the proportion of blacks has remained roughly stable. The sex composition is largely a biological constant; and as a result of wars, only the proportion of males has periodically fallen, thus actually reinforcing the "normal" trend toward falling crime rates.
Similarly, the composition of age groups has changed only slowly; and due to declining birth rates and higher life expectancies the average age of the population has actually increased, thus helping to depress crime rates still further. Finally, the degree of urbanization began to increase dramatically from about 1800 onward. A period of rising crime rates during the early 19th century can be attributed to this initial spurt of urbanization.See Wilson & Herrnstein, Crime and Human Nature, p. 411.
Yet, after a period of adjustment to the new phenomenon of urbanization, from the mid-19th century onward, the countervailing tendency toward falling crime rates took hold again, despite the fact that the process of rapid urbanization continued for about another hundred years. And when crime rates began to move systematically upward, from the mid-20th century onward, the process of increasing urbanization had actually come to a halt.
It thus appears that the phenomenon of rising crime rates cannot be explained other than with reference to the process of democratization: by a rising degree of social time preference, an increasing loss of individual responsibility, intellectually and morally, and a diminished respect for all law — moral relativism — stimulated by an unabated flood of legislation. Of course, "high time preference" is by no means equivalent with "crime." A high time preference can also find expression in such perfectly lawful activities as recklessness, unreliability, poor manners, laziness, stupidity or hedonism.
Nonetheless, a systematic relationship between high time preference and crime exists, for in order to earn a market income a certain minimum of planning, patience and sacrifice is required. One must first work for a while before one gets paid. In contrast, most serious criminal activities such as murder, assault, rape, robbery, theft, and burglary require no such discipline. The reward for the aggressor is immediate and tangible, whereas the sacrifice — possible punishment — lies in the future and is uncertain. Consequently, if the social degree of time preference were increased, it would be expected that the frequency in particular of these forms of aggressive behavior would rise — as they in fact did.On the relationship between high time preference and crime see also E.C. Banfield, The Unheavenly City Revisited (Boston: Little, Brown & Company,1974), esp. chs. 3 and 8; idem, "Present-Orientedness and Crime," in: R.E. Barnett/J. Hagel, eds.,Assessing the Criminal (Cambridge: Ballinger, 1977); Wilson & Herrnstein, Crime and Human Nature, pp. 414–424.
IV. Conclusion: Monarchy, Democracy, and the Idea of a Natural OrderFrom the vantage point of elementary economic theory and in light of historical evidence, then, a revisionist view of modern history results. The Whig theory of history, according to which mankind marches continually forward toward ever higher levels of progress, is incorrect. From the viewpoint of those who prefer less exploitation over more and who value farsightedness and individual responsibility above shortsightedness and irresponsibility, the historic transition from monarchy to democracy represents not progress but civilizational decline.
Nor does this verdict change if more or other indicators are included. Quite to the contrary. Without question the most important indicator of exploitation and present-orientedness not discussed above is war. Yet if this indicator were included the relative performance of democratic-republican government appears to be even worse, not better. In addition to increased exploitation and social decay, the transition from monarchy to democracy has brought a change from limited warfare to total war, and the 20th century, the age of democracy, must be ranked also among the most murderous periods in all of history.On the contrast between monarchical and democratic warfare see J.F.C. Fuller, The Conduct of War, esp. chs. 1 and 2; idem, War and Western Civilization (Freeport: Books for Libraries, 1969); M. Howard, War in European History (Oxford: Oxford University Press, 1976), esp. ch. 6; idem, War and the Liberal Conscience (New Brunswick: Rutgers University Press, 1978); B. de Jouvenel, On Power, ch. 8; W.A. Orton, The Liberal Tradition (Port Washington: Kennikat Press, 1969), pp. 251ff; G. Ferrero, Peace and War, ch. 1.
Thus, inevitably two final questions arise. What can we expect? And what can we do? As for the first question, the answer is brief. At the end of the 20th century, democratic republicanism in the United States and all across the Western world has apparently exhausted the reserve fund that was inherited from the past. For decades, real incomes have stagnated or even fallen.For a revealing analysis of US data see R. Batemarco, "GNP, PPR, and the Standard of Living," Review of Austrian Economics, vol. 1, 1987. The public debt and the cost of social security systems have brought on the prospect of an imminent economic meltdown.
At the same time, societal breakdown and social conflict have risen to dangerous heights. If the tendency toward increased exploitation and present-orientedness continues on its current path, the Western democratic welfare states will collapse as the East European socialist peoples' republics did in the late 1980s. Hence one is left with only the second question: what can we do in order to prevent the process of civilizational decline from running its full course to an economic and social catastrophe?
First, the idea of democracy and majority rule must be delegitimized. Ultimately, the course of history is determined by ideas, be they true or false. Just as kings could not exercise their rule unless a majority of public opinion accepted such rule as legitimate, so will democratic rulers not last without ideological support in public opinion.On the relation between government and public opinion see the classic expositions by E. de la Boetie, The Politics of Obedience: The Discourse of Voluntary Servitude (New York: Free Life Editions, 1975); D. Hume, Essays. Moral, Political, and Literary (Oxford: Oxford University Press, 1963), esp. "Essay IV: Of the First Principles of Government."
Likewise, the transition from monarchical to democratic rule must be explained as fundamentally nothing but a change in public opinion. In fact, until the end of WWI, the overwhelming majority of the public in Europe accepted monarchical rule as legitimate.As late as 1871, for instance, with universal male suffrage, the National Assembly of the French Republic contained only about 200 republicans out of more than 600 deputies. And the restoration of a monarchy was only prevented because the supporters of the Bourbons and the Orleans checkmated each other.Today, hardly anyone would do so.
On the contrary, the idea of monarchical government is considered laughable. Consequently, a return to the "ancien regime" must be regarded as impossible. The legitimacy of monarchical rule appears to have been irretrievably lost. Nor would such a return be a genuine solution. For monarchies, whatever their relative merits, do exploit and do contribute to present-orientedness as well. Rather, the idea of democratic-republican rule must be rendered equally if not more laughable, not in the least by identifying it as the source of the ongoing process of decivilization.
But secondly, and still more importantly, at the same time a positive alternative to monarchy and democracy — the idea of a natural order — must be spelled out and understood. On the one hand, and simply enough, this involves the recognition that it is not exploitation, either monarchical or democratic, but private property, production, and voluntary exchange that are the ultimate source of human civilization.
On the other hand, psychologically more difficult to accept, it involves the recognition of a fundamental sociological insight (which incidentally also helps identify precisely where the historic opposition to monarchy went wrong): that the maintenance and preservation of a private-property based exchange economy requires as its sociological presupposition the existence of a voluntarily acknowledged "natural" elite — a nobilitas naturalis.See also W. Röpke, Jenseits von Angebot und Nachfrage (Bern: P.Haupt,1979), pp. 191–199; B. de Jouvenel, On Power, ch. 17.
The natural outcome of the voluntary transactions between various private property owners is decidedly nonegalitarian, hierarchical, and elitist. As the result of widely diverse human talents, in every society of any degree of complexity a few individuals quickly acquire the status of an elite. Owing to superior achievements of wealth, wisdom, bravery, or a combination thereof, some individuals come to possess "natural authority," and their opinions and judgments enjoy widespread respect.
Moreover, because of selective mating and marriage and the laws of civil and genetic inheritance, positions of natural authority are more likely than not passed on within a few — noble — families. It is to the heads of these families with long-established records of superior achievement, farsightedness, and exemplary personal conduct, that men turn with their conflicts and complaints against each other, and it is these very leaders of the natural elite who typically act as judges and peacemakers, often free of charge, out of a sense of obligation required and expected of a person of authority or even out of a principled concern for civil justice, as a privately produced "public good."See also M. Harris, Cannibals and Kings. The Origins of Culture (New York: Vintage Books, 1977), pp.104ff on the private provision of public goods by "big men."
In fact, the endogenous origin of a monarchy (as opposed to its exogenous origin via conquest)As a comparative evaluation of theories of the endogenous versus the exogenous origin of government and a historical critique of the latter as incorrect or incomplete see W. Mühlmann,Rassen, Ethnien, Kulturen (Neuwied: Luchterhand, 1964), pp. 248–319, esp. pp. 291–296.For proponents of theories of the exogenous origin of government see F. Ratzel, Politische Geographie (München, 1923); F. Oppenheimer, System der Soziologie. Vol. 2: Der Staat; A. Rüstow, Freedom and Domination (Princeton: Princeton University Press, 1980). cannot be understood except before the background of a prior order of natural elites. The small but decisive step in the transition to monarchical rule — original sin — consisted precisely in the monopolization of the function of judge and peacemaker. The step was taken, once a single member of the voluntarily acknowledged natural elite — the king — could insist, against the opposition of other members of the social elite, that all conflicts within a specified territory be brought before him.
From this moment on, law and law enforcement became more expensive: instead of being offered free of charge or for a voluntary payment, they were financed with the help of a compulsory tax. At the same time, the quality of law deteriorated: instead of upholding the preexisting law and applying universal and immutable principles of justice, a monopolistic judge, who did not have to fear losing clients as a result of being less than impartial in his judgments, could successively alter and pervert the existing law to his own advantage.
It was to a large extent the inflated price of justice and the perversions of ancient law by the kings which motivated the historical opposition against monarchy. However, confusion as to the causes of this phenomenon prevailed. There were those who recognized correctly that the problem lay with monopoly, not with elites or nobility.See, for instance, G. de Molinari, The Production of Security (New York: Center for Libertarian Studies, 1977), published originally in 1849, in French. But they were far outnumbered by those who erroneously blamed it on the elitist character of the ruler instead, and who accordingly advocated to maintain the monopoly of law and law enforcement and merely replace the king and the visible royal pomp by the "people" and the presumed modesty and decency of the "common man." Hence the historic success of democracy.
Ironically, the monarchy was then destroyed by the same social forces that kings had first stimulated when they began to exclude competing natural authorities from acting as judges. In order to overcome their resistance, kings typically aligned themselves with the people, the common man.See on this also H. Pirenne, Medieval Cities (Princeton: Princeton University Press, 1974), esp. pp. 179–180, and pp. 227f; B. de Jouvenel, On Power, ch.17.
Appealing to the always popular sentiment of envy, kings promised the people cheaper and better justice in exchange and at the expense of taxing — cutting down to size — their own betters (that is, the kings' competitors). When the kings' promises turned out to be empty, as was to be predicted, the same egalitarian sentiments which they had previously courted now focused and turned against them.
After all, the king himself was a member of the nobility, and as a result of the exclusion of all other judges, his position had become only more elevated and elitist and his conduct only more arrogant. Accordingly, it appeared only logical then that kings, too, should be brought down and that the egalitarian policies, which monarchs had initiated, be carried through to their ultimate conclusion: the monopolistic control of the judiciary by the common man.
Predictably, as explained and illustrated in detail above, the democratization of law and law enforcement — the substitution of the people for the king — made matters only worse, however. The price of justice and peace has risen astronomically, and all the while the quality of law has steadily deteriorated to the point where the idea of law as a body of universal and immutable principles of justice has almost disappeared from public opinion and has been replaced by the idea of law as legislation (government-madelaw).
At the same time, democracy has succeeded where monarchy only made a modest beginning: in the ultimate destruction of the natural elites. The fortunes of great families have dissipated, and their tradition of a culture of economic independence, intellectual farsightedness, and moral and spiritual leadership has been lost and forgotten. Rich men still exist today, but more frequently than not they owe their fortune now directly or indirectly to the state.
Hence, they are often more dependent on the state's continued favors than people of far lesser wealth. They are typically no longer the heads of long-established leading families but "nouveaux riches." Their conduct is not marked by special virtue, dignity, or taste but is a reflection of the same proletarian mass-culture of present-orientedness, opportunism, and hedonism that the rich now share with everyone else; and consequently, their opinions carry no more weight in public opinion than anyone else's.
Hence, when democratic rule has finally exhausted its legitimacy, the problem faced will be significantly more difficult than when kings lost their legitimacy. Then, it would have been sufficient by and large to abolish the king's monopoly of law and law enforcement and replace it with a natural order of competing jurisdictions, because remnants of natural elites who could have taken on this task still existed.
Now, this will no longer be sufficient. If the monopoly of law and law enforcement of democratic governments is dissolved, there appears to be no other authority to whom one can turn for justice, and chaos would seem to be inevitable. Thus, in addition to advocating the abdication of democracy, it is now of central strategic importance that at the same time ideological support be given to all decentralizing or even secessionist social forces; that is, the tendency toward political centralization that has characterized the Western world for many centuries, first under monarchical rule and then under democratic auspices, must be systematically reversed.On the political economy of political centralization, and the rationale of decentralization and secession, see H.H. Hoppe, "Against Centralization," Salisbury Review June 1993; idem, "Migrazione, centralismo e secessione nell'Europa contemporanea," biblioteca della liberta, no. 118, 1992; J. Baechler, The Origins of Capitalism (New York: St. Martin's Press, 1976), esp. ch.
Even if as a result of a secessionist tendency a new government, whether democratic or not, should spring up, territorially smaller governments and increased political competition will tend encourage moderation as regards exploitation. And in any case, only in small regions, communities or districts will it be possible again for a few individuals, based on the popular recognition of their economic independence, outstanding professional achievement, morally impeccable personal life, and superior judgment and taste, to rise to the rank of natural, voluntarily acknowledged authorities and lend legitimacy to the idea of a natural order of competing judges and overlapping jurisdictions — an "anarchic" private law society — as the answer to monarchy and democracy.
This article is excerpted from the Journal of Libertarian Studies, Vol. 11 Num. 2.
Utility is the importance that we attach to things. We make choices on the basis of this importance. Indeed, in economic terms, "utility," "importance," and "value" are synonyms. We choose what is more important to us and give up what is less important. Utility is subjective.
Carl Menger (1840–1921) is the father of this subjective theory of value. He states, "value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being."
There is no economist — except those who adhere to the failed labor theory of value — who denies this proposition. However, it seems there are many who, along the way, have forgotten what Menger meant by "diminishing marginal utility."
This essay is based on the following postulates of the subjective theory of value: (1) utility is always marginal, and (2) something has utility only if it satisfies a human end.
The law of diminishing marginal utility simply states that every additional unit of a homogeneous good or service is worth less than the previous unit. This law follows directly from the fact that we attach different value to different things, the fact that we choose more valuable things over less valuable things, and the fact that we exist in time. The first unit of a homogeneous good or service is the most valuable because we use it for the satisfaction of the most important end.
The second unit goes for satisfaction of the second most important end. Thus, the second unit is less valuable than the first unit. The third unit is less valuable than the second for the same reason, and so forth.
Murray Rothbard, in his article "Toward a Reconstruction of Utility and Welfare Economics," and in his treatise Man, Economy, and State, elaborated on the law of diminishing marginal utility. Art Carden, in "Diminishing Marginal Utility: It's a Law," further clarifies why diminishing marginal utility is "more than merely empirically demonstrable: it is irrefutably true."
This law applies to everyone, because claiming that a person would choose something he or she values less over something he or she values more defies the laws of logic. The act of choice is an expression of preference. Preference is not a psychological concept but a logical one, and it can be summarized simply as follows: I choose, therefore I prefer.
Risk Aversion, Risk Neutrality, and Risk LovingnessMainstream economics explains risk aversion using diminishing marginal utility. This approach was promoted in the works of Milton Friedman and Leonard Savage.
Risk aversion is defined as follows: A person is risk averse if he or she prefers a certain outcome over an uncertain one, with the same expected money outcome. For example, a person would be considered risk averse if he or she preferred receiving $3,000 for certain instead of a fifty-fifty gamble where he or she could get either $1,000 or $5,000. This is explained using diagrams similar to the one shown in Figure 1.
It is said that a risk-averse person has this preference because his or her expected utility (EU) of the gamble (point A) is less than the utility of a certain money income of $3,000 (point B). And this is because the utility function has a negative second derivative, which is assumed to be the same as diminishing marginal utility.
Figure 1A diminishing-marginal-utility functionIt is then said that most people are risk averse, but some are risk neutral, and some are risk loving. Risk neutrality is then explained using a constant-marginal-utility function, and risk lovingness is explained using an increasing-marginal-utility function.
Figure 2 is a graphical representation of a risk-neutral person's preferences within the Friedmanite framework. This person's preferences are described using a linear, neutral, utility function.
This means that the utility of an additional dollar does not change with the amount of money the person already possesses. He or she values each additional dollar just as much as the previously acquired dollar. It turns out that he or she would be indifferent between the same fifty-fifty gamble that was rejected by the risk-averse person from Figure 1, and a certain gain of $3,000. This is explained by indicating that the expected utility (EU) of the gamble (point F) is identical to the utility of a certain gain of $3,000 (point E).
Figure 2A constant-marginal-utility functionFinally, there may be a person who would choose to take this gamble, in which he or she may end up having either a $1,000 or $5,000 with equal probabilities. This person would be called risk loving, and his or her utility function is shown in Figure 3.
This is an increasing-marginal-utility function, and it is characterized by an increasing slope. It is supposed to describe preferences where a person values each additional dollar more than the previously acquired dollar. The explanation for this person's choice is that the expected utility (EU) of the gamble (point C) is higher than the utility of a certain gain of $3,000 (point D).
Figure 3An increasing-marginal-utility functionThere are at least two problems with this explanation. First, utility, as a subjective state of mind, does not conform to algebraic operations. Thus the meaning of "average utility" is unclear.
Second, there is no such thing as constant or increasing marginal utility, as is assumed by the use of a utility function. In the Austrian approach, there can only be diminishing marginal utility. This truth was established by the two principles at the beginning of this article.
How Then Do Austrians Explain Gambling?To reiterate, in order for every unit of a homogeneous good to have value, each unit needs to satisfy an end. All ends are ranked on a scale in the order of decreasing importance. We use the first unit of a good to satisfy the most important end. The second unit is used for the end that is next in importance, and so forth. Each additional unit is less valuable to us because it is used for an end of lower importance. Thus, marginal utility is always diminishing.
In the language of mainstream economics, this would mean that everyone is risk averse and no person would ever accept a gamble in which he or she could either win or lose the same amount of money with equal probabilities (i.e., the so-called fair gamble). There is no need for sophisticated empirical observation to notice that something went wrong here.
What went wrong is that in Friedman's approach, there is an attempt to decompose the utility of an activity — gambling — into the money segment and an abstract risk segment. Then, depending on the contribution of the risk segment to the utility of the whole gamble, people are classified into different categories.
But this is incompatible with the Mengerian definition of utility in several ways. First, as Menger stated, we attach utility only to things that we see as means of satisfying an end. Playing a round of roulette is an end. This end could be satisfied by going to a casino. Thus, utility would be attached to going to a casino and playing the round of roulette. On the other hand, experiencing risk is neither an end nor means because it is not clear what risk is nor how it is to be experienced.
Second, it is not clear how utility, as a subjective state of mind, could be meaningfully decomposed into segments by an external analyst. Third, and perhaps most important, explaining differences in preferences across individuals is simply outside the scope of economics.
To illustrate how the Austrian perspective on gambling and risk differs from Friedman's approach, imagine the following situation: A person, Jim, is approached by his friend, Janis, and asked if he wants to play a game. In this game, Jim and Janis would each put $2000 on the table. Then they would take one coin, and each pick heads or tails. The person whose pick ends up on the top gets all $4000 lying on the table. Suppose also that Jim had $3000 in his pocket at the moment he met Janis.
Following the logic of mainstream economics, Jim is facing a set of monetary payoffs identical to those in figures 1 through 3. Depending on his risk type, constructed by conveniently picking different utility-of-money functions, he may accept or reject the gamble, or even be indifferent.
In the Austrian perspective, Jim's decision is put into a different context. He could either say no to Janis and use his time and money to do something else, or he could say yes and enter this game.
When making his choice, Jim will consider all the attributes of the offered game. The act of choice is an expression of preference for the whole package that comes with the game. Its attributes — number and magnitude of possible payoffs, uncertainty of the payoffs, etc. — are not goods.
Thus, one cannot talk about preferences for risk independently of the real human activity that has risk as one of its attributes. One can, however, talk about preference for the activity — i.e., gambling. Still, there is no need (and even no way) to explain how this preference came into existence or how it is affected by the different attributes of the activity in question.
If Jim chooses to join in and play the game, an Austrian economist would say that his expected marginal utility (because utility is always marginal) of the game was higher than the expected marginal utility of anything else Jim had thought of doing instead, using his limited time and resources. The gamble was higher on his value scale.
But the thought mechanism that leads Jim to position the gamble above all other alternative uses of his time and resources is outside of the Austrian area of concern. In other words, it is not important why he likes the game. For example, Murray Rothbard, in Man, Economy, and State, describes gambling as a purposeful attempt to create uncertainty just for the fun of it.
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Audiobook read by Jeff RiggenbachThus, it is not necessary to go further than saying that some people gamble because they like it. This is why, for Austrians, there is no need to construct an artificial, ad hoc thought process that would supposedly predict human behavior. Human action, not prediction, is the centre of the Austrian approach.
In conclusion, when it comes to the origins of attitudes toward risky events, some economists have stepped into the territory of another discipline — psychology. The thought mechanisms that lead some people to like (or, as economists say, have preference for) gambling are of no more economic interest than the reasons why some people like going to soccer games while others like to stay at home. Answering such questions may be a job for psychologists, but it is not one for economists.
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Probably what most sets Austrian economics apart from the mainstream is the Austrian School's careful analysis of the structure of production. When an Austrian economist considers the structure of production, he doesn't just dwell on crude aggregates, such as the total number or total value of capital goods in an economy. Rather, he considers how long (or how "roundabout") a given structure of production is.
An Austrian economist asks, "How many steps are there in the production process between the extraction of raw resources and the actual output of consumers' goods?" He also considers how any given society with a given structure of production can improve its productivity.
Capital Accumulation and Social ProgressAny change in the structure of production obviously must either involve an increase, decrease, or maintenance of its length. Improvements in productivity that involve less or equally roundabout production processes will tend to be adopted very quickly because they tend to require fewer resources. Therefore, all that is required for their adoption is their discovery. For example, it won't take long for a hunting society to realize that the hard, sharp obsidian in the area is better for skinning animals than the fragile, blunt pumice stones they may have tried to use first.
But once a society has plucked all the low-hanging fruit of "no-brainer" productivity improvements, what then can its members do to improve productivity? The only thing left to do would be to adopt improvements in productivity that involve more roundabout methods of production.
For example, a hunting society might try the more roundabout (but more productive) method of making and using bows and arrows for hunting to replace the less roundabout (but less productive) method of making and using crude spears. This is an investment in more-productive capital goods.
However, since making bows and arrows takes more time, and perhaps more resources, the hunters and their investment must be sustained by an adequate stock of food and other materials; even though the bows and arrows will yield a greater bounty, they will only do so after a longer period of time. Thus, savings are an indispensable prerequisite for increases in productivity that involve lengthening the structure of production.
As Ludwig von Mises explained in Human Action, chapter 18, section 3,
MP3CD$20 $15
Audiobook read by Jeff RiggenbachThis postponement of consumption makes it possible to direct action toward temporally remoter ends. It is now feasible to aim at goals which could not be thought of before on account of the length of the period of production required.… The sine qua non of any lengthening of the process of production adopted is saving, i.e., an excess of current production over current consumption. Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way.
Such "further progress" is possible due to the fact that more-bountiful production methods mean more goods, which in turn mean a greater capacity for savings. The new saved goods can be used, not only to maintain the new, longer structure of production (by replacing bows and arrows as they are spent), but can also be used to support an even longer and more bountiful structure of production (say, in the case of the hunters, building and using extensive traps).
The savings made possible by the second productivity-enhancing lengthening of the chain of production can then in turn be used for a third such lengthening, and so on. In a free market, this virtuous cycle of capital accumulation can go on in perpetuity, thus engendering an upward spiral in the well-being of mankind.
But as Mises wrote later in the same section, no matter how high up the spiral we may be, we always owe the propitious opportunities at hand to the capital accumulation of those who came before us.
Every single performance in this ceaseless pursuit of wealth production is based upon the saving and the preparatory work of earlier generations.… We favorite children of the age of electricity still derive advantage from the original saving of the primitive fishermen who, in producing the first nets and canoes, devoted a part of their working time to provision for a remoter future. If the sons of these legendary fishermen had worn out these intermediary products — nets and canoes — without replacing them by new ones, they would have consumed capital and the process of saving and capital accumulation would have had to start afresh.
It is just such an upward spiral that the Western world experienced during the Industrial Revolution. And as Mises further elucidated in chapter 18, section 4, the rapid rise in Western living standards during that time was a function of capital accumulation.
An increment in capital goods available makes it possible to attain temporally remoter ends without being forced to restrict consumption. A loss in capital goods, on the other hand, makes it necessary either to abstain from striving after certain goals which one could aim at before or to restrict consumption.…
As against those who lack capital goods, the capitalist, under the given state of technological knowledge, is in a position to reach a definite goal sooner without restricting consumption and without increasing the input of labor and nature-given material factors of production. His head start is in time.…
The start which the peoples of the West have gained over the other peoples consists in the fact that they have long since created the political and institutional conditions required for a smooth and by-and-large uninterrupted progress of the process of larger-scale saving, capital accumulation, and investment.
What ultimately matters for the well-being of society is the degree to which our wants are satisfied, and therefore the actual usefulness of goods. Of course, we can only know the actual usefulness of goods in hindsight. Acting man, therefore, must rely on his anticipation of their actual usefulness.
Of course, man is not prescient, so he will often err in his anticipations. The more he errs, the more he will adopt structures of production that are either not as capital intensive (and productive) as he could have afforded, or more capital intensive than he can sustain and see through to completion. As an example of the latter, a hunter who incorrectly measured the length of rope in his possession might embark on building a kind of trap that required more rope than he actually had. He would, of course, be unable to finish the trap, and any of the rope that was cut into lengths unusable for anything else will have been wasted.
Central Banks and Social RetrogressionThe Austrian business-cycle theory, first formulated by Mises in 1912, teaches us that in a developed economy, artificial expansions of the supply of money and credit (which now are the exclusive prerogatives of central banks) temporarily lower the rate of interest, which leads to mass error. It causes people to think, like the hunter with poor rope-measuring skills, that they are wealthier than they truly are, which leads them to overconsume and to invest in production processes which are too ambitious given the capital goods available.
Let's say a hunting society using crude spears is at level 1 of capital accumulation. Bows and arrows are used at level 2, and traps at level 3. Using such a scale, an industrial society would have to be characterized as being several orders of magnitude above these levels. But, let's just say, for simplicity's sake, that in the early phases of its first industrial revolution, a given society was at level 8 of capital accumulation, and it subsequently advanced to level 9, then 10, and so on.
"Savings are an indispensable prerequisite for increases in productivity that involve lengthening the structure of production."Now, let's say that the society at some point is cursed with a central bank. At the time of the central bank's first expansion of money and credit, the society is at level 10. Again, artificial expansion of the supply of money and credit makes the members of society think they are at a more advanced level than they really are. It makes them think they have sufficient capital goods to see through longer, more productive production processes, when they really don't.
And so let's say the monetary expansion is sufficient to make the members of the society think they are at level 11, instead of level 10. They make level 11–appropriate investments, which are simply unsustainable. The society is going through an economic bubble. The reality of the situation will eventually reveal itself to the members of society. That is the moment of the "bursting of the bubble."
Now you might think it would then simply be a matter of reallocating the capital to level 10–appropriate production processes. But that presupposes that capital is an amorphous blob, like a mass of clay, which can be divided up and merged together to any purpose. But just as the shaft of a curved bow makes a wretched spear, and much of the materials of an animal trap are useless for the production of bows, most of the investments made during a bubble are simply lost. As Jim Fedako has beautifully put it,
The standard view is that capital is clay, ready for the potter to reshape it in a moment's time. In contrast, the Austrian view takes the current structure of capital as a given, something that the entrepreneur must take into consideration when formulating his plans. If an entrepreneur wants to change the current structure of capital, he will wield dynamite and dozer, not water and wheel.
And so, having squandered its resources, our hypothetical society, which was acting as if it were at level 11, is likely to find itself taking multiple steps back. It may, at best, need to adopt level 9–appropriate methods of production.
"Just as the shaft of a curved bow makes a wretched spear, and much of the materials of an animal trap are useless for the production of bows, most of the investments made during a bubble are simply lost."That is of course, unless the central bank expands money and credit even further, making people think level 11 is still viable. Then they will just continue to squander resources and drop level after level until the central bank finally leaves bad enough alone.
And of course it is not just how long the central bank fosters malinvestment that matters, but how intensely it does so. The greater the degree to which the central bank expands money and credit, the worse will be the resulting malinvestments. An unsound production process adopted by a businessman who thinks he's three times as wealthy as he really is will squander more resources than one adopted by a businessman who thinks he's only two times as wealthy as he really is.
Our Present Crisis of InterventionismWhat does this mean for us in our present situation? The longevity and the intensity of the monetary and credit expansion embarked upon by the Federal Reserve since the beginning of Alan Greenspan's term has been unprecedented. Even compared to the Hoover-Roosevelt era, what Greenspan did after the dot-com bubble burst, and what Ben Bernanke did following the bursting of the housing bubble, was stratospheric. Bernanke doubled the Fed's balance sheet in just months. (And as of now, it has been tripled.) Through engendering massive capital consumption, these measures have destroyed prodigious amounts of wealth, and continue to do so today.
Regarding the true wealth of society, nobody can say exactly how many "levels" we've fallen, or will fall. But it will very likely be enough to result in a calamitous long-term plummet in the living standards of the average person. This will very likely bring us to the climax of what Mises called the "Crisis of Interventionism."
Before the rise of liberalism made continuous capital accumulation possible across generations, the common man held a gross underestimation of what his own species was capable of. He took it for granted that economic stagnation across millennia was simply an inevitable fact of life. He had no inkling that human society was capable of enormous strides in the standard of living within a single decade. If the average man had any notion of it at all, he would have shrugged at the fact that his own standard of living was not much different from that of the average man a dozen generations before him, or, for that matter, from an even more ancient forebear 1,000 years prior. And if the ruling caste lived high on the hog while the bulk of the populace remained mired in squalor, well that was just a fact of life, too.
But that has irreversibly changed. The phenomenal increases in the well-being of man over the past centuries have exploded such lies. The common man knows he and his fellows are capable of wondrous achievements.
And so, years from now, after the prodigious capital consumption engendered by the Federal Reserve and other government measures has reduced society to squalor again, the common man will not accept it. The ruling caste may insist to him that the new squalor is simply a product of circumstances brought on by the recklessness of certain private individuals, and that the maintenance of the rulers' own power and position are necessary to keep things from getting even worse (as the Fed is doing even now as it is confronted with but a mild curtailment of its powers).
But the common man will not believe these lies. He will not accept a return to the old order. He has already tasted the fruits of capital accumulation. He knows civilization is capable of more than this, and that somewhere there must be a wrench in the gears of society: a problem too fundamental to be explained by just the reckless investing or heedless consumption of certain private individuals at a certain point in time.
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"If he survives long enough, and if society does not descend into barbarism first, the common man might find the answer to his conundrum in the writings of Ludwig von Mises."He will desperately look for this wrench, even if it means abandoning some of his most firmly held beliefs about government and society. He already knows from history that the students of Marx can't help him find it. And he will come to realize after a string of failed economic-rescue attempts that the students of Keynes and other mainstream economists don't know where it is either.
But, if he survives long enough, and if society does not descend into barbarism first, the common man might find the answer to his conundrum in the writings of Ludwig von Mises and his students. And he will learn from Mises that the wrench in the gears of civilization is nothing else but the interventionist state. He might even then find the will and the nerve to yank out the wrench for good.
Or he might not, and all will be lost.
As the state brings the world deeper into the crisis of interventionism, civilization itself is nearing a fork in the road. It will be Mises or bust.
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This article is based on my notes from Jorg-Guido Hülsmann's Mises University lecture "The Life and Work of Ludwig von Mises," delivered at the Ludwig von Mises Institute on July 26, 2009. You can also listen to a ten-lecture series on Mises here. Professor Hülsmann was kind enough to give me permission to write this article even though it is explicitly derived from his lecture.
"On August 4, 1940, Mises arrived in Manhattan. He was 59 years old at the time, and he had just been chased from his homeland by genocidal tyrants."Ludwig von Mises died in 1973. His most important book is 60 years old. So how is he relevant? Why should we read his work? What can we learn by studying his life? In light of the current recession, the intellectual history of the last two centuries, and what we know about the prerequisites for growth and prosperity, we can learn much by reading and studying Mises.
A recent symposium in the Freeman marked the sixtieth anniversary of Human Action. Mises embodied the virtues of a scholar, a creator, and a hero, to borrow the title of Murray Rothbard's biography of his mentor. He was an example of scholarly virtue, courage, and commitment to truth in the face of incredible opposition. His success as a vocational economist is embodied in the legacy he leaves through his writing and through his influence on generations of scholars like Fritz Machlup, F.A. Hayek, and Murray Rothbard. His influence is also expressed through Mises Institutes around the world and in academic programs at George Mason University, Universidad Rey Juan Carlos, Universidad Francisco Marroquin, Hillsdale College, Grove City College, Loyola University-New Orleans, and other institutions. Mises never got the academic post he deserved in the United States, and he spent his American years as a visiting professor at New York University, but he was offered positions at UCLA and the University of Rochester in addition to being named a distinguished fellow of the American Economic Association.
An event early in Mises's life illustrates the importance of ideas and of keeping ideas alive. His life changed in 1902 when he first read Carl Menger's Principles of Economics. Menger left the University of Vienna before Mises was able to take one of his courses, but Mises saw in Principles of Economics a clearly defined alternative to what was then being promulgated by the German Historical School. Menger's system revealed to Mises a realistic view of the world as it is, with clearly defined laws of action that applied to all social phenomena. Mises could not take a course from Menger, but he was able to attend Eugen von Böhm-Bawerk's seminar at Vienna (where he was a classmate of Joseph Schumpeter and the socialist Otto Bauer).
After some time working in a very prestigious job for the Austrian government, Mises discovered that he was poorly suited for life as a bureaucrat. After spending some time with a law firm and learning (again) that this was not his calling, he joined the Lower Austria Chamber of Commerce. This started a career that spanned 25 years. As a member of the Chamber, Mises could comment on policy issues by speaking directly to members of Parliament and by writing for scholarly and popular outlets.
World War I interrupted Mises's career with the Chamber and almost cut his life short. He joined the army as a lieutenant but rose to captain quickly and moved onto the front lines. His colleagues felt that this was a great risk and thought he was more valuable helping run things from behind the lines. After the war, Austria-Hungary was broken up into Yugoslavia, Hungary, Austria, and Czechoslovakia. Parts of the empire were added to Poland and Italy.
Mises had a profound influence on policy from his position as an "extraordinary" — i.e., adjunct — professor at the University of Vienna. Through his theoretical, popular, and policy writings, he helped save Austria from a Bolshevik takeover and from the kind of hyperinflation that occurred in Germany in 1923. He was offered a position with the Kredit-Anstalt, which was one of the world's great banks, in the 1920s, but he refused on the grounds that the world was on the verge of a great crisis to which he did not want to lend his good name.
In 1934, Mises took advantage of the opportunity to take an early retirement from the Chamber of Commerce and moved to the Graduate Institute for International Studies in Geneva. The Institute had offered him a one-year position, but he stayed in Geneva for six years. While in residence in Vienna, he wrote Nationalokonomie, which was the German-language predecessor to Human Action.
"Ludwig von Mises was, first and foremost, an economist and social scientist who built an entire intellectual system from a very simple principle: man acts."In Professor Hülsmann's Mises University lecture, he notes that these were probably Mises's happiest years. Unfortunately, these happy years were interrupted by World War II. France was overrun by the Germans and then the Italians; Switzerland was encircled by the Germans and the Italians; life became unpleasant for enemies of the Nazi regime — and Mises was certainly one of its enemies. Mises was fortunate to evade the Nazis long enough to secure passage to the United States. Millions of others were not so lucky.
He was granted research fellowships from the Rockefeller Foundation and the National Association of Manufacturers, and he later found himself with a visiting appointment at NYU. During this time he began his association with the Foundation for Economic Education, and he published the first edition of his magnum opus, Human Action, in 1949. Human Action provided an intellectual foundation for further work by other scholars. Murray Rothbard, for example, would write Man, Economy, and State and Power and Market based on Human Action. Together, these texts provided the starting point, and the internal coherence, for the late-20th-century Austrian paradigm.
Why were Mises's contributions significant? To really know, we have to go back to the Classical economists, the mercantilists, and the first two generations of Austrian economists (Menger and Böhm-Bawerk). In 1776, Adam Smith published his systematic treatise An Inquiry into the Nature and Causes of the Wealth of Nations, which synthesized a number of existing ideas and refuted many popular mercantilist doctrines. Mercantilism seeks to restrict imports and encourage exports through tariffs, subsidies, and monopoly.
Smith argued (quite effectively and correctly) that this was wrong: for Smith, the wealth of nations had nothing to do with the level of spending or with the money supply. The real causes of economic growth were capital accumulation and the division of labor. Smith argued that under the "obvious and simple system of natural liberty," capital would be allocated to the lines of employment in which it would be most profitable. Mercantilism necessarily meant an impoverished economy.
Most scholars would be content to make one lasting contribution. Mises made three. The first was his business-cycle theory, which appeared in his 1912 book, The Theory of Money and Credit — published when he was 31, I might add — which completed parts of the research program started by Adam Smith and integrated value theory and monetary theory.
When governments print money, they fool investors and drive down interest rates. An interest rate that would otherwise tell investors about consumers' time preferences will, after credit expansion, yield incorrect information. This means that people start too many projects relative to the number of projects that can be completed. We learn of our error when we start running out of real resources and when prices adjust to reflect this reality.
His second important contribution was his demonstration that there can be no such thing as "rational economic calculation" if resources are not privately owned. In other words, there can be no such thing as rational, meaningful economic calculation under socialism, as he demonstrated in his 1922 book, Socialism.
Profitability is the criterion by which projects are evaluated in the market economy. This presupposes prices for inputs and outputs, which in turn presupposes private property and exchange. Socialism is defined by the common ownership of the means of production, which means that we cannot have exchange, prices, or rational economic calculation. Since there are no prices, profits cannot be calculated. Therefore, projects cannot be evaluated.
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Third, Mises developed a new epistemology of economics and the social sciences. The Marxists and socialists, for example, argued that all economics is ideology. Mises argued that economic science is a priori: it deals with a level of reality that is inaccessible to the senses. Choice is an example: we know it is there, but we cannot observe it — it precedes action. This was a claim developed in detail in his 1933 book, Epistemological Problems of Economics, his 1949 book, Human Action, his 1957 book, Theory and History, and his 1962 book, The Ultimate Foundation of Economic Science.
Ludwig von Mises was, first and foremost, an economist and social scientist who built an entire intellectual system from a very simple principle: man acts. By our nature, we do some things and forego others. This principle is at the base of the Misesian approach to economics. Mises was much more than a scholar. He was also an example of someone who fearlessly pursued truth even in the face of incredible opposition. It was through his courage that the Last Knight of Liberalism set an example for all to follow.
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NoteThis article is based on my notes from Jorg-Guido Hülsmann's Mises University lecture "The Life and Work of Ludwig von Mises," delivered at the Ludwig von Mises Institute on July 26, 2009. You can also listen to a ten-lecture series on Mises here. Professor Hülsmann was kind enough to give me permission to write this article even though it is explicitly derived from his lecture.
[Excerpted from Human Action, Scholar's Edition, pp. 418–419]
The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money's purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money.
Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. Changes in money's purchasing power generate changes in the disposition of wealth among the various members of society.
From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renders can be neither improved nor impaired by changing the supply of money.
There may appear an excess or a deficiency of money in an individual's cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.
From the point of view of this insight one may call wasteful all expenditures incurred for increasing the quantity of money. The fact that things which could render some other useful services are employed as money and thus withheld from these other employments appears as a superfluous curtailment of limited opportunities for want satisfaction. It was this idea that led Adam Smith and Ricardo to the opinion that it was very beneficial to reduce the cost of producing money by resorting to the use of paper printed currency.
However, things appear in a different light to the students of monetary history. If one looks at the catastrophic consequences of the great paper-money inflations, one must admit that the expensiveness of gold production is the minor evil. It would be futile to retort that these catastrophes were brought about by the improper use which the governments made of the powers that credit money and fiat money placed in their hands and that wiser governments would have adopted sounder policies.
As money can never be neutral and stable in purchasing power, a government's plans concerning the determination of the quantity of money can never be impartial and fair to all members of society. Whatever a government does in the pursuit of aims to influence the height of purchasing power depends necessarily upon the rulers' personal value judgments. It always furthers the interests of some groups of people at the expense of other groups. It never serves what is called the commonweal or the public welfare. In the field of monetary policies too there is no such thing as a scientific ought.
The choice of the good to be employed as a medium of exchange and as money is never indifferent. It determines the course of the cash-induced changes in purchasing power. The question is only who should make the choice: the people buying and selling on the market, or the government?
It was the market that, in a selective process going on for ages, finally assigned to the precious metals gold and silver the character of money. For two hundred years the governments have interfered with the market's choice of the money medium. Even the most bigoted étatists do not venture to assert that this interference has proved beneficial.
Inflation and Deflation; Inflationism and DeflationismThe notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians.
They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.
However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power.
Since the question as to at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorical precision required for praxeological, economic, and catallactic concepts. Their application is appropriate for history and politics.
Catallactics is free to resort to them only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result and pedantic heaviness of expression can be avoided. But it is necessary never to forget that all that catallactics says with regard to inflation and deflation — i.e., big cash-induced changes in purchasing power — is valid also with regard to small changes, although, of course, the consequences of smaller changes are less conspicuous than those of big changes.
The terms inflationism and deflationism, inflationist and deflationist, signify the political programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power.
The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates.
This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.
First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy you cannot name. Statesmen and writers no longer have the opportunity of resorting to a terminology accepted and understood by the public when they want to question the expediency of issuing huge amounts of additional money.
They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject. As this policy has no name, it becomes self-understood and a matter of fact. It goes on luxuriantly.
The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse.
"The confusion of inflation and its consequences can directly bring about more inflation."
– Ludwig von MisesThe best example was provided by the subsidies granted on the part of the governments of the United States, Canada, and Great Britain to farmers. Price ceilings reduce the supply of the commodities concerned because production involves a loss for the marginal producers. To prevent this outcome the governments granted subsidies to the farmers producing at the highest costs. These subsidies were financed out of additional increases in the quantity of money.
If the consumers had had to pay higher prices for the products concerned, no further inflationary effects would have emerged. The consumers would have had to use for such surplus expenditure only money which had already been issued previously. Thus the confusion of inflation and its consequences in fact can directly bring about more inflation.
It is obvious that this newfangled connotation of the terms inflation and deflation is utterly confusing and misleading and must be unconditionally rejected.
This article was excerpted from Human Action, Scholar's Edition, pp. 418–419.
[From Property, Freedom and Society: Essays in Honor of Hans-Hermann Hoppe.]
Rights are the means by which we can reasonably predict human behavior. Without predictability, the existence of higher life forms would be impossible. The water source should be found at the end of the same track beaten each morning; berries which have always been edible should not suddenly become poisonous; species which have never posed a threat should not suddenly become predatory.
When humans or animals experience something that goes directly against fundamental expectations, stress and anxiety ensue, even when the consequences are not life threatening. The purpose of science and of gaining personal experience is to establish a chain of cause and effect with which we can then anticipate events. We can count on the bridge to bear our weight, the plane to defy gravity, and on drugs to cure us. Science boosts our sense of confidence in the world even if, through changing our environment, it itself, in turn, creates the unexpected.
The degree of confidence we have in our predictions diminishes when we are dealing with the behavior of higher life forms. Evolution programs in freedom; indeed freedom is fundamental to evolution. If in fleeing antelope always veered to the right, their predators would have already wiped out the species. We humans are programmed to find individual and original solutions to our problems; it is both the elevation and the tragedy of the human condition.
Natural RightsAnticipating human behavior is therefore a risky business. We are one of many species whose members kill one another. Preying on our fellows is a fundamental feature of humanity that falls into direct conflict however with another feature — man as a social animal.
How can we reconcile our violent impulses with the need to live together? Society demands that predation be checked. As a group member, we have reasonable expectations concerning other members: that they will not murder us in our sleep; that they will not assault us when we go out at night, for instance.
These expectations do not only concern our person but our property as well. All human languages have a concept of a personal pronoun and a gerund. These indicate the bond that a human being establishes between herself and another, between himself and an object: not just any man, but my friend; not just any tool, but mine, one which I have made, which I have used and which I can reasonably expect to use again. That bond is established through birth (my child), between consenting adults (my spouse), through homesteading (my land, which I settled before anybody else did), through transfer by mutual consent (my book for which I have paid the price asked by the seller). Who could make a stronger claim? Those who are not the parents? Those who have not first tilled the soil? Those who have not paid for the book?
By publicly declaring this bond, we are counting on others to respect it. We are counting on reaping the harvest from the field we went to all the trouble of sowing. This expectation is reasonable and when it is dashed, especially through the deliberate actions of other members of our society (confiscating an owner's dwelling, taking a child away from her mother) we feel stress, anxiety and deep resentment.
A society that placed no bounds on rape, pillage, and murder would disintegrate. Its members would defect. Without these limitations, society would be impossible. It is intrinsic to the nature of every social group that each member can rely on others not to arbitrarily rob them of their lives or their assets. Each of us reasonably declares this as a right.
Humans are fundamentally social animals (there is no such thing as a nonsocialized human being), and it is in the nature of society for these rights to be at least partially respected. This is why these are termed natural rights — not that it is in the nature of human beings to have rights (I am not going to open this debate), but that it is in the nature of human societies.
These rights were not invented by governments, as the proponents of positive rights maintain, nor have they arisen on the back of nothing more than convention. They are the very stuff of social existence. A ragtag bunch of shipwreck survivors dragging themselves ashore on a desert island would have to respect these rights from the outset, simply in order to function as a social unit, even before establishing any institution. The purpose of politics is to create exceptions to rights, so that rights are no longer shared identically by all members of society.
There are two forms of exception:
Everyone is exempted from respecting another person's rights in certain clearly defined circumstances (for instance, each of us has the right to kill our aggressor if we are acting in self-defense).
Certain clearly defined persons are exempted from respecting other people's rights in all circumstances. They are the government. The government may rob and kill with impunity when they declare this transgression to be in the name of "taxation," "just war," or "reasons of state."
Implementing RightsWe not only demand of people that they refrain from attacking us, but we also base our own set of reasonable expectations on their behavior. Should their behavior fail to meet our expectations — we experience disappointment, stress, and anxiety; we feel wronged.
A custom is a good example of a behavior that it would be reasonable to assume will be perpetuated. In many societies, custom dictates the giving of gifts, for instance, at a wedding. A relative failing to respect this custom would offend, or at least annoy, the bride and groom. It would be appropriate to sanction this failure to comply with their reasonable expectations through a well-placed remark or by neglecting to invite the offending relative to the next family occasion. By the same token, if for years a villager has been taking a shortcut across a neighbor's field without any opposition on the neighbor's part, she would feel resentment and a sense of loss should the neighbor suddenly bar her route.
These expectations would have been perfectly legitimate, just as the stress and anxiety at seeing them disappointed is understandable. They would have been even better founded, and would have become indisputable rights, had, for example, the villager signed an agreement according her the right of way across her neighbor's field.
The parties' intentions and their reasonable expectations concerning their respective behavior suffice to create a right. But as popular wisdom reminds us: "that which goes without saying is much better said, and even better written down!"
Rights born of such contracts and agreements are no longer natural, nor inherent, nor common to all societies (as is respect for life and property). They illustrate the wide breadth of human commitments according to their historical context and level of development (the sale of a radio frequency would have made scant sense in medieval times). Parties devise strategies, base investments, and enter into further agreements with other parties on the strengths of these promises. Were the contracting party to renege on their obligations, those relying on them would be disappointed and sometimes gravely injured.
The Transference of RightsConflicting desires reign in every human heart. These desires compete fiercely for a human being's limited resources: his time, his body, his energy, the use of his material possessions. Our moral life centers on setting priorities for these irreconcilable desires (to work or laze around, to drink or drive, to have an affair or to stay faithful, to focus on career ambitions or to bring up a family).
The majority of our choices indicate the value that we place on bonds, as each bond has a value, even if that value is "priceless" as when people say: "I wouldn't part with that for love or money." Value is that which one acts to gain and/or keep, as in the words of Ayn Rand.[1] We cannot make a distinction concerning the nature of the value we place on bonds — only concerning their intensity.
The death of a child, the loss of an object, of a job, of a hope, causes us vastly different levels of anxiety and suffering, but that sense of loss is always felt. The best evidence for the common nature of these bonds is our ability to substitute one for another. Values are fungible. Some would refuse and others would jump at the chance of a juicy promotion at the expense of a colleague according to the respective value they place on loyalty and money.
Each of us has the right to attempt to create a bond — or to choose not to do so. Charlotte has the right to reject the bond that Werther would like to create between them, even if it drives the young Werther to commit suicide. He is expecting a form of happiness from this bond which is not what she has in mind. She is looking to achieve this happiness through creating a bond with someone else, Albert (whilst running the inevitable risk of being disappointed). In much the same way, the owners of the Cherry Orchard in Chekhov's play of the same name reject Lopakhin's crass offer to divide it into building lots. They badly need the money, but they place even a greater value on the orchard's magical beauty.
Therefore, the only limit to our creating new bonds with people (both in relation to themselves and to objects) is their right of refusal. We do not want to be forced into a marriage, friendship, employment, or to be forced to buy or sell, and we find it reasonable not to impose these demands on others. We intrinsically believe that each of us should have the possibility of evaluating his existing ties, to exchange these or not to do so, in accordance with what he believes will be the satisfaction that he and his counterpart will each derive from that exchange.
However, this is not always the case, as can be seen in the following discussion.
False Rights — PossessionIn the 1970s, I was a frequent visitor to New York. There, Cornell, a young man from the South Bronx, took me under his wing. His sense of property was highly selective: inviolable if it was a case of one of his acquaintances — he wouldn't have walked off with my ink pen; anyone else's was fair game. One day, when I made a passing remark about how nice it would be to cycle through Central Park, he immediately suggested he should get me a bike. "How many gears do you want? What color?" No doubt he would have got me the bike of my dreams within 48 hours.
My friend Cornell would have been bound by his promise. We would have entered into a contract, but concerning an article which did not belong to him, and consequently one which would not have belonged to me either. The chain of transfers by mutual consent would have been broken. Someone's deliberate act would have deprived a man, somewhere or other, of the bicycle he counted on. His bicycle. His travel plans thwarted, both the bike's usage value and its expected resale value gone.
What if Cornell had been a trickster trumped? Surely he would have felt the same anger and frustration as his victim if, looking forward to delivering to me what he had promised, one of his ilk had pinched that bike. But, in taking possession of that bicycle, Cornell had not been assigned the right to sever the bond between this object and its owner. Only through the parties' consent may a bond to an object be assigned, without disappointing their expectations and causing them suffering.
Only rights are transferable, not property itself. Those who take possession of a piece of property disregarding the owner's intention to transfer his right do not break the bond between that property and its owner.[2] What grounds would I have had to object, had the owner come and reclaimed what had never stopped being his bicycle?[3]
False Rights — The Legalization of TheftIn others, we hope to find certain behaviors, although these behaviors neither stem from their personal commitment, nor are set in stone by custom: we would like them to be polite, helpful, and hospitable.
If my car breaks down, I would like a driver to give me a lift to the next village, but it would be unreasonable to assume that the first one who comes along will be the one to do it; I do not have any right to assistance. I have a reasonable expectation that the employees of an establishment open to the public will treat me with courtesy, but is it my right? Precedents would imply so, but the right to demand deference towards customers belongs to the employer, if she has taken care to incorporate this specific written clause into her employment contracts.
On the other hand, if I pay pension contributions or health insurance premiums, I am "counting" on the service providers to deliver. As far as I am concerned, I am covered for these eventualities. I would feel seriously let down were these organizations to renege on their obligations through either dishonesty or bankruptcy. But can I reasonably require of people who do not know me, and who do not have any personal obligation to me, to care for me in my old age, to cover the cost of my hospitalization, or to support me whilst unemployed?
Governments claim a quasi-monopoly on social support which lends them the legitimacy of their power. They create and fulfill expectations by forcing taxpayers to bail out social security and pension systems.
But, in fulfilling this expectation, doesn't this place them in the same position as Cornell, offering me something that doesn't belong to him? What's the difference? From him as well I was certain of receiving the bike, but at the cost of the owner's frustration and resentment and by thwarting his travel plans, a cost that neither I nor Cornell was willing to bear, so how come we would impose it on someone else? Does not forced redistribution make each beneficiary a receiver of stolen goods?
CommandsThis brings us to the other obvious ways of creating predictability in society: not through rights, but through commands. After all, as Benjamin Franklin famously remarked, there are only two certainties in this mortal coil: death and taxes. The government sends out tax demands to millions of households and can with reasonable certainty expect that at least 95% of people will comply. This predictability is even greater when members of another form of racket threaten to nail your kneecaps to the floor should you fail to stump up your protection money within three days.
Thus, there are two means of creating predictability in human societies: commands (to do something) and rights (that we may not be subjected to something). The fundamental difference between liberalism and all other political philosophies is that, in all instances, liberals accord rights precedence over commands.
The Moral OrderA command works better when it is internalized. Rather than waiting for the master to give an order, the individual carries that master within herself at all times. Information no longer needs to travel up and down the hierarchy. The individual is deemed to have already accepted the existence of commands to apply in each and every circumstance. This is the goal of morality.
But a moral code is intrinsically a personal commitment. It creates predictability for that individual. We can hope that a great number of individuals internalize certain core values, but just as we have seen with hospitality and mutual aid we cannot legitimately demand it. The confusion of morality with legislation forms the root of fundamentalism. Politics based on moral order is a contradiction in terms and are doomed to failure.
In a complex world where no situation ever presents itself in exactly the same fashion, rights foster negotiation to adjust individual actions. The market is the medium for these adjustments. But when the law has been internalized, the individual has no one with whom to negotiate adjustments (can one negotiate with oneself?). Faced with a new situation, an individual would be inflicting a useless privation on himself and/or his loved ones were he to apply a more rigorous moral criterion than his own morality would demand; on the other hand, he would end up experiencing guilt were he to act with laxity.
Economists recognize that in this situation where dialogue is absent, contracts are impossible: it is called a command economy. Prices are set outside the market: too high — and production surplus results in wastage; too low — and demand will remain unsatisfied. In all cases, commands, either internal or external, in the moral realm or in the economy, coupled with the impossibility of negotiations weaken the social fabric. There is no island left in our globalized world, no place to hide.
History engages all. Those human groups where dialogue and negotiation are stifled are extremely vulnerable now that they are in contact with other groups that have reached a higher, more liberal stage of development. Societies that are insufficiently complex adapt through violent transformation, as, say, many Muslim societies today, or are shattered out of existence, as are "first nations."
Of course, a fraught relationship exists between centers and margins, majorities and minorities, dominant and subordinate cultures, with the realization that dissidence may not only be repressed by the dominant, but in a sense actually created by it.
In other words, herd morality, being intrinsically reactive, is defined by what it is not, by what it fears, and by what it excludes. It is the state police itself which produces the figure of the dissident; religion (of whatever persuasion) that of the heretic; the moral order, that of the pervert. Let us celebrate dissidents! Strength may preserve, but it is dissidence and transgression that advance man as a species.
The "Good Society" and Its EnemiesThe "Good Society" creates reasonable expectations through its institutions, its customs, and respect for contracts. It diminishes the stress and anxiety placed on its members. Through not subjugating them to any bond (no forced marriages, no castes, no legal monopoly of "public services" providers), people are allowed to form ones they choose: among themselves personally (friendships, partnerships), and among themselves concerning objects (property rights). In this way, the "Good Society" maximizes each person's chances of creating the most beneficial and strongest bonds.
The "Good Society" never offers the best possible circumstances for all its members from the outset. For how could its leaders possibly anticipate each person's wants? Particularly as human desires evolve.
Each of us wants the ability to better our condition through substituting one bond with another that we believe to be of greater value (divorcing in order to marry a more considerate spouse, switching holdings in a securities portfolio, changing jobs, placing our children in a better school). Even if some people are mistaken in their expectations, others will not know this with complete certainty and, having prevented or forbidden the transaction, they could not compensate those who had wanted it in the first place and are now proven right in their assessment (time lost and opportunity costs cannot be compensated for).
Therefore, any intervention that would ruin the parties' expectations pertaining to the exercise and formation of these bonds constitutes the most direct and the most harmful attack on the "Good Society." We have seen that two types of individuals commit this aggression.
In the first instance, we find those who cannot or will not obtain someone's consent to transfer a bond to an object to them. Murderers, rapists, robbers, swindlers, these all know they will never be granted this bond, but nevertheless choose to attack a person and to dispossess her of her rights to her body or possessions against her will.
The other group consists of a party with somewhat starker ambition, those who are aware that to simply seize an asset would make them nothing more than thieves. This gang instead forbids the creation of certain bonds between people and invalidates those which people have been able to create between themselves and objects.
Governments (they alone can harbor this outrageous pretension) impose restrictions on marriage contracts, employment and business contracts, on the free movement of people, on the construction of buildings, on what people can eat, drink, smoke, read, view, say, print and broadcast, what clothes we can wear, and what medicines we can use. They seize all or part of the assets of individuals and companies at will.
Yet, the desire to create new bonds underpins our initiatives, and as these bonds strengthen they bring us ever-greater satisfaction. So conversely, their violation causes us ever-greater distress.
This is why the common good of the "Good Society" is to protect these bonds without which it would not exist and to protect them especially against those who have the political power to infringe on them.
$25 $20
Will we ever achieve a "Good Society"? There is often cause for despair, I agree. It seems the battle is never won. But let me quote a wonderful Bulgarian poet, Blaga Dimitrova, with words that have inspired me for many years:
I'm not afraid
they'll stamp me flat.
Grass stamped flat
soon becomes a path.[4]
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Notes[1] "Values," The Ayn Rand Lexicon: Objectivism from A to Z, Harry Binswanger, ed. (New York: New American Library, 1986).
[2] Hoppe discusses the importance of objective ("intersubjectively ascertainable") links between owners and scarce resources in Hans-Hermann Hoppe, A Theory of Socialism and Capitalism: Economics, Politics, and Ethics (Boston: Kluwer Academic Publishers, 1989), 12, 212 n.2, et pass; idem, Eigentum, Anarchie und Staat: Studien zur Theorie des Kapitalismus (Opladen: Westdeutscher Verlag, 1987), 98–100); idem, "Four Critical Replies," in The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy (Boston: Kluwer, 1993), 242. See also discussion of same in Stephan Kinsella, "How We Come to Own Ourselves," Mises Daily (September 7, 2006).
[3] On the importance of the prior-later distinction, see Hoppe, A Theory of Socialism and Capitalism, chaps. 1, 2, 7 et pass.; Kinsella, "How We Come to Own Ourselves," text at n. 4.
[4] Blaga Dimitrova, "Grass," quoted in Harold B. Segel, The Columbia Guide to the Literatures of Eastern Europe Since 1945 (New York: Columbia University Press, 2003 [1974]), 146.
Carl Menger has not only provided an irrefutable praxeological theory of the origin of money. He has also recognized the import of his theory for the elucidation of fundamental principles of praxeology and its methods of research.Cf. Carl Mender's books Grundsätze der Volkswirtschaftslehre (Vienna, 1871). pp. 250 ff.; ibid. (2d ed. Vienna, 1923), pp. 241 ff.; Untersuchungen über die Methode der Sozialwissenschaften (Leipzig, 1883), pp. 171 ff.
There were authors who tried to explain the origin of money by decree or covenant. The authority, the state, or a compact between citizens has purposively and consciously established indirect exchange and money. The main deficiency of this doctrine is not to be seen in the assumption that people of an age unfamiliar with indirect exchange and money could design a plan of a new economic order, entirely different from the real conditions of their own age, and could comprehend the importance of such a plan. Neither is it to be seen in the fact that history does not afford a clue for the support of such statements. There are more substantial reasons for rejecting it.
If it is assumed that the conditions of the parties concerned are improved by every step that leads from direct exchange to indirect exchange and subsequently to giving preference for use as a medium of exchange to certain goods distinguished by their especially high marketability, it is difficult to conceive why one should, in dealing with the origin of indirect exchange, resort in addition to authoritarian decree or an explicit compact between citizens. A man who finds it hard to obtain in direct barter what he wants to acquire renders better his chances to acquire what he is asking for in later acts of exchange by the procurement of a more marketable good. Under these circumstances there was no need of government interference or of a compact between the citizens. The happy idea of proceeding in this way could strike the shrewdest individuals, and the less resourceful could imitate the former's method. It is certainly more plausible to take for granted that the immediate advantages conferred by indirect exchange were recognized by the acting parties than to assume that the whole image of a society trading by means of money was conceived by a genius and, if we adopt the covenant doctrine, made obvious to the rest of the people by persuasion.
If, however, we do not assume that individuals discovered the fact that they fare better through indirect exchange than through waiting for an opportunity for direct exchange, and, for the sake of argument, admit that the authorities or a compact introduced money, further questions are raised. We must ask what kind of measures were applied in order to induce people to adopt a procedure the utility of which they did not comprehend and which was technically more complicated than direct exchange. We may assume that compulsion was practiced. But then we must ask, further, at what time and by what occurrences indirect exchange and the use of money later ceased to be procedures troublesome or at least indifferent to the individuals concerned and became advantageous to them.
The praxeological method traces all phenomena back to the actions of individuals. If conditions of interpersonal exchange are such that indirect exchange facilitates the transactions, and if and as far as people realize these advantages, indirect exchange and money come into being. Historical experience shows that these conditions were and are present. How, in the absence of these conditions, people could have adopted indirect exchange and money and clung to these modes of exchanging is inconceivable.
The historical question concerning the origin of indirect exchange and money is after all of no concern to praxeology. The only relevant thing is that indirect exchange and money exist because the conditions for their existence were and are present. If this is so, praxeology does not need to resort to the hypothesis that authoritarian decree or a covenant invented these modes of exchanging. The étatists may if they like continue to ascribe the "invention" of money to the state, however unlikely this may be. What matters is that a man acquires a good not in order to consume it or to use it in production, but in order to give it away in a further act of exchange. Such conduct on the part of people makes a good a medium of exchange and, if such conduct becomes common with regard to a certain good, makes it money. All theorems of the catallactic theory of media of exchange and of money refer to the services which a good renders in its capacity as a medium of exchange. Even if it were true that the impulse for the introduction of indirect exchange and money was provided by the authorities or by an agreement between the members of society, the statement remains unshaken that only the conduct of exchanging people can create indirect exchange and money.
History may tell us where and when for the first time media of exchange came into use and how, subsequently, the range of goods employed for this purpose was more and more restricted. As the differentiation between the broader notion of a medium of exchange and the narrower notion of money is not sharp, but gradual, no agreement can be reached about the historical transition from simple media of exchange to money. This is a matter of historical understanding. But, as has been mentioned, the distinction between direct exchange and indirect exchange is sharp and everything that catallactics establishes with regard to media of exchange refers categorially to all goods which are demanded and acquired as such media.
As far as the statement that indirect exchange and money were established by decree or by covenant is meant to be an account of historical events, it is the task of historians to expose its falsity. As far as it is advanced merely as a historical statement, it can in no way affect the catallactic theory of money and its explanation of the evolution of indirect exchange. But if it is designed as a statement about human action and social events, it is useless because it states nothing about action. It is not a statement about human action to declare that one day rulers or citizens assembled in convention were suddenly struck by the inspiration that it would be a good idea to exchange indirectly and through the intermediary of a commonly used medium of exchange. It is merely pushing back the problem involved.
It is necessary to comprehend that one does not contribute anything to the scientific conception of human actions and social phenomena if one declares that the state or a charismatic leader or an inspiration which descended upon all the people have created them. Neither do such statements refute the teachings of a theory showing how such phenomena can be acknowledged as "the unintentional outcome, the resultant not deliberately designed and aimed at by specifically individual endeavors of the members of a society."Cf. Menger, Untersuchungen, i.e., p. 178.
This article is excerpted from chapter 17 of Human Action.
The reader of this, the second volumeHere is our review of the first volume, Rothbard's Last Triumph, Part 1. of Rothbard's last great work, will at once face a puzzle: how was one person able to unify so vast a mass of material into a tightly organized narrative? I cannot pretend to provide a full answer, but one part of the solution lies in the fact that Rothbard follows a few main themes with iron consistency.
One of these central themes emerges in the book's initial chapter, "J.B. Say: the French Tradition in Smithian Clothing." Jean-Baptiste Say, far from being a mere popularizer of Adam Smith, "was the first economist to think deeply about the proper methodology of his discipline, and to base his work, as far as he could, upon that methodology" (p. 12).
And what is the procedure that Say advocated? One starts from certain "general facts" that are incontestably known to be true. From these, the economist reasons deductively. Since the beginning axioms are true, whatever is validly deduced from them also is true. Here, in brief compass, Say discovered the praxeological method that came to full fruition in the work of Mises and Rothbard himself.
To understand praxeology, a key point about the initial axioms must be kept in mind. The starting points are common sense, "obvious" truths, e.g., that people engage in exchange in order to benefit themselves. The economist should not begin from oversimplified hypotheses about the economy as a whole, chosen because they are convenient for mathematical manipulation. In Rothbard's view, the adoption of this wrong method was the besetting vice of the economics of David Ricardo, and the main impediment to the development of economic science in the 19th century.
This conflict of method had a fundamental effect on the content of Say's and Ricardo's economics. Say began from the individual in action, the subject of the common-sense propositions Say took to be axiomatic. Thus, he placed great emphasis on the entrepreneur. One cannot assume that the economy automatically adjusts itself: only by the foresight of those able and willing to take risks can production be allocated efficiently. "It seems to us that Say is foursquare in the Cantillon-Turgot tradition of the entrepreneur as forecaster and risk-bearer" (p. 26).
Again, Say's stress on the individual underlies his analysis of taxation, which Rothbard rates among his greatest contributions. Some, notoriously including Adam Smith, consider taxes a way to benefit the public; but Say would have nothing of this nonsense.
Taxation, in essence, is theft: the government forcibly seizes property from its rightful owners. If the powers that be then condescend to spend some of their ill-gotten gains for the "public benefit," they are in reality purchasing the people's goods with the people's own money. Taxation, accordingly, should be as low as possible; the search of Smith and his followers for "canons of justice" in taxation must be rejected. Rothbard characteristically adds, Why have any taxes at all?
As any reader will discover after a few pages, Rothbard spurns the desiccated neutrality of much contemporary pseudoscience. He has his heroes and villains, chosen not by arbitrary preference but according to his carefully reasoned conception of economic principles. Yet he is no uncritical partisan of his heroes: he is a master of the fine discriminations that, as Dr. Leavis has taught us, characterize the great critic.
When Rothbard turns to Ricardo, he once again reverses conventional opinion. Say was not a popularizer, but a great economist. Likewise, Ricardo was not a truly scientific economist. His much-praised logic is mere "verbal mathematics" that fundamentally misconceives economics.
Ricardo was stuck with a hopeless problem. He had four variables, but only one equation with which to solve them: Total output (or income) = rent + profits + wages. To solve — or rather, pretend to solve — this equation, Ricardo had to 'determine' one or more of these entities from outside his equation in such a way as to leave others as residuals. (p. 82)
Rothbard explains with crystal clarity the path by which Ricardo sought to escape. He simply held fixed as many of his variables as he could: he "solved" his equations by oversimplified assumptions. In particular, he adopted a theory of rent based on differential productivity, which Rothbard neatly skewers; and he made price largely a function of the quantity of labor time embodied in a commodity's production.
Ricardo's labor theory of value had a consequence that would no doubt have shocked its author: it paved the way for Marxism.
Marx found a crucial key to this mechanism [by which the capitalist class would be expropriated] in Ricardo's labor theory of value, and in the Ricardian socialist thesis that labor is the sole determinant of value, with capital's share, or profits, being the 'surplus value' extracted by the capitalist from labor's created product. (p. 409)
With his stress on the Ricardian roots of Marxism, Rothbard begins a devastating assault on "scientific socialism," the like of which has not been seen since Böhm-Bawerk.
As Rothbard notes, Marx's economics falls into error from the start. Marx assumed that in an exchange, the commodities traded have equal value. Moreover, he took this postulated equality in a very strong sense: both of the goods must be identical to some third thing. This, by a spurious reasoning that Rothbard deftly exposes, he claimed could only be labor.
But the flaw in Marx's derivation does not lie in the details of his argument. A leitmotif of Rothbard's work is that an exchange consists not of an equality, but rather of a double inequality. Marx's whole edifice thus rests on a spurious assumption, and the three volumes of Das Kapital constitute an elaborate attempt to conjure a solution to a nonexistent problem.
But the difficulties of Marxist economics are not confined to its starting point. Rothbard points out that Marx's theory of wage determination really applies not to capitalism but to slavery.
Oddly, neither Marx nor his critics ever realized that there is one place in the economy where the Marxist theory of exploitation and surplus value does apply: not to the capitalist-worker relation in the market, but to the relation of master and slave under slavery. Since the masters own the slaves, they indeed only pay them their subsistence wage: enough to live on and reproduce, while the masters pocket the surplus of the slaves' marginal product over their cost of subsistence. (p. 393)
Rothbard does not confine his assault on Marxism to an exposure of its economic fallacies. Behind the economics of Marxism, he finds a heretical religious myth, the goal of which is "the obliteration of the individual through 'reunion' with God, the One, and the ending of cosmic 'alienation', at least on the level of each individual" (p. 351).
One might at first think that abstruse theosophical speculations that date back to Plotinus have little to do with Marxism. But Rothbard convincingly shows that Marx, through the intermediary of Hegel, presented a secularized version of this witches' brew in the guise of "scientific socialism." In the course of doing so, Rothbard makes Hegel's philosophy seem amusing; his remarks on the "cosmic blob" are worthy of Mencken (p. 349).
So filled with material is the book that one could easily write another detailed review stressing entirely different parts of it, such as the long and learned account of the bullionist controversy. I shall, with regret, confine myself to two final items. In his discussion of utilitarianism, Rothbard's philosophical turn of mind is evident. He notes that according to that system, reason
is only a hand-maiden, a slave to the passions.…
But what, then, is to be done about the fact that most people decide on their ends by ethical principles, which cannot be considered reducible to an original personal emotion? (p. 57)
Rothbard has here rediscovered an objection to utilitarianism raised by Archbishop Whately: how can utilitarianism accommodate preferences based on competing ethical systems? John Stuart Mill, though familiar with the objection, never answered it in a convincing way. I cannot resist ending with Rothbard's assessment of him:
John Stuart was the quintessence of soft rather than hardcore, a woolly minded man of mush in striking contrast to his steel-edged father.… John Mill's enormous popularity and stature in the British intellectual world was partially due to his very mush-headedness. (p. 277)
You will not encounter another intellectual historian who writes like that. Murray Rothbard's two volumes are a monument of 20th-century scholarship.
This article was first published in Mises Review, Summer 1995, Volume 1, Number 2.
[Excerpted from chapter 5 of Freedom, Property, and Society: Essays in Honor of Hans-Hermann Hoppe.]
Ludwig von Mises believed that the topic of polylogism was important enough to put up front in the introduction of Human Action:
Marxism asserts that a man's thinking is determined by his class affiliation. Every social class has a logic of its own…. This polylogism was later taught in various other forms also. Historicism asserts that the logical structure of human thought and action is liable to change in the course of historical evolution. Racial polylogism assigns to each race a logic of its own.Ludwig von Mises, Human Action, Scholar's Edition (Auburn, Ala.: Ludwig von Mises Institute, 1998 [1949]), p. 5.
He was writing in 1949 but he saw where trends were headed: polylogist thinking — the belief that a multiplicity of conflicting forms of logic exist within the human population, subdivided by some group-based characteristic — would become a prevailing feature of modern social science. So today a vast amount of modern politics is based on some form of this idea. We speak of the group-based interests not just about class but also in the areas of race, sex, religion, ability, looks, and more. Even environmentalist politics might be understood in these terms: that nature itself operates according to a different logical matrix from the human population, so that we are exploiting nature all the time and might not know it.
An additional point about polylogism: it is believed that not only are there are a variety of forms of logical structure existing in the world but that these forms of logic create a conflict, rooted in exploitation, that forms the basis of society and cries out for correction by some external means. Thus do all these forms of polylogism generate a supposed need for some social (state) action to accommodate these varieties of thinking. The exploiters must be overthrown, even in the case of the environment. So pervasive is this perspective that it nearly defines the whole of the social sciences as practiced in academia today.My friend B.K. Marcus sums up his entire college experience as a four-year case for polylogism.
Becoming aware of this through reading Mises, the reader is shocked at Hans-Hermann Hoppe's presentation of the core claims of Marxian class theory and his summary conclusion: "I claim that all of them are essentially correct."Hans-Hermann Hoppe, The Economics and Ethics of Private Property (Auburn, Ala.: Ludwig von Mises Institute, 2006), pp. 117–38.
How can we account for Hoppe's apparent softness toward the Marxist idea, even as Mises is so thoroughly against it? There is an answer here: what Hoppe has done is purge Marxism of its epistemological assumptions and retained its analysis of the material world. This permits us to draw for Marxism many important insights while disregarding the polylogism that has led to so much insidious rhetoric of the past and present.
A classic example of the use of polylogism can be found in Karl Marx and the Close of His System by Eugen von Böhm-Bawerk in 1896.Eugen von Böhm-Bawerk, Karl Marx and the Close of His System (New York: Augustus M. Kelley, 1949). Böhm-Bawerk offers a painstakingly detailed argument, stretching over 150 pages, that Marx never got around to fully explaining why it is that goods do not exchange in proportion to the value of labor in them but rather that the profit of capital is in proportion to the capital invested. Had Marx attempted to explain this, as he kept promising he would, it would have been obvious that his entire theory of surplus value was inherently contradictory to the facts on the ground.
This is a fatal flaw in Marx's work, because he doesn't allow the reader to logically or empirically test his claim concerning the surplus value extracted by the capitalist and not given to workers. Böhm-Bawerk further writes that Marxism seems to have built into the system a strategy that belies any attempt to refute it. Every disagreement is dismissed with ad hominem of sorts, that the writer is hopelessly mired in bourgeois thinking. "Is it too much to demand that if he introduces subjective interpolations into his system they should be correct, well founded, and non-contradictory? And this reasonable demand Marx has continually contravened." This was Böhm-Bawerk's protest against the use of polylogist assertions embedded in Marxist defense tactics.
Marxist theorist Rudolf Hilferding responded to Böhm-Bawerk in a way that underscored the problem with polylogism: he does precisely what Böhm-Bawerk would predict that a Marxist would do. He dismissed the source, and with long-winded criticism tossed aside all of Marx's critics in the same way that Marx did. Concerning the great professor's detailed attempt to grapple with the details of Marx's theory, Hilferding writes:
As spokesman for the bourgeoisie, it enters the lists only where the bourgeoisie has practical interests to defend. In the economico-political struggles of the day it faithfully reflects the conflict of interests of the dominant cliques, but it shuns the attempt to consider the totality of social relationships, for it rightly feels that any such consideration would be incompatible with its continued existence as bourgeois economics. Ibid., p. 121.
Hilferding further says that the professor's argument can be disregarded because he failed to deal with Marxism "in its entirety" as a complete system of thought, that, one supposes, must be accepted on faith. Whereas Böhm-Bawerk talks about subjective values, and individual prices and their relationship with capital invested, Marx, writes Hilferding, "looks upon the theory of value, not as the means for ascertaining prices, but as the means for discovering the laws of motion of capitalist society."
Hilferding writes:
Instead of taking economic or social relationships as the starting point of their system, they have chosen for that starting point the individual relationship between men and things. They regard this relationship from the psychological outlook as one which is subject to natural and unalterable laws. They ignore the relationships of production in their social determinateness, and the idea of a law-abiding evolution of economic happenings is alien to their minds.Ibid., pg. 196.
Hilferding's criticism can be summed as an application of this polylogist dismissal: as a member of the ruling class who is wedded to bourgeois ways of thinking, Böhm-Bawerk is just not capable of thinking the right way about these things. Marxist thought, which is all about the laws of history and the social determinates driving the material world, is alien to him simply because his mind is incapable of seeing the truth.
And so it is today with so many political arguments. The rhetoric is on a much lower level today, but this is the usual way in which political discussion takes place in the post-Marxist society in which the polylogist assumption drives discussion. Capitalists can't possibly understand the logic of environmentalist thinking because they are out of touch with nature and its need. Whites cannot even begin to comprehend the demands of blacks for preference and redistribution because the black experience and way of thinking are alien to the white experience and way of thinking. So too with issues of sex, sexuality, religion, and physical ability.
It is usually assumed that one may not even speak about the controversies of our time unless one belongs to the "victim group" being discussed. Even then, if a woman or a black or a gay offers a point of view that runs contrary to the dominant political agenda of the mainstream lobby for these groups, that person is dismissed as somehow lacking higher consciousness or hopelessly mired in a different mindset. She is not a real woman, he is not a real black, they are not really disabled, he doesn't genuinely represent the views of Islam, etc.
What's at work here is an unraveling of the entire basis for any form of intellectual discussion. If we can't agree on universal rules of establishing the veracity of truth claims, all discussion is reduced to a series of demands followed by ad hominem attacks on anyone who resists those demands. Mises himself understood that if we are to avoid this fate, there had to be some understanding and agreement on the rules of logic. George Koether reportsAustrian Economics Newsletter 20, no. 3 (Fall 2000). that Mises told his seminar students that the first book on economics that they should read is a book on logic by Morris Cohen, a book which is in fact one of the last complete texts on logic to be published for universal use in the college classroom.Morris Cohen, An Introduction to Logic and Scientific Method (New York: Read Books, 2007); originally published in 1934. Meanwhile, forums on academic discussion boards filled with complaints that logic as a discipline is no longer part of high-school study or even undergraduate college study, which means that after 16 years of formal study, hardly any students are taught even the basic rules on how to think.
This is further evidence that this one aspect of Marxism—its radical attack on the core of clear thinking, a subject that (along with grammar and rhetoric) has been part of the "trivium" since the middle ages—has triumphed in mainstream thinking today, so much so that any professor suspected of holding to logical universals and refusing to accept class-interest arguments as self-evidently true can be driven out of the university merely for holding "politically incorrect" opinions.
Hoppe's attachment to Marxism, however, eschews polylogism completely and instead embraces universal logical principles as the very method by which to reapply Marxian political theory in a completely different context. In his writings on class theory, he ticks through the familiar list: history is defined by class struggle; the ruling class has a common interest; class rule is defined by ownership relations involving exploitation; there is a tendency toward centralization of class interest; and centralization and expansion of exploitative rules leads to an unviable attempt at global domination. What he is speaking of here is not polylogism as such but a narrower aspect of Marxian politics and its claims concerning the social forces of history. And he says that they are all essentially correct. The basis for Hoppe's claim reflects his views of the Marxist theory of exploitation, which he regards as correct in its analytical features but not in its application.
Hoppe deals with the application error in Marxist theory swiftly and decisively. The Marxist view says it is exploitation for the worker to labor five days and receive only three days of product value back in wages. And yet it remains true that workers willingly accept wage contracts. It is a strange sort of exploitation that is mutually beneficial to all parties and engaged in willingly and happily by billions of people every day. The interests of the worker and the capitalist are harmonious: the worker accepts a smaller portion of goods in the present over a larger one in the future, while the capitalist has the opposite preference. Marx didn't see this because he failed to comprehend that it is impossible to exchange future goods against present goods except at a discount.
But what about the theory of the reality of exploitation itself? Hoppe argues that it is fulfilled in the Austrolibertarian framework of looking at the world, once we understand that the ruling class is distinguished by its access to state power. This follows from Hoppe's new definition of exploitation, which occurs when a person successfully claims partial or full control over scarce resources that he has not homesteaded, saved, or produced, nor acquired contractually from a previous producer-owner. The state can be seen as a firm devoted entirely to the task of exploitation in this sense. This exploitation creates victims, who can overthrow their exploiters once they develop a consciousness of the possibility of an exploitation-free society in which private property is universally respected and not systematically violated by a ruling class.
What's interesting about the Hoppean account of the Marxian theory, and his recasting of the theory in light of Austrolibertarian theory, is that it completely bypasses the core polylogist assumption of Marxist theory. There is no need to postulate that the exploiters and the exploited are somehow socially hardwired into thinking differently according to conflicting logical principles. On the contrary, Hoppe's approach assumes the universal applicability of one set of logical principles. Here is the main point of departure, one that clarifies the seeming difference between Mises and Hoppe, and highlights an important ideological agenda for the future.
In what ways might Hoppe's reconstruction of Marxism apply to Marxism's modern spinoffs? Once we strip away the polylogist assumption underlying modern politics, we can see that many group relations are indeed characterized by varieties of Hoppe-style exploitation. And it is precisely law and legislation that make this possible. Laws that privilege one race, one religion, one sex, one class of abilities, over another generate a group of victims and solidify a form of group solidarity that might have previously existed only in nascent form. Whereas group differences might resolve themselves through trade, the entry of the state into the association amplifies and institutionalizes group conflicts.
This is true as regards, for example, religion. Once the state begins to subsidize one form of religious expression, it generates the impression on the part of other religions that they are being ripped off or put upon in some way, and the only means of defense is to organize and coalesce to take back what is rightly theirs. This trajectory can become particularly explosive when it involves issues of race and sex, but conflict also appears in other areas, such as environmental legislation and disability legislation.
In the same way that state-subsidized exploitation led Marx to observe but misdiagnose the nature of exploitation in his time, forms of state exploitation today can lead people to embrace anticapitalistic creeds based on a misdiagnosis of the root of conflicts over race, sex, religion, ability, and the environment today. It is not the case that demographic groups are inherently in conflict; the illusion is created by the absence of what Hoppe calls "clean capitalism," in which all relationships in society are characterized by voluntary exchange and association.
Part of that misdiagnosis drives people to embrace a polylogist understanding of the structure of the human mind. But once the Hoppean understanding of the exploitation and conflict — those kernels of truth in Marxism — becomes clear, there is no need to resort to far-flung explanations to account for them. The root problem is not somehow embedded in the structural diversity of operating logics in the world; the explanation of conflict in society is rooted in a much more direct and simple cause: the state itself.
In this way, then, the Hoppean theory of social conflict has the potential to not only do away with old-time Marxist politics and its destructive effects in the world but to hold within itself the potential for uprooting and overthrowing the entire polylogist basis of the social sciences as they have developed in the last hundred years — and the state apparatus of interventionism that results from them. As to whether this is possible, it comes down to the question of which is more fundamental to the Marxist worldview: its polylogism or its exploitation theory. A major job of the Hoppean project is to toss out the former while retaining a version of the latter in a way that can be used against the state and its interests.
The year was 1921. It was near midnight. Economist Ludwig von Mises was guiding some visitors through Vienna's dimly lit inner city. The city was asleep. All was quiet except for the sound of the men's muted conversation and the clop of their footsteps on the cobblestone streets. The men had just come from an economic conference where they had been discussing the disastrous effects of inflation.Prices were rising rapidly in most of the countries of post — World War I Europe. Germany and Austria, especially, were facing hyperinflation. In Austria, the economy was in the doldrums. Large numbers of industrial firms were idle throughout the land, while others were working only part-time.
As the men approached the center of the city, the still of the night was broken by "the heavy drone of the Austro-Hungarian Bank's printing presses." Their Viennese host, Mises, explained that those presses "were running incessantly day and night, to produce new banknotes." Throughout the land, only the printing presses making banknotes were operating at full speed. "Let us hope," Mises told his guests, "that industry in Germany and Austria will once more regain its prewar volume and that war- and inflation-related industries, devoted specifically to the printing of notes, will give way to more useful activities."
Mises had been concerned about inflation even as a young man. After receiving his doctorate in 1906, he wrote a number of serious studies on money and banking. Former Austrian Minister of Finance Ernst von Plener, a leading economist, called Mises to his office one day to discuss one of Mises's papers. "I don't know why a young man like you is interested in inflation," Plener said. "True, inflation was a serious problem in the past. But," he went on, "all the civilized countries in the world are now on the gold standard. Can you imagine England, France, or Germany going off the gold standard?"
Ludwig, then only 26 years old, of medium height, serious, prim and proper, with a military bearing, was respectful. But he begged to differ. "I see a movement in those countries," Mises said, "that can't be called anything but 'inflationist.' The books of their economists express enthusiasm for inflation, even for unlimited inflation. Sooner or later, the ideas of those inflationist economists will influence public opinion. And that must lead to inflationist government policies. " Mises's anticipation was borne out during World War I when England, France, and Germany all went off the gold standard.
Mises served in the Austro-Hungarian cavalry on the eastern (Russian) front in World War I. When he returned to Vienna, he found that inflation had compounded the destitution of the people. Men and women who had worked and saved for decades discovered that the value of their pensions was evaporating; the savings of a lifetime could pay for only a few streetcar rides. Merchants could not replace inventories with the receipts from their sales. A shoe dealer, for instance, with an inventory of 10,000 pairs of shoes in 1914, saw his assets dwindle each year as the cost of shoes went up with the inflation; finally, his receipts from a year's sales could pay for only one pair of shoelaces.
"Men and women who had worked and saved for decades discovered that the value of their pensions was evaporating." One Austrian émigré, who went to the United States before 1900 and became wealthy, bequeathed his fortune to establish an educational institution for orphans in Austria. Under Austrian law, the dollars had to be invested in Austrian government bonds until arrangements for the institution could be made. World War I intervened. By the end of the war, inflation had made the government bonds worthless, and nothing was left for the orphans.
Mises realized that inflation hurt some people at the expense of others. Those who were industrious, conscientious, and responsible, who worked hard and saved, were "losers," as the inflation eroded their savings. Those who borrowed to live beyond their means and spent lavishly were "winners," as they were able to repay their creditors with worthless paper money.
In 1922 Ignaz Seipel became Chancellor of Austria. Dr. Seipel, a Roman Catholic priest, honest and conscientious but naive about finance, was not the usual politician. Mises, by then a government adviser, and Wilhelm Rosenberg, a lawyer friend who was an expert in financial questions, convinced Seipel that for the good of the people, the printing of superfluous banknotes should be stopped.
"Mises realized that inflation hurt some people at the expense of others." Then Mises realized Seipel expected that halting the inflation would bring prosperity right away. Mises didn't want to deceive Seipel. "Stopping the inflation will bring economic improvement in time," Mises told him. "But not immediately.… Its first effect will be to cause a 'stabilization crisis,' that will bring about serious, though short-run, economic hardship." Mises went on to explain why:
The people have come to expect ever-rising prices. They have adjusted to the inflation so far as they were able. Halting the flow of banknotes will come as a shock. Those who have anticipated further inflation will find their plans frustrated. Thus, the immediate effect of stopping the inflation will not be to benefit you and your political party. I [dare] say you will have serious difficulties.
Seipel interrupted. "But you say this is necessary — that this is the moral thing to do. If so, it doesn't matter. The party must do not only what is popular in the short run; it must also do what is best for the country." Thanks to Seipel, inflation was then brought to a halt in Austria in the fall of 1922, a year before Germany's catastrophic post — World War I inflation came to an end. And, in spite of the opposition of socialist opponents, Monsignor Seipel and his party won their next (October 1923) election.
Mises's Attack on CommunismMises's first serious attack on communism, or socialism as it was often called, was in a 1920 article. Then two years later, Mises shocked his contemporaries with a book Socialism, in which he explained that if the Communists did away with private property, they would be unable to calculate and thus unable to plan production. In a Communist society, he said, in which all property was communally owned, the planners would have to rely on soldiers and hangmen to enforce their edicts.
Without private property, there would be no private owners bidding for goods and services, and no exchanges among real owners. Without private owners, each guided by the desire for profits and the fear of losses, there would be no market prices to indicate what people wanted and how much they were willing to pay for it. Without market prices, there would be no competition and no profit-and-loss system. And without a profit-and-loss system, there would be no network of interrelated, consumer-directed, independent producers. Without private property, competition, market prices, and a profit-and-loss system, the planners would not know what to produce, how much to produce, or how to produce it.
Except as the planners could observe and copy production in non-socialist lands, they would find themselves "floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation." Thus a Communist society would be rife with economic waste, malinvestment, production bottlenecks, surpluses of some things, and shortages of others. Certainly it would be no utopia.
When Socialism appeared in 1922, prosocialist, post–World War I Europe was not ready to accept Mises's rigorous critique of Communism and all varieties of socialism. The book was criticized severely, not only by socialist polemicists but also by learned professors. For decades, apologists for Communism energetically defended the USSR and its economic system, arguing that the nation, supposedly a Communist society, obviously maintained itself and functioned well. In 1957, the Swedish sociologist (and future Nobel laureate) Gunnar Myrdal ridiculed Mises, saying that the very type of economic planning Mises had said was "impossible" was actually being carried out in almost all underdeveloped countries and "often with the competent guidance of economists."
"A Communist society would be rife with economic waste, malinvestment, production bottlenecks, surpluses of some things, and shortages of others." For decades, the USSR stumbled along. Its edicts were enforced, as Mises had predicted, by soldiers and hangmen, and the system was only maintained with the assistance of massive subsidies from abroad. For 72 years from the Revolution of 1917, the USSR's people endured economic shortages and bottlenecks, tolerated shoddy merchandise, and suffered deprivation. For 72 years the Soviets struggled to copy foreign production processes and foreign prices. Then finally the coup de grace. In 1989, the Communist regimes of Eastern Europe and the USSR collapsed. Widespread economic waste and continuing malinvestment throughout those 72 years in the USSR and its satellite nations were their undoing — eloquent testimony to the truth of Mises's 1920 thesis. In spite of the thousands of words devoted to trying to refute Mises, the USSR's central planners had really not been able to calculate after all. Mises had been right.
When, in 1989, Mises's 98-year-old widow learned that the Berlin Wall had been knocked down and the Communist regimes of Eastern Europe and the USSR had been toppled, she wished her husband had lived to see that day. "But," she said, "he had known that one day Communism would come tumbling down."
The Rise of NazismMises was a Jew in a society that was becoming increasingly anti-Semitic. As an economist who understood the principles of human action, he saw the handwriting on the wall as early as 1927. He realized that the interventionist policies that several European governments were following would bring disaster to the Continent and its inhabitants. Mises foresaw the end of freedom in Central Europe. But the world didn't listen to his warnings.
Adolf Hitler had been a failure in his native Austria. He had fought with the Germans during World War I and had then stayed on in Germany. Not long after the War, Hitler gained control of the German Workers' Party and transformed it into the anti-Semitic National Socialist German Workers' Party. By the 1930s, Hitler's movement was gaining adherents in large numbers in Germany.
Mises was at a garden tea party in September 1932, at a meeting of the Society for Social Policy (Verein für Sozialpolitik), in Bad Kissingen, Germany, when he suddenly asked those assembled, "Do you realize that we are gathered together for the last time? Hitler's rise to power will put an end to such meetings as this." At first the members of Mises's audience were aghast at his remark. Then they laughed! Mises continued: "Hitler will be in office in 12 months."
The others present thought that unlikely. "But even so," they asked, "even if Hitler does come to power, why shouldn't the Society meet again?" Hitler, Mises said, wouldn't tolerate gatherings of intellectuals who might someday become his opponents.
Hitler came to power in Germany in March 1933, about six months after the Society's September meeting. As Mises had anticipated, the Society did not meet again until after the end of World War II.
Mises served for many years in the Austrian government's chamber of commerce as economic adviser to the national parliament. He was a part-time, unsalaried lecturer at the University of Vienna, receiving as pay only the fees of students. In 1927 he established the Austrian Institute for Business Cycle Research. By dint of his prodigious output — books, articles, and lectures — Mises acquired a reputation in Europe as a serious scholar, and he earned some international recognition.
Mises also conducted a private seminar in Vienna for young PhDs who were interested in economics. Mises and his seminar students did serious work, but they also joked, dined together, and sang lighthearted songs about economics, composed by one of their number, Felix Kaufmann.
Standing at the window of his office one day, Mises mused aloud to one of his young economist friends, Fritz Machlup. "Maybe our civilization will end, maybe grass will grow on the Ringstrasse," referring to Vienna's wide street which had been built on the site of the medieval fortifications that circled the inner city. "Maybe we will all have to leave Austria. But where shall we go and what can we do? For what jobs are we qualified?"
Mises speculated that he and his friends might wind up in a Latin American country and he considered the kind of work each might do. "You, Fritz," he said, "being friendly and sociable, might become a dancer in a night club, giving young ladies and old a good time." Mises suggested various roles his other friends might fill in that night club, as actors, singers, waiters, hostesses, and bartenders. When Mises considered his own talents, he said, "Unfortunately, I am no good as a dancer or singer, and I don't think I would be a good waiter. I will have to be the doorman standing in a uniform in front of the place."
Mises's Viennese friends heeded his warning and were able to leave Austria before the Anschluss in 1938, when Hitler's forces marched into Vienna. Most came to the United States and in time found positions, not as waiters and bartenders, but as professors at prestigious colleges and universities.
An Economist in ExileMises himself, foreseeing the threat of Hitler's totalitarian regime, left Vienna in 1934 to take a position at the Graduate Institute for International Studies in Geneva, Switzerland. He retained his old apartment in Vienna and his professional ties with the Institute for Business Cycle Research and the Chamber of Commerce.
Ludwig, a very private person, seldom talked about his personal affairs. His friends and colleagues in Vienna considered him a confirmed bachelor. Yet in the 1930s he was quietly courting a glamorous former actress, Grete (or Margit) Herzfeld Sereny. A widow, she was struggling to raise two young children alone. Mises visited Vienna in February 1938 to make arrangements for their marriage.
When Hitler's forces invaded Austria that March, confusion reigned. Margit, in Vienna, managed to telegraph Ludwig, by then back in Geneva, "no need to come. " She and her daughter, Gitta (Margit's son was already out of the country, studying in England), finally succeeded in obtaining the necessary papers and railroad tickets, left Austria and traveled to Switzerland, where Margit and Ludwig were quietly married. Mises's apartment in Vienna was ransacked, and his books and other property were destroyed by Austrian Nazis soon after March 1938, when Hitler took over Austria.
Professor and Mrs. Mises spent their first few years together in Switzerland, enjoying the intellectual life of Geneva. However, when the Germans conquered France and entered Paris, they decided it was time to leave Switzerland and go to the United States. They fled by bus with other refugees across southern France. It was a harrowing trip. The driver was frequently forced to change his route to avoid running into German soldiers. Turned back at the small town of Cerberes on the Spanish border because their visas were no longer valid, Mises was able, by taking a four a.m. train for Toulouse, to get new visas. The next day the bus with its passengers crossed into Spain. The refugees then took a train to Barcelona, a plane to Lisbon, and from there finally, after a 13-day wait, a ship to the United States.
The Miseses arrived in New York in August 1940. At 59, Ludwig had to start over in a new land, writing, lecturing, and teaching to a new audience in a new language. During his years in the United States, he taught at the New York University Graduate School of Business Administration, and wrote many important books. Although his books were often criticized severely when they appeared, his analyses of market operations, money, inflation, government intervention, and Communism, all firmly based on human action principles, live on and are gaining increasingly serious attention from scholars. Mises may very well prove to be, as one admirer described him, "the greatest economist of the century — the next century."
[A review of Ludwig von Mises, Epistemological Problems of Economics; Essays in European Economic Thought, edited by Louise Sommer; and Richard von Mises, Probability, Statistics, and Truth.]
If the proper study of mankind is man, the question immediately arises: what is the proper way to study man? In recent generations, the enormous prestige gained by physics in advancing our knowledge of the material world has led to the uncritical transfer of the methods appropriate in the natural sciences to the study of actions of men. These three books illuminate different aspects of the important truth that the differences between the nature of human action and the behavior of unmotivated physical objects require different methodologies of scientific study. Epistemological Problems of Economics The science of economics has always had a separate methodology of its own; but, as in almost all successful sciences, it did not begin to examine and analyze its methodology until it had developed the bulk of its laws and principles. However, if a well-analyzed methodology is not established in time, a science is in danger of falling into gross error by wandering down plausible but invalid paths. In an age when many widely divergent and even contradictory paths of inquiry are open to economists, it is more important than ever that economic science develop a more critical awareness of its proper methodology. Ludwig von Mises's Grundprobleme der Nationalökonomie, published in 1933, was a monumental achievement in the study of economic methodology. While previous work by Senior, Cairnes, and Menger had vindicated the validity of economic theory, Mises's volume was the first to rid the methodology of economics of all traces of positivism and relativism. For the first time, Mises explained fully why the laws of human action (economics and, more widely, "praxeology") cannot be "tested" by reference to statistical or historical "data." In the behavior of physical objects, science begins by empirical observation of constant relations, and then frames tentative hypotheses of explanatory laws, these hypotheses being always subject to testing and revision by referring their deduced consequents to controlled experiments, where all but the relevant, isolated factors are held constant. This is the "scientific method" of physics. But in the study of human action, as Mises shows, the reverse is true; here, we begin by knowing the causal laws: by knowing the fact of human consciousness, of free will, of motivated, purposeful action of human beings in using given means for the attainment of desired ends. On the other hand, the facts of human history are not, as in physics, controllable and subject to testing; they are the complex and changing resultants of the interplay of human motives and actions, impinging on the natural environment and on each other. The laws of economic science, therefore, can only be constructed by starting with apodictically known axioms and deducing from them a body of necessarily true laws.
The best-known modern work on economic methodology in the English-speaking world has been Lionel Robbins's An Essay on the Nature and Significance of Economic Science, published at about the same time as Grundprobleme. But Mises's book is a far more profound and basic work in the same general tradition, and its present translation as Epistemological Problems of Economics therefore fills a vital gap by bringing us the outstanding work on the methodology of economics.
Essays in European Economic Thought Essays in European Economic Thought brings to the American reader translations of seven important European economic essays of the past century. Perhaps the outstanding article in the collection is the brilliant critique of mathematical economics by Paul Painlevé, an eminent French mathematician who wrote the essay as the introduction to the French translation of W. Stanley Jevons's Theory of Political Economy in 1909. Jevons's work was one of the first, and one of the least harmful, of the increasingly frequent incursions into economics of the mathematical method; and yet, in his critique of Jevons, Painlevé already saw the dangers and fallacies. The Austrian, praxeological tradition has always recognized that mathematics, and quantitative methods generally, are appropriate to the physical sciences, where behavior is continuous and unmotivated; but that verbal logic, in contrast, is the appropriate method where one is studying the necessarily discrete, motivated, qualitative actions of men. In a field where mathematical economists are too often inclined to dismiss critics as ignorant of mathematics, the arguments of this distinguished mathematician carry particular weight.
Probability, Statistics, and Truth Richard von Mises's great classic, Probability, Statistics, and Truth, effected a revolution in the nature of probability theory during the 1920s and 1930s. "Classical" probability theory considered numerical probability to be derived from "equal ignorance" about the potential events being considered: thus, the probability of obtaining a "three-spot" upon the throw of a die was considered to be "one-sixth" because there are six possibilities and we do not know if one possibility is stronger than another. Mises (the brother of Ludwig von Mises), demonstrated the contradictions of this approach, insisting both that the probability is not one-sixth if the die happens to be loaded, and that the only way to find out if a die is loaded is by tossing it a large number of times. Thus was born the "frequency theory" of numerical probability, based on knowledge and not on ignorance. The frequency theory implies that to say the probability of a die showing "three" is "one-sixth" means that, if a die is thrown a great many times, the number of occasions on which "three" is obtained will approach one out of every six throws. But this means that numerical and mathematical probability theory cannot really apply to each single case, but only to the proportion of randomly-selected homogeneous events, as in tossing a coin or throwing a die. This fact is much more true of the unique, nonrandom events of ordinary human (and entrepreneurial) action. It becomes evident from Richard von Mises's fundamental work that mathematical probability theory can never be applicable to economics, or to any other study of human action.
At the present time, when mathematical probability theory is very heavily used in economics and sociology, the translation of the third German edition of Richard von Mises's work is particularly welcome. For Mises here refutes various modern criticisms of his theory and demolishes the attempts of such philosophers as Carnap and Reichenbach to establish a mathematical theory for individual cases, as contrasted to large homogeneous classes, of human actions.
This review is reprinted from the September 15, 1961, issue of The National Book Foundation.
[This "Introduction" by F.A. Hayek was written for the German-language edition of Mises's Notes and Recollections (Erinnerungen von Ludwig von Mises [Stuttgart: Gustav Fischer, 1978]). It was translated into English by Hans-Hermann Hoppe and published in the Austrian Economics Newsletter (Fall 1988): 1–3. It now appears in Memoirs by Ludwig von Mises.]
Although without a doubt one of the most important economists of his generation, in a certain sense Ludwig von Mises remained an outsider in the academic world until the end of his unusually long scholarly career — certainly within the German-speaking world — but also during the last third of his life, when in the United States he raised a larger circle of students. Before this, his strong immediate influence had essentially been restricted to his Viennese Privatseminar, whose members for the most part only became attracted to him once they had completed their original studies.
If it would not have unduly delayed the publication of these memoirs, found among his papers, I would have welcomed the opportunity of analyzing the reasons for this curious neglect of one of the most original thinkers of our time in the field of economics and social philosophy. But, in part, the fragmentary autobiography he left provides in itself the answer. The reasons why he never acquired a chair at a German-speaking university during the 1920s or before 1933, while numerous and often indisputably highly unimportant persons did, were certainly personal. His appointment would have been beneficial for every university. Yet the instinctive feeling of the professors that he would not quite fit into their circle was not entirely wrong.
Even though his subject-knowledge surpassed that of most occupants of professorial chairs, he was nonetheless never a real specialist. When, in the realm of the social sciences, I look for similar figures in the history of thought, I do not find them among the professors, not even in Adam Smith; instead, he must be compared to thinkers like Voltaire or Montesquieu, Tocqueville and John Stuart Mill. This is an impression that has by no means been reached only in retrospect. But when more than fifty years ago I tried to explain Mises's position in pretty much the same words to Wesley Clair Mitchell in New York, I only encountered — perhaps understandably — a politely ironic skepticism.
"Mises must be compared to thinkers like Voltaire or Montesquieu, Tocqueville and John Stuart Mill."Essential to his work is a global interpretation of social development. In contrast to the few comparable contemporaries such as Max Weber, with whom he was connected by a rare mutual respect, in this Mises had the advantage of a genuine knowledge of economic theory.
The following memoirs say much more about his development, position, and views than I know or could tell. I can only attempt here to supplement or confirm information regarding the ten years of his time in Vienna (1921–1931) during which I was closely associated with him. I came to him rather characteristically not as a student, but as a fresh doctor of law and a civil servant, subordinate to him, at one of those special institutions that had been created to execute the provisions of the peace treaty of St. Germain.
The letter of recommendation by my university teacher Friedrich von Wieser, who described me as a highly promising young economist, was met by Mises with a smile and the remark that he had never seen me in his lectures.
However, when he found my interest confirmed and my knowledge satisfactory, he helped me in every regard and contributed much to make my lengthier visit to the United States possible (before the time of the Rockefeller fellowship) to which I owe a great deal. But although I saw him during the first years daily in an official capacity, I had no idea that he was preparing his great book, Socialism, which upon its publication in 1922 influenced me decisively.
Only after I returned from America in the summer of 1924 was I admitted to that circle, which had been in existence for some time, and through which Mises's scholarly work in Vienna mainly exerted its influence. This "Mises Seminar," as we all called the biweekly nightly discussions in his office, is described in detail in his memoirs. Mises though does not mention the hardly less important regular continuations of the official discussions that lasted long into the night at a Viennese coffeehouse. As he correctly describes, these were not instructional meetings, but discussions presided over by an older friend whose views were by no means shared by all members. Strictly speaking, only Fritz Machlup was originally Mises's student.
As regards the others, of the regular members, only Richard Strigl, Gottfried Haberler, Oskar Morgenstern, Lene Lieser, and Martha Stefanie Braun were specialists in economics. Ewald Schams and Leo Schönfeld, who belonged to the same highly gifted but early deceased intermediate generation as Richard Strigl, were, to my knowledge, never regular participants in the Mises Seminar. But sociologists like Alfred Schütz, philosophers like Felix Kaufmann, and historians like Friedrich Engel-Janosi were equally active in the discussions, which frequently dealt with the problems of the methods of the social sciences, but rarely with special problems of economic theory (except those of the subjective theory of value). Questions of economic policy, however, were discussed often, and always from the perspective of the influence of different social philosophies upon it.
All this seemed to be the rare mental distraction of a man, who, during the day, was fully occupied with urgent political and economic problems, and who was better informed about daily politics, modern history, and general ideological developments than most others. What he was working on, even I, who officially saw him almost daily during those years, did not know; he never spoke about it. We could even less imagine when he would actually write his works. I knew only from his secretary that from time to time he had a manuscript typed from his distinctively clear handwriting. But many of his works only existed in handwriting until publication, and an important article was considered lost for a long time, until it finally resurfaced among the papers of a journal editor. No one knew anything regarding his private work methods until his marriage. He did not speak about his literary activity until he had completed a work. Though he knew that I was most willing to occasionally help him, he only asked me once to look up a quote for his work and this was after I mentioned that I wanted to consult a work on the canonists in the library. He never had, at least in Vienna, a scholarly assistant.
"A Jewish intellectual who justified capitalism appeared to most as some sort of monstrosity, something unnatural…"The problems with which he concerned himself were mostly problems for which he considered the prevailing opinion false. The reader of the following book might gain the impression that he was prejudiced against the German social sciences as such. This was definitely not the case, even though in the course of time he developed a certain understandable irritation. But he valued the great early German theoreticians like Thünen, Hermann, Mangoldt or Gossen more highly than most of his colleagues, and knew them better. Also, among his contemporaries he valued a few similarly isolated figures such as Dietzel, Pohle, Adolf Weber and Passow, as well as the sociologist Leopold von Wiese and, above all, Max Weber.
With Weber a close scholarly relationship had been formed during Weber's short teaching activity in Vienna, in the spring of 1918, which could have meant a great deal if Weber had not died so soon.
But in general, there can be no doubt that he had nothing but contempt for the majority of the professors who, occupying the chairs of the German universities, pretended to teach theoretical economics. Mises does not exaggerate in his description of the teachings of economics as espoused by the historical school. Just how far the level of theoretical thinking in Germany had sunk is indicated by the fact that it needed the simplifications and coarseness of the — herein certainly meritorious — Swede Gustav Cassel in order to again find an audience for theory in Germany. Notwithstanding his exquisite politeness in society and his generally great self-control (he could also occasionally explode), Mises was not the man to successfully hide his contempt.
This drove him to increased isolation among professional economists generally as well as among those Viennese circles with which he had scholarly and professional contacts. He became estranged from his cohorts and fellow students when he turned away from the advancing ideas of social policy. Twenty-five years later I could still feel the emotion and anger his seemingly sudden break had caused — when he had turned away from the dominating ideals of the academic youth of the first few years of the century — when his fellow student F.X. Weiss (the editor of the shorter writings of Böhm-Bawerk) told me about the event with unconcealed indignation, obviously in order to prevent me from a similar betrayal of "social" values and an all-too-great sympathy for an "outlived" liberalism.
If Carl Menger had not aged relatively early and Böhm-Bawerk had not died so young, Mises probably would have found support among them. But the only survivor of the older Austrian School was my revered teacher Friedrich von Wieser, and he was more a Fabian — proud, as he believed, to have provided a scientific justification for progressive income taxation with his development of the theory of marginal utility.
"The problems with which he concerned himself were mostly problems for which he considered the prevailing opinion false."Mises's return to classical liberalism was not only a reaction to a dominating trend. He completely lacked the adaptability of his brilliant seminar fellow Josef Schumpeter, who always quickly accommodated current intellectual fashions, as well as Schumpeter's joy in "épater le bourgeois" [shocking the middle classes]. In fact, it appeared to me as if these two most important representatives of the third generation of leading Austrian economists (one can hardly consider Schumpeter a member of the "Austrian School" in the narrower sense despite all mutual intellectual respect) each got on the other's nerves.
In today's world, Mises and his students are regarded as the representatives of the Austrian School, and justifiably so, although he only represents one of the branches into which Menger's theories had already been divided by his students, and the close personal friendship between Eugen von Böhm-Bawerk and Friedrich von Wieser. I only admit this with some hesitation, because I expected much of the tradition of Wieser, which his successor Hans Mayer attempted to advance. But these expectations have not yet become fulfilled, even though those stimuli may perhaps still prove more fruitful than they have been so far. Today's active "Austrian School," almost exclusively in the United States, is at base a Misesian school that goes back to Böhm-Bawerk, while the man in whom Wieser had set such great hopes and who had succeeded him in his chair never really fulfilled the promise.
Because he never occupied a regular chair in his field in the German-speaking world, and had to devote most of his time to other-than-scholarly activities until his late fifties, Mises remained an outsider in academia. Other reasons contributed to isolating him in his position in public life and as a representative of a great social-philosophical project.
A Jewish intellectual who advocated socialist ideas had his respected place in the Vienna of the first third of this century, a place that was accorded to him as a matter of course. Likewise, the Jewish banker or businessman who (bad enough!) defended capitalism had his rights. But a Jewish intellectual who justified capitalism appeared to most as some sort of monstrosity, something unnatural, which could not be categorized and with which one did not know how to deal.
His undisputed subject-knowledge was impressive, and one could not avoid consulting him in critical economic situations, but rarely was his advice understood and followed. Mostly he was regarded as somewhat of an eccentric whose "old-fashioned" ideas were impracticable "today."
That he himself had constructed, in long years of hard work, his own social philosophy was only known by very few and perhaps could not be understood by distant observers until 1940, when in his Nationalökonomie he presented for the first time his system of ideas in its entirety. But by this time he could no longer reach readers in Germany and Austria. Apart from the small circle of young theoreticians who met at his office, and some highly gifted friends in the business world who were similarly concerned about the future and who are mentioned in the following, he only encountered genuine understanding among occasional foreign visitors like the Frankfurt banker Albert Hahn, whose work in monetary theory he smiled at, however, as a vain sin of youth.
Yet he did not always make it easy for them. The arguments by which he supported his unpopular views were not always completely conclusive, even though some reflection could have shown that he was right. But when he was convinced of his conclusions and had presented them in clear and plain language — a gift that he possessed to a high degree — he believed that this would also have to convince others and only prejudice and stubbornness prevented them from understanding. For too long he had lacked the opportunity of discussing problems with intellectual equals who shared his basic moral convictions in order to see how even small differences in one's implicit assumptions can lead to different results. This manifested itself in a certain impatience that was easily suspected of being an unwillingness to understand, whereas an honest misunderstanding of his arguments was the case.
I must admit that I myself often initially did not think his arguments to be completely convincing and only slowly learned that he was mostly right and that, after some reflection, a justification could be found that he had not made explicit. And today, considering the kind of battle that he had to lead, I also understand that he was driven to certain exaggerations, like that of the a priori character of economic theory, where I could not follow him.
For Mises's friends of his later years, after his marriage and the success of his American activity had softened him, the sharp outbursts in the following memoirs, written at the time of his greatest bitterness and hopelessness, might come as a shock. But the Mises who speaks from the following pages is without question the Mises we knew from the Vienna of the twenties; of course without the tactful reservation that he invariably displayed in oral expression; but the honest and open expression of what he felt and thought. To a certain extent this may explain his neglect, even though it does not excuse it. We, who knew him better, were at times outraged, of course, that he did not get a chair, yet we were not really surprised. He had too much to criticize about the representatives of the profession into which he was seeking entrance to appear acceptable to them. And he fought against an intellectual wave which is now subsiding, not least because of his efforts, but which was much too powerful then for one individual to successfully resist.
That they had one of the great thinkers of our time in their midst, the Viennese have never understood.
This "Introduction" by F.A. Hayek was written for the German-language edition of Mises's Notes and Recollections (Erinnerungen von Ludwig von Mises [Stuttgart: Gustav Fischer, 1978]). It was translated into English by Hans-Hermann Hoppe and published in the Austrian Economics Newsletter (Fall 1988): 1–3. It also appears in the Fortunes of Liberalism: The Collected Works of F.A. Hayek (Chicago: University of Chicago Press, 1992), pp. 153–59.
Austrian economists have long been critical of the static, unrealistic models of neoclassical economics and instead take a dynamic, causal-realist approach. Similarly, the role of government, while receiving heavy analysis from Austrians, is taken as a given in most neoclassical models and textbooks, used today in almost all university economics courses.
Laying aside the Austrian critique of neoclassical models, an analysis of the role and characteristics of government — within the neoclassical framework — will show that this institution most closely resembles the model viewed as least efficient in terms of production and allocation of scarce resources.
The government is not a deus ex machina. The question of where the government fits into the neoclassical framework demands an answer. It cannot just be assumed that any market "inefficiencies" (in the neoclassical sense) could be limited or eliminated by government, when government itself is arguably the most inefficient of all institutions.
In the neoclassical view, there are four market models that can exist in a society, all of which are described as having degrees of costs and benefits. Based on this analysis, the models could be ranked according to how efficiently goods are produced and allocated. The role of government in such models is usually taken as a given — it is an existing institution, smuggled in with many (false) assumptions, unexamined, and excluded from economic analysis.
In this article, I will (a) briefly review the neoclassical models and (b) apply them to the US government in order to (c) analyze which model — perfect competition, monopolistic competition, oligopoly, or pure monopoly — corresponds most closely with characteristics of the federal government of the United States.
Neoclassical models can be analyzed by looking primarily at the following characteristics of each model: number of firms, control over price, and ease of entry.
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In the neoclassical model of perfect competition, there is a relatively large number of firms offering a standardized product or service with no control over price. Firms are "price takers" and face a horizontal demand curve, by which it follows that price equals marginal revenue. Because of the extreme amount of competition, the rationale is that if an individual firm increases its price, consumers — possessed with perfect information and no switching or transactions costs — will turn to one of its many competitors. The firm that raises its price will lack customers and, therefore, revenues. It is very easy to enter (and exit) the industry, and there is no nonprice competition, e.g., advertising or product differentiation. Firms earn a "normal profit," breaking even, where marginal revenue (and price) equals marginal cost and total revenue equals total cost. This imaginary world may be labeled "ideal" due to its productive and allocative efficiency.
In monopolistic competition, there are also many firms, but with differentiated products (through advertising, location, service, brand name, etc.). Firms possess some control over price, but, unlike perfect competition, firms do face a downward-sloping demand curve. It is relatively easy for new firms to enter and compete in this model. Inefficiencies are typically "allowed" to exist because, although the model is not efficient, consumers benefit from product differentiation and choice.
In the oligopoly model, there are only a few large firms offering standardized or differentiated products. These firms are constrained by mutual interdependence that may lead to collusive behavior, although this is illegal. Collusion of firms may lead to a de facto monopoly, thus charging a monopoly price and producing a monopoly output. In other words, this model, like monopoly, underproduces and overprices relative to pure competition. It is also difficult to enter and compete in an oligopolistic industry.
The final model, pure monopoly, is where only one firm exists and sells a unique product with no close substitutes. The firm is the industry because of its ownership of resources, patents, or economies of scale. The pure monopoly firm has considerable control over price— although not absolute, as it also faces a downward-sloping demand curve — and can restrict product availability. Entry barriers are very high; it is essentially impossible for new firms to enter. One identified failure of the monopoly model is that a monopolist will charge a price in the elastic portion of its demand curve (where marginal revenue is positive). A monopolist underproduces and charges a higher price (relative to perfect competition).
Characteristics of GovernmentHaving briefly explained the models, we can now attempt to answer the question, which model does government most closely fit? While Austrolibertarians knew the answer from the beginning, a review of government's attributes will make the answer — or at least its justification — clearer.
One difficulty with analyzing the US government is that it consists of seemingly endless programs and bodies. Therefore, in order to allocate government to one of the four models, its most-commonly-agreed-upon functions — judicial and military protection — will be used to analyze number of firms and ease of entry. Taxation and control over (monetary) inflation will be used to consider control over price.
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In terms of judicial protection, the US Supreme Court has exclusive judicial power. It is the "final arbiter of the law … [and] functions as guardian and interpreter of the Constitution." Competition in law and legislation is not merely difficult — it is illegal. If a citizen has a dispute with the government, it takes place in a government court. Although simplified, it should not be difficult to see the problem with one party holding its own proceedings and deciding the outcome. Rothbard explained this in For a New Liberty:
[W]e turn over all of our powers of ultimate decision-making to this deified group, and then we must jolly well sit back quietly and await the unending stream of justice that will pour forth from these institutions — even though they are basically judging their own case.
Not only does the US government claim ultimate decision-making authority in the court system; it is in complete control of national defense, where it is also illegal to compete. Individuals may not start up National Defense Firm B and attempt to lower costs through diplomacy, since war is costly in terms of lives and money. This is the function Rothbard believed was
reserved most jealously by the State. It is vital to the State's existence, for on its monopoly of force depends its ability to exact taxes from the citizens.
Protection and defense services would surely be in demand in a free society, i.e., without government provision of them. Yet the utilitarian question of whether or not such services would be better provided by the private sector seems to answer itself with the number of YouTube videos exposing police officers abusing their power. The apposite question is more likely to be, could private cops be any worse?
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To analyze control over price, income tax will suffice as an appropriate measure. According to the Urban Institute and Brookings Institution's Tax Policy Center, "the individual income tax has been the largest single source of federal revenue since 1950, averaging just over 8 percent of GDP." In 2008, 45% of federal tax revenue came from individual income taxes, or over one trillion dollars.
In terms of government's control over "price" through taxation, government cannot necessarily set its price as high as it wants for fear of a potential revolution by the population. However, with self-granted access to the unlimited printing of money through inflation, the less seen price — the hidden tax — may be almost as high as the government wishes. The important point is that government is not a "price taker" as in the perfect-competition model; its price is also not constrained by mutual interdependence as in the oligopolist model. Similar to the pure-monopoly model, government, through tax and access to a printing press, can exercise great control over its "price"; it is a price maker.
However, there is an important difference between government and pure monopoly. Even in the neoclassical pure-monopoly model, individuals are making voluntary exchanges, with each party expecting to benefit. In contrast, government force to extract taxes creates an "exchange" where one party benefits at the expense of the other. This creates a conflict between classes of net taxpayers and net tax consumers. Unlike even pure monopoly — that most dreadful of neoclassical models — it is only the government (and a criminal gang) that obtains its "revenue" through force.
ConclusionThis article sought to analyze the US government and place it into one of the four neoclassical models, leaving aside the Austrian critique of such models. By now the obvious answer should be that government most closely corresponds to the pure-monopoly model, the model viewed as least efficient by neoclassical economists. As demonstrated above, the government is in many cases worse than the pure-monopoly model. There is only one "firm"; it is illegal to compete; and price is controlled through tax and, especially, the ability to print money.
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Neoclassical economists would argue that government can correct for (alleged) "inefficiencies" in the market through legislation, subsidies, and taxes. However, government itself cannot be excluded from economic analysis and assumed to be able to remove inefficiencies. As shown above, it is the most inefficient model that exists. Neoclassicals, instead of viewing the government as savior to "inefficient markets," should realize it is the least productive, gaining all of its revenue from others' labor in the private sector. In Man, Economy, and State, Rothbard explains government's monopoly ownership in the following way:
[I]n all countries the State has made sure it owns the vital nerve centers, the command posts of the society. It has acquired compulsory monopoly ownership over these command posts, and it has always tried to convince the populace that private ownership and enterprise in these fields is simply and a priori impossible.
Fortunately, Austrian economists have shown that every product and service can be offered privately, without the use of monopoly force through government.
Typically, neoclassical models assume government as a given, and as a means to step in and overcome "market failure." This amounts to turning a blind eye to one of the most powerful and dangerous institutions in all of history: the state. It is a monopoly in the purest sense.
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[This article is excerpted from chapter 2 of Human Action. You can download an MP3 audio version of the chapter or subscribe to the Human Action podcast.The entire book is being professionally recorded and uploaded on Mises.org, toward the completion of an audio book version.]
Praxeology deals with the actions of individual men. It is only in the further course of its inquiries that cognition of human cooperation is attained and social action is treated as a special case of the more universal category of human action as such.
This methodological individualism has been vehemently attacked by various metaphysical schools and disparaged as a nominalistic fallacy. The notion of an individual, say the critics, is an empty abstraction. Real man is necessarily always a member of a social whole. It is even impossible to imagine the existence of a man separated from the rest of mankind and not connected with society. Man as man is the product of a social evolution. His most eminent feature, reason, could only emerge within the framework of social mutuality. There is no thinking which does not depend on the concepts and notions of language. But speech is manifestly a social phenomenon. Man is always the member of a collective. As the whole is both logically and temporally prior to its parts or members, the study of the individual is posterior to the study of society. The only adequate method for the scientific treatment of human problems is the method of universalism or collectivism.
Now the controversy whether the whole or its parts are logically prior is vain. Logically the notions of a whole and its parts are correlative. As logical concepts they are both apart from time.
No less inappropriate with regard to our problem is the reference to the antagonism of realism and nominalism, both these terms being understood in the meaning which medieval scholasticism attached to them. It is uncontested that in the sphere of human action social entities have real existence. Nobody ventures to deny that nations, states, municipalities, parties, religious communities, are real factors determining the course of human events. Methodological individualism, far from contesting the significance of such collective wholes, considers it as one of its main tasks to describe and to analyze their becoming and their disappearing, their changing structures, and their operation. And it chooses the only method fitted to solve this problem satisfactorily.
First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character. It is the meaning that marks one action as the action of an individual and another action as the action of the state or of the municipality. The hangman, not the state, executes a criminal. It is the meaning of those concerned that discerns in the hangman's action an action of the state. A group of armed men occupies a place. It is the meaning of those concerned which imputes this occupation not to the officers and soldiers on the spot, but to their nation.
If we scrutinize the meaning of the various actions performed by individuals we must necessarily learn everything about the actions of collective wholes. For a social collective has no existence and reality outside of the individual members' actions. The life of a collective is lived in the actions of the individuals constituting its body. There is no social collective conceivable which is not operative in the actions of some individuals. The reality of a social integer consists in its directing and releasing definite actions on the part of individuals. Thus the way to a cognition of collective wholes is through an analysis of the individuals' actions.
As a thinking and acting being, man emerges from his prehuman existence already as a social being. The evolution of reason, language, and cooperation is the outcome of the same process; they were inseparably and necessarily linked together. But this process took place in individuals. It consisted in changes in the behavior of individuals. There is no other substance in which it occurred than the individuals. There is no substratum of society other than the actions of individuals.
That there are nations, states, and churches, that there is social cooperation under the division of labor, becomes discernible only in the actions of certain individuals. Nobody ever perceived a nation without perceiving its members. In this sense one may say that a social collective comes into being through the actions of individuals. That does not mean that the individual is temporally antecedent. It merely means that definite actions of individuals constitute the collective.
There is no need to argue whether a collective is the sum resulting from the addition of its elements or more, whether it is a being sui generis, and whether it is reasonable or not to speak of its will, plans, aims, and actions and to attribute to it a distinct "soul." Such pedantic talk is idle. A collective whole is a particular aspect of the actions of various individuals and as such a real thing determining the course of events.
It is illusory to believe that it is possible to visualize collective wholes. They are never visible; their cognition is always the outcome of the understanding of the meaning which acting men attribute to their acts. We can see a crowd, i.e., a multitude of people. Whether this crowd is a mere gathering or a mass (in the sense in which this term is used in contemporary psychology) or an organized body or any other kind of social entity is a question which can only be answered by understanding the meaning which they themselves attach to their presence. And this meaning is always the meaning of individuals. Not our senses, but understanding, a mental process, makes us recognize social entities.
Those who want to start the study of human action from the collective units encounter an insurmountable obstacle in the fact that an individual at the same time can belong and — with the exception of the most primitive tribesmen — really belongs to various collective entities. The problems raised by the multiplicity of coexisting social units and their mutual antagonisms can be solved only by methodological individualism.
I and WeThe Ego is the unity of the acting being. It is unquestionably given and cannot be dissolved or conjured away by any reasoning or quibbling.
The We is always the result of a summing up which puts together two or more Egos. If somebody says I, no further questioning is necessary in order to establish the meaning. The same is valid with regard to the Thou and, provided the person in view is precisely indicated, with regard to the He. But if a man says We, further information is needed to denote who the Egos are who are comprised in this We. It is always single individuals who say We; even if they say it in chorus, it yet remains an utterance of single individuals.
The We cannot act otherwise than each of them acting on his own behalf. They can either all act together in accord, or one of them may act for them all. In the latter case the cooperation of the others consists in their bringing about the situation which makes one man's action effective for them too. Only in this sense does the officer of a social entity act for the whole; the individual members of the collective body either cause or allow a single man's action to concern them too.
"First we must realize that all actions are performed by individuals."The endeavors of psychology to dissolve the Ego and to unmask it as an illusion are idle. The praxeological Ego is beyond any doubts. No matter what a man was and what he may become later, in the very act of choosing and acting he is an Ego.
From the pluralis logicus (and from the merely ceremonial pluralis majestaticus) we must distinguish the pluralis gloriosus. If a Canadian who never tried skating says, "We are the world's foremost ice hockey players," or if an Italian boor proudly contends, "We are the world's most eminent painters," nobody is fooled. But with reference to political and economic problems the pluralis gloriosus evolves into the pluralis imperialis and as such plays a significant role in paving the way for the acceptance of doctrines determining international economic policies.
This article is excerpted from chapter 2 of Human Action. You can download an MP3 audio version of the chapter or subscribe to the Human Action podcast.
[This article is excerpted from Human Action: The Scholar's Edition. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]
- Economics and PraxeologyEconomics is the youngest of all sciences. In the last two hundred years, it is true, many new sciences have emerged from the disciplines familiar to the ancient Greeks. However, what happened here was merely that parts of knowledge which had already found their place in the complex of the old system of learning now became autonomous. The field of study was more nicely subdivided and treated with new methods; hitherto unnoticed provinces were discovered in it, and people began to see things from aspects different from those of their precursors. The field itself was not expanded. But economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and interdependence of market phenomena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathematics, psychology, physics, nor biology.
Philosophers had long since been eager to ascertain the ends which God or Nature was trying to realize in the course of human history. They searched for the law of mankind's destiny and evolution. But even those thinkers whose inquiry was free from any theological tendency failed utterly in these endeavors because they were committed to a faulty method. They dealt with humanity as a whole or with other holistic concepts like nation, race, or church. They set up quite arbitrarily the ends to which the behavior of such wholes is bound to lead. But they could not satisfactorily answer the question regarding what factors compelled the various acting individuals to behave in such a way that the goal aimed at by the whole's inexorable evolution was attained. They had recourse to desperate shifts: miraculous interference of the Deity either by revelation or by the delegation of God-sent prophets and consecrated leaders, preestablished harmony, predestination, or the operation of a mystic and fabulous "world soul" or "national soul." Others spoke of a "cunning of nature" which implanted in man impulses driving him unwittingly along precisely the path Nature wanted him to take.
Other philosophers were more realistic. They did not try to guess the designs of Nature or God. They looked at human things from the viewpoint of government. They were intent upon establishing rules of political action, a technique, as it were, of government and statesmanship. Speculative minds drew ambitious plans for a thorough reform and reconstruction of society. The more modest were satisfied with a collection and systematization of the data of historical experience. But all were fully convinced that there was in the course of social events no such regularity and invariance of phenomena as had already been found in the operation of human reasoning and in the sequence of natural phenomena. They did not search for the laws of social cooperation because they thought that man could organize society as he pleased. If social conditions did not fulfill the wishes of the reformers, if their utopias proved unrealizable, the fault was seen in the moral failure of man. Social problems were considered ethical problems. What was needed in order to construct the ideal society, they thought, were good princes and virtuous citizens. With righteous men any utopia might be realized.
The discovery of the inescapable interdependence of market phenomena overthrew this opinion. Bewildered, people had to face a new view of society. They learned with stupefaction that there is another aspect from which human action might be viewed than that of good and bad, of fair and unfair, of just and unjust. In the course of social events there prevails a regularity of phenomena to which man must adjust his actions if he wishes to succeed. It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value. One must study the laws of human action and social cooperation as the physicist studies the laws of nature. Human action and social cooperation seen as the object of a science of given relations, no longer as a normative discipline of things that ought to be--this was a revolution of tremendous consequences for knowledge and philosophy as well as for social action.
For more than a hundred years, however, the effects of this radical change in the methods of reasoning were greatly restricted because people believed that they referred only to a narrow segment of the total field of human action, namely, to market phenomena. The classical economists met in the pursuit of their investigations an obstacle which they failed to remove, the apparent antinomy of value. Their theory of value was defective, and forced them to restrict the scope of their science. Until the late nineteenth century political economy remained a science of the "economic" aspects of human action, a theory of wealth and selfishness. It dealt with human action only to the extent that it is actuated by what was — very unsatisfactorily — described as the profit motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines. The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice.
For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the "economic side" of human endeavors and of man's striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference. The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology.The term praxeology was first used in 1890 by Espinas. Cf. his article "Les Origines de law technologies," Revue Philosophique XVth year, XXX, 114–115, and his book published in Paris in 1897, with the same title. The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection.The term Catallactics or the Science of Exchanges was first used by Whately. Cf. his book Introductory Lectures on Political Economy (London, 1831), p. 6. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.
- The Epistemological Problem of a General Theory of Human ActionIn the new science everything seemed to be problematic. It was a stranger in the traditional system of knowledge; people were perplexed and did not know how to classify it and to assign it its proper place. But on the other hand they were convinced that the inclusion of economics in the catalogue of knowledge did not require a rearrangement or expansion of the total scheme. They considered their catalogue system complete. If economics did not fit into it, the fault could only rest with the unsatisfactory treatment that the economists applied to their problems.
It is a complete misunderstanding of the meaning of the debates concerning the essence, scope, and logical character of economics to dismiss them as the scholastic quibbling of pedantic professors. It is a widespread misconception that while pedants squandered useless talk about the most appropriate method of procedure, economics itself, indifferent to these idle disputes, went quietly on its way. In the Methodenstreit between the Austrian economists and the Prussian Historical School, the self-styled "intellectual bodyguard of the House of Hohenzollern," and in the discussions between the school of John Bates Clark and American Institutionalism much more was at stake than the question of what kind of procedure was the most fruitful one. The real issue was the epistemological foundations of the science of human action and its logical legitimacy. Starting from an epistemological system to which praxeological thinking was strange and from a logic which acknowledged as scientific--besides logic and mathematics--only the empirical natural sciences and history, many authors tried to deny the value and usefulness of economic theory. Historicism aimed at replacing it by economic history; positivism recommended the substitution of an illusory social science which should adopt the logical structure and pattern of Newtonian mechanics. Both these schools agreed in a radical rejection of all the achievements of economic thought. It was impossible for the economists to keep silent in the face of all these attacks.
The radicalism of this wholesale condemnation of economics was very soon surpassed by a still more universal nihilism. From time immemorial men in thinking, speaking, and acting had taken the uniformity and immutability of the logical structure of the human mind as an unquestionable fact. All scientific inquiry was based on this assumption. In the discussions about the epistemological character of economics, writers, for the first time in human history, denied this proposition too. Marxism asserts that a man's thinking is determined by his class affiliation. Every social class has a logic of its own. The product of thought cannot be anything else than an "ideological disguise" of the selfish class interests of the thinker. It is the task of a "sociology of knowledge" to unmask philosophies and scientific theories and to expose their "ideological" emptiness. Economics is a "bourgeois" makeshift, the economists are "sycophants" of capital. Only the classless society of the socialist utopia will substitute truth for "ideological" lies.
This polylogism was later taught in various other forms also. Historicism asserts that the logical structure of human thought and action is liable to change in the course of historical evolution. Racial polylogism assign to each race a logic of its own. Finally there is irrationalism, contending that reason as such is not fit to elucidate the irrational forces that determine human behavior.
Such doctrines go far beyond the limits of economics. They question not only economics and praxeology but all other human knowledge and human reasoning in general. They refer to mathematics and physics as well as to economics. It seems therefore that the task of refuting them does not fall to any single branch of knowledge but to epistemology and philosophy. This furnishes apparent justification for the attitude of those economists who quietly continue their studies without bothering about epistemological problems and the objections raised by polylogism and irrationalism. The physicist does not mind if someone stigmatizes his theories as bourgeois, Western, or Jewish; in the same way the economist should ignore detraction and slander. He should let the dogs bark and pay no heed to their yelping. It is seemly for him to remember Spinoza's dictum: Sane sicut lux se ipsam et tenebras manifestat, sic veritas norma sui et falsi est.
However, the situation is not quite the same with regard to economics as it is with mathematics and the natural sciences. Polylogism and irrationalism attack praxeology and economics. Although they formulate their statements in a general way to refer to all branches of knowledge, it is the sciences of human action that they really have in view. They say that it is an illusion to believe that scientific research can achieve results valid for people of all eras, races, and social classes, and they take pleasure in disparaging certain physical and biological theories as bourgeois or Western. But if the solution of practical problems requires the application of these stigmatized doctrines, they forget their criticism. The technology of Soviet Russia utilizes without scruple all the results of bourgeois physics, chemistry, and biology just as if they were valid for all classes. The Nazi engineers and physicians did not disdain to utilize the theories, discoveries, and inventions of people of "inferior" races and nations. The behavior of people of all races, nations, religions, linguistic groups, and social classes clearly proves that they do not endorse the doctrines of polylogism and irrationalism as far as logic, mathematics, and the natural sciences are concerned.
But it is quite different with praxeology and economics. The main motive for the development of the doctrines of polylogism, historicism, and irrationalism was to provide a justification for disregarding the teachings of economics in the determination of economic policies. The socialists, racists, nationalists, and etatists failed in their endeavors to refute the theories of the economists and to demonstrate the correctness of their own spurious doctrines. It was precisely this frustration that prompted them to negate the logical and epistemological principles upon which all human reasoning both in mundane activities and in scientific research is founded.
It is not permissible to dispose of these objections merely on the ground of the political motives which inspired them. No scientist is entitled to assume beforehand that a disapprobation of his theories must be unfounded because his critics are imbued by passion and party bias. He is bound to reply to every censure without any regard to its underlying motives or its background. It is no less impermissible to keep silent in the face of the often asserted opinion that the theorems of economics are valid only under hypothetical assumptions never realized in life and that they are therefore useless for the mental grasp of reality. It is strange that some schools seem to approve of this opinion and nonetheless quietly proceed to draw their curves and to formulate their equations. They do not bother about the meaning of their reasoning and about its reference to the world of real life and action.
This is, of course, an untenable attitude. The first task of every scientific inquiry is the exhaustive description and definition of all conditions and assumptions under which its various statements claim validity. It is a mistake to set up physics as a model and pattern for economic research. But those committed to this fallacy should have learned one thing at least: that no physicist ever believed that the clarification of some of the assumptions and conditions of physical theorems is outside the scope of physical research. The main question that economics is bound to answer is what the relation of its statements is to the reality of human action whose mental grasp is the objective of economic studies.
It therefore devolves upon economics to deal thoroughly with the assertion that its teachings are valid only for the capitalistic system of the shortlived and already vanished liberal period of Western civilization. It is incumbent upon no branch of learning other than economics to examine all the objections raised from various points of view against the usefulness of the statements of economic theory for the elucidation of the problems of human action. The system of economic thought must be built up in such a way that it is proof against any criticism on the part of irrationalism, historicism, panphysicalism, behaviorism, and all varieties of polylogism. It is an intolerable state of affairs that while new arguments are daily advanced to demonstrate the absurdity and futility of the endeavors of economics, the economists pretend to ignore all this.
It is no longer enough to deal with the economic problems within the traditional framework. It is necessary to build the theory of catallactics upon the solid foundation of a general theory of human action, praxeology. This procedure will not only secure it against many fallacious criticisms but clarify many problems hitherto not even adequately seen, still less satisfactorily solved. There is, especially, the fundamental problem of economic calculation.
- Economic Theory and the Practice of Human ActionIt is customary for many people to blame economics for being backward. Now it is quite obvious that our economic theory is not perfect. There is no such thing as perfection in human knowledge, nor for that matter in any other human achievement. Omniscience is denied to man. The most elaborate theory that seems to satisfy completely our thirst for knowledge may one day be amended or supplanted by a new theory. Science does not give us absolute and final certainty. It only gives us assurance within the limits of our mental abilities and the prevailing state of scientific thought. A scientific system is but one station in an endlessly progressing search for knowledge. It is necessarily affected by the insufficiency inherent in every human effort. But to acknowledge these facts does not mean that present-day economics is backward. It merely means that economics is a living thing--and to live implies both imperfection and change.
The reproach of an alleged backwardness is raised against economics from two different points of view. There are on the one hand some naturalists and physicists who censure economics for not being a natural science and not applying the methods and procedures of the laboratory. It is one of the tasks of this treatise to explode the fallacy of such ideas. In these introductory remarks it may be enough to say a few words about their psychological background. It is common with narrow-minded people to reflect upon every respect in which other people differ from themselves. The camel in the fable takes exception to all other animals for not having a hump, and the Ruritanian criticizes the Laputanian for not being a Ruritanian. The research worker in the laboratory considers it as the sole worthy home of inquiry, and differential equations as the only sound method of expressing the results of scientific thought. He is simply incapable of seeing the epistemological problems of human action. For him economics cannot be anything but a kind of mechanics.
Then there are people who assert that something must be wrong with the social sciences because social conditions are unsatisfactory. The natural sciences have achieved amazing results in the last two or three hundred years, and the practical utilization of these results has succeeded in improving the general standard of living to an unprecedented extent. But, say these critics, the social sciences have utterly failed in the task of rendering social conditions more satisfactory. They have not stamped out misery and starvation, economic crises and unemployment, war and tyranny. They are sterile and have contributed nothing to the promotion of happiness and human welfare.
These grumblers do not realize that the tremendous progress of technological methods of production and the resulting increase in wealth and welfare were feasible only through the pursuit of those liberal policies which were the practical application of the teachings of economics. It was the ideas of the classical economists that removed the checks imposed by age-old laws, customs, and prejudices upon technological improvement and freed the genius of reformers and innovators from the straitjackets of the guilds, government tutelage, and social pressure of various kinds. It was they that reduced the prestige of conquerors and expropriators and demonstrated the social benefits derived from business activity. None of the great modern inventions would have been put to use if the mentality of the precapitalistic era had not been thoroughly demolished by the economists. What is commonly called the "industrial revolution" was an offspring of the ideological revolution brought about by the doctrines of the economists. The economists exploded the old tenets: that it is unfair and unjust to outdo a competitor by producing better and cheaper goods; that it is iniquitous to deviate from the traditional methods of production; that machines are an evil because they bring about unemployment; that it is one of the tasks of civil government to prevent efficient businessmen from getting rich and to protect the less efficient against the competition of the more efficient; that to restrict the freedom of entrepreneurs by government compulsion or by coercion on the part of other social powers is an appropriate means to promote a nation's well-being. British political economy and French Physiocracy were the pacemakers of modern capitalism. It is they that made possible the progress of the applied natural sciences that has heaped benefits upon the masses.
What is wrong with our age is precisely the widespread ignorance of the role which these policies of economic freedom played in the technological evolution of the last two hundred years. People fell prey to the fallacy that the improvement of the methods of production was contemporaneous with the policy of laissez faire only by accident. Deluded by Marxian myths, they consider modern industrialism an outcome of the operation of mysterious "productive forces" that do not depend in any way on ideological factors. Classical economics, they believe, was not a factor in the rise of capitalism, but rather its product, its "ideological superstructure," i.e., a doctrine designed to defend the unfair claims of the capitalistic exploiters. Hence the abolition of capitalism and the substitution of socialist totalitarianism for a market economy and free enterprise would not impair the further progress of technology. It would, on the contrary, promote technological improvement by removing the obstacles which the selfish interests of the capitalists place in its way.
The characteristic feature of this age of destructive wars and social disintegration is the revolt against economics. Thomas Carlyle branded economics a "dismal science," and Karl Marx stigmatized the economists as "the sycophants of the bourgeoisie." Quacks — praising their patent medicines and short cuts to an earthly paradise — take pleasure in scorning economics as "orthodox" and "reactionary." Demagogues pride themselves on what they call their victories over economics. The "practical" man boasts of his contempt for economics and his ignorance of the teachings of "armchair" economists. The economic policies of the last decades have been the outcome of a mentality that scoffs at any variety of sound economic theory and glorifies the spurious doctrines of its detractors. What is called "orthodox" economics is in most countries barred from the universities and is virtually unknown to the leading statesmen, politicians, and writers. The blame for the unsatisfactory state of economic affairs can certainly not be placed upon a science which both rulers and masses despise and ignore.
It must be emphasized that the destiny of modern civilization as developed by the white peoples in the last two hundred years is inseparably linked with the fate of economic science. This civilization was able to spring into existence because the peoples were dominated by ideas which were the application of the teachings of economics to the problems of economic policy. It will and must perish if the nations continue to pursue the course which they entered upon under the spell of doctrines rejecting economic thinking.
It is true that economics is a theoretical science and as such abstains from any judgment of value. It is not its task to tell people what ends they should aim at. It is a science of the means to be applied for the attainment of ends chosen, not, to be sure, a science of the choosing of ends. Ultimate decisions, the valuations and the choosing of ends, are beyond the scope of any science. Science never tells a man how he should act; it merely shows how a man must act if he wants to attain definite ends.
It seems to many people that this is very little indeed and that a science limited to the investigation of the is and unable to express a judgment value about the highest and ultimate ends is of no importance for life and action. This too is a mistake. However, the exposure of this mistake is not a task of these introductory remarks. It is one of the ends of the treatise itself.
- RésuméIt was necessary to make these preliminary remarks in order to explain why this treatise places economic problems within the broad frame of a general theory of human action. At the present stage both of economic thinking and of political discussions concerning the fundamental issues of social organization, it is no longer feasible to isolate the treatment of catallactic problems proper. These problems are only a segment of a general science of human action and must be dealt with as such.
[Introduction to the Second Edition of Man, Economy, and State with Power and Market]
Murray Rothbard began work on this magnum opus on January 1, 1952.[1] On May 5, 1959 Rothbard wrote to his mentor, Ludwig von Mises, informing him, "È finito!"[2] The more-than-seven years that it took Rothbard to complete Man, Economy, and State elapsed during, what was up to that time, one of the most sterile and retrogressive decades in the history of scientific economics, dating back to the birth of the science in the systematic treatise of Richard Cantillon published in 1755.[3] In view of the progressive degeneration of economic thought throughout the 1950s, the eventual publication of Rothbard's treatise in 1962 was a milestone in the development of sound economic theory and an event that rescued the science from self-destruction.
The era of modern economics emerged with the publication of Carl Menger's seminal work, Principles of Economics, in 1871. In this slim book, Menger set forth the correct approach to theoretical research in economics and elaborated some of its immediate implications. In particular, Menger sought to identify the causal laws determining the prices that he observed being paid daily in actual markets.[4] His stated goal was to formulate a realistic price theory that would provide an integrated explanation of the formation of market phenomena valid for all times and places.[5] Menger's investigations led him to the discovery that all market prices, wage rates, rents, and interest rates could ultimately be traced back to the choices and actions of consumers striving to satisfy their most important wants by "economizing" scarce means or "economic goods." Thus, for Menger, all prices, rents, wage, and interest rates were the outcome of the value judgments of individual consumers who chose between concrete units of different goods according to their subjective values or "marginal utilities" to use the term coined by his student Friedrich Wieser. With this insight was born modern economics.
Menger's causal-realist approach to economic theorizing quickly began to attract outstanding followers both in Austria and, later, throughout Continental Europe and the Anglophone countries. What came to be called the "Austrian School" grew rapidly in prestige and numbers and by World War I theoretical research based on the causal-realist approach was considered the cutting edge of economic science. For various reasons, the school suffered an amazingly rapid decline, especially in Great Britain and the United States but also in Austria, after the war. By the 1920s, the causal-realist approach had been overshadowed by the partial equilibrium approach of Alfred Marshall in Great Britain, the United States, and even parts of Continental Europe. Its star fell further with the importation of the mathematical general-equilibrium approach of Léon Walras into the English-speaking world in the early 1930s. A little later Menger's approach was nearly buried by the Keynesian revolution. Hence, by the advent of World War Two there ceased to be a self-conscious, institutionally embedded network of economists actively engaged in teaching and research in the Mengerian tradition.[6]
After World War II, a new and stifling orthodoxy known as the "neoclassical synthesis" had descended upon economics, especially in the United States. This so-called "synthesis" was actually a hodgepodge of the three disparate approaches that had overwhelmed the Mengerian causal-realist approach in the interwar period. It jumbled together the Marshallian and Walrasian approaches to price determination with Keynesian macroeconomics. The first two approaches focused narrowly on analyzing the determination of unreal, equilibrium prices either in single markets (partial equilibrium) or in all markets simultaneously (general equilibrium). Keynesian macroeconomics denied the efficacy of the price system altogether in coordinating the various sectors of an economy confronted with the "failure of aggregate demand." This latter condition was supposed to have caused the Great Depression and was further alleged by Keynes and his followers to be an endemic feature of the market economy. The neoclassical synthesis thus proclaimed that the price system worked efficiently to allocate scarce resources only if the government deftly employed fiscal and monetary policies to maintain a level of aggregate demand or total spending in the economy that was sufficient to absorb a full-employment level of output.
"After World War II, a new and stifling orthodoxy known as the 'neoclassical synthesis' had descended upon economics, especially in the United States."This new orthodoxy also promoted hyperspecialization and a corresponding disintegration of economic science into a clutter of compartmentalized subdisciplines. Even the theoretical core of economics was now split into "microeconomics" and "macroeconomics," which had seemingly very little connection to each other. Specialized journals proliferated and resulted in a radical change in the research culture, with a premium on the writing and reading of the latest journal articles. The few books that were published were technical monographs or dumbed-down textbooks; the era of the great systematic treatise on economic theory was at a close.[7]
Almost the sole holdout against this intellectual revolution was Ludwig von Mises. With the publication in 1940 of Nationalökonomie, the German-language forerunner of Human Action, Mises singlehandedly recovered and greatly advanced the system of causal-realistic economic theory.[8] In particular, he integrated Mengerian value and price theory with his own earlier restatement of monetary theory. In addition, he provided a rigorous foundation for the entire system of economic theory in a broader science of human action that he himself had expounded in earlier works and now further elaborated. This science of human action he now dubbed, "praxeology." Unfortunately, Mises's great treatise was almost completely ignored by the postwar economics profession.[9] However, while it failed to inspire an immediate renewal of the Mengerian scientific movement, Human Action did lay the foundations for its later revival. This revival was to be ignited by the publication of Man, Economy, and State in 1962.[10]
When Rothbard initiated work on what would turn out to be a full-blown treatise, he conceived of the project as a book suitable both for lay readers and for college instruction that would bring "to the surface and [clarify] the step-by-step nature of the edifice which Mises had constructed but more or less had taken for granted that his readers would understand."[11] This was necessary because Human Action was addressed to a scholarly audience, and Mises had accordingly assumed a great deal of familiarity among his readers with many of the concepts and theorems of what he called "modern subjectivist economics." Thus Rothbard intended "to do for Mises, what McCulloch did for Ricardo," that is, to make his work comprehensible to an intelligent lay readership.[12]
But Rothbard quickly realized that his original plan was flawed and had to be abandoned for three reasons. First the traditional textbook format was too disorganized in its arrangement and treatment of various topics to accommodate the development of economic theory in the logical step-by-step manner that Rothbard had envisioned. As such, it was inadequate to convey a "sense of the grand sweep, of the coherent system integrating and pervading all aspects of sound economic doctrine."[13]
"The neoclassical synthesis thus proclaimed that the price system worked efficiently to allocate scarce resources only if the government deftly employed fiscal and monetary policies to maintain a level of aggregate demand…"Second, Rothbard discovered that there existed "a lot of gaps" in Mises's "economic organon" that he had to "fill in" himself.[14] In addition, Rothbard's step-by-step deductions led him to the conclusion that Mises's theory of monopoly, which was held by most economists in the Mengerian tradition, was irreparably flawed and had to be completely revised. The book was thus turning out "to involve a good deal of original contribution" on Rothbard's part.
Third, as he proceeded in writing the book, Rothbard was concurrently researching the literature and reading widely, and he began to realize that Human Action had emerged from a very broad tradition that included many more economists than just Mises and his famous predecessors and direct protégés (e.g., Friedrich A. Hayek) in the native Austrian School. Moreover, as Rothbard read and wrote, it became increasingly clear to him that the various strands of this theoretical tradition, which included many important American and British contributions in addition to the great Austrian works, had not yet been completely integrated and their principles fully delineated in a systematic treatise. Accordingly, Rothbard concluded, "many essential points must be deduced originally or with the help of other works" and therefore "the book cannot simply be a paraphrase of Human Action."[15] Rothbard's proposed book was thus transformed, in the very process of its writing, from a straightforward exposition of the principles of received doctrine of the Austrian School narrowly conceived to a treatise elaborating a complete system of economic theory and featuring many original, and even radically new, deductions and theorems.
Mises himself immediately recognized the profound originality and significance of Rothbard's contribution. In his review of Man, Economy, and State, Mises wrote that Rothbard
joins the ranks of eminent economists by publishing a voluminous work, a systematic treatise on economics…. In every chapter of his treatise, Rothbard … adopt[s] the best teachings of his predecessors … and add[s] to them highly important observations….[16]
Mises went on to characterize Rothbard's work as
an epochal contribution to the general science of human action, praxeology, and its practically most important and up-to-now best elaborated part, economics. Henceforth, all essential studies in these branches of knowledge will have to take full account of the theories and criticisms expounded by Dr. Rothbard.[17]
Given Mises's exacting scholarly standards and his well-known parsimony in paying compliments for scientific contributions, this is high praise indeed for a book published by a thirty-six-year-old economist.[18] More importantly, Mises evidently viewed Rothbard's work as opening a new epoch in modern economic science.
Rothbard himself was not reluctant to indicate the respects in which he considered his treatise to have been a departure from or an advance upon Mises's work. Foremost, among Rothbard's theoretical innovations was his formulation of a complete and integrated theory of production. Previously, production theory in causal-realist analysis was in disarray and had consisted of a number of independent and conflicting strands of thought that treated capital and interest, marginal-productivity theory, rent theory, entrepreneurship, and so on in isolation. Somewhat surprised by this yawning gap in production theory, Rothbard commented,
Mises has very little detail on production theory, and as a consequence it took me many false starts, and lots of what turned out to be wasted effort, before I arrived at what satisfied me as a good Production Theory. (It's involved emancipation from 90 percent of current textbook material.)[19]
In Man, Economy, and State, Rothbard elaborates a unified and systematic treatment of the structure of production, the theory of capital and interest, factor pricing, rent theory, and the role of entrepreneurship in production. Furthermore, production theory is presented as part of the core of economic analysis and covers five of the book's twelve chapters and approximately 30 percent of its text. One of Rothbard's greatest accomplishments in production theory was the development of a capital-and-interest theory that integrated the temporal production-structure analysis of Knut Wicksell and Hayek with the pure-time-preference theory expounded by Frank A. Fetter and Ludwig von Mises. Although the roots of both of these strands of thought can be traced back to Böhm-Bawerk's work, his exposition was confused and raised seemingly insoluble contradictions between the two.[20] They were subsequently developed separately until Rothbard revealed their inherent logical connection.
Despite Mises's lavish praise for the book as an epochal leap forward in economic science as well as general recognition among many adherents, observers, and critics of the contemporary Austrian movement that Man, Economy, and State is indeed a foundational work in the renaissance of modern Austrian economics, there are two crucial questions regarding the book that, surprisingly, have never even been addressed, let alone resolved. The first question relates to the precise sense in which Rothbard's treatise can be described as a work in "Austrian economics" and how Rothbard himself conceived the connection between his treatise and this body of received doctrine. The second question concerns Rothbard's perception of the relationship of the theoretical system expounded in his treatise and the neoclassical synthesis of the 1950s. As we shall see, the answers to these questions are not only surprising but are pregnant with implications for interpreting recent developments in Austrian economics and evaluating its future possibilities and prospects.
Before addressing the question of the doctrinal filiation between Man, Economy, and State and Austrian economics, it is instructive to examine Mises's attitude toward the Austrian School, because it is not as straightforward as is generally supposed and it clearly influenced Rothbard's view. As early as 1932, Mises had argued that all the essential ideas of the Austrian School of economics had been absorbed into the mainstream of what he called "modern subjectivist economics."[21] According to Mises,
the Austrian and the Anglo-American Schools and the School of Lausanne … differ only in their mode of expressing the same fundamental idea and … are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings.[22]
Now admittedly this opinion was delivered at an economics conference in Germany that was heavily attended by the still influential remnants of the German Historical School who were antagonistic to economic theory of all kinds. It certainly can be reasonably argued that, given this venue, Mises's remarks were intended as a generic defense of theoretical research in economics. In fact, a year earlier Mises had written,
Within the field of modern economics the Austrian School has shown its superiority to the School of Lausanne and the schools related to the latter, which favor mathematical formulations, by clarifying the causal relationship between value and cost, while at the same time eschewing the concept of function, which in our science is misleading.[23]
In spite of the foregoing caveat, Mises continued to maintain that the label "Austrian School" was an anachronism, arguing in the last publication of his career in 1969, that the Austrian School constituted a closed chapter in the history of economic thought from about the time of Menger's death in 1921. By that time, according to Mises,
all the essential ideas of the Austrian School were by and large accepted as an integral part of economic theory … [and] one no longer distinguished between an Austrian School and other economics. The appellation "Austrian School" became the name given to an important chapter of the history of economic thought; it was no longer the name of the specific sect with doctrines different from those held by other economists.[24]
As noted, Mises used the term "modern subjectivist economics" to describe the new synthesis of theoretical approaches that he believed had begun to emerge in the 1920s. There are two problems with this label, which may explain Mises's ambivalent attitude toward the inclusion of the Marshallian and Lausanne Schools under its head. First, by World War I most theoretical economists at least paid lip service to some version of subjective-value theory, so that subjectivism was no longer a distinguishing characteristic of a unique approach to theoretical research. Second, as we have seen in our own time, the term subjectivism is a notoriously elastic term that can be stretched to denote even the nihilistic approach to economic theory famously propounded by George Shackle, the later Ludwig Lachmann, and a number of post-modernist and hermeneutical economists.[25]
Rothbard evidently followed Mises in construing the term "Austrian School" as the designation for an important movement in the history of economic thought. In the text of Man, Economy, and State, Rothbard uses the terms "Austrian" or "Austrian School" at least ten times enclosed in quotation marks, as he naturally would if he were referring to a movement that had only historical significance to the contemporary reader. The few times he uses these terms without quotation marks, they clearly refer to historical doctrines or controversies such as "the Austrian-Wicksteedian theory of price" or the Austrian School versus Alfred Marshall on the relationship between prices and costs. The single time that Rothbard mentions "Austrian" in his preface to the first edition, he does so in the phrase "the 'Austrian' economists," placing the word in quotation marks and using it in a sentence featuring verbs in the past tense.[26]
This textual exegesis is not meant to imply that Rothbard did not consider his work as continuing the great tradition originated by the early Austrian economists. Indeed Rothbard wrote of
the myth among economists that the Austrian School is effectively dead and has no more to contribute and that everything of lasting worth that it had to offer was effectively stated and integrated in Alfred Marshall's Principles.[27]
Rather, the point is that Rothbard's goal was to recover and advance a much broader doctrinal tradition, for which Menger's and Böhm-Bawerk's works were indisputably the taproot. Thus in his preface, Rothbard stated, "This book, then, is an attempt to fill part of the enormous gap of 40 years' time."[28] The "gap" Rothbard is here referring to separates the publication of Man, Economy, and State and that of the last three systematic economics treatises to appear in English, by Philip Wicksteed (1910), Frank Fetter (1910), and Frank Taussig (1911).[29] The treatises of Wicksteed and Fetter in particular were in what Rothbard called "the praxeological tradition." Their procedure, like his own, was "slowly and logically to build on the basic axioms an integrated and coherent edifice of economic truth."[30] The main reason that his treatise contains numerous references to the historical Austrian School was because Rothbard judged the members of this school to have "best perceived this method and used it most fully and cogently. They were the classic employers, in short, of the 'praxeologic' method."[31]
In contrast to Mises's "modern subjectivist economics," Rothbard's reference to the "praxeologic method" drew a bright line between those who employed Menger's procedure in logically deducing economic laws from a few basic facts of reality and those who did not. "Praxeology" was Mises's explicit and self-conscious elaboration of this venerable procedure for discovering the causal laws governing market phenomena. The early Austrian School and their followers, and even some of the better classical economists, had used this research method without being fully aware of it. The praxeological method begins with the self-evident reality of human action and its immediate implications. It then introduces other empirical postulates that reflect the concrete conditions of action from which emerge the historically specific market phenomena that the economist seeks to analyze. It is, therefore, necessarily about real things. It is for this reason that it has no use for fictions and figments like the "representative firm," "the perfectly competitive market," or "the social-welfare function"; nor does it concern itself with the existence, uniqueness, and stability of general equilibrium.
The highly selective use that the praxeological method makes of imaginary constructs has a single aim: the systematic elaboration of a unified body of theory comprising meaningful propositions about the causes of economic phenomena in the world as it is, has been, or is likely to be. As Mises put it, the praxeological method
studies acting under unrealized and unrealizable conditions only from two points of view. It deals with states of affairs which, although not real in the present and past world, could possibly become real at some future date. And it examines unreal and unrealizable conditions if such an inquiry is needed for a satisfactory grasp of what is going on under the conditions present in reality.[32]
Mises concluded, "The specific method of economics is the method of imaginary constructions…. [I]t is the only method of praxeological and economic inquiry."[33]
Rothbard took Mises's dictum seriously and for seven years immersed himself in employing and perfecting this method in elaborating an integrated system of economic theory. This explains why Rothbard identified the use of the praxeological method, rather than a loose subjectivist orientation, as the hallmark and acid test of scientific economics. During the long period of sustained effort in writing the present volume, Rothbard thus became a master practitioner of the praxeological research method. He not only skillfully used the various imaginary constructs whose nature and specific use Mises had explicitly formulated in Human Action, but also devised new ones as needed to assist in the deduction of new theorems to elucidate unexplained features of economic reality.[34]
Let us take a detailed example to illustrate Rothbard's procedure. In confronting the daunting task of untangling and systematizing causal-realist production theory, Rothbard postulates an imaginary world of specific factors, in which each and every individual laborer, parcel of land, and capital good is irrevocably committed to the production of a single product and cannot be converted to use in any other production process.[35]
Rothbard also imagines two variations of this world. In the first, the cooperating factors in each stage of a given production process jointly own the product (i.e., capital good) of that stage and, since the services of all capital goods are embodied in the final product, therefore all factors jointly own the final good that is sold to consumers in exchange for money. The money receipts are then distributed according to the terms of a voluntary contract among all joint factor owners. In the second variation, a single capitalist or consortium of capitalists pay the various factors participating in the amalgamated process in advance of the sale of the final product on the market and in exchange receive ownership of the capital goods from every stage as well as the stock of final consumer goods and the money revenue obtained from its sale to consumers.[36] In both variations of the construct, an evenly rotating economy is assumed in order to abstract from the problems of entrepreneurship.
With the assistance of this construct, Rothbard deduces a number of important theorems and principles of production. First, in the case of joint ownership of the product by the collaborating land and labor factors, there are no independent, primordial owners of capital goods, which are intermediate goods in the production process and therefore resolvable into the labor and land inputs that cooperated in producing them.
"Rothbard took Mises's dictum seriously and for 7 years immersed himself in employing and perfecting this method in elaborating an integrated system of economic theory."Second, and consequently, all income in production consists of wages and land rents — capital goods, which are merely way stations on the path to the final product, do not earn any net rents for their owners. Third, all cooperating laborers and land owners must wait for their income from the inception of the productive process to its termination and the subsequent sale of the final product to consumers. Therefore, fourth, the size of the aggregate income of the cooperating factor owners depends solely and completely on the demand of consumers for their product. A relative shift in relative consumer demand between final goods will fall solely and completely on the specific factors that are involved in the production of the affected products.
Once the capitalist is introduced into this fictitious world, a fifth principle becomes immediately evident: the function of the capitalist is to relieve the factor owners of the burden of waiting for income, as he advances them present money payments from his accumulated savings for the joint product of their labor and land services. In exchange for these present wages and rents, the capitalist receives an interest return on his invested funds, which is based on time preference and reflects the value discount of the anticipated future monetary revenues he will be receiving relative to the present money payments he expends on the factor services. Conversely, the factor owners agree to this deduction from the full-sale proceeds of their product that is embodied in their discounted wage and rent payments from the capitalist, because these present payments unshackle them from the temporal dimension of the production process.
A sixth principle is that, even in a world of capitalist ownership of the entire production process, capital goods still do not generate a net monetary income for their owners, because the net interest return obtained by the capitalist-owners is fully derived from the discount incorporated into the present wages and rents paid to owners of labor and land factors, who are the only net recipients of incomes in a world without capitalists. Thus wage, rent, and interest incomes logically exhaust the entire proceeds from the sale of the final product, leaving no remainder for net payments to capital goods.[37]
This analysis of Rothbard's hypothetical world of purely specific factors also is pregnant with implications for the role of subjective costs in production and pricing. Given that specific land factors and capital goods have no alternative uses in this imagined world, an immediate inference is that their use in production is "costless" and their respective supply curves perfectly inelastic. Labor, specific to a particular production process though it may be, in contrast, is costly to use because it has an alternative use in the production of "leisure," which is an instantaneously producible consumers' good. Thus, in a world without capitalists, labor involves the disutility of foregoing both leisure and present goods. The arrival of capitalists on the scene reduces, but does not eradicate, the disutility of labor.
"Rothbard also wields the fictive construction he formulated to demolish Marshallian price theory…"These inferences starkly demonstrate the principle that all production costs are ultimately and essentially subjective. Leisure preferences and time preferences thus determine the ultimate costs of production and these costs are purely subjective and consist of the valuation of the forgone utilities of the producers against the anticipated monetary revenues from consumers. Once these (subjective) producers' costs have all been incurred, the stocks of the various kinds of consumers' goods emerge from the production process ready for sale to consumers. Unless their producers have a direct use for the goods, their sale to consumers is completely costless and their relative prices are determined solely by the structure-of-value scale of consumers. Hence, barring speculation on future price variations, the supply curves for the various stocks of consumer goods are also perfectly inelastic. In sum, "production costs" — that is, the disutilities of labor and waiting that have already been incurred, or the utilities of leisure and immediate enjoyment that have already been forgone, by producers — have no role whatever in determining the prices of the existing stocks of consumers goods.
Rothbard also wields the fictive construction he formulated to demolish Marshallian price theory, according to which prices were determined by two scissor blades: the subjective values of consumers composing one blade while the objective or real costs of production compose the other. While Marshall and his contemporary followers concede that, in the transient immediate run the subjective-value blade predominates in determining prices, they maintain that in the long-run equilibrium, where the permanent tendencies of the economy reveal themselves, the cost-of-production blade governs because the price of every product conforms to its average cost of production. Thus Marshallians superficially conclude that costs must therefore determine prices.
However, Rothbard easily demonstrates that this conformity between price and average cost in long-run equilibrium or the ERE — which itself is not real but a useful imaginary construction — is the result of the same principles governing the determination of the actual prices that momentarily prevail and at which exchanges take place in real-world markets. In a world where all factors are purely specific to a single production process, Rothbard shows that in the long run, where entrepreneurial errors are absent and profits and losses have been totally eliminated, the aggregate payments to all factors cooperating in a given production process are rigidly governed by, and must perfectly correspond to, the aggregate revenues spent on the final product by consumers minus the interest return to capitalists. Accepting this deduction and dividing both aggregate revenues and aggregate factor payments by the quantity of product implies that the direction of causation of the equality between price and average cost, especially in the long run, runs from the former to the latter.
Rothbard's formulation and deployment of this imaginary world of purely specific factors epitomizes the application of the praxeological method in theoretical research. As Mises pointed out,
The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present in actual action. Then we are in a position to grasp the hypothetical consequences of the absence of these conditions and to conceive the effects of their existence.[38]
Thus Rothbard first imagines that in this world all production processes are owned by the cooperating factors themselves, who must endure without income until the final product has emerged and is sold to consumers. By first analyzing the state of affairs in abstraction from the existence of the capitalist, we are able to grasp his function of advancing his accumulated savings to the factors before the sale of the final product and to comprehend the nature of his income as a return to time preference, which has been previously established much earlier in the chain of praxeological deductions as an immediate inference from the Action Axiom. In assuming away the capitalist we have also assumed away monetary costs of production, since the only money payments are directly from consumers to the joint factor owners of the final product. This enables us to see that total monetary costs are essentially determined by and equal to these total money expenditures by consumers as mediated through capitalists who have previously advanced present wages and rents to the factor owners.
In later chapters, Rothbard proceeds to drop the assumption of purely specific factors and admits varying degrees of specificity among factors into his analysis. The effects of relatively nonspecific factors in the production process can now be identified by investigating how their presence modifies the outcomes of a hypothetical world of purely specific factors. Since nonspecific factors can be converted to use in a wide range of production processes, a relative shift in consumer demand, ceteris paribus, will alter their allocation while only temporarily affecting their prices. But the principles already deduced regarding specific factors still hold sway in this more complex world and so we are able to conclude that prices of the relatively specific factors in any process will bear the brunt of the change in aggregate consumer expenditures on a given final product.
Thus, for instance, in the case of a relative decline of the demand for diamonds, all other things equal, the capital values of diamond mines and the wages of highly skilled jewelers will also decline while the wages of diamond miners and rents of electric generators will undergo little change as these nonspecific factors shift to other employments. Furthermore, introduction of nonspecific factors into the analysis will make a large part of the monetary costs of production appear to be given to the capitalist-employer of factors independently of the demand for his particular good. As a result, the capitalist will react to a change in his costs by adjusting his level of production, just as he would in the case of a change in the demand for his product. Hence, in the absence of a long chain of deductive reasoning utilizing imaginary constructs, à la Rothbard and earlier Austrians, a superficial view of the matter will render Marshall's metaphor of the two blades of the scissors as a plausible representation of reality. Without sedulous employment of the praxeological method, it would be impossible to conceive that it is the demands of consumers for the outputs of a wide range of production processes, as mediated through the bids of capitalist-entrepreneurs, as ultimately and exclusively determinative of the prices of all factors, relatively nonspecific as well as purely specific.
"By the early 1950s, the praxeological method and verbal logic had been eclipsed by positivism and mathematical models."This praxeological method so masterfully deployed by Rothbard had been used, even if implicitly and crudely, as the primary tool of theoretical research in economics up through the 1930s. However, as Rothbard points out, it was precisely "Marshall's distrust of 'long chains of deduction,'" in addition to "the whole Cambridge impetus toward" making short-cut assumptions designed to make their theory more testable that led to the gradual breakdown of the praxeological method and its replacement by positivism.[39]
By the early 1950s, the praxeological method and verbal logic had been eclipsed by positivism and mathematical models. For example, the leading economist of the postwar era, Paul Samuelson, now maintained that the task of economic theory was to "organize the facts into useful and meaningful" patterns and in so doing to provide economical descriptions of complex reality.[40]
Economic theorems, then, had to be framed in a manner that was "operationally meaningful." According to Samuelson, a meaningful theorem was "simply a hypothesis about empirical data that could conceivably be refuted, if only under ideal conditions." Whether such a theorem was "false," or "of trivial importance," or even of "indeterminate" validity was not as important to Samuelson as it being framed as a proposition capable in principle of empirical refutation.[41]
For Samuelson, theorems would thus be embodied and expressed in highly simplified mathematical models that could be subjected to empirical tests if the data were available. Since, admittedly, the requisite data were rarely accessible, the most that could be expected from such abstract models was that they "often point the way to an element of truth present in a complex situation" and that they "afford tolerably accurate extrapolations and interpolations."[42]
However, in a retrospective, Samuelson lamented the lack of success of the crude positive method in economics, writing,
When I was 20 … I expected that the new econometrics would enable us to narrow down the uncertainties of our economic theories. We would be able to test and reject false theories. We would be able to infer new good theories… [I]t has turned out not to be possible to arrive at a close approximation to indisputable truth [and] it seems objectively to be the case that there does not accumulate a convergent body of econometric findings, convergent on a testable truth.[43]
Of course this does not mean that Samuelson's faith in the positivist method was shaken. Rather, it confirmed his prior belief that truth was multifaceted and therefore "Precision in deterministic facts or in probability laws can at best be only partial and approximate."[44]
If Samuelson downplayed the attainment of truth as a goal of theoretical research in favor of the formulation of operationally meaningful theorems, the other avatar of positivism in postwar economics, Milton Friedman, jettisoned all references to truth and realism in assessing the validity of economic theorems. Rejecting Samuelson's crude logical positivism, Friedman reveled in the falsity or "unrealism" of a theorem's assumptions and offered the seemingly more sophisticated alternative of "falsificationism," which was allegedly based on Karl Popper's philosophy of science.[45] Friedman's position was concisely summed up in Mark Blaug's statement, "No assumptions about economic behavior are absolutely true and no theoretical conclusions are valid for all times and places…."[46]
Despite the formal adherence by most of the profession to positivist methods during the 1950s, Rothbard's quest to recover and reconstruct the edifice of sound economic theory drove him to scour the contemporary literature for new ideas and insights as carefully as he had scrutinized the writings of his predecessors in the causal-realist tradition. Rothbard's treatise contains citations from over 150 books, journal articles, conference proceedings, government documents, dissertations, and policy- and research-institute monographs published between the appearance of Human Action in 1949 and Man, Economy, and State in 1962.[47] Rothbard's deep engagement with the contemporary literature paid off as he discovered that many of these works contained research that clarified, refined or advanced causal-realist theory and he eagerly integrated these contributions into his own work.
"The appellation 'Austrian' was chosen for this new intellectual tendency mainly for strategic reasons."For example, in his notable development of an explanation of the firm's costs and return on investment that sharply deviates from the Marshallian theory of the firm, Rothbard was heavily influenced by two neglected articles coauthored by André Gabor and I.F. Pierce on "the Austro-Wicksellian" theory of the firm.[48]
Rothbard cites a discussion by the Cambridge economist Roy Harrod, in addition to a discussion by Böhm-Bawerk, as a source for his own path-breaking identification of a fourth component in the gross business income of the capitalist-entrepreneur. This "ownership" or "decision-making" rent is distinct from and in addition to implicit wages of management, interest return on invested capital, and pure profit.[49] In his thoroughgoing critique of the theories of perfect- and monopolistic-competition doctrines and his original formulation of a positive theory of competition as a dynamic process, Rothbard favorably cites the contributions of a number of his mainstream contemporaries, including G. Warren Nutter, Wayne Leeman, Marshall I. Goldman, and Reuben Kessel. Rothbard singles out a book by Lawrence Abbott published in 1952 titled Quality and Competition for special praise, characterizing it as "one of the outstanding theoretical works of recent years."[50],[51] Indeed, the theory of rivalrous competition that Rothbard expounds is clearly influenced by Abbott's arguments on the central importance of the qualitative dimensions of competition.
The fact that theoretical research employing verbal logic and the praxeological method still remained relatively pervasive among academic economists even as late as the 1950s highlights the deep and hardy roots of the causal-realist tradition. It also accounts for why Rothbard did not yet perceive any advantage in appropriating the label "Austrian" to differentiate his treatise from contemporary economics. In fact, in private correspondence dated February 1954, Rothbard expressed confidence that mainstream economic theorists could still be drawn back toward the causal-realist research program and that his work in progress
will, I believe, command the attention of the profession as a treatise because of its considerable elaborations in those areas not developed by Mises, its differences from Mises in such areas as monopoly, banking ethics, and government … and its refutations of current economic theory.[52]
While in retrospect we may be tempted to dismiss Rothbard's bold prediction as a burst of youthful optimism, it hardly reflects the attitude of someone intent on completely breaking with the prevailing doctrine and founding a heterodox school of thought.
By the advent of the 1970s, however, mainstream economic theory had sunk to almost unfathomable depths, degenerating into a series of loosely related mathematical models which had little contact with reality. Following the prevailing Friedmanite positivist methodology, the tentative "validity" — never the truth — of these models was putatively established by empirically testing their ability to predict or, more accurately, "retrodict" using the methods of econometrics. The last vestiges of the Mengerian approach thus disappeared from the curricula of graduate economics programs and causal-realist theoretical research was now completely banished from academic journals, which had become the main, if not the only, research outlet for mainstream economics.
Around the same time as this sea change in economic theory and method, there began to coalesce outside the formal institution of academic economics a new intellectual movement that was directly inspired by Rothbard's reconstruction of the causal-realist theoretical organon in Man, Economy, and State. This movement comprised mainly graduate students and younger faculty members associated with US academic institutions who were disaffected with the orthodox neoclassical synthesis, which had begun to break down with the failure of the Kennedy-Johnson "New Economic" policies to rein in the Vietnam War inflation and the subsequent emergence of stagflation in the early 1970s.
By the mid-1970s the new movement had grown to such an extent that the opportunity presented itself to institutionalize and promote its existence by means of a formal academic conference on Austrian economics, which was held at South Royalton, Vermont, in June 1974. The appellation "Austrian" was chosen for this new intellectual tendency mainly for strategic reasons. Since the Rothbardian movement embraced a method and body of doctrine that now shared very little common ground with the entrenched positivist orthodoxy, the label at least provided the movement with a recognizable affiliation with one of the great streams of early marginalist thought that had fed into this modern mainstream. The name also instantly endowed the movement with the great cachet associated with the well-known names of the founding members of the Austrian School, such as Carl Menger, Eugen von Böhm-Bawerk, and Friedrich von Wieser and its later representatives Ludwig von Mises and Friedrich A. Hayek. The prestige of the "Austrian" brand name was further enhanced when Hayek became a corecipient of the Nobel Prize in economics later in the year. The term had the additional virtue of identifying the movement's general theoretical orientation.
"Friedman reveled in the falsity or 'unrealism' of a theorem's assumptions…"Rothbard and his followers eagerly embraced the new designation and began to refer to themselves as members or followers of the modern Austrian School, which was now positioned as a heterodox challenger to "mainstream economics." Despite its significant short-run strategic virtues, however, branding the school of thought that coalesced at the South Royalton conference as "Austrian" has engendered a number of serious problems in the long run. First, it has come to obscure the extent to which the modern Austrian School was directly inspired by Rothbard. Indeed it is no exaggeration to say that a large majority of the thirty or so participants in the South Royalton conference adhered to the body of causal-realist theory elaborated in Man, Economy, and State. Second, it conceals the fact, noted above, that in writing this treatise, Rothbard drew from a much broader range of literature than that emanating from the original Austrian School and its direct intellectual descendents. Third, the label diverts attention from Rothbard's primary mission in writing his treatise, which was to purge modern economic science of its alien positivist and mathematical-formalist elements and to reconstruct it along consistently causal-realist lines.
It cannot be stated too often or too emphatically that engineering a radical break from standard economic theory and establishing a heterodox school of thought that rejected all forms of equilibrium analysis and the use of imaginary constructs was not Rothbard's purpose in writing Man, Economy, and State. Indeed, as we have seen, one of Rothbard's most important contributions in his treatise is his painstaking explication of the content and the proper use of fictitious constructs and imaginary states of the world in deriving meaningful propositions about the causal determinants of observable economic phenomena.
The last and perhaps most significant disadvantage of applying the unqualified term "Austrian" to the post–South Royalton economics movement is the fact that it fosters a conflation of the very different and conflicting research programs that have grown up under this opaque semantic veil. Rothbard recognized and lamented this state of affairs in the preface to the revised edition of Man, Economy, and State published in 1993:
In fact, the number of Austrians has grown so large, and the discussion so broad, that differences of opinion and branches of thought have arisen, in some cases developing into genuine clashes of thought. Yet they have all been conflated and jammed together by non-Austrians and even by some within the school, giving rise to a great deal of intellectual confusion, lack of clarity, and outright error. The good side of these developing disputes is that each side has clarified and sharpened its underlying premises and world-view. It has indeed become evident in recent years that there are three clashing paradigms within Austrian economics: the original Misesian or praxeological paradigm, to which the present author adheres; the Hayekian paradigm, stressing "knowledge" and "discovery" rather than praxeological "action" and "choice," and whose leading exponent now is Professor Israel Kirzner; and the nihilistic view of the late Ludwig Lachmann, an institutionalist anti-theory approach taken from the English "subjectivist" Keynesian G.L.S Shackle. (p. xiv)
While this accurately describes the state of Austrian economics in the early 1990s, the situation has become even more contentious and muddled since then. While the Lachmannian branch has waned somewhat in influence, a new, wildly eclectic tendency has developed that proposes to agglomerate indiscriminately selected elements of Menger, Mises, Hayek, Lachmann, Kirzner, and Rothbard with random insights from Adam Smith's economics, Public Choice Theory, New Institutional Economics, transaction-costs economics, game-theoretic modeling, hermeneutical economics, and ethnographic and historical case studies, all under the rubric of Austrian economics or "good economics."
Needless to say, the situation is even less satisfactory now than it was when Rothbard penned the passage above. Those interested in pursuing theoretical research in the Mengerian causal-realist tradition are now viewed by the profession, thanks to the Austrian label, as part of a splintered and feuding heterodox movement more interested in discoursing on metaeconomic esoterica or devising "spontaneous-order" explanations for obscure historical episodes than in analyzing the "mundane" issues at the heart of mainstream economics — value theory, price theory, capital theory, monetary theory, and business cycles.
Fortunately, Man, Economy, and State points the way out of this morass of confusion, which threatens permanent and wholesale marginalization of all branches of Austrian economics. Every page of Rothbard's treatise is imbued with a profound awareness that the causal-realist theoretical system that he was expounding was in the mainstream of an international economic tradition that originated in the Marginalist Revolution. His treatise thus was not intended as the program for a new heterodox movement or the revival of an old one; rather it represented an endeavor to reconstruct orthodox economics on the unshakeable foundation of the praxeological method and to use this method to substantively advance the theory.
In a crucial sense, economic science had temporarily lost its bearings and was beginning to stray from its rich heritage, and Rothbard aimed at setting it back on course. Consequently, he never conceded the mainstream of economic science to the disciples of mathematical modeling and the positivist method, whom he regarded as an irrationalist cult that had hijacked economics and whose silly doctrines would sooner or later wind up in the dustbin of intellectual history.
$50 $40
"The death knell is now tolling for the mathematical and positivist pretenders to the mainstream of economics."Rothbard has been proven correct. Mathematical modeling has revealed itself to be a vain and formalistic exercise incapable of explaining the international currency crises, stock-market and real-estate bubbles, or the global financial crises that have racked our world in the past two decades. It is increasingly evident, even to professional economists, that the tortuous positivist detour has led to an intellectual dead end. Hence, bizarre heterodox sects, such as behavioral economics, experimental economics, the "happiness" literature, neuro-economics, etc. now abound. Some market-oriented economists have even abandoned modern economic theory altogether for the less rigorous rhetoric and metaphors of Adam Smith's "invisible hand" and Hayek's "spontaneous order."[53]
The death knell is now tolling for the mathematical and positivist pretenders to the mainstream of economics. The time is ripe for Austrians to recover their rightful position as the true representatives of the central tendency of modern economic theory by affirming the praxeological method as the research method of economics. The prodigious fruits of this method stand before us in the integrated theoretical structure expounded in Man, Economy, and State.
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Notes[1] Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers. The Introduction draws substantially on the information and resources found in the Murray N. Rothbard Papers. The Rothbard Papers are currently held at the Ludwig von Mises Institute, Auburn, Alabama, and include, among other materials, Murray Rothbard's letters and correspondence (1940–1994), memos and unpublished essays (1945–1994), and drafts of published works.
[2] Rothbard to Mises, May 5, 1959; Rothbard Papers. In English, "It is finished."
[3] Richard Cantillon, Essai sur la Nature du commerce en Général, ed. and trans. Henry Higgs (New York: Augustus M. Kelley, 1964).
[4] Carl Menger, Principles of Economics, trans. James Dingwall and Bert E. Hoselitz (New York: New York University Press, 1981). Menger had worked as an economic journalist and market analyst for daily newspapers on and off for over a decade. For an overview of Menger's life and thought see Joseph T. Salerno, "Carl Menger: The Founding of the Austrian School," in Randall G. Holcombe, ed., 15 Great Austrian Economists (Auburn, Ala.: Ludwig von Mises Institute, 1999), pp. 71–100 and the sources cited therein.
[5] Thus in his Preface to the book, Menger (Principles, p. 49) wrote,
I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production … for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) under one unified point of view…. (emphasis added)
[6] For the factors underlying the rise and decline of the early Austrian School, see Joseph T. Salerno, "The Place of Mises's Human Action in the Development of Modern Economic Thought," Quarterly Journal of Austrian Economics 2, no. 1 (Spring 1999): 35–65.
[7] Indeed, in the preface to this treatise, Rothbard laments the demise of "the old-fashioned treatise on economic 'principles'" after World War I and the ensuing progressive disintegration of economics, including economic theory, into compartmentalized subdisciplines. On the factors that exacerbated this fragmentation of economics after World War II, see Joseph T. Salerno, "Economics: Vocation or Profession," Mises Daily (November 17, 2004).
[8] Ludwig von Mises, Human Action: A Treatise on Economics, Scholar's Edition (Auburn, Ala.: Ludwig von Mises Institute, 1998).
[9] On the reasons for this, see Salerno "The Place of Mises's Human Action," pp. 59–61. The books that molded postwar economics were cut from a completely different cloth than Mises's treatise and dealt primarily with the formal techniques, rather than the substance, of economic theory. These included, especially: J.R. Hicks, Value and Capital: An Inquiry into Some Fundamental Principles of Economics Theory, 2nd ed. (New York: Oxford University Press, 1946); Paul A. Samuelson, Foundations of Economic Analysis (Cambridge, Mass.: Harvard University Press, 1947); and George J. Stigler, The Theory of Price (New York: Macmillan, 1947).
[10] Rothbard's central role in the modern revival of Austrian economics is detailed in Joseph T. Salerno, "The Rebirth of Austrian Economics — In Light of Austrian Economics," Quarterly Journal of Austrian Economics 5, no. 4 (Winter 2002): 111–28.
[11] Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers.
[12] Rothbard to H. Cornuelle, March 14, 1951; Rothbard Papers. "What McCulloch did for Ricardo" refers to John Ramsay McCulloch's Principles of Political Economy (New York: Augustus M. Kelley, [1864] 1965).
[13] Ibid.
[14] Rothbard to R. Cornuelle, August 9, 1954; Rothbard Papers.
[15] Rothbard to H. Cornuelle, June 28, 1952; Rothbard Papers.
[16] Ludwig von Mises, "Man, Economy and State: A New Treatise on Economics," in idem, Economic Freedom and Interventionism: An Anthology of Articles and Essays, ed. Bettina Bien Greaves (Irvington-on-Hudson, N.Y.: The Foundation for Economic Education, 1990), pp. 155–56.
[17] Ibid., pp. 156–57.
[18] The following statement is indicative of Mises's attitude in this respect: "There never lived at the same time more than a score of men whose work contributed anything essential to economics" (Mises, Human Action, p. 869).
[19] Rothbard to R. Cornuelle, memo: "Textbook or Treatise?"; Rothbard Papers.
[20] In Human Action, Mises avoided a deep analysis of the time-spanning structure of production, perhaps because he associated it with the concept of the backward-looking "average period of production" in Böhm-Bawerk's work, which he criticized (Mises, Human Action, pp. 485–86).
[21] Mises, Human Action, p. 3.
[22] Ludwig von Mises, Epistemological Problems of Economics, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 2003), p. 228.
[23] Ibid., p. 175.
[24] Ludwig von Mises, The Historical Setting of the Austrian School of Economics, 2nd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1984), p. 41.
[25] For an overview and critique of this nihilist turn in economics, see David Gordon, Hermeneutics Versus Austrian Economics (Auburn, Ala.: Ludwig von Mises Institute, 1986); Hans-Hermann Hoppe, "In Defense of Extreme Rationalism: Thoughts on Donald McCloskey's The Rhetoric of Economics," Review of Austrian Economics 3 (1989): 179–214 ; and Murray N. Rothbard, "The Hermeneutical Invasion of Philosophy and Economics," in idem, The Logic of Action Two: Applications and Criticism from the Austrian School (Lyme, N.H.: Edward Elgar, 1997), pp. 275–93.
[26] Rothbard, Man, Economy, and State, p. xcii.
[27] Ibid., p. 357.
[28] Ibid., p. xciii.
[29] Philip H. Wicksteed, The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory, ed. Lionel Robbins, 2 vols. (New York: Augustus M. Kelley, 1967); Frank A. Fetter, The Principles of Economics with Applications to Practical Problems (New York: The Century Co., 1910); F.W. Taussig, Principles of Economics, 2 vols. (New York: The Macmillan Company, 1911). Rothbard did not consider Human Action an "old-style Principles" because "it assumes considerable previous economic knowledge and includes within its spacious confines numerous philosophic and historical insights" (Rothbard, Man, Economy, and State, p. xciii).
[30] Rothbard, Man, Economy, and State, p. xciii.
[31] Ibid., p. xcii.
[32] Mises, Human Action, p. 65.
[33] Ibid., pp. 237–38.
[34] Ibid., pp. 237–57.
[35] While this construct is highly unrealistic, it is not unrealizable like the evenly rotating economy (ERE), which abstracts completely from change and uncertainty and is used to analytically isolate interest income and the capitalist function that earns it from entrepreneurial profit. Thus a world in which every factor is suited for one and only one task is not inconceivable or logically contradictory. In contrast, the ERE is indeed an unrealizable and self-contradictory construct. It describes a world in which, for example, the future is known with perfect certainty, but action — which is always aimed at changing the future — occurs; and agents hold money balances despite the absence of uncertainty regarding the temporal pattern of their future receipts and expenditures. This is not to imply that proximity to reality makes one imaginary construct better or more useful than another; the sole test of a construct's usefulness is the aid it gives to thought in deducing the causal laws operating in real markets.
[36] For the explanation of this construct and its variations and the elaboration of its implications, see Rothbard, Man, Economy, and State, pp. 329–66.
[37] This conclusion of the exhaustion of the income from production among wages, rents, and interest receipts holds true only under the assumption that future market conditions are known with certainty. Once this assumption is dropped and the possibility is admitted of overvaluation or undervaluation of the complements of specific factors by capitalist investors, entrepreneurial profits and losses enter the picture. However, in a world of purely specific factors, such profits and losses would not have an allocative function because, by definition, factors cannot shift between production processes. More importantly, it becomes clear that such incomes accrue to the capitalists alone and that, therefore, in the real world of uncertainty, the functions of capitalist and entrepreneur are integrated in the same agent.
[38] Mises, Human Action, p. 238.
[39] Rothbard, Man, Economy, and State, p. xcii. While Marshall utilized the method of imaginary constructions, his aversion to lengthy step-by-step deduction runs afoul of Mises's warning: that it is "a method very difficult to handle because it can easily result in fallacious syllogisms. It leads along a sharp edge; on both sides yawns the chasm of absurdity and nonsense" (Mises, Human Action, p. 238).
[40] Paul Samuelson, "My Life Philosophy: Policy Credos and Working Ways," in Michael Szenberg, ed., Eminent Economists: Their Life Philosophies (New York: Cambridge University Press, 1993), p. 241.
[41] Paul Samuelson, Foundations of Economic Analysis, 2nd ed. (New York: Atheneum, 1976), p. 4.
[42] Paul Samuelson, "International Factor Price Equalisation Once Again," in The American Economics Association, Readings in International Economics (Homewood, Ill.: Richard D. Irwin, 1968), pp. 58; and idem, "My Life Philosophy," p. 241.
[43] Samuelson, "My Life Philosophy," p. 243.
[44] Ibid., p. 244
[45] Milton Friedman, "The Methodology of Positive Economics," in idem, Essays in Positive Economics (Chicago: University of Chicago Press, 1970), pp. 1–43. Some methodologists have argued that Friedmanite-positivist methodology shares little more than vocabulary with Popper's philosophy of science. For example, see Lawrence A. Boland, The Foundations of Economic Method (Boston: Allen & Unwin, 1982), pp. 155–96.
[46] Mark Blaug, Economic Theory in Retrospect, 4th ed. (New York: Cambridge University Press, 1986), p. 3.
[47] Actually some of the references in the present edition are to works published after 1962, because this volume includes Power and Market which was originally written as the third volume of Man, Economy, and State, but was published separately eight years later. For the story behind the editorial decision to truncate Man, Economy, and State and publish it as two volumes and Rothbard's reaction to it, see Stromberg, pp. lxv–lxxi.
[48] André Gabor and I.F. Pearce, "A New Approach to the Theory of the Firm," Oxford Economic Papers 54 (October 1952): 252–65; idem, "The Place of Money Capital in the Theory of Production," Quarterly Journal of Economics 72 (November 1958): 537–57.
[49] Roy Harrod, "Theory of Profit," in idem, Economic Essays (New York, Harcourt and Brace & Co., 1952), pp. 190–95. For a detailed discussion of Rothbard's concept of decision-making rent and its significance for the theories of entrepreneurship and the firm, see Joseph T. Salerno, "The Entrepreneur: Real and Imagined," Quarterly Journal of Austrian Economics 11, no. 3 (Fall 2008).
[50] Lawrence Abbott, Quality and Competition: An Essay on Economic Theory (Westport, Conn.: Greenwood Press, 1973).
[51] Rothbard, Man, Economy and State, p. 666, fn. 28.
[52] Rothbard to R. Cornuelle, memo: "Textbook or Treatise?"; Rothbard Papers.
[53] Of course the concept of the "spontaneous order" was only one of Hayek's many contributions. Most of these contributions were squarely in the Mengerian causal-realist tradition and dealt with themes of mundane economics such as capital theory, business-cycle theory, international monetary theory, and comparative monetary institutions. For a collection of Hayek's most important works in these areas, see Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, Ala.: Ludwig von Mises Institute, 2008). Also see Peter G. Klein, "The Mundane Economics of the Austrian School," Quarterly Journal of Austrian Economics 11, no. 3 (Fall 2008), for the argument that the notion of spontaneous order, rightly understood, has roots in Menger's causal-realist economics.
[This review, "Man, Economy and State: A New Treatise on Economics," originally appeared in New Individualist Review, Autumn 1962.It was reprinted in Economic Freedom and Interventionism.]
Most of what goes today under the label of the social sciences is poorly disguised apologetics for the policies of governments. What the philosopher George Santayana (1863–1952) once said about a teacher of philosophy of the, then Royal Prussian, University of Berlin, that it seemed to this man "that a professor's business was to trudge along a governmental towpath with a legal cargo," is today everywhere true for the majority of those appointed to teach economics. As these doctors see it, all the evils that plague mankind are caused by the acquisitiveness of greedy exploiters, speculators, and monopolists, who are supreme in the conduct of affairs in the market economy. The foremost task of good government is to curb these scoundrels by suppressing their "economic freedom" and subjecting all affairs to the decisions of the central authority. Full government control of everybody's activities — whether called planning, socialism, communism, or any other name — is praised as the panacea.
To make these ideas plausible one had to proscribe as orthodox, classical, neoclassical, and reactionary all that economics had brought forward before the emergence of the New Deal, the Fair Deal, and the New Frontier. Any acquaintance with pre-Keynesian economics is considered as rather unsuitable and unseemly for an up-to-date economist. It could easily raise in his mind some critical thoughts. It could encourage him to reflect, instead of meekly endorsing the empty slogans of governments and powerful pressure groups. There is, in fact, in the writings and teaching of those who nowadays call themselves "economists," no longer any comprehension of the operation of the economic system as such. Their books and articles do not describe, analyze, or explain the econonomic phenomena. They do not pay attention to the interdependence and mutuality of the various individuals' and groups' activities. In their view, there exist different economic spheres that have to be treated by and large as isolated domains. They dissolve economics into a number of special fields, such as economics of labor, agriculture, insurance, foreign trade, domestic trade, and so on. These books and articles deal with the height of wage rates, for example, as if it were possible to treat this subject independently of the problems of commodity prices, interest, profit and loss, and all the other issues of economics. They assemble, without any idea for what purpose they are doing it, a vast array of statistical and other historical data about the recent past, which they choose to style the "present." They entirely fail to comprehend the interconnectedness and mutual determination of the actions of the various individuals whose behavior results in the emergence of the market economy.
The economic writings of the last decades provide a pitiful story of progressing deterioration and degradation. Even a comparison of the recent publications of many older authors with their previous writings, shows an advancing decline. The few, very few, good contributions that came out in our age were smeared as old-fashioned and reactionary by the government economists, boycotted by the universities, the academic magazines, and the newspapers, and ignored by the public.
Let us hope that the fate of Murray N. Rothbard's book Man, Economy, and State (Princeton: D. Van Nostrand, 1962) will be different. Dr. Rothbard is already well known as the author of several excellent monographs. Now, as the result of many years of sagacious and discerning meditation, he joins the ranks of eminent economists by publishing a voluminous work, a systematic treatise on economics.
The main virtue of this book is that it is a comprehensive and methodical analysis of all activities commonly called economic. It looks upon these activities as human action, i.e., as conscious striving after chosen ends by resorting to appropriate means. This cognition exposes the fateful efforts of the mathematical treatment of economic problems.
The mathematical economist attempts to ignore the difference between physical phenomena, on the one hand, the emergence and consummation of which man is unable to see the operation of any final causes — and which can be studied scientifically only because there prevails a perceptible regularity in their concatenation and succession — and praxeological phenomena, on the other hand, that lack such a regularity but are conceivable to the human mind as the outcomes of purposeful aiming at definite ends chosen.
Mathematical equations, says Rothbard, are appropriate and useful where there are constant quantitative relations among unmotivated variables; they are inappropriate in the field of conscious behavior. In a few brilliant lines he demolishes the main device of mathematical economists, viz., the fallacious idea of substituting the concepts of mutual determination and equilibrium for the allegedly outdated concept of cause and effect. And he shows that the concepts of equilibrium and the evenly rotating economy do not refer to reality; although indispensable for any economic inquiry, they are merely auxiliary mental tools to aid us in the analysis of real action.
The equations of physics describe a process through time, while those of economics do not describe a process at all, but merely the final equilibrium point, a hypothetical situation that is outside of time and will never be reached in reality. Furthermore, they cannot say anything about the path by which the economy moves in the direction of the final equilibrium position. As there are no constant relations between any of the elements which the science of action studies, there is no measurement possible, and all numerical data available have merely a historical character; they belong to economic history and not to economics as such. The positivist slogan, "science is measurement," in no way refers to the sciences of human action; the claims of "econometrics" are vain.
In every chapter of his treatise, Dr. Rothbard, adopting the best of the teachings of his predecessors, and adding to them highly important observations, not only develops the correct theory but is no less anxious to refute all objections ever raised against these doctrines. He exposes the fallacies and contradictions of the popular interpretation of economic affairs. Thus, for instance, in dealing with the problem of unemployment he points out: in the whole modern and Keynesian discussion of this subject the missing link is precisely the wage rate. It is meaningless to talk of unemployment or employment without reference to a wage rate. Whatever supply of labor service is brought to market can be sold, but only if wages are set at whatever rate will clear the market. If a man wishes to be employed, he will be, provided the wage rate is adjusted according to what Rothbard calls his discounted marginal value product, i.e., the present height of the value which the consumers — at the time of the final sale of the product — will ascribe to his contribution to its production. Whenever the job seeker insists on a higher wage, he will remain unemployed. If people refuse to be employed except at places, in occupations, or at wage rates they would like, then they are likely to be choosing unemployment for substantial periods. The full import of this state of affairs becomes manifest if one gives attention to the fact that, under present conditions, those offering their services on the labor market themselves represent the immense majority of the consumers whose buying or abstention from buying ultimately determines the height of wage rates.
Less successful than his investigations in the fields of general praxeology and economics are the author's occasional observations concerning the philosophy of law and some problems of the penal code. But disagreement with his opinions concerning these matters cannot prevent me from qualifying Rothbard's work as an epochal contribution to the general science of human action, praxeology, and its practically most important and, up to now, best-elaborated part, economics. Henceforth all essential studies in these branches of knowledge will have to take full account of the theories and criticisms expounded by Dr. Rothbard.
The publication of a standard book on economics raises again an important question, viz., for whom are essays of this consequence written: only for specialists, the students of economics, or for all of the people?
To answer this question we have to keep in mind that the citizens, in their capacity as voters, are called upon to determine ultimately all issues of economic policies. The fact that the masses are ignorant of physics and do not know anything substantial about electricity does not obstruct the endeavors of experts who utilize the teachings of science for the satisfaction of the wants of the consumers. From various points of view, one may deplore the intellectual insufficiency and indolence of the multitude. But their ignorance regarding the achievements of the natural sciences does not endanger our spiritual and material welfare.
It is quite different in the field of economics. The fact that the majority of our contemporaries, the masses of semi-barbarians led by self-styled intellectuals, entirely ignore everything that economics has brought forward, is the main political problem of our age. There is no use in deceiving ourselves. American public opinion rejects the market economy, the capitalistic free-enterprise system that provided the nation with the highest standard of living ever attained. Full government control of all activities of the individual is virtually the goal of both national parties. The individual is to be deprived of his moral, political, and economic responsibility and autonomy, and to be converted into a pawn in the schemes of a supreme authority aiming at a "national" purpose. His "affluence" is to be cut down for the benefit of what is called the "public sector," i.e., the machine operated by the party in power. Hosts of authors, writers, and professors are busy denouncing alleged shortcomings of capitalism and exalting the virtues of "planning." Full of a quasi-religious ardor, the immense majority is advocating measures that step by step lead to the methods of administration practiced in Moscow and in Peking.
If we want to avoid the destruction of Western civilization and the relapse into primitive wretchedness, we must change the mentality of our fellow citizens. We must make them realize what they owe to the much vilified "economic freedom," the system of free enterprise and capitalism. The intellectuals and those who call themselves educated must use their superior cognitive faculties and power of reasoning for the refutation of erroneous ideas about social, political and economic problems and for the dissemination of a correct grasp of the operation of the market economy. They must start by familiarizing themselves with all the issues involved in order to teach those who are blinded by ignorance and emotions. They must learn in order to acquire the ability to enlighten the misguided many.
It is a fateful error on the part of our most valuable contemporaries to believe that economics can be left to specialists in the same way in which various fields of technology can be safely left to those who have chosen to make any one of them their vocation. The issues of society's economic organization are every citizen's business. To master them to the best of one's ability is the duty of everyone.
Now such a book as Man, Economy, and State offers to every intelligent man an opportunity to obtain reliable information concerning the great controversies and conflicts of our age. It is certainly not easy reading and asks for the utmost exertion of one's attention. But there are no shortcuts to wisdom.
[Presented at a session on "Human Action After Sixty Years" at the Eastern Economic Association in New York City, February 26-March 1, 2009.]
In September of 2009, it will be sixty years since the appearance of Ludwig von Mises's Human Action, a Treatise on Economics, one of the truly great "classics" of modern economics. Often a "classic" means a famous book considered to have made important contributions to a discipline that is reverentially referred to but is rarely ever read. In economics, Adam Smith's Wealth of Nations is the typical example of such a work. Every economist has heard of the "invisible hand" and the notion of self-interest furthering the public interest through the incentive mechanism of the market, but probably few economists nowadays have actually read more than a handful of snippets and brief passages from Smith's treatise.
However, Human Action uniquely stands out as a classic in the literature of economics. Not only among Austrian economists but also for a growing number of other people, Mises's brilliant treatise continues to be read and taken seriously as a cornerstone for understanding the nature of the free society and the workings of the market economy.
It has taken on even more significance in these early years of the 21st century precisely because of the economic crisis through which the world is presently passing. It rings just as relevant today as when it was published six decades ago because the issues that Mises dealt with in Human Action and in many of his other works still dominate the public-policy discourses of our own time.
A central concept through much of the book is Mises's insistence on the essential importance of economic calculation. In the early decades of the 20th century, socialists of almost all stripes were certain that the institutions of the market economy could be done away with — either through peaceful means or violent revolution — and replaced with direct government ownership or control of the means of production with no loss in economic productivity or efficiency.
Mises's landmark contribution was to demonstrate that only with market-based prices expressed through a medium of exchange could rational decision making be undertaken for the use and application of the myriad means of production to assure the effective satisfaction of the multitudes of competing consumer demands in society.
"Monetary calculation is the guiding star of action under a system of division of labor," Mises declared in Human Action. "It is the compass of the man embarking on production."Ludwig von Mises, Human Action, A Treatise on Economics (Chicago: Henry Regnery, 3rd ed., 1966), p. 229. The significance of the competitive process, as Mises had expressed it in his earlier volume Liberalism, is that it facilitates "the intellectual division of labor that consists in the cooperation of all entrepreneurs, landowners, and workers as producers and consumers in the formation of market prices. But without it, rationality, i.e., the possibility of economic calculation, is unthinkable."Ludwig von Mises, Liberalism, the Classical Tradition (Indianapolis, IN: Liberty Fund, [1927] 2005), p. 50.
Such rationality in the use of means to satisfy ends is impossible in a comprehensive system of socialist central planning. How, Mises asked, will the socialist planners know the best uses for which the factors of production under their central control should be applied without such market-generated money prices? Without private ownership of the means of production, there would be nothing (legally) to buy and sell. Without the ability to buy and sell, there would be no bids and offers, and therefore no haggling over terms of trade among competing buyers and sellers. Without the haggling of market competition there would, of course, be no agreed-upon terms of exchange. Without agreed-upon terms of exchange, there are no actual market prices. And without such market prices, how will the central planners know the opportunity costs and therefore the most highly valued uses for which those resources could or should be applied? With the abolition of private property, and therefore market exchange and prices, the central planners would lack the necessary institutional and informational tools to determine what to produce and how, in order to minimize waste and inefficiency.
Therefore, Mises declared in 1931,
From the standpoint of both politics and history, this proof [of the "impossibility" of socialist planning] is certainly the most important discovery by economic theory … It alone will enable future historians to understand how it came about that the victory of the socialist movement did not lead to the creation of the socialist order of society.Ludwig von Mises, "On the Development of the Subjective Theory of Value," [1931] Epistemological Problems of Economics [1933] (New York: New York University Press, 1981), p. 157.
At the same time, Mises demonstrated the inherent inconsistencies in any system of piecemeal political intervention in the market economy. Price controls and production restrictions on entrepreneurial decision making bring about distortions and imbalances in the relationships of supply and demand, as well as constraints on the most efficient use of resources in the service of consumers. The political intervener is left with the choice of either introducing new controls and regulations in an attempt to compensate for the distortions and imbalances the prior interventions have caused, or repealing the interventionist controls and regulations already in place and allowing the market once again to be free and competitive. The path of one set of piecemeal interventions followed by another entails a logic in the growth of government that eventually would result in the entire economy coming under state management. Hence, interventionism consistently applied could lead to socialism on an incremental basis.Mises, Critique of Interventionism [1929] (Irvington-on-Hudson, NY: Foundation for Economic Education, 1998) pp. 1–31, 97–106; Interventionism: An Economic Analysis [1941] (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996); Human Action, pp. 716–79; Planning for Freedom (South Holland, Ill: Libertarian Press, 4th ed., 1980), pp. 1–49.
The most pernicious form of government intervention, in Mises's view, was political control and manipulation of the monetary system. Contrary to both the Marxists and the Keynesians, Mises did not consider the fluctuations experienced over the business cycle to be an inherent and inescapable part of the free-market economy. Waves of inflations and depressions were the product of political intervention in money and banking. And this included the Great Depression of the 1930s, Mises argued.
Under various political and ideological pressures, governments had monopolized control over the monetary system. They used the ability to create money out of thin air through the printing press or on the ledger books of the banks to finance government deficits and to artificially lower interest rates to stimulate unsustainable investment booms. Such monetary expansions always tended to distort market prices resulting in misdirections of resources, including labor, and malinvestments of capital. The inflationary upswing that is caused by an artificial expansion of money and bank credit sets the stage for an eventual economic downturn. By distorting the rate of interest — the market price for borrowing and lending — the monetary authority throws savings and investment out of balance, with the need for an inevitable correction.
The "depression" or "recession" phase of the business cycle occurs when the monetary authority either slows downs or stops any further increases in the money supply. The imbalances and distortions become visible, with some investment projects having to be written down or written off as losses, with reallocations of labor and other resources to alternative, more profitable employments, and sometimes significant adjustments and declines in wages and prices to bring supply and demand back into proper order.Ludwig von Mises, The Theory of Money and Credit (Indianapolis, IN: Liberty Classics, 1981 [1912; revised eds., 1934, 1953]); "Monetary Stabilization and Cyclical Policy" [1928] Percy L. Greaves, ed., The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression (Auburn, Ala.: The Ludwig von Mises Institute, 2006) pp. 53–153; Human Action, pp. 398–478, 538–86, 780–803.
The Keynesian revolution of the 1930s, which then dominated economic-policy discussions for decades following the Second World War, was based on a fundamental misconception of how the market economy worked. What Keynes called "aggregate demand failures" (to explain the reason for high and prolonged unemployment) distracted attention from the real source of less-than-full employment: the failure of producers and workers on the "supply side" of the market to price their products and labor services at levels that potential demanders would be willing to pay. Unemployment and idle resources were a pricing problem, not a demand-management problem. Mises considered Keynesian economics basically to be nothing more than a rationale for special-interest groups, such as trade unions, who didn't want to adapt to the reality of supply and demand, and what the market viewed as their real worth.For Mises's analysis of the causes and cures for the Great Depression, see Ludwig von Mises, "The Causes of the Economic Crisis" [1931] in The Causes of the Economic Crisis, pp. 155–81; and on Keynesian economics, see Mises, "Stones into Bread, The Keynesian Miracle" [1948], and "Lord Keynes and Say's Law" [1950] in Planning for Freedom, pp. 50–71; for a detailed comparison of the Austrian and Keynesian analyses of the causes and cures of the Great Depression, see Richard M. Ebeling, "The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run" in Richard M. Ebeling, ed. Human Action, A 50-Year Tribute (Hillsdale, MI: Hillsdale College Press, 2000), pp. 15–110.
Thus Mises's conclusion from his analysis of socialism and interventionism, including monetary manipulation, was that there is no alternative to a thoroughgoing, unhampered, free-market economy — and one that included a market-based monetary system such as the gold standard.See Richard M. Ebeling, Austrian Economics and the Political Economy of Freedom (Northampton, MA: Edward Elgar, 2003), ch. 5: "Ludwig von Mises and the Gold Standard," pp. 136–58. Both socialism and interventionism are, respectively, unworkable and unstable substitutes for capitalism. The classical liberal defends private property and the free-market economy, he insisted, precisely because it is the only system of social cooperation that provides wide latitude for freedom and personal choice to all members of society, while generating the institutional means for coordinating the actions of billions of people in the most economically rational manner.
The apparent "triumph" of capitalism over collectivism, following the demise of the Soviet bloc in the 1990s, was mostly an illusion. Governments in the Western world did not reduce their size or intrusiveness in the economic affairs of their citizens. The interventionist welfare state has remained alive and well.On some of the reasons why capitalism has not triumphed, in spite of the failure of socialist central planning everywhere it has been tried, see Richard M. Ebeling, "Is the 'Specter of Communism' Still Haunting the World?" Notes from FEE (March 2006).
But the heart of the interventionist system is government control of the monetary system — indeed, it has remained an untouched system of monetary central planning through the institution of central banking. During the Second World War, the German free-market economist Gustav Stolper, then in exile in America from war-torn Europe, pointed out that,
Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system…. A "free" capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits governmental interference to go. Money control is the supreme and most comprehensive of all government controls short of expropriation.
Stolper went on to say,
there is today only one prominent liberal theorist consistent enough to advocate free, uncontrolled competition among the banks in the creation of money. Mises, whose intellectual influence on modern neo-liberalism was very strong, has hardly made one proselyte for that extreme conclusion.Gustav Stolper, This Age of Fable: The Political and Economic World We Live In (New York: Reynal & Hitchcock, 1942), pp. 7–8.
Fortunately, over the last thirty years, Mises's analysis and defense of gold-backed, private competitive banking in place of government-monopoly central banking has finally begun to win over a growing number of Austrian and other advocates.
Monetary manipulation by central banks inserts one of the most disruptive distortions into the process of economic calculation. Interest rates — which are meant to inform market participants about the availability of savings relative to the demands for investment expenditures, and which facilitate the intertemporal coordination of resource use over periods of time relative to the demands of income earners for consumption in the present versus the future — send out misinformation to both producers and consumers under the pressure of monetary expansion.
In the wake of Federal Reserve monetary mischief, once again, over the last several years, the imbalances and distortions generated by monetary policies have resulted in the current economic crisis. And now, in the face of the inescapable need for the rebalancing and recoordination of misdirected resources and malinvested capital, the "ghost of Keynes past" has been resurrected.
The focus on aggregate output and employment declines over the last year, which is guiding government policy, hides from view the underlying microeconomic relations that are at the core of the market process. How can the multitudes of market participants discern where and to what extent market errors have been made under the pressure of past monetary and interest-rate manipulations if the price system is not permitted to perform its job of telling the truth about the reality of supply and demand? That is, the degree to which resources have been misallocated and wrongly priced during the boom. Or the extent to which men, material, and savings-backed financial funds must realign themselves to restore a properly understood full-employment economy that has market-based sustainability.
"Contrary to both the Marxists and the Keynesians, Mises did not consider the fluctuations experienced over the business cycle to be an inherent and inescapable part of the free-market economy."How can people know what to do and where to do it in the social system of division of labor if the crucial tool of economic calculation is undermined by government bailouts, subsidies, price floors, capital-market interventions, and the continuing monetary manipulation that threatens further misdirections of capital and labor, and runs the danger of serious price inflation in the months and years ahead?
In the present economic crisis, the argument is constantly made that many banks are too big to fail, that depositors need to have their various types of bank accounts protected and guaranteed, and that the repercussions of allowing the financial markets to adjust to the postboom reality would be too harsh. Mises responded to these types of arguments in 1928, even before the Great Depression began, including a warning about what today is understood as "moral hazard," the danger of reinforcing the repetition of bad decisions by the government bailing out mistakes made in the market:
In any event, the practice of intervening for the benefit of banks, rendered insolvent by the crisis, and of the customers of these banks, has resulted in suspending the market forces which could serve to prevent a return of the expansion, in the form of a new boom, and the crisis which inevitably follows. If the banks emerge from the crisis unscathed, or only slightly weakened, what remains to restrain them from embarking once more on an attempt to reduce artificially the interest rate on loans and expand circulation credit? If the crisis were ruthlessly permitted to run its course, bringing about the destruction of enterprises which were unable to meet their obligations, then all entrepreneurs — not only banks but also other businessmen — would exhibit more caution in granting and using credit in the future. Instead, public opinion approves of giving assistance in the crisis. Then, no sooner is the worst over, than the banks are spurred on to a new expansion of circulation credit.Ludwig von Mises, "Monetary Stabilization and Cyclical Policy" [1928] in The Causes of the Economic Crisis, p. 127.
Just as there was a huge shift toward more and bigger government in the years leading up to Mises's writing of Human Action, so today we appear to be on the threshold of a similar expansion of governmental presence and domination of even more of social life, especially in health care, education, and the energy sector — as well as a much greater control over the financial and capital markets.
But where will all the money come from to fund this new gargantuan largess for expanded political paternalism? In the Austria of the interwar period of the 1920s and 1930s, Mises had witnessed and explained the consequences from unrestrained government spending that finally resulted in the "eating of the seed corn" — capital consumption.On Mises's writings as a policy analyst with the Vienna Chamber of Commerce in the interwar period, including his explanation of the consumption of capital in Austria due to monetary and fiscal policy, see Richard M. Ebeling, "The Economist as the Historian of Decline: Ludwig von Mises and Austria Between the Two World Wars" in Richard M. Ebeling, ed., Globalization: Will Freedom or World Government Dominate the International Marketplace? (Hillsdale, Michigan, Hillsdale College Press, 2002), pp. 1–68. Mises warned of this danger, too, in the pages of Human Action, and the fact that there must be a point at which the interventionist welfare state will have exhausted "the reserve fund" of accumulated wealth, after which the consumption of capital becomes the only basis upon which to continue to feed the fiscal demands of the redistributive stateMises Human Action, pp. 855–61. Those currently in political power in Washington seem hell-bent on bringing this about in the decades ahead.
When Friedrich A. Hayek reviewed the German-language predecessor to Human Action, shortly after it appeared in 1940, he emphasized its astonishingly unique qualities:
There appears to be a width of view and an intellectual spaciousness about the whole book that are much more like that of an eighteenth-century philosopher than that of a modern specialist. And yet, or perhaps because of this, one feels throughout much nearer reality, and is constantly recalled from the discussion of the technicalities to the consideration of the great problems of our time … It ranges from the most general philosophical problems raised by all scientific study of human action to the major problems of economic policy of our time … [T]he result is a really imposing unified system of a liberal social philosophy. It is here also, more than elsewhere, that the author's astounding knowledge of history as well as of the contemporary world helps most to illustrate his argument.F. A. Hayek, review of "Nationalökonomie: Theorie des Handelns and Wirtshaftens," Economic Journal (April 1941), pp. 125, 126, 127; reprinted in Peter Klein, ed., The Collected Works of F. A. Hayek, Vol. 4: The Fortunes of Liberalism, Essays on Austrian Economics and the Ideal of Freedom (Chicago: University of Chicago Press, 1992), pp. 149, 151, 152.
The years since the original appearance of Human Action in 1949 have done nothing to diminish the validity of Hayek's interpretation. Indeed, the social, political, and economic conditions of our world today give Ludwig von Mises's treatise a refreshing relevance matched by few other works written over the last century. That is what results in it being read by more and more people today, rather than simply being one of those many "classics" collecting dust on a shelf.
If enough people discover and rediscover the timeless truths in the pages of Human Action, the ideas of Ludwig von Mises may well assist us in stemming this growing tide toward an even larger leviathan state.
Why are diamonds, which are little more than decorative baubles, so much more valuable than water, without which we would die? The answer is that value is determined at the margin, meaning that we value not "diamonds" as a category compared to "water" as a category, but one more diamond compared to one more unit of water.
Water is super-abundant while diamonds are not; this is one reason why a diamond is so expensive while water is not. This also illustrates an important point about decision making. Instead of "setting priorities" and viewing things in terms of all-or-nothing decisions, we should look at trade-offs.
One of the most important principles of economics is that decisions are made at the margin, and one of the key problems in classical economics concerned the source of value. The law of diminishing marginal utility is a fundamental tenet of economics, and it is every bit as much a scientific law as the law of gravity (more so, perhaps, as it can be deduced from an axiom — man acts — that is self-evidently true). Marginal utility is not decreasing just because we assume it is. The law of marginal utility is an implication of the action axiom, not merely an ad hoc assumption.
The "utility" one derives from consuming a good or undertaking an activity is best understood as a set of wants that can be satisfied by employing means, not as the output of a function mapping from an agent's consumption set into the real number line. Following this definition, the "marginal utility" of employing another unit of a homogeneous supply of goods or services must be understood as the additional set of wants that can be satisfied by employing that marginal unit. From the fundamental axiom of praxeology — that "human action is the use of means to arrive at preferred ends"[1] — we can see that the marginal utility of employing unit n is preferred to the marginal utility of employing unit n+1; in the language of mainstream economics, marginal utility must be decreasing.
In his classic article "Toward a Reconstruction of Utility and Welfare Economics" and in his treatise Man, Economy, and State, Murray Rothbard asks us to consider eggs as an example. (I alter the example slightly here.) Consider Joe, who has a wife, a daughter, a dog, and the following value scale:
Feed his family with cake
Feed his daughter with scrambled egg
Feed his wife with scrambled egg
Feed himself with scrambled egg
Feed his dog with scrambled egg
Suppose he needs four eggs to bake a cake. With his first egg, he will feed his daughter because he prefers this to all other sets of wants he can satisfy with one egg. With his second egg, he will feed his wife, and with his third egg, he will feed himself.
Now, suppose Joe purchases a fourth egg. This leads us to a possible misconception: one might be tempted to look at the situation and exclaim, "Aha! With the fourth egg, Joe can feed his family with cake, which he clearly prefers to feeding them with scrambled eggs! Clearly, then, the marginal utility of the fourth egg is higher than the marginal utility of the third egg; therefore, marginal utility is increasing!"
This line of reasoning neglects a crucial point: the fourth egg can only be used to bake a cake in the presence of the first three eggs. Since "marginal utility" is a concept that can only be applied to homogeneous units of a given supply, "one egg" is no longer the relevant unit of analysis. The homogeneity of units is determined by the set of wants that can be satisfied with a unit of a good; in this case, the relevant unit of analysis becomes "1 unit=a set of four eggs." Thus, Joe's value scale may now be
Feed his family with cake
Feed his family with scrambled eggs
He will clearly choose to feed his family with cake and, should he happen upon a second set of four eggs, scrambled eggs as well.
The astute reader will notice that the value scales listed above were listed according to the wants satisfied by the marginal unit of a given good, not by the good itself after the fashion of Rothbard in "Toward A Reconstruction." Our hero Joe didn't prefer the first egg to the second in and of itself; he preferred feeding his daughter to feeding his wife. If only one egg is available, he must choose between competing ends, and the end that satisfies him most is feeding his daughter.
It should be evident that the law of marginal utility should be accorded just that epistemological status: a law. As Rothbard explains (and as Carl Menger and others showed before him), this theorem, which can be deduced from the action axiom, is more than merely empirically demonstrable: it is irrefutably true.
Notes[1] Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics."
Imagine that you and a friend are sitting on a bench across the street from a construction site. In quick succession, two trucks arrive and dump a pile of sand, one pile next to the other. Moments later, a bulldozer appears and pushes the two piles together. After some thought, your friend has an "a-ha" moment.
"Interesting," he notes, channeling Jacques Derrida, "one and one are no longer two."
His comment slowly invades your thoughts. Finally, you respond, "What did you just say?"
Repeating his statement, only with more certainty and strength, "One and one are no longer two, under all circumstances. See that pile of sand. Before it was two piles of sand, and now it's one. So, one pile plus another pile is just one pile. One and one are no longer two."
Floored, you stare at your friend hoping to find a sign of jest.
He continues, "This isn't the first time that fundamentals have changed. During this past year, we've witnessed the fundamentals of economics — you know, supply and demand — rocked by oil speculators. It is no longer supply and demand setting the price, it's now the speculator. The fundamentals changed. Times have changed. We are living in a different world."
Taking a deep breath, you slowly note, "Fundamentals are just that: fundamental. By definition, they can't change, regardless of the time or place."
"But they do, and they did," he replies.
Throwing aside the linguistic deconstruction of a pile of sand, the pronouncement "This is the dawn of a new economy, an economy where scarcity and supply and demand are no longer constraints," is as cyclical as our fiat-driven economy. And, in the face of the history of such pronouncements, many folks still believe that the fundamentals of the market can change under certain circumstances.
Speculation in the Oil MarketSpeculation can change the market price if and only if speculation causes a change in supply or demand. A futures price driven by speculation may induce producers to modify the amount produced. The price may also encourage speculators to buy current supply for later sale or induce producers to exercise their demand to hold. In both cases, the actions can cause the spot supply curve to be other than it would have been in the absence of speculation — a change in supply that is covered by the fundamentals of economics.
Additionally, there are instances where oil speculation can change the spot demand curve. Suppose company X wants to expand a product line that uses oil as a primary factor of production. Seeing the price of oil futures rise may lead X to delay its planned expansion. Or X may plan to reduce production — and, hence, consumption of oil — based on the price of the futures. But, again, the changes to the demand curve are covered by the fundamentals of economics.
But, speculation per se is not the issue here. The issue is not whether speculators manipulated the spot price of oil;[1] the issue is the insistence that the fundamentals of economics can change. Once such a position is accepted, further analysis is subject to political propaganda and nonsense. Once the foundations of economics are removed, any idea can be assumed true.
Austrians to the RescueThe Austrian school is the only school of thought built on a solid foundation. The Austrian school's a priori knowledge is apodictically true, and not subject to time or place. Contrast that with the other schools of thought, schools that try to define knowledge based on observed data.
In these schools, any observed trend or correlation trumps the fundamentals. If the observed data appear to refute a fundamental law, the observation is reaffirmed and the law suspended. But such an epistemology is nothing more than poking in the dark — or poking in the data.
Outside of deconstructed linguistics, no one is going to accept the dawning of a utopia where one plus one is one. We turn our backs on such nonsense. Yet when someone shows correlated data implying a fracture in the law of supply or demand, many folks accept the conclusion.
The FilterThese are the questions to ask: What's your epistemological filter? Do the fundamentals rule? Or do the data rule?
When it's the data that rule, all things can be proposed, but are not all possible. When it's the fundamentals, all things can be understood, even when not observed.
ConclusionWe have not entered a new age — a utopia of sorts — and we never will. Yet we continue to hear the claim that this time things are different; this time the new age has dawned. However, the proclaimed utopia never arrives — it can't. Scarcity and the law of supply and demand can not be waved away.
Instead, the vision of each utopia is destroyed in a blaze of capital destruction. The new economics driven by tech stocks: ashes. The world of exponentially increasing property values: ashes. The savior of credit derived exclusively from notations on the books of the Federal Reserve: quickly burning to ash. And, of course, the list goes on and on.
While playing with piles of sand can be a fun mental exercise, the fundamentals of math are not affected. The same is true with economic data or intervention. The fundamentals of the market rule, regardless of the observation or desire.
Note[1] I will let Robert Murphy explain speculation and the current market for oil.
The Pricing ProcessValuation and AppraisementThe Prices of the Goods of Higher OrdersCost AccountingLogical Catallactics Versus Mathematical Catallactics[This article is excerpted from chapter 16 of Human Action. Robert Murphy has written a study guide for this chapter, available in HTML and PDF.This article follows "Chapter XV. The Market, Part 2."]
- The Pricing ProcessIn an occasional act of barter in which men who ordinarily do not resort to trading with other people exchange goods ordinarily not negotiated, the ratio of exchange is determined only within broad margins. Catallactics, the theory of exchange ratios and prices, cannot determine at what point within these margins the concrete ratio will be established. All that it can assert with regard to such exchanges is that they can be effected only if each party values what he receives more highly than what he gives away.
The recurrence of individual acts of exchange generates the market step by step with the evolution of the division of labor within a society based on private property. As it becomes a rule to produce for other people's consumption, the members of society must sell and buy. The multiplication of the acts of exchange and the increase in the number of people offering or asking for the same commodities narrow the margins between the valuations of the parties. Indirect exchange and its perfection through the use of money divide the transactions into two different parts: sale and purchase. What in the eyes of one party is a sale, is for the other party a purchase. The divisibility of money, unlimited for all practical purposes, makes it possible to determine the exchange ratios with nicety. The exchange ratios are now as a rule money prices. They are determined between extremely narrow margins: the valuations on the one hand of the marginal buyer and those of the marginal offerer who abstains from selling, and the valuations on the other hand of the marginal seller and those of the marginal potential buyer who abstains from buying.
The concatenation of the market is an outcome of the activities of entrepreneurs, promoters, speculators, and dealers in futures and in arbitrage. It has been asserted that catallactics is based on the assumption — contrary to reality — that all parties are provided with perfect knowledge concerning the market data and are therefore in a position to take best advantage of the most favorable opportunities for buying and selling. It is true that some economists really believed that such an assumption is implied in the theory of prices. These authors not only failed to realize in what respects a world peopled with men perfectly equal in knowledge and foresight would differ from the real world which all economists wanted to interpret in developing their theories; they also erred in being unaware of the fact that they themselves did not resort to such an assumption in their own treatment of prices.
In an economic system in which every actor is in a position to recognize correctly the market situation with the same degree of insight, the adjustment of prices to every change in the data would be achieved at one stroke. It is impossible to imagine such uniformity in the correct cognition and appraisal of changes in data except by the intercession of superhuman agencies. We would have to assume that every man is approached by an angel informing him of the change in data which has occurred and advising him how to adjust his own conduct in the most adequate way to this change. Certainly the market that catallactics deals with is filled with people who are to different degrees aware of the changes in data and who, even if they have the same information, appraise it differently. The operation of the market reflects the fact that changes in the data are first perceived only by a few people and that different men draw different conclusions in appraising their effects. The more enterprising and brighter individuals take the lead; others follow later. The shrewder individuals appreciate conditions more correctly than the less intelligent and therefore succeed better in their actions. Economists must never disregard in their reasoning the fact that the innate and acquired inequality of men differentiates their adjustment to the conditions of their environment.
The driving force of the market process is provided neither by the consumers nor by the owners of the means of production — land, capital goods, and labor — but by the promoting and speculating entrepreneurs. These are people intent upon profiting by taking advantage of differences in prices. Quicker of apprehension and farther-sighted than other men, they look around for sources of profit. They buy where and when they deem prices too low, and they sell where and when they deem prices too high. They approach the owners of the factors of production, and their competition sends the prices of these factors up to the limit corresponding to their anticipation of the future prices of the products. They approach the consumers, and their competition forces prices of consumers' goods down to the point at which the whole supply can be sold. Profit-seeking speculation is the driving force of the market as it is the driving force of production.
On the market, agitation never stops. The imaginary construction of an evenly rotating economy has no counterpart in reality. There can never emerge a state of affairs in which the sum of the prices of the complementary factors of production, due allowance being made for time preference, equals the prices of the products and no further changes are to be expected. There are always profits to be earned by somebody. The speculators are always enticed by the expectation of profit.
The imaginary construction of the evenly rotating economy is a mental tool for comprehension of entrepreneurial profit and loss. It is, to be sure, not a design for comprehension of the pricing process. The final prices corresponding to this imaginary conception are by no means identical with the market prices. The activities of the entrepreneurs or of any other actors on the economic scene are not guided by consideration of any such things as equilibrium prices and the evenly rotating economy. The entrepreneurs take into account anticipated future prices, not final prices or equilibrium prices. They discover discrepancies between the height of the prices of the complementary factors of production and the anticipated future prices of the products, and they are intent upon taking advantage of such discrepancies. These endeavors of the entrepreneurs would finally result in the emergence of the evenly rotating economy if no further changes in the data were to appear.
The operation of the entrepreneurs brings about a tendency toward an equalization of prices for the same goods in all subdivisions of the market, due allowance being made for the cost of transportation and the time absorbed by it. Differences in prices which are not merely transitory and bound to be wiped out by entrepreneurial action are always the outcome of particular obstacles obstructing the inherent tendency toward equalization. Some check prevents profit-seeking business from interfering. An observer not sufficiently familiar with actual commercial conditions is often at a loss to recognize the institutional barrier hindering such equalization. But the merchants concerned always know what makes it impossible for them to take advantage of such differences.
Statisticians treat this problem too lightly. When they have discovered differences in the wholesale price of a commodity between two cities or countries, not entirely accounted for by the cost of transportation, tariffs, and excise duties, they acquiesce in asserting that the purchasing power of money and the "level" of prices are different.Sometimes the difference in price as established by price statistics is apparent only. The price quotations may refer to various qualities of the article concerned. Or they may, complying with the local usages of commerce, mean different things. They may, for instance, include or not include packing charges; they may refer to cash payment or to payment at a later date; and so on. On the basis of such statements people draft programs to remove these differences by monetary measures. However, the root cause of these differences cannot lie in monetary conditions. If prices in both countries are quoted in terms of the same kind of money, it is necessary to answer the question as to what prevents businessmen from embarking upon dealings which are bound to make price differences disappear. Things are essentially the same if the prices are expressed in terms of different kinds of money. For the mutual exchange ratio between various kinds of money tends toward a point at which there is no further margin left to profitable exploitation of differences in commodity prices. Whenever differences in commodity prices between various places persist, it is a task for economic history and descriptive economics to establish what institutional barriers hinder the execution of transactions which must result in the equalization of prices.
All the prices we know are past prices. They are facts of economic history. In speaking of present prices we imply that the prices of the immediate future will not differ from those of the immediate past. However, all that is asserted with regard to future prices is merely an outcome of the understanding of future events.
The experience of economic history never tells us more than that at a definite date and definite place two parties A and B traded a definite quantity of the commodity a against a definite number of units of the money p. In speaking of such acts of buying and selling as the market price of a, we are guided by a theoretical insight, deduced from an aprioristic starting point. This is the insight that, in the absence of particular factors making for price differences, the prices paid at the same time and the same place for equal quantities of the same commodity tend toward equalization, viz., a final price. But the actual market prices never reach this final state. The various market prices about which we can get information were determined under different conditions. It is impermissible to confuse averages computed from them with the final prices.
Only with regard to fungible commodities negotiated on organized stock or commodity exchanges is it permissible, in comparing prices, to assume that they refer to the same quality. Apart from such prices negotiated in exchanges and from prices of commodities the homogeneity of which can be precisely established by technological analysis, it is a serious blunder to disregard differences in the quality of the commodity in question. Even in the wholesale trade of raw textiles the diversity of the articles plays the main role. A comparison of prices of consumers' goods in mainly misleading on account of the difference in quality. The quantity traded in one transaction too is relevant in the determination of the price paid per unit. Shares of a corporation sold in one large lot bring a different price than those sold in several small lots.
It is necessary to emphasize these facts again and again because it is customary nowadays to play off the statistical elaboration of price data against the theory of prices. However, the statistics of prices is altogether questionable. Its foundations are precarious because circumstances for the most part do not permit the comparison of the various data, their linking together in series, and the computation of averages. Full of zeal to embark upon mathematical operations, the statisticians yield to the temptation of disregarding the incomparability of the data available. The information that a certain firm sold at a definite date a definite type of shoes for six dollars a pair relates a fact of economic history. A study of the behavior of shoe prices from 1923 to 1939 is conjectural, however sophisticated the methods applied may be.
Catallactics shows that entrepreneurial activities tend toward an abolition of price differences not caused by the costs of transportation and trade barriers. No experience has ever contradicted this theorem. The results obtained by an arbitrary identification of unequal things are irrelevant.
- Valuation and AppraisementThe ultimate source of the determination of prices is the value judgments of the consumers. Prices are the outcome of the valuation preferring a to b. They are social phenomena as they are brought about by the interplay of the valuations of all individuals participating in the operation of the market. Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of the market prices. But the larger the market is, the smaller is the weight of each individual's contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct.
The valuations which result in determination of definite prices are different. Each party attaches a higher value to the good he receives than to the good he gives away. The exchange ratio, the price, is not the product of an equality of valuation, but, on the contrary, the product of a discrepancy in valuation.
Appraisement must be clearly distinguished from valuation. Appraisement in no way depends upon the subjective valuation of the man who appraises. He is not intent upon establishing the subjective use-value of the good concerned, but upon anticipating the prices which the market will determine. Valuation is a value judgment expressive of a difference in value. Appraisement is the anticipation of an expected fact. It aims at establishing what prices will be paid on the market for a particular commodity or what amount of money will be required for the purchase of a definite commodity.
Valuation and appraisement are, however, closely connected. The valuations of an autarkic husbandman directly compare the weight he attaches to different means for the removal of uneasiness. The valuations of a man buying and selling on the market must not disregard the structure of market prices; they depend upon appraisement. In order to know the meaning of a price one must know the purchasing power of the amount of money concerned. It is necessary by and large to be familiar with the prices of those goods which one would like to acquire and to form on the ground of such knowledge an opinion about their future prices. If an individual speaks of the costs incurred by the purchase of some goods already acquired or to be incurred by the purchase of goods he plans to acquire, he expresses these costs in terms of money. But this amount of money represents in his eyes the degree of satisfaction he could obtain by employing it for the acquisition of other goods. The valuation makes a detour: it goes via the appraisement of the structure of market prices; but it always aims finally at the comparison of alternative modes for the removal of felt uneasiness.
It is ultimately always the subjective value judgments of individuals that determine the formation of prices. Catallactics in conceiving the pricing process necessarily reverts to the fundamental category of action, the preference given to a over b. In view of popular errors it is expedient to emphasize that catallactics deals with the real prices as they are paid in definite transactions and not with imaginary prices. The concept of final prices is merely a mental tool for the grasp of a particular problem, the emergence of entrepreneurial profit and loss. The concept of a "just" or "fair" price is devoid of any scientific meaning; it is a disguise for wishes, a striving for a state of affairs different from reality. Market prices are entirely determined by the value judgments of men as they really act.
If one says that prices tend toward a point at which total demand is equal to total supply, one resorts to another mode of expressing the same concatenation of phenomena. Demand and supply are the outcome of the conduct of those buying and selling. If, other things being equal, supply increases, prices must drop. At the previous price all those ready to pay this price could buy the quantity they wanted to buy. If the supply increases, they must buy larger quantities or other people who did not buy before must become interested in buying. This can only be attained at a lower price.
It is possible to visualize this interaction by drawing two curves, the demand curve and the supply curve, whose intersection shows the price. It is no less possible to express it in mathematical symbols. But it is necessary to comprehend that such pictorial or mathematical modes of representation do not affect the essence of our interpretation and that they do not add a whit to our insight. Furthermore it is important to realize that we do not have any knowledge or experience concerning the shape of such curves. Always, what we know is only market prices — that is, not the curves but only a point which we interpret as the intersection of two hypothetical curves. The drawing of such curves may prove expedient in visualizing the problems for undergraduates. For the real tasks of catallactics they are mere byplay.
- The Prices of the Goods of Higher OrdersThe market process is coherent and indivisible. It is an indissoluble intertwinement of actions and reactions, of moves and countermoves. But the insufficiency of our mental abilities enjoins upon us the necessity of dividing it into parts and analyzing each of these parts separately. In resorting to such artificial cleavages we must never forget that the seemingly autonomous existence of these parts is an imaginary makeshift of our minds. They are only parts, that is, they cannot even be thought of as existing outside the structure of which they are parts.
The prices of the goods of higher orders are ultimately determined by the prices of the goods of the first or lowest order, that is, the consumers' goods. As a consequence of this dependence they are ultimately determined by the subjective valuations of all members of the market society. It is, however, important to realize that we are faced with a connection of prices, not with a connection of valuations. The prices of the complementary factors of production are conditioned by the prices of the consumers' goods. The factors of production are appraised with regard to the prices of the products, and from this appraisement their prices emerge. Not the valuations but the appraisement are transferred from the goods of the first order to those of higher orders. The prices of the consumers' goods engender the actions resulting in the determination of the prices of the factors of production. These prices are primarily connected only with the prices of the consumers' goods. With the valuations of the individuals they are only indirectly connected, viz., through the intermediary of the prices of the consumers' goods, the products of their joint employment.
The tasks incumbent upon the theory of the prices of factors of production are to be solved by the same methods which are employed for treatment of the prices of consumers' goods. We conceive the operation of the market of consumer's goods in a twofold way. We think on the one hand of a state of affairs which leads to acts of exchange; the situation is such that the uneasiness of various individuals can be removed to some extent because various people value the same goods in a different way. On the other hand, we think of a situation in which no further acts of exchange can happen because no actor expects any further improvement of his satisfaction by further acts of exchange. We proceed in the same way in comprehending the formation of the prices of factors of production. The operation of this market is actuated and kept in motion by the exertion of the promoting entrepreneurs, eager to profit from differences in the market prices of the factors of production and the expected prices of the products. The operation of this market would stop if a situation were ever to emerge in which the sum of the prices of the complementary factors of production — but for interest — equaled the prices of the products and nobody believed that further price changes were to be expected. Thus we have described the process adequately and completely by pointing out, positively, what actuates it and, negatively, what would suspend its motion. The main importance is to be attached to the positive description. The negative description resulting in the imaginary constructions of the final price and the evenly rotating economy is merely auxiliary. For the task is not the treatment of imaginary concepts, which never appear in life and action, but the treatment of the market prices at which the goods of higher orders are really bought and sold.
This method we owe to Gossen, Carl Menger, and Böhm-Bawerk. Its main merit is that it implies the cognition that we are faced with a phenomenon of price determination inextricably linked with the market process. It distinguishes between two things: (a) the direct valuation of the factors of production which attaches the value of the product to the total complex of the complementary factors of production, and (b) the prices of the single factors of production which are formed on the market as the resultant of the concurring actions of competing highest bidders. Valuation as it can be practiced by an isolated actor (Robinson Crusoe or a socialist board of production management) can never result in a determination of such a thing as quotas of value. Valuation can only arrange goods in scales of preference. It can never attach to a good something that could be called a quantity or magnitude of value. It would be absurd to speak of a sum of valuations or values. It is permissible to declare that, due allowance being made for time preference, the value attached to a product is equal to the value of the total complex of complementary factors of production. But it would be nonsensical to assert that the value attached to a product is equal to the "sum" of the values attached to the various complementary factors of production. One cannot add up values or valuations. One can add up prices expressed in terms of money, but not scales of preference. One cannot divide values or single out quotas of them. A value judgment never consists in anything other than preferring a to b.
The process of value imputation does not result in derivation of the value of the single productive agents from the value of their joint product. It does not bring about results which could serve as elements of economic calculation. It is only the market that, in establishing prices for each factor of production, creates the conditions required for economic calculation. Economic calculation always deals with prices, never with values.
The market determines prices of factors of production in the same way in which it determines prices of consumers' goods. The market process is an interaction of men deliberately striving after the best possible removal of dissatisfaction. It is impossible to think away or to eliminate from the market process the men actuating its operation. One cannot deal with the market of consumers' goods and disregard the actions of the consumers. One cannot deal with the market of the goods of higher orders while disregarding the actions of the entrepreneurs and the fact that the use of money is essential in their transactions. There is nothing automatic or mechanical in the operation of the market. The entrepreneurs, eager to earn profits, appear as bidders at an auction, as it were, in which the owners of the factors of production put up for sale land, capital goods, and labor. The entrepreneurs are eager to outdo one another by bidding higher prices than their rivals. Their offers are limited on the one hand by their anticipation of future prices of the products and on the other hand by the necessity to snatch the factors of production away from the hands of other entrepreneurs competing with them.
The entrepreneur is the agency that prevents the persistence of a state of production unsuitable to fill the most urgent wants of the consumers in the cheapest way. All people are anxious for the best possible satisfaction of their wants and are in this sense striving after the highest profit they can reap. The mentality of the promoters, speculators, and entrepreneurs is not different from that of their fellow men. They are merely superior to the masses in mental power and energy. They are the leaders on the way toward material progress. They are the first to understand that there is a discrepancy between what is done and what could be done. They guess what the consumers would like to have and are intent upon providing them with these things. In the pursuit of such plans they bid higher prices for some factors of production and lower the prices of other factors of production by restricting their demand for them. In supplying the market with those consumers' goods in the sale of which the highest profits can be earned, they create a tendency toward a fall in their prices. In restricting the output of those consumers' goods the production of which does not offer chances for reaping profit, they bring about a tendency toward a rise in their prices. All these transformations go on ceaselessly and could stop only if the unrealizable conditions of the evenly rotating economy and of static equilibrium were to be attained.
In drafting their plans, the entrepreneurs look first at the prices of the immediate past, which are mistakenly called present prices. Of course, the entrepreneurs never make these prices enter into their calculations without paying regard to anticipated changes. The prices of the immediate past are for them only the starting point of deliberations leading to forecasts of future prices. The prices of the past do not influence the determination of future prices. It is, on the contrary, the anticipation of future prices of the products that determines the state of prices of the complementary factors of production. The determination of prices has, as far as the mutual exchange ratios between various commodities are concerned,It is different with regard to the mutual exchange ratios between money and the vendible commodities and services. Cf. below, pp. 410–411. no direct causal relation whatever with the prices of the past. The allocation of the nonconvertible factors of production among the various branches of productionThe problem of the nonconvertible capital goods is dealt with below, pp. 503–509. and the amount of capital goods available for future production are historical magnitudes; in this regard the past is instrumental in shaping the course of future production and in affecting the prices of the future. But directly the prices of the factors of production are determined exclusively by the anticipation of future prices of the products. The fact that yesterday people valued and appraised commodities in a different way is irrelevant. The consumers do not care about the investments made with regard to past market conditions and do not bother about the vested interests of entrepreneurs, capitalists, landowners, and workers, who may be hurt by changes in the structure of prices. Such sentiments play no role in the formation of prices. (It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference.) The prices of the past are for the entrepreneur, the shaper of future production, merely a mental tool. The entrepreneurs do not construct afresh every day a radically new structure of prices or allocate anew the factors of production to the various branches of industry. They merely transform what the past has transmitted in better adapting it to the altered conditions. How much of the previous conditions they preserve and how much they change depends on the extent to which the data have changed.
The economic process is a continuous interplay of production and consumption. Today's activities are linked with those of the past through the technological knowledge at hand, the amount and the quality of the capital goods available, and the distribution of the ownership of these goods among various individuals. They are linked with the future through the very essence of human action; action is always directed toward the improvement of future conditions. In order to see his way in the unknown and uncertain future man has within his reach only two aids: experience of past events and his faculty of understanding. Knowledge about past prices is a part of this experience and at the same time the starting point of understanding the future.
If the memory of all prices of the past were to fade away, the pricing process would become more troublesome, but not impossible as far as the mutual exchange ratios between various commodities are concerned. It would be harder for the entrepreneurs to adjust production to the demand of the public, but it could be done nonetheless. It would be necessary for them to assemble anew all the data they need as the basis of their operations. They would not avoid mistakes which they now evade on account of experience at their disposal. Price fluctuations would be more violent at the beginning; factors of production would be wasted; want satisfaction would be impaired. But finally, having paid dearly, people would again have acquired the experience needed for a smooth working of the market process.
The essential fact is that it is the competition of profit-seeking entrepreneurs that does not tolerate the preservation of false prices of the factors of production. The activities of the entrepreneurs are the element that would bring about the unrealizable state of the evenly rotating economy if no further changes were to occur. In the world-embracing public sale called the market, they are the bidders for the factors of production. In bidding, they are the mandataries of the consumers, as it were. Each entrepreneur represents a different aspect of the consumers' wants, either a different commodity or another way of producing the same commodity. The competition among the entrepreneurs is ultimately a competition among the various possibilities open to men to remove their uneasiness as far as possible by the acquisition of consumers' goods. The decisions of the consumers to buy one commodity and to postpone buying another determine the prices of factors of production required for manufacturing these commodities. The competition between the entrepreneurs reflects the prices of consumers' goods in the formation of the prices of the factors of production. It reflects in the external world the conflict which the inexorable scarcity of the factors of production brings about in the soul of each individual. It makes effective the subsumed decisions of the consumers as to what purpose the nonspecific factors should be used for and to what extent the specific factors of production should be used.
The pricing process is a social process. It is consummated by an interaction of all members of the society. All collaborate and cooperate, each in the particular role he has chosen for himself in the framework of the division of labor. Competing in cooperation and cooperating in competition, all people are instrumental in bringing about the result, viz., the price structure of the market, the allocation of the factors of production to the various lines of want satisfaction, and the determination of the share of each individual. These three events are not three different matters. They are only different aspects of one indivisible phenomenon which our analytical scrutiny separates into three parts. In the market process they are accomplished uno actu. Only people prepossessed by socialist leanings who cannot free themselves from longing glances at socialist methods speak of three different processes in dealing with the market phenomena: the determination of prices, the direction of productive efforts, and distribution.
A Limitation on the Pricing of Factors of ProductionThe process which makes the prices of the factors of production spring from the prices of products can achieve its results only if, of the complementary factors not replaceable by substitutes, not more than one is of absolutely specific character, that is, is not suitable for any other employment. If the production of a product requires two or more absolutely specific factors, only a cumulative price can be assigned to them. If all factors of production were absolutely specific, the pricing process would not achieve more than such cumulative prices. It would accomplish nothing more than statements like this: as combining 3 a and 5 b produces one unit of p, 3a and 5b together are equal to 1p and the final price of 3a+5b is — due allowance being made for time preference — equal to the final price of 1p. As entrepreneurs who want to use a and b for purposes other than the production of p do not bid for them, a more detailed price determination is impossible. Only if a demand emerges for a (or for b) on the part of entrepreneurs who want to employ a (or b) for other purposes, does competition between them and the entrepreneurs planning the production of p arise and a price for a (or for b) comes into existence, the height of which determines also the price of b (or a).
"In drafting their plans, the entrepreneurs look first at the prices of the immediate past, which are mistakenly called present prices."A world in which all the factors of production are absolutely specific could manage its affairs with such cumulative prices. In such a world there would not exist the problem of how to allocate the means of production to various branches of want satisfaction. In our real world, things are different. There are many scarce means of production which can be employed for various tasks. There the economic problem is to employ these factors in such a way that no unit of them should be used for the satisfaction of a less urgent need if this employment prevents the satisfaction of a more urgent need. It is this that the market solves in determining the prices of the factors of production. The social service rendered by this solution is not in the least impaired by the fact that, for factors which can be employed only cumulatively, no other than cumulative prices are determined.
Factors of production which can be used in the same ratio of combination for the production of various commodities but do not allow of any other use, are to be considered as absolutely specific factors. They are absolutely specific with regard to the production of an intermediary product which can be utilized for various purposes. The price of this intermediary product can be assigned to them cumulatively only. Whether this intermediary product can be directly apperceived by the senses or whether it is merely the invisible and intangible outcome of their joint employment makes no difference.
- Cost AccountingIn the calculation of the entrepreneur, costs are the amount of money required for the procurement of the factors of production.
The entrepreneur is intent upon embarking upon those business projects from which he expects the highest surplus of proceeds over costs and upon shunning projects from which he expects a lower amount of profit or even a loss. In doing this, he adjusts his effort to the best possible satisfaction of the needs of the consumers. The fact that a project is not profitable because costs are higher than proceeds is the outcome of the fact that there is a more useful employment available for the factors of production required. There are other products in the purchase of which the consumers are prepared to allow for the prices of these factors of production. But the consumers are not prepared to pay these prices in buying the commodity the production of which is not profitable.
Cost accounting is affected by the fact that the two following conditions are not always present:
First, every increase in the quantity of factors expended for the production of a consumers' good increases its power to remove uneasiness.
Second, every increase in the quantity of a consumers' good requires a proportional increase in the expenditure of factors of production or even a more-than-proportional increase in their expenditure.
If both these conditions were always and without any exception fulfilled, every increment z expended for increasing the quantity m of a commodity g would be employed for the satisfaction of a need viewed as less urgent than the least-urgent need already satisfied by the quantity m available previously. At the same time, the increment z would require the employment of factors of production to be withdrawn from the satisfaction of other needs considered as more pressing than those needs whose satisfaction was foregone in order to produce the marginal unit of m. On the one hand, the marginal value of the satisfaction derived from the increase in the quantity available of g would drop. On the other hand, the costs required for the production of additional quantities of g would increase in marginal disutility: factors of production would be withheld from employments in which they could satisfy more urgent needs. Production must stop at the point at which the marginal utility of the increment no longer compensates for the marginal increase in the disutility of costs.
"It is precisely the fact that the market does not respect vested interests that makes the people concerned ask for government interference."Now these two conditions are present very often, but not generally without exception. There exist many commodities of all orders of goods whose physical structure is not homogeneous and which are therefore not perfectly divisible.
It would, of course, be possible to conjure away the deviation from the first condition mentioned above by a sophisticated play on words. One could say, half a motorcar is not a motorcar. If one adds to half a motorcar a quarter of a motorcar, one does not increase the "quantity" available; only the perfection of the process of production which turns out a complete car produces a unit and an increase in the "quantity" available. However, such an interpretation misses the point. The problem we must face is that not every increase in expenditure increases proportionately the objective use-value, the physical power of a thing to render a definite service. The various increments in expenditure bring about different results. There are increments the expenditure of which remains useless if no further increments of a definite quantity are added.
On the other hand — and this is the deviation from the second condition — an increase in physical output does not always require a proportionate increase in expenditure or even any additional expenditure. It may happen that costs do not rise at all or that their rise increases output more than proportionately. For many means of production are not homogeneous either and not perfectly divisible. This is the phenomenon known to business as the superiority of big-scale production. The economists speak of the law of increasing returns or decreasing costs.
We consider — as case A — a state of affairs in which all factors of production are not perfectly divisible and in which full utilization of the productive services rendered by every further indivisible element of each factor requires full utilization of the further indivisible elements of every other of the complementary factors. Then in every aggregate of productive agents, each of the assembled elements — every machine, every worker, every piece of raw material — can be fully utilized only if all the productive services of the other elements are fully employed too. Within these limits the production of a part of the maximum output attainable does not require a higher expenditure than the production of the highest possible output. We may also say that the minimum-size aggregate always produces the same quantity of products; it is impossible to produce a smaller quantity of products even if there is no use for a part of it.
We consider — as case B — a state of affairs in which one group of the productive agents (p) is for all practical purposes perfectly divisible. On the other hand, the imperfectly divisible agents can be divided in such a way that full utilization of the services rendered by each further indivisible part of one agent requires full utilization of the further indivisible parts of the other imperfectly divisible complementary factors. Then increasing production of an aggregate of further indivisible factors from a partial to a more complete utilization of their productive capacity requires merely an increase in the quantity of p, the perfectly divisible factors. However, one must guard oneself against the fallacy that this necessarily implies a decrease in the average cost of production. It is true that within the aggregate of imperfectly divisible factors each of them is now better utilized, that therefore costs of production as far as they are caused by the cooperation of these factors remain unchanged, and that the quotas falling to a unit of output are decreasing. But on the other hand, an increase in the employment of the perfectly divisible factors of production can be attained only by withdrawing them from other employments. The value of these other employments increases, other things being equal, with their shrinking; the price of these perfectly divisible factors tends to rise as more of them are used for the better utilization of the productive capacity of the aggregate of the not-further-divisible factors in question. One must not limit the consideration of our problem to the case in which the additional quantity of p is withdrawn from other enterprises producing the same product in a less efficient way and forces these enterprises to restrict their output. It is obvious that in this case — competition between a more and a less efficient enterprise producing the same article out of the same raw materials — the average cost of production is decreasing in the expanding plant. A more general scrutiny of the problem leads to a different result. If the units of p are withdrawn from other employments in which they would have been utilized for the production of other articles, there emerges a tendency toward an increase in the price of these units. This tendency may be compensated by accidental tendencies operating in the opposite direction; it may sometimes by so feeble that its effects are negligible. But it is always present and potentially influences the configuration of costs.
Finally we consider — as case C — a state of affairs in which various imperfectly divisible factors of production can be divided only in such a way that, given the conditions of the market, any size which can be chosen for their assemblage in a production aggregate does not allow for a combination in which full utilization of the productive capacity of one factor makes possible full utilization of the productive capacity of the other imperfectly divisible factors. This case c alone is of practical significance, while the cases A and B hardly play any role in real business. The characteristic feature of case C is that the configuration of production costs varies unevenly. If all imperfectly divisible factors are utilized to less than full capacity, an expansion of production results in a decrease of average costs of production unless a rise in the prices to be paid for the perfectly divisible factors counterbalances this outcome. But as soon as full utilization of the capacity of one of the imperfectly divisible factors is attained, further expansion of production causes a sudden sharp rise in costs. Then again a tendency toward a decrease in average production costs sets in and goes on working until full utilization of one of the imperfectly divisible factors is attained anew.
Other things being equal, the more production of a certain article increases, the more factors of production must be withdrawn from other employments in which they would have been used for the production of other articles. Hence — other things being equal — average production costs increase with the increase in the quantity produced. But this general law is by sections superseded by the phenomenon that not all factors of production are perfectly divisible and that, as far as they can be divided, they are not divisible in such a way that full utilization of one of them results in full utilization of the other imperfectly divisible factors.
The planning entrepreneur is always faced with the question: to what extent will the anticipated prices of the products exceed the anticipated costs? If the entrepreneur is still free with regard to the project in question, because he has not yet made any inconvertible investments for its realization, it is average costs that count for him. But if he has already a vested interest in the line of business concerned, he sees things from the angle of additional costs to be expended. He who already owns a not fully utilized production aggregate does not take into account average cost of production but marginal cost. Without regard to the amount already expended for inconvertible investments he is merely interested in the question whether or not the proceeds from the sale of an additional quantity of products will exceed the additional cost incurred by their production. Even if the whole amount invested in the inconvertible production facilities must be wiped off as a loss, he goes on producing provided he expects a reasonableReasonable means in this connection that the anticipated returns on the convertible capital used for the continuation of production are at least not lower than the anticipated returns on its use for other projects. surplus of proceeds over current costs.
With regard to popular errors, it is necessary to emphasize that if the conditions required for the appearance of monopoly prices are not present, an entrepreneur is not in a position to increase his net returns by restricting production beyond the amount conforming with consumers' demand. But this problem will be dealt with later in section 6.
That a factor of production is not perfectly divisible does not always mean that it can be constructed and employed in one size only. This, of course, may occur in some cases. But as a rule it is possible to vary the dimensions of these factors. If out of the various dimensions which are possible for such a factor — e.g., a machine — one dimension is distinguished by the fact that the costs incurred by its production and operation are rendered lower per unit of the productive services than those for other dimensions, things are essentially identical. Then the superiority of the bigger plant does not consist in the fact that it utilizes a machine to full capacity while the smaller plant utilizes only a part of the capacity of a machine of the same size. It consists rather in the fact that the bigger plant employs a machine which operates with a better utilization of the factors of production required for its construction and operation than does the smaller machine employed by the smaller plant.
The role played in all branches of production by the fact that many factors of production are not perfectly divisible is very great. It is of paramount importance in the course of industrial affairs. But one must guard oneself against many misinterpretations of its significance.
One of these errors was the doctrine according to which in the processing industries there prevails a law of increasing returns, while in agriculture and mining a law of decreasing returns prevails. The fallacies implied have been exploded above.Cf. Above, p. 130. As far as there is a difference in this regard between conditions in agriculture and those in the processing industries, differences in the data bring them about. The immobility of the soil and the fact that the performance of the various agricultural operations depends on the seasons make it impossible for farmers to take advantage of the capacity of many movable factors of production to the degree which conditions in manufacturing for the most part allow. The optimum size of a production outfit in agricultural production is, as a rule, much smaller than in the processing industries. It is obvious and does not need any further explanation why the concentration of farming cannot be pushed to anything near the degree obtaining in the processing industries.
However, the inequality in the distribution of natural resources over the earth's surface, which is one of the two factors making for the higher productivity of the division of labor, puts a limit to the progress of concentration in the processing industries also. The tendency toward a progressive specialization and the concentration of integrated industrial processes in only a few plants is counteracted by the geographical dispersion of natural resources. The fact that the production of raw materials and foodstuffs cannot be centralized and forces people to disperse over the various parts of the earth's surface enjoins also upon the processing industries a certain degree of decentralization. It makes it necessary to consider the problems of transportation as a particular factor of production costs. The costs of transportation must be weighed against the economies to be expected from more thoroughgoing specialization. While in some branches of the processing industries the utmost concentration is the most adequate method or reducing costs, in other branches a certain degree of decentralization is more advantageous. In the servicing trades, the disadvantages of concentration become so great that they almost entirely overweigh the advantages derived.
Then a historical factor comes into play. In the past, capital goods were immobilized on sites on which our contemporaries would not have set them. It is immaterial whether or not this immobilization was the most economical procedure to which the generations that brought it about could resort. In any event the present generation is faced with a fait accompli. It must adjust its operations to the fact and it must take it into account in dealing with problems of the location of the processing industries.For a thoroughgoing treatment of the conservatism enjoined upon men by the limited convertibility of many capital goods, the historically determined element in production, see below, pp. 503–514.
Finally there are institutional factors. There are trade and migration barriers. There are differences in political organization and methods of government between various countries. Vast areas are administered in such a way that it is practically out of the question to choose them as a seat for any capital investment no matter how favorable their physical conditions may be.
Entrepreneurial cost accounting must deal with all these geographical, historical, and institutional factors. But even apart from them there are purely technical factors limiting the optimum size of plants and firms. The greater plant or firm may require provisions and procedures which the smaller plant or firm can avoid. In many instances the outlays caused by such provisions and procedures may be overcompensated by the reduction in costs derived from better utilization of the capacity of some of the not-perfectly-divisible factors employed. In other instances, this may not be the case.
Under capitalism, the arithmetical operations required for cost accounting and the confrontation of costs and proceeds can easily be effected as there are methods of economic calculation available. However, cost accounting and calculation of the economic significance of business projects under consideration is not merely a mathematical problem, which can be solved satisfactorily by all those familiar with the elementary rules of arithmetic. The main question is the determination of the money equivalents of the items which are to enter into the calculation. It is a mistake to assume, as many economists do, that these equivalents are given magnitudes, uniquely determined by the state of economic conditions. They are speculative anticipations of uncertain future conditions and, as such, depend on the entrepreneur's understanding of the future state of the market. The term fixed costs is also in this regard somewhat misleading.
Every action aims at the best possible supplying of future needs. To achieve these ends it must make the best possible use of the available factors of production. However, the historical process which brought about the present state of factors available is beside the point. What counts and influences the decisions concerning future action is solely the outcome of this historical process, the quantity and the quality of the factors available today. These factors are appraised only with regard to their ability to render productive services for the removal of future uneasiness. The amount of money spent in the past for their production and acquisition is immaterial.
It has already been pointed out that an entrepreneur who, by the time he has to make a new decision, has expended money for the realization of a definite project, is in a different position from that of a man who starts afresh. The former owns a complex of inconvertible factors of production which he can employ for certain purposes. His decisions concerning further action will be influenced by this fact. But he appraises this complex not according to what he expended in the past for its acquisition. He appraises it exclusively from the point of view of its usefulness for future action. The fact that he has spent more or less for its acquisition is insignificant. This fact is only a factor in determining the amount of the entrepreneur's past losses or profits and the present state of his fortune. It is an element in the historical process that brought about the present state of the supply of factors of production and, as such, it is of importance for future action. But it does not count for the planning of future action and the calculation regarding such action. It is irrelevant that the entries in the firm's books differ from the actual price of such inconvertible factors of production.
Of course, such consummated losses or profits may motivate a firm to operate in a different way from which it would if it were not affected by them. Past losses may render a firm's financial position precarious, especially if they bring about indebtedness and burden it with payments of interest and installments on the principal. However, it is not correct to refer to such payments as a part of fixed costs. They have no relation whatever to the current operations. They are not caused by the process of production, but by the methods employed by the entrepreneur in the past for the procurement of the capital and capital goods needed. They are only accidental with reference to the going concern. But they may enforce upon the firm in question a conduct of affairs which it would not adopt if it were financially stronger. The urgent need for cash in order to meet payments due does not affect its cost accounting, but its appraisal of ready cash as compared with cash that can only be received at a later day. It may impel the firm to sell inventories at an inappropriate moment and to use its durable production equipment in a way that unduly neglects its conservation for later use.
It is immaterial for the problems of cost accounting whether a firm owns the capital invested in its enterprise or whether it has borrowed a greater or smaller part of it and is bound to comply with the terms of a loan contract rigidly fixing the rate of interest and the dates of maturity for interest and principal. The costs of production include only the interest on the capital which is still existent and working in the enterprise. It does not include interest on capital squandered in the past by bad investment or by inefficiency in the conduct of current business operations. The task incumbent upon the businessman is always to use the supply of capital goods now available in the best possible way for the satisfaction of future needs. In the pursuit of this aim he must not be misled by past errors and failures the consequences of which cannot be brushed away. A plant may have been constructed in the past which would not have been built if one had better forecast the present situation. It is vain to lament this historical fact. The main thing is to find out whether or not the plant can still render any service and, if this question is answered in the affirmative, how it can be best utilized. It is certainly sad for the individual entrepreneur that he did not avoid errors. The losses incurred impair his financial situation. They do not affect the costs to be taken into account in planning further action.
It is important to stress this point because it has been distorted in the current interpretation and justification of various measures. One does not "reduce costs" by alleviating some firms' and corporations' burden of debts. A policy of wiping out debts or the interest due on them totally or in part does not reduce costs. It transfers wealth from creditors to debtors; it shifts the incidence of losses incurred in the past from one group of people to another group, e.g., from the owners of common stock to those of preferred stock and corporate bonds. This argument of cost reduction is often advanced in favor of currency devaluation. It is no less fallacious in this case than all the other arguments brought forward for this purpose.
What are commonly called fixed costs are also costs incurred by the exploitation of the already available factors of production which are either rigidly inconvertible or can be adapted for other productive purposes only at a considerable loss. These factors are of a more durable character than the other factors of production required. But they are not permanent. They are used up in the process of production. With each unit of product turned out, a part of the machine's power to produce is exhausted. The extant of this attrition can be precisely ascertained by technology and can be appraised accordingly in terms of money.
However, it is not only this money equivalent of the machine's wearing out which the entrepreneurial calculation has to consider. The businessman is not merely concerned with the duration of the machine's technological life. He must take into account the future state of the market. Although a machine may still be technologically perfectly utilizable, market conditions may render it obsolete and worthless. If the demand for its products drops considerably or disappears altogether, or if more efficient methods for supplying the consumers with these products appear, the machine is economically merely scrap iron. In planning the conduct of his business, the entrepreneur must pay full regard to the anticipated future state of the market. The amount of "fixed" costs which enter into his calculation depends on his understanding of future events. It is not to be fixed simply by technological reasoning.
The technologist may determine the optimum for a production aggregate's utilization. But this technological optimum may differ from that which the entrepreneur, on the ground of his judgment concerning future market conditions, enters into his economic calculation. Let us assume that a factory is equipped with machines which can be utilized for a period of ten years. Every year, 10 percent of their prime costs is laid aside for depreciation. In the third year, market conditions place a dilemma before the entrepreneur. He can double his output for the year and sell it at a price which (apart from covering the increase in variable costs) exceeds the quota of depreciation for the current year and the present value of the last depreciation quota. But this doubling of production trebles the wearing out of the equipment and the surplus proceeds from the sale of the double quantity of products are not great enough to make good also for the present value of the depreciation quota of the ninth year. If the entrepreneur were to consider the annual depreciation quota as a rigid element for his calculation, he would have to deem the doubling of production as not profitable, as additional proceeds lag behind additional cost. He would abstain from expanding production beyond the technological optimum. But the entrepreneur calculates in a different way, although in his accountancy he may lay aside the same quota for depreciation every year. Whether or not the entrepreneur prefers a fraction of the present value of the ninth year's depreciation quota to the technological services which the machines could render him in the ninth year, depends on his opinion concerning the future state of the market.
Public opinion, governments and legislators, and the tax laws look upon a business outfit as a source of permanent revenue. They believe that the entrepreneur who makes due allowance for capital maintenance by annual depreciation quotas will always be in a position to reap a reasonable return from the capital invested in his durable producers' goods. Real conditions are different. A production aggregate, such as a plant and its equipment, is a factor of production whose usefulness depends on changing market conditions and the skill of the entrepreneur in employing it in accordance with the change in conditions.
There is in the field of economic calculation nothing that is certain in the sense in which this term is used with regard to technological facts. The essential elements of economic calculation are speculative anticipations of future conditions. Commercial usages and customs and commercial laws have established definite rules for accountancy and auditing. There is accuracy in the keeping of books. But they are accurate only with regard to these rules. The book values do not reflect precisely the real state of affairs. The market value of an aggregate of durable producers' goods may differ from the nominal figures the books show. The proof is that the stock exchange appraises them without any regard to these figures.
Cost accounting is therefore not an arithmetical process which can be established and examined by an indifferent umpire. It does not operate with uniquely determined magnitudes which can be found out in an objective way. Its essential items are the result of an understanding of future conditions, necessarily always colored by the entrepreneur's opinion about the future state of the market.
Attempts to establish cost accounts on an "impartial" basis are doomed to failure. Calculating costs is a mental tool of action, the purposive design to make the best of the available means for an improvement of future conditions. It is necessarily volitional, not factual. In the hands of an indifferent umpire, it changes its character entirely. The umpire does not look forward to the future. He looks backward to the dead past and to rigid rules, which are useless for real life and action. He does not anticipate changes. He is unwittingly guided by the prepossession that the evenly rotating economy is the normal and most desirable state of human affairs. Profits do not fit into his scheme. He has a confused idea about a "fair" rate of profit or a "fair" return on capital invested. However, there are no such things. In the evenly rotating economy, there are no profits. In a changing economy, profits are not determined with reference to any set of rules by which they could be classified as fair or unfair. Profits are never normal. Where there is normality, i.e., absence of change, no profits can emerge.
- Logical Catallactics Versus Mathematical CatallacticsThe problems of prices and costs have been treated also with mathematical methods. There have even been economists who held that the only appropriate method of dealing with economic problems is the mathematical method and who derided the logical economists as "literary" economists.
If this antagonism between the logical and the mathematical economists were merely a disagreement concerning the most adequate procedure to be applied in the study of economics, it would be superfluous to pay attention to it. The better method would prove its preeminence by bringing about better results. It may also be that different varieties of procedure are necessary for the solution of different problems and that for some of them one method is more useful than the other.
However, this is not a dispute about heuristic questions, but a controversy concerning the foundations of economics. The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences. Its syllogisms are not only sterile; they divert the mind from the study of the real problems and distort the relations between the various phenomena.
The ideas and procedures of the mathematical economists are not uniform. There are three main currents of thought which must be dealt with separately.
The first variety is represented by the statisticians who aim at discovering economic laws from the study of economic experience. They aim to transform economics into a "quantitative" science. Their program is condensed in the motto of the Econometric Society: "Science is measurement."
The fundamental error implied in this reasoning has been shown above.Cf. Above, pp. 31, 55-56. Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history. No reasonable man can contend that the relation between price and supply is, in general or in respect of certain commodities, constant. We know, on the contrary, that external phenomena affect different people in different ways, that the reactions of the same people to the same external events vary, and that it is not possible to assign individuals to classes of men reacting in the same way. This insight is a product of our aprioristic theory. It is true the empiricists reject this theory; they pretend that they aim to learn only from historical experience. However, they contradict their own principles as soon as they pass beyond the unadulterated recording of individual single prices and begin to construct series and to compute averages. A datum of experience and a statistical fact is only a price paid at a definite time and a definite place for a definite quantity of a certain commodity. The arrangement of various price data in groups and the computation of averages are guided by theoretical deliberations which are logically and temporally antecedent. The extent to which certain attending features and circumstantial contingencies of the price data concerned are taken or not taken into consideration depends on theoretical reasoning of the same kind. Nobody is so bold as to maintain that a rise of a percent in the supply of any commodity must always — in every country and at any time — result in a fall of b percent in its price. But as no quantitative economist ever ventured to define precisely on the ground of statistical experience the special conditions producing a definite deviation from the ratio a : b, the futility of his endeavors is manifest. Moreover, money is not a standard for the measurement of prices; it is a medium whose exchange ratio varies in the same way, although as a rule not with the same speed and to the same extent, in which the mutual exchange ratios of the vendible commodities and services vary.
There is hardly any need to dwell longer upon the exposure of the claims of quantitative economics. In spite of all the high-sounding pronouncements of its advocates, nothing has been done for the realization of its program. The late Henry Schultz devoted his research to the measurement of elasticities of demand for various commodities. Professor Paul H. Douglas has praised the outcome of Schultz's studies as "a work as necessary to help make economics a more or less exact science as was the determination of atomic weights for the development of chemistry."Cf. Paul H. Douglas in Econometrica, VII, 105. The truth is that Schultz never embarked upon a determination of the elasticity of demand for any commodity as such; the data he relied upon were limited to certain geographical areas and historical periods. His result for a definite commodity, for instance potatoes, do not refer to potatoes in general, but to potatoes in the United States in the years from 1875 to 1929.Cf. Henry Schultz, The Theory and Measurement of Demand (University of Chicago Press, 1938), pp. 405–427. They are, at best, rather questionable and unsatisfactory contributions to various chapters of economic history. They are certainly not steps toward the realization of the confused and contradictory program of quantitative economics. It must be emphasized that the two other varieties of mathematical economics are fully aware of the futility of quantitative economics. For they have never ventured to make any magnitudes as found by the econometricians enter into their formulas and equations and thus to adapt them for the solution of particular problems. There is in the field of human action no means for dealing with future events other than that provided by understanding.
The second field treated by mathematical economists is that of the relation of prices and costs. In dealing with these problems the mathematical economists disregard the operation of the market process and moreover pretend to abstract from the use of money inherent in all economic calculations. However, as they speak of prices and costs in general and confront prices and costs, they tacitly imply the existence and the use of money. Prices are always money prices, and costs cannot be taken into account in economic calculation if not expressed in terms of money. If one does not resort to terms of money, costs are expressed in complex quantities of diverse goods and services to be expended for the procurement of a product. On the other hand, prices — if this term is applicable at all to exchange ratios determined by barter — are the enumeration of quantities of various goods against which the "seller" can exchange a definite supply. The goods which are referred to in such "prices" are not the same to which the "costs" refer. A comparison of such prices in kind and costs in kind is not feasible. That the seller values the goods he gives away less than those he receives in exchange for them, that the seller and the buyer disagree with regard to the subjective valuation of the two goods exchanged, and that an entrepreneur embarks upon a project only if he expected to receive for the product goods that he values higher than those expended in their production, all this we know already on the ground of praxeological comprehension. It is this aprioristic knowledge that enables us to anticipate the conduct of an entrepreneur who is in a position to resort to economic calculation. But the mathematical economist deludes himself when he pretends to treat these problems in a more general way by omitting any reference to terms of money. It is vain to investigate instances of nonperfect divisibility of factors of production without reference to economic calculation in terms of money. Such a scrutiny can never go beyond the knowledge already available; namely that every entrepreneur is intent upon producing those articles the sale of which will bring him proceeds that he values higher than the total complex of goods expended in their production. But if there is no indirect exchange and if no medium of exchange is in common use, he can succeed, provided he has correctly anticipated the future state of the market, only if he is endowed with a superhuman intellect. He would have to take in at a glance all exchange ratios determined at the market in such a way as to assign in his deliberations precisely the place due to every good according to these ratios.
It cannot be denied that all investigations concerning the relation of prices and costs presuppose both the use of money and the market process. But the mathematical economists shut their eyes to this obvious fact. They formulate equations and draw curves which are supposed to describe reality. In fact they describe only a hypothetical and unrealizable state of affairs, in no way similar to the catallactic problems in question. They substitute algebraic symbols for the determinate terms of money as used in economic calculation and believe that this procedure renders their reasoning more scientific. They strongly impress the gullible layman. In fact they only confuse and muddle things which are satisfactorily dealt with in textbooks of commercial arithmetic and accountancy.
Some of these mathematicians have gone so far as to declare that economic calculation could be established on the basis of units of utility. They call their methods utility analysis. Their error is shared by the third variety of mathematical economics.
The characteristic mark of this third group is that they are openly and consciously intent upon solving catallactic problems without any reference to the market process. Their ideal is to construct an economic theory according to the pattern of mechanics. They again and again resort to analogies with classical mechanics which in their opinion is the unique and absolute model of scientific inquiry. There is no need to explain again why this analogy is superficial and misleading and in what respects purposive human action radically differs from motion, the subject matter of mechanics. It is enough to stress one point, viz., the practical significance of the differential equations in both fields.
The deliberations which result in the formulation of an equation are necessarily of a nonmathematical character. The formulation of the equation is the consummation of our knowledge; it does not directly enlarge our knowledge. Yet, in mechanics, the equation can render very important practical services. As there exist constant relations between various mechanical elements and as these relations can be ascertained by experiments, it becomes possible to use equations for the solution of definite technological problems. Our modern industrial civilization is mainly an accomplishment of this utilization of the differential equations of physics. No such constant relations exist, however, between economic elements. The equations formulated by mathematical economics remain a useless piece of mental gymnastics and would remain so even it they were to express much more than they really do.
A sound economic deliberation must never forget these two fundamental principles of the theory of value: First, valuing that results in action always means preferring and setting aside; it never means equivalence or indifference. Second, there is no means of comparing the valuations of different individuals or the valuations of the same individuals at different instants other than by establishing whether or not they arrange the alternatives in question in the same order of preference.
In the imaginary construction of the evenly rotating economy, all factors of production are employed in such a way that each of them renders the most valuable service. No thinkable and possible change could improve the state of satisfaction; no factor is employed for the satisfaction of a need a if this employment prevents the satisfaction of a need b that is considered more valuable than the satisfaction of a. It is, of course, possible to describe this imaginary state of the allocation of resources in differential equations and to visualize it graphically in curves. But such devices do not assert anything about the market process. They merely mark out an imaginary situation in which the market process would cease to operate. The mathematical economists disregard the whole theoretical elucidation of the market process and evasively amuse themselves with an auxiliary notion employed in its context and devoid of any sense when used outside of this context.
In physics we are faced with changes occurring in various sense phenomena. We discover a regularity in the sequence of these changes and these observations lead us to the construction of a science of physics. We know nothing about the ultimate forces actuating these changes. They are, for the searching mind, ultimately given and defy any further analysis. What we know from observation is the regular concatenation of various observable entities and attributes. It is this mutual interdependence of data that the physicist describes in differential equations.
In praxeology, the first fact we know is that men are purposively intent upon bringing about some changes. It is this knowledge that integrates the subject matter of praxeology and differentiates it from the subject matter of the natural sciences. We know the forces behind the changes, and this aprioristic knowledge leads us to a cognition of the praxeological processes. The physicist does not know what electricity "is." He knows only phenomena attributed to something called electricity. But the economist knows what actuates the market process. It is only thanks to this knowledge that he is in a position to distinguish market phenomena from other phenomena and to describe the market process.
Now, the mathematical economist does not contribute anything to the elucidation of the market process. He merely describes an auxiliary makeshift employed by the logical economists as a limiting notion, the definition of a state of affairs in which there is no longer any action and the market process has come to a standstill. That is all he can say. What the logical economist sets forth in words when defining the imaginary constructions of the final state of rest and the evenly rotating economy and what the mathematical economist himself must describe in words before he embarks upon his mathematical work, is translated into algebraic symbols. A superficial analogy is spun out too long, that is all.
Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease. But the logical economist knows much more than that. He shows how the activities of enterprising men, the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss. He shows how this process would finally result in the establishment of the evenly rotating economy. This is the task of economic theory. The mathematical description of various states of equilibrium is mere play. The problem is the analysis of the market process.
A comparison of both methods of economic analysis makes us understand the meaning of the often-raised request to enlarge the scope of economic science by the construction of a dynamic theory instead of the mere occupation with static problems. With regard to logical economics, this postulate is devoid of any sense. Logical economics is essentially a theory of processes and changes. It resorts to the imaginary constructions of changelessness merely for the elucidation of the phenomena of change. But it is different with mathematical economics. Its equations and formulas are limited to the description of states of equilibrium and nonacting. It cannot assert anything with regard to the formation of such states and their transformation into other states as long as it remains in the realm of mathematical procedures. As against mathematical economics the request for a dynamic theory is well substantiated. But there is no means for mathematical economics to comply with this request. The problems of process analysis, i.e., the only economic problems that matter, defy any mathematical approach. The introduction of time parameters into the equations is no solution. It does not even indicate the essential shortcomings of the mathematical method. The statements that every change involves time and that change is always in the temporal sequence are merely a way of expressing the fact that, as far as there is rigidity and unchangeability, there is no time. The main deficiency of mathematical economics is not the fact that it ignores the temporal sequence, but that it ignores the operation of the market process.
The mathematical method is at a loss to show how, from a state of nonequilibrium, those actions spring up which tend toward the establishment of equilibrium. It is, of course, possible to indicate the mathematical operations required for the transformation of the mathematical description of a definite state of nonequilibrium into the mathematical description of the state of equilibrium. But these mathematical operations by no means describe the market process actuated by the discrepancies in the price structure. The differential equations of mechanics are supposed to describe precisely the motions concerned at any instant of the time traveled through. The economic equations have no reference whatever to conditions as they really are in each instant of the time interval between the state of nonequilibrium and that of equilibrium. Only those entirely blinded by the prepossession that economics must be a pale replica of mechanics will underrate the weight of this objection. A very imperfect and superficial metaphor is not a substitute for the services rendered by logical economics.
In every chapter of catallactics, the devastating consequences of the mathematical treatment of economics can be tested. It is enough to refer to two instances only. One is provided by the so-called equation of exchange, the mathematical economists' futile and misleading attempt to deal with changes in the purchasing power of money.Cf. below, p. 399. The second can be best expressed in referring to Professor Schumpeter's dictum according to which consumers, in evaluating consumers' goods "ipso facto also evaluate the means of production which enter into the production of these goods."Cf. Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York, 1942), p. 175. For a critique of this statement, cf. Hayek, ?The Use of Knowledge in Society,? Individualism and the Social Order (Chicago, 1948), pp. 89 ff. It is hardly possible to construe the market process in a more erroneous way.
Economics is not about goods and services; it is about the actions of living men. Its goal is not to dwell upon imaginary constructions such as equilibrium. These constructions are only tools of reasoning. The sole task of economics is analysis of the actions of men, is the analysis of processes.
Praxeology - economics - provides no ultimate ethical judgments: it simply furnishes the indispensable data necessary to make such judgments. Common criticisms of the free market are refuted praxeologically in this chapter.
Absolute equality is an impossible goal. Egalitarianism is a senseless social philosophy.
All rights can be analyzed in terms of property rights. Free speech? You can say anything on your own property. Yelling fire in a theater is fraud against the ticket holders.
An Alice J. Lillie Seminar. This lecture covers pp. 1297-1355 in the Scholar's Edition of Rothbard's Man, Economy, and State.
Human action is defined simply as purposeful behavior. Men act by virtue of their being human. Action can be undertaken only by individual actors. Leisure is a good. Mises derives economic law from this axiom that the study of man is the concept of action.
Utilities are ordinal not cardinal rankings. A supply of a good is available in specific units each perfectly substitutable for every other. The law of (diminishing) marginal utility reflects that each unit that enters into concrete action is evaluated separately. For all human actions as the quantity of the supply (stock) of a good increases, the utility (value) of each additional unit decreases.
An Alice J. Lillie Seminar. This lecture covers pp. 1-78 in the Scholar's Edition of Rothbard's Man, Economy, and State.
Libertarian Paternalism. It would appear to be a contradiction in terms. But Richard Thaler and Cass Sunstein argue for just such a thing in Nudge (Yale University Press, 2008). They try to combine the two by arguing that a nudge — "any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives" — can benefit those nudged, while staying consistent with liberty because it does not force anyone to do anything.
The prototype nudge Thaler and Sunstein propose is changing default options. For instance, rather than requiring an employee to choose to participate in an employer's 401(k) retirement plan (where the default option is to not participate), they would make participation automatic. They assert that while that would change the default option, increasing retirement savings, it would not be coercive since employees could opt out if they chose.
In the same vein, the "shortage" of organ donations could be addressed by making people donors unless they choose to opt out rather than nondonors unless they choose to opt in. Paternalistic nudges could also be used in other areas, such as reducing unhealthy choices.
Given the authors' connections to Barack Obama, Nudge and earlier work by its authors have gotten more attention than they otherwise would, and several positive reviews (though, tellingly, not from libertarians). On the other hand, those who consider issues of liberty more carefully have been less kind to their arguments, notably David Gordon, "Libertarian Paternalism," Gregory Mitchell, "Libertarian Paternalism is an Oxymoron," and Richard Epstein, Skepticism and Freedom.
While those interested in liberty should read those and other careful considerations of the theory behind Nudge, there is another fatal but overlooked flaw in the book's argument. They begin by assuming that people's current choices reflect the results when they are left alone to make them (i.e., reflecting self-ownership and voluntary market choices). That is why any shortcomings must be the fault of irrational individuals, who need paternalistic nudges to improve things. However, our current savings, organ-donation, and health choices are not those of free individuals; they are the choices made in large part because current government policies — taxes, regulations, mandates, etc. — impair incentives. They are government failures presented as market failures.
Consider Americans' famously low rate of saving, the most important "market failure" a nudge is supposed to help offset. The real problem is that government policies do so much to discourage saving.
People have been led to substitute Social Security's vastly underfunded promise of retirement benefits for funds they would have saved for their retirement. And since promised benefits are far higher than current rates of taxation can sustain, they anticipate being richer in retirement than they will actually be, reducing saving even more. Those who save enough to provide well for their retirement also face paying income taxes on up to 85% of their Social Security benefits as a result.
Taxes on capital also reduce saving, by reducing the after-tax return on saving and investment. These include property taxes that, while relatively small percentages of the capital invested, are sizable fractions of the annual income generated. Then state and federal (and sometimes local) corporate taxes take further bites from that income, further reducing the after-tax return. The implicit tax imposed by regulatory burdens must also be borne before earnings can go to investors.
Personal income taxes reduce saving even more. Investment income left after other taxes is taxed again if paid out as dividends. Further, earnings from saving and investment can trigger additional tax burdens by triggering phase-outs of deductions and exemptions that are allowed. If investment earnings are retained and reinvested, increasing asset values, they are taxed as capital gains upon sale. And even increases in asset values that only reflect inflation are taxed as if they were real increases in wealth.
Other government policies also reduce saving. Medicare coverage reduces a major reason to save. Further, current earners, who must cover three quarters of its cost, are left with less to save. The fact that Medicaid covers nursing-home costs only after one's assets are virtually exhausted reduces another motive to save. Unemployment benefits, along with food stamps and other means-tested benefits, reduce the need to set aside a nest egg "just in case." Estate taxes (which will be phased out by 2010, but reinstated in full force in 2011) also reduce successful savers' ability to pass on assets as bequests, undermining another major motive to save.
Each of these government policies acts as a disincentive to save. Together, they punish saving heavily, reducing it to the point that many do not have any appreciable savings. But fixing that saving problem doesn't require ever more government programs to help us, force us, or nudge us to save more; it only requires that the government stop undermining our incentives to save in all the ways it does now.
Consider also the "shortage" of organ donations. The root cause is not a market failure, to be fixed by making donation automatic unless one opts out. The root cause is that government has already taken away potential donors' ownership of their own body parts. Unlike everyone else involved in the big business of transplants — doctors, nurses, hospitals, drug makers, etc. — all of whom are paid — organ donors (or their heirs) are not allowed to be paid. When potential donors of very valuable organs cannot be compensated, the result is like every other government price ceiling imposed on sellers — a shortage. One needs no assumption of individual irrationality to explain the problem. And the solution to problems arising because government doesn't allow donors to benefit from markets in organs is not a government nudge in the opposite direction; it is to stop hindering the market.
Health-related issues (diet, smoking, etc.) suffer from similar problems. The costs of health problems that result once one becomes eligible for Medicare coverage are not borne by the individual (as they would be with true private insurance) as presently all are charged the same premiums, regardless of weight, smoking history, or any other factor. Similar results arise from premiums that do not vary with such circumstances in employer-provided group health insurance (which exists largely because it is not subject to income taxation). The possibilities of declaring bankruptcy, of using emergency rooms without having to be able to pay, or of becoming a Medicaid recipient if medical bills become large enough are further ways government has made it possible to impose many of the health-care costs of individuals' own choices on others. When government makes the price of health problems artificially low to those individuals making the choices, it is no wonder those choices are not as good as we would like.
The problem with any logical argument is that if one starts from false premises, even airtight logic does not guarantee correct results. Nudge's argument is far from airtight. But even more devastating is its reliance on a false premise. The "market failure" examples it promises to improve are actually government failures. And the solution to government failure is to reduce the disincentives that government causes, not to intervene further, however mild its authors find the additional intervention.
Nudge's blaming of "irrational" individuals and markets for the results of government-caused distortions is not even new. For instance, it parallels the Keynesian attribution of the business climate in the Depression to the (irrational) "animal spirits of investors," when, in fact, Hoover and FDR's massive interventions (e.g., the Smoot-Hawley tariff, the National Industrial Recovery Act, tax increases, mandatory wage increases, FDR's attacks on businessmen who resisted his plans as "economic royalists", etc.) were among the irrational government causes that would deter any rational investor. Going even further back, as David Gordon observed, any claim that Nudge has to being a kinder, gentler form of paternalism that is compatible with liberty is dashed by Alexis de Tocqueville. In Democracy in America, he described the consequences of that approach:
"Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications and to watch over their fate. That power is absolute, minute, regular, provident, and mild… The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd."
Thaler and Sunstein claim to be trying "to influence choices in a way that will make choosers better off, as judged by themselves." But in their reasoning, they ignore how much those choices are actually currently caused by existing government interventions — both paternalistic and predatory (to pay for the paternalism), making their prescriptions little more than distractions, directing attention away from the real source — government — and real solution: expanding liberty.
What undermines their attractive-sounding sales pitch that "if incentives and nudges replace requirements and bans, government will be both smaller and more modest," is that they are not in fact proposing less intrusive government nudges to replace more intrusive government coercion, but yet still more government on top of what we have today.
Anyone who peruses the top mainstream economics journals will quickly realize that economic theory has been crowded out by mathematical formalism. The neoclassical economists' uncompromising quest for precision in their models has been achieved at the expense of the accuracy of their predictions.
The old joke of the drunk searching for his keys near the streetlight is an appropriate metaphor.
In this article we'll discuss two classic illustrations of this habit, where the mainstream economist must abandon common sense because his favored mathematical tools demand total loyalty. The first example comes from a recent challenge to Austrian economics from its frequent foe, Bryan Caplan. The second example involves economics professor and Slate columnist Steven Landsburg's criticism of people who donate to multiple charities.
As we shall see, both Caplan and Landsburg go wrong because they desperately want to deploy their mathematical models to capture economic realities. They provide two more examples of why the Austrian approach — often derided as "unscientific" and "verbal" — is an excellent foil to guard against such neoclassical slips.
Bryan Caplan Asks Austrians an Impossible QuestionAt the popular blog EconLib, Bryan Caplan poses a challenge to Austrians in "The Trojan Horse Example":
Austrian economists often attack the mainstream for ignoring something they call "radical uncertainty," "sheer ignorance," or sometimes "Knightian uncertainty." A common Austrian slogan is that "Neoclassical economists study only cases where people know that they don't know; we study cases where people don't know that they don't know."
All of this sounds plausible until you press the Austrian to do one of two things:
Explain his point using standard probability language. What probability does "don't know that you don't know" correspond to? Zero? But if people really assigned p=0 to an event, than the arrival of counter-evidence should make them think that they are delusional, not [that] a p=0 event has [occurred].Give a good concrete example. I've heard Israel Kirzner give examples involving library books, pay phones, and bumps on the head, but none of them [makes] any sense to me. (Emphasis original)Before pointing out the absurdity in Caplan's request, we should provide some background. In the early and mid-20th century, standard mainstream models assumed that agents in the economy had perfect information. In such a setting, it was easy enough to "prove" that advertising was wasteful, that cleverly designed mechanisms could allow central planners to replicate the outcomes of a market, and that economic theorists could safely neglect entrepreneurship.
Naturally, more and more critics lambasted such an unrealistic approach. In response, the top mainstream economists incorporated "uncertainty" into their models, but only in a very limited way. Now, instead of knowing (say) the spot price of oil at every hour, from now until the year 2050, the cutting-edge general-equilibrium models would instead assume that agents only know the probability distribution of spot oil prices at each moment in time for the rest of eternity. Thus, the modelers thought they had adequately dealt with the objection, for now the agent in the model really doesn't know what the price of oil will be tomorrow.
Now we can understand the debate to which Caplan alludes. Austrian economists, most notably Israel Kirzner, have stressed that this isn't really incorporating genuine uncertainty — versus actuarial risk — into the mainstream approach. Agents still know the structure of the world with certainty; there is no possibility, say, that an agent mistakenly thinks oil prices are distributed normally with a mean of $120, when in reality the true mean is $121. This type of situation is ruled out as impossible in a mainstream model.
In a mainstream model — even one that nominally includes "uncertainty" — Jim the Speculator can't outperform Joe the Speculator in the oil futures markets because of his better foresight. Nobody can ever make a true mistake. Yes, investors might later regret their actions, once the random variables have been realized, but they would only do so the way a blackjack player might "regret" doubling down on an 11 against a dealer's 6. Even after losing, the blackjack player would rightly say, "I didn't really make a mistake, because my move was optimal given the information I had at the time of my decision." This immunity to actual error and surprise is still true of all formal mainstream models, because it's very difficult to formally (but nonarbitrarily) model mistakes.
The Austrians, on the other hand, are perfectly free to explain that some entrepreneurs do better than others in the real world, because they adapted to changing conditions more quickly than their peers, and hence earned economic profits. Austrians can do this because they aren't wed to formal mathematical models. This freedom in their verbal explanation isn't a sign of sloppiness but rather a more accurate description of what's really going on in the world.
So let's sum up the debate: Austrians say that standard probability tools are inapplicable in a world of open-ended uncertainty, where it is impossible to assign a numerical probability to all possible future outcomes. If for no other reason than limited mental powers of computation, real people simply do not act this way.
Recall now Caplan's request: he wants the Austrian to paraphrase this insight "using standard probability language"! It reminds me of an episode in grad school, when I was working on a paper explaining that "radical uncertainty" posed serious problems for the neoclassical approach to interest.This topic is covered in the third paper in my dissertation. One of my advisors listened to me explain the problems for five minutes in the hall and then said, "Hmm, put all of that into a simple two-period model."
Landsburg Thinks Most People Giving to Charity Are SelfishLet's leave Bryan Caplan alone and switch to University of Rochester economist, and Slate columnist, Steven Landsburg.
In "Giving Your All," Landsburg argues that if they were truly motivated by altruism for the recipients, then people should concentrate their charitable giving on a single target:
People constantly ignore my good advice by contributing to the American Heart Association, the American Cancer Society, CARE, and public radio all in the same year — as if they were thinking, "OK, I think I've pretty much wrapped up the problem of heart disease; now let's see what I can do about cancer." But such delusions of grandeur can't be very common. So there has to be some other reason why people diversify their giving.
I think I know what that reason is. You give to charity because you care about the recipients, or you give to charity because it makes you feel good to give. If you care about the recipients, you'll pick the worthiest and "bullet" (concentrate) your efforts. But if you care about your own sense of satisfaction, you'll enjoy pointing to 10 different charities and saying, "I gave to all those!"
In the first place, I want to point out that even on his own terms, Landsburg's criticism doesn't make much sense. Even if people are really donating merely in order to feel good about themselves, why would they care about something irrelevant, such as the number of organizations to which they donated? For example, if a person pats himself on the back for sending $500 each to four different charities, why wouldn't that person feel equally smug by sending $2000 to one charity? (Or for that matter, why not $2 each to one thousand different charities?)
As so often happens in these matters, the problem is that Landsburg needs to model the situation using formal mathematical tools, and once he goes down this path, out pops the "optimal" answer that a person should concentrate all of his giving into the single charity that he considers most important. I'm not putting words in his mouth; here is Landsburg himself:
Early in this century, the eminent economist Alfred Marshall offered this advice to his colleagues: When confronted with an economic problem, first translate into mathematics, then solve the problem, then translate back into English and burn the mathematics. I am a devotee of Marshall's and frequently follow his advice. But in this instance, I want to experiment with a slight deviation: Rather than burn the mathematics, I will make it available as a link.
I propose to establish the following proposition: If your charitable contributions are small relative to the size of the charities, and if you care only about the recipients (as opposed to caring, say, about how many accolades you receive), then you will bullet all your contributions on a single charity. That's basically a mathematical proposition, which I have translated into English in this column.
Now there are all sorts of motivations that could acquit philanthropists of Lansburg's charge, namely that they are either irrational or secretly donating to charity just to win public approval. For example, someone might want to build up a level of trust with an organization over time, and see how it spends smaller donations before ramping up the contributions. Or, someone might think that an organization can only maintain its independence if it relies on numerous small contributions, rather than a few large donations from wealthy individuals.
The point here is not to offer a rival theory. Rather, my point is that people do not approach charitable giving the way Landsburg assumes in his model. Since he is wrong at step 1, it shouldn't surprise us that he reaches a conclusion that strikes most people as counterintuitive.
ConclusionThe Misesian approach to economics does not rely on unrealistic formal models. Rather, praxeology — the science of human action — deduces necessarily true conclusions from the fact that people act.
It's true, the Misesian can often present his entire analysis in purely verbal terms, and he can't make any guaranteed quantitative predictions about the economy. But as the joke about the drunk looking for his keys illustrates so well, scientists need to look for answers where they actually may lie, rather than redefining the problem into one that our favorite tools can handle.
IntroductionPositivist Dogma and Human ActionThe Alleged Materialism of EconomicsScience and "Irrationality"The Serviceableness of the Means Employed to Attain the Ends SoughtHistorical Relativism versus PraxeologyHistoricist Self-ContradictionEthical Relativism[This paper was originally presented at the Volker Fund's Symposium on Relativism, 1960.] La Condition Humaine" by René Magritte (1898–1967)
I. IntroductionUp to the 18th century, historians paid little or no attention to the epistemological problems of their craft. In dealing with the subject of their studies, they again and again referred to some regularities that — as they themselves and their public assumed — are valid for any kind of human action irrespective of the time and the geographical scene of the action as well as of the actors' personal qualities and ideas. But they did not raise the question whether these regularities were of an extraneous character or inherent in the very nature of human action. They knew very well that man is not able to attain all that he wants to attain. But they did not ask whether the limits of a man's power are completely described by reference to the laws of nature and to the Deity's miraculous interference with them, on the one hand, and to the superior power of more puissant men, on the other hand.
Like all other people, the historians too distinguished between behavior complying with the moral law and behavior violating it. But, like all other people, they were fully aware of the fact that nonobservance of the laws of ethics did not necessarily — in this life — result in failure to attain the ends sought. Whatever may happen to the sinner in the life hereafter and on the day of the Last Judgment, the historian could not help realizing that on earth he could sometimes fare very well, much better than many pious fellow men.
Entirely new perspectives were opened when the economists discovered that there prevails a regularity in the sequence and interdependence of market phenomena. It was the first step to a general theory of human action, praxeology. For the first time people became aware of the fact that, in order to succeed, human action must comply not only with what are called the laws of nature, but also with specific laws of human action. There are things that even the most efficient constabulary of a formidable government cannot bring about, although they may not appear impossible from the point of view of the natural sciences.
It was obvious that the claims of this new science could not fail to give offense from three points of view. There were first of all the governments. Despots as well as democratic majorities are not pleased to learn that their might is not absolute. Again and again they embark upon policies that are doomed to failure and fail because they disregard the laws of economics. But they do not learn the lesson. Instead they employ hosts of pseudoeconomists to discredit the "abstract," i.e., in their terminology, vain teachings of sound economics.
Then there are ethical doctrines that charge economics with ethical materialism. As they see it, economics teaches that man ought to aim exclusively or first of all at satisfying the appetites of the senses. They stubbornly refuse to learn that economics is neutral with regard to the choice of ultimate ends as it deals only with the methods for the attainment of ends chosen, whatever these ends may be.
There are, finally, authors who reject economics on account of its alleged "unhistorical approach." The economists claim absolute validity for what they call the laws of economics; they assert that in the course of human affairs something is at work that remains unchanged in the flux of historical events. In the opinion of many authors this is an unwarranted thesis, the acceptance of which must hopelessly muddle the work of historians.
In dealing with this brand of relativism, we must take into account that its popularity was not due to epistemological, but to practical considerations. Economics pointed out that many cherished policies cannot result in the effects aimed at by the governments that resorted to them, but bring about other effects — from the point of view of those who advocated and applied those policies — were even more unsatisfactory than the conditions that they were designed to alter. No other conclusion could be inferred from these teachings than that these measures were contrary to purpose and that their repeal would benefit the rightly understood or long-run interests of all the people. This explains why all those whose short-run interests were favored by these measures bitterly criticized the "dismal science." The epistemological qualms of some philosophers and historians met with an enthusiastic response on the part of aristocrats and landowners who wanted to preserve their old privileges and on the part of small business and employees who were intent upon acquiring new privileges. The European "historical schools" and American Institutionalism won political and popular support, which is, in general, denied to theoretical doctrines.
However, the establishment of this fact must not induce us to belittle the seriousness and importance of the problems involved. Epistemological relativism as expressed in the writings of some of the historicists, e.g., Karl Knies and Max Weber, was not motivated by political zeal. These two outstanding representatives of historicism were, as far as this was humanly possible in the milieu of the German universities of their age, free from an emotional predilection in favor of interventionist policies and from chauvinistic prejudice against the foreign, i.e., British, French, and Austrian science of economics. Besides, [Karl Knies, Geld und Kredit, 3 vols. (Berlin: Weidmann, 1873–79) — Ed.]Knies wrote a remarkable book on money and credit, and Weber[Max Weber, Wirtschaft und Gesellschaft vol. 1 of Grundriß der Sozial Ökonomik (Tübingen, 1922). English language edition The Theory of Social and Economic Organization, A.M. Henderson and Talcott Parsons, trans. (Glencoe, Ill.: Free Press, 1947) — Ed.] gave the deathblow to the methods applied by the schools of Schmoller and [Ed.] [Gustav Schmoller was the founder of the "Younger" German Historical or "Historicoethical" School. Its program combined an historical approach to economic phenomena with the pursuit of economic and social politics grounded in "moral principles." Lujo Brentano was a prominent proponent and follower of Schmoller but disagreed on matters of methodology — Ed.]Brentano by demonstrating the unscientific character of judgments of value. There were certainly in the argumentation of the champions of historical relativism points that call for an elucidation.
II. Positivist Dogma and Human ActionBefore entering into an analysis of the objections raised against the "absolutism" of economics, it is necessary to point out that the rejection of economics by epistemological relativism has nothing to do with the positivist rejection of the methods actually used by historians.
In the opinion of positivism, the work of the historians is mere gossip or, at best, the accumulation of a vast amount of material that they do not know how to use. What is needed is a science of the laws that determine what happens in history. Such a science has to be developed by the same methods of research that made it possible to develop out of experience the science of physics.
The refutation of the positivistic doctrine concerning history is an achievement of several German philosophers, first of all of Wilhelm Windelband and of Heinrich Rickert. They pointed out in what the fundamental difference between history, the record of human action, and the natural sciences consists. Human action is purposive, it aims at the attainment of definite ends chosen, it cannot be treated without reference to these ends, and history is in this sense — we must emphasize, only in this sense — finalistic. But to the natural sciences the concept of ends and final causes is foreign.
Then there is a second fundamental difference. In the natural sciences man is able to observe in the laboratory experiment the effects brought about by a change in one factor only, all other factors the alteration of which could possibly produce effects remaining unchanged. This makes it possible to find what the natural sciences call experimentally established facts of experience. No such technique of research is available in the field of human action. Every experience concerning human action is historical, i.e., an experience of complex phenomena, of changes produced by the joint operation of a multitude of factors. Such an experience cannot produce "facts" in the sense in which this term is employed in the natural sciences. It can neither verify nor falsify any theorem. It would remain an inexplicable puzzle if it could not be interpreted by dint of a theory that had been derived from other sources than historical experience.
Now, of course, neither Rickert and the other authors of the group to which he belonged, the "Southwestern German philosophers," not the historians who shared their conception went as far as this last conclusion. To them, professors of German universities at the end of the 19th and the beginning of the 20th century, the very idea that there could be any science claiming for its theses universal validity for all human action irrespective of time, geography, and the racial and national characteristics of people remained unknown. For men living in the spiritual climate of the second German Reich, it was an understood thing that the pretensions of "abstract" economic theory were vain and that German wirtschaftliche Staatswissenschaften (the economic aspects of political science), an entirely historical discipline, had replaced the inane generalization of the school of Hume, Adam Smith, and Ricardo. As they saw it, human action — apart from theology, ethics, and jurisprudence — could be dealt with scientifically only by history. Their radical empiricism prevented them from paying any attention to the possibility of an a priori science of human action.
The positivist dogma that Dilthey, Windelband, Rickert, and their followers demolished was not relativistic. It postulated a science — sociology — that would derive from the treatment of the empirical data provided by history a body of knowledge that would render to the mind the same services with regard to human action that physics renders with regard to events in the sphere of nature. These German philosophers demonstrated that such a general science of action could not be elaborated by a posteriori reasoning. The idea that it could be the product of a priori reasoning did not occur to them.
III. The Alleged Materialism of EconomicsThe deficiency of the work of the classical economists consisted in their attempt to draw a sharp line of demarcation between "purely economic activities" and all other human concerns and actions. Their great feat was the discovery that there prevails in the concatenation and sequence of market phenomena a regularity that can be compared to the regularity in the concatenation and sequence of natural events. Yet, in dealing with the market and its exchange ratios, they were baffled by their failure to solve the problem of valuation. In interpersonal exchange transactions objects are not valued according to their utility, they thought, because otherwise "iron" would be valued more highly than "gold." They did not see that the apparent paradox was due only to the vicious way they formulated the question. Value judgments of acting men do not refer to "iron" or to "gold" as such, but always to definite quantities of each of these metals between which the actor is forced to choose because he cannot have both of them. The classical economists failed to find the law of marginal utility. This shortcoming prevented them from tracing market phenomena back to the decisions of the consumers. They could deal only with the actions of the businessmen, for whom the valuations of the consumers are merely data. The famous formula "to buy on the cheapest and to sell on the dearest market" makes sense only for the businessman. It is meaningless for the consumer.
Thus forced to restrict their analysis to business activities, the classical economists constructed the concept of a science of wealth or the production and distribution of wealth. Wealth, according to this definition meant all that could be bought or sold. The endeavors to get wealth were seen as a separate sphere of activities. All other human concerns appeared from the vantage point of this science merely as disturbing elements.
Actually, few classical economists were content with this circumscription of the scope of economics. But their search for a more satisfactory concept could not succeed before the marginalists substituted the theory of subjective value from the various abortive attempts of the classical economists and their epigones. As long as the study of the production and distribution of wealth was considered as the subject matter of economic analysis, one had to distinguish between the economic and the noneconomic actions of men. Then economics appeared as a branch of knowledge that dealt with only one segment of human action. There were, outside of this field, actions about which the economists had nothing to say. It was precisely the fact that the adepts of the new science did not deal with all those concerns of man which in their eyes were qualified as extraeconomic that appeared to many outsiders as a depreciation of these matters dictated by an insolent materialistic bias.
Things are different for modern economics, with its doctrine of the subjective interpretation of valuation. In its context the distinction between economics and allegedly noneconomic ends becomes meaningless. The value judgments of the ultimate consumers express not only the striving after more tangible material goods, but no less the striving after all other human concerns. The narrow viewpoint of a science of — material — wealth is surpassed. Out of the discipline of wealth evolves a general theory of all choices made by acting men, a general theory of every kind of human action, praxeology. In their behavior on the market people evidence not only their wishes to acquire more material goods, but no less all their other preferences. Market prices reflect not only the "materialistic side" of man, but his philosophical, ethical, and religious ideas as well. The observance of religious commandments — to build and maintain houses of worship, to cease working on holidays, to avoid certain foods either always or on specific days and weeks, to abstain from intoxicating beverages and tobacco, to assist those in need, and many others — is one of the factors that determines the supply of and the demand for consumers' goods and thereby the conduct of business. Praxeology is neutral with regard to the ultimate ends that the individuals want to attain. It does not deal with ultimate ends, but with the means chosen for their attainment. It is merely interested in the question whether or not the means resorted to are fitted to attain the ends sought.
The enormous quantity of antieconomic literature published in the last hundred and fifty years turns around one argument only. Its authors repeat again and again that man as he really is and acts strives not only after more material amenities, but also after some other — higher or loftier or ideal — aims. From this point of view the self-styled Historical School attacked what they called the absolutism of the economic doctrine and advocated a relativistic approach. It is not the theme of this paper to investigate whether the economists of the classical school and their epigones were really guilty of having neglected to pay due attention to the nonmaterialistic concerns of man. But it is to be emphasized that all the objections raised by the Historical School, e.g., by Knies in his famous book,The first edition was published in 1853 under the title Die poitische Ökonomie vom Standpunkte der geschichtlichen Methode. The second edition was published in 1883 under the title Die politische Ökonomie vom geschichtlichen Standpunkte. It is by and large a reprint of the earlier edition enlarged by many additions. are futile and invalid with regard to the teachings of modern economics.
It is customary in German political literature to distinguish between an older and a later Historical School.[The "older" Historical School proponents did not advocate politics as a means of intervention, nor a basis for economic reasoning as did the "younger" Historical School advocates — Ed.] As the champions of the older school, Roscher, Bruno Hildebrand, and Knies are named. The younger school consists of the followers of Schmoller who after the establishment of the Reich in 1870 held the chairs of economics at the German universities. This way of subdividing into periods the history of ideas is an outcome of the parochialism that induced German authors to slight all that was accomplished abroad. They failed to realize that the "historical" opposition against what was called the absolutism of economics was inaugurated outside of Germany. Its outstanding representative was [Jean Charles Leonard Sismondi was a Swiss economist and historian. He thought that the focus of economics should be man and social reform not wealth and laissez faire. Sismondi was the first to practice modern period analysis in 1819 — Ed.]Sismondi rather than Roscher and Hildebrand. But it is much more important to realize the fact that all those who in Germany as well as in other countries after the publication of the books of Jevons, Menger, and Walras criticized economic doctrine on account of its alleged materialism were fighting against windmills.
IV. Science and "Irrationality"Max Weber's concept of a general science of human action — to which he applied the name sociology — no longer refers to the distinction between economic action and other activities. But Weber virtually endorsed the objections raised by historicism against economics by distinguishing between genuinely rational action, on the one hand, and other kinds of action. His doctrine is so closely connected with some untranslatable peculiarities of the German language that it is rather difficult to expound it in English.
The distinction that Weber makes between "social action" and other action is, from the point of view of our problem, of little importance. The main thing is that Weber quite correctly distinguishes between sinnhaftes Handeln and the merely physiologically determined reactions of the human body. Sinnhaftes Handeln is directed by the Sinn the acting individual attaches to it; we would have to translate: by the meaning the actor attaches to it and by the end he wants to attain by it. This definition would appear as a clear distinction between human action, the striving after a definite end, on the one hand, and the physiological — quasi-automatic — reactions of the nerves and cells of the human body, on the other hand. But then Weber goes on to distinguish within the class of sinnhaftes Handeln four different subclasses. The first of these subclasses is called zwechrationales Handeln and is defined as action aiming at a definite end. The second subclass is called wertrationales Handeln and is defined as action determined by the belief in the unconditional intrinsic value (unbedingter Eigenwert) of a certain way of conduct as such, without regard to its success, from the point of view of ethics, aesthetics, religion, or other principles. What Weber failed to see is the fact that also the striving after compliance with definite ethical, aesthetical, and religious ideas is no less an end than any other end that men may try to attain. A Catholic who crosses himself, a Jew who abstains from food and drink on the Day of Atonement, a lover of music who forgoes dinner in order to listen to a Beethoven symphony, all aim at ends that from their point of view are more desirable than what they have to renounce in order to get what they want. Only a personal judgment of value can deny to their actions the qualification zweckrational, i.e., aiming at a definite end. And what in Weber's definition do the words "without regard to its success" mean? The Catholic crosses himself because he considers such behavior as one link in a chain of conduct that will lead him to what for him is the most important success of man's earthly pilgrimage. It is tragic that Max Weber, the eminent historian of religion, the man who tried to free German sociological thought from its naive commitment to judgments of value, failed to see the contradictions of his doctrine.There is no need to enter into an analysis of the two other subclasses enumerated by Weber. For a detailed critique of Weber's doctrine, see my essay "Sociologie und Geschichte," in Archiv für Sozialwissenschaft vol. 61 [1929], reprinted in my book Grundprobleme der National Ökonomie (Jena: Gustav Fischer, 1933), pp. 64–121. In the English-language translation of this book, Epistemological Problems of Economics, George Reisman, trans. and Arthur Goddard, ed. (Princeton: D. Van Nostrand, 1960), this essay appears on pp. 68–129.
Other attempts to distinguish between rational action and nonrational or irrational action were likewise based on crass misconstructions and failed. Most of them called "irrational" conduct directed by mistaken ideas and expectations concerning the effects of definite methods of procedure. Thus, magic practices are today styled as irrational. They were certainly not fitted to attain the ends sought. However, the people who resorted to them believed that they were the right technique in the same way in which physicians up to the middle of the past century believed that bleeding is a method of preventing and curing various diseases. In speaking of human action, we have in mind conduct that, in the opinion of the actor, is best fitted to attain an end he wants to attain, whether or not this opinion is also held by a better informed spectator or historian. The way in which contemporary physicians deal with cancer is not irrational, although we hope that one day more efficacious therapeutic and prophylactic methods will be discovered. A report concerning other people's actions is confusing if it applies the term irrational to the activities of people whose knowledge was less perfect than that of the reporter. As no reporter can claim for himself omniscience, he would at least have to add to his qualification of an action as irrational the proviso "from my personal point of view."
Another way in which the epithet "irrational" is often employed refers, not to the means, but to the ends of definite modes of conduct. Thus, some authors call, either approvingly or disapprovingly, "irrational" the behavior of people who prefer religious concerns, national independence, or other goals commonly called noneconomic to a more abundant supply of material satisfactions. Against this highly inexpedient and confusing terminology there is need to emphasize again and again the fact that no man is called to sit in judgment on other people's judgments of value concerning ultimate ends. When the Huguenots preferred the loss of all their earthly possessions, the most cruel punishments, and exile to the adoption of a creed that in their opinion was idolatrous, their behavior was not "irrational." Neither was Louis XIV "irrational" when he deprived his realm of many of its most worthy citizens in order to comply with the precepts of his conscience. The historian may disagree with the ultimate ends that the persecutors and their victims were aiming at. But this does not entitle him to call the means to which they resorted in order to attain their ends irrational. The terms "rational" and "irrational" are just as much out of place when applied to ends as when applied to means. With regard to ultimate ends, all that a mortal man can assert is approval or disapproval from the point of view of his own judgments of value. With regard to means there is only one question, viz., whether or not they are fitted to attain the ends sought.
Most of our contemporaries are guided by the idea that it is the worst of all crimes to force a man, by recourse to violence, to behave according to the commandments of a religious or political doctrine that he despises. But the historian has to record the fact that there were ages in which only a minority shared this conviction, and unspeakable horrors were committed by fanatical princes and majorities. He is right in pointing out that Louis XIV, in outlawing Protestantism, inflicted irreparable evils on the French nation. But he must not forget to add that the King was not aware of these consequences of his policy and that, even if he had anticipated them, he would perhaps nonetheless have considered the attainment of religious uniformity as a good for which the price paid was not too high.
The surgeons who accompanied the armies of ages past did their best to save the lives of the wounded warriors. But their therapeutic knowledge was pitifully inadequate. They bled the injured man whom only a transfusion of blood could have saved and thus virtually killed him. Because of their ignorance, their treatment was contrary to purpose. It would be misleading and inexpedient to call it irrational. Present-day doctors are not irrational, although probably better informed physicians of the future will qualify some of their therapeutical techniques as detrimental and contrary to purpose.
V. The Serviceableness of the Means Employed to Attain the Ends SoughtWhenever the distinction between rational and irrational is applied to ultimate ends, the meaning is that the judgments of value underlying the choice of the end in question meet with approval or disapproval on the part of the speaker or writer. Now the promulgation of judgments of value is not the business of a man in his capacity as a praxeologist, economist, or historian. It is rather the task of religion, metaphysics, or ethics. History of religion is not theology, and theology is not history of religion.
When the distinction between rational and irrational is applied to means, the meaning is that the speaker or writer asserts that the means in question are not serving their purpose, i.e., that they are not fit to attain the ends sought by the people who resort to such means. It is certainly one of the main tasks of history to deal with the serviceableness of the means people employed in their endeavors to attain the ends sought. It is also certain that the main practical goal of praxeology and its hitherto best-developed part, economics, is to distinguish between means that are fit to attain the ends sought and those that are not. But it is, as has been pointed out, not expedient and rather confusing to use for this distinction the terms "rational" and "irrational." It is more appropriate to speak of means answering the intended purpose and those not answering it.
This holds true also with regard to the way in which the terms "rational" and "irrational" are employed by psychoanalysts. They "call behavior irrational that is predominately emotional or instinctual," and furthermore "all unconscious functions" and in this sense distinguish between "irrational (instinctual or emotional) action as opposed to rational action, and irrational as opposed to rational thinking."H. Hartmann, "On Rational and Irrational Action," in Psychoanalysis and the Social Sciences, vol. 1 (1947), p. 371. Whether this terminology is expedient for the treatment of the therapeutic problems of psychoanalysis may be left to the psychoanalysts. From the praxeological point of view, the spontaneous reactions of the human body's organs and the activity of instinctual drives are not action. On the other hand, it is manifestly the outcome of a personal judgment of value to call emotional actions — e.g., the action with which a man may react to the awareness of his fellow men's distress — irrational. It is further obvious that no other meaning can be ascribed to the term "irrational thinking" than that it is logically invalid thinking and leads to erroneous conclusions.
VI. Historical Relativism versus PraxeologyThe philosophy of historical relativism — historicism — fails to see the fact that there is something unchanging that, on the one hand, constitutes the sphere of history or historical events as distinct from the spheres of other events and, on the other hand, enables man to deal with these events, i.e., to record their succession and to try to find out their concatenation, in other words, to understand them. This unchanging phenomenon is the fact that man is not indifferent to the state of his environment (including the conditions of his own body) and that he tries, as far as it is possible for him to do so, to substitute by purposive action a state that he likes better for a state he likes less. In a word: man acts. This alone distinguishes human history from the history of changes going on outside the field of human action, from the study of "natural history" and its various subdivisions as, e.g., geology or the evolution of various species of living beings. In human history we are dealing with the ends aimed at by the actors, that is, with final causes.When the sciences of human action refer to ends, they always mean the ends that acting men are aiming at. This distinguishes these sciences from the metaphysical doctrines known under the name of "philosophy of history" that pretend to know the ends toward which a superhuman entity — for instance, in the context of Marxism, the "material productive forces" — directs the course of affairs independently of the ends the acting men want to attain. In natural history, as in the other branches of the natural sciences, we do not know anything about final causes.
All human wisdom, science, and knowledge deal only with the segment of the universe that can be perceived and studied by the human mind. In speaking of human action as something unchanging, we refer to the conditions of this segment only. There are authors who assume that the state of the universe — the cosmos — could change in a way about which we simply do not know anything and that all that our natural sciences say about the behavior of sodium and levers, for example, may be invalid under this new state. In this sense they deny "any kind of universality to chemical and mechanical statements" and suggest that they be treated "as historical ones."Otto Neurath, "Foundations of the Social Sciences," International Encyclopedia of Unified Science, vol. 2, no. 1 (Chicago: University of Chicago Press, 1956). p. 9. With this brand of agnostic hyperhistoricism that deals in its statements with visionary conditions about which — as they freely admit — we do not know and cannot know anything, reason and science have no quarrel.
Thinking man does not look upon the world with a mind that is, as it were, a Lockean paper upon which reality writes its own story. The paper of his mind is of a special quality that enables man to transform the raw material of sensation into perception and the perceptual data into an image of reality. It is precisely this specific quality or power of his intellect — the logical structure of his mind — that provides man with the faculty of seeing more in the world than nonhuman beings see. This power is instrumental in the development of the natural sciences. But it alone would not enable man to discover in the behavior of his fellow men more than he can see in the behavior of stars or of stones, in that of amoebae or in that of elephants.
In dealing with his fellow men, the individual resorts not only to the a priori of logic, but besides to the praxeological a priori. Himself an acting being, he knows what it means to strive after ends chosen. He see more in the agitation and the stir of his fellow men than in the changes occurring in his nonhuman environment. He can search for the ends their conduct is aiming at. There is something that distinguishes in his eyes the movements of germs in a liquid as observed in the microscope from the movements of the individuals in the crowd he may observe in the rush hour at New York's Grand Central Terminal. He knows that there is some "sense" in a man's running around or sitting still. He looks upon his human environment with a mental equipment that is not required or, to say it more precisely, is downright obstructive in endeavors to explore the state of his nonhuman environment. This specific mental equipment is the praxeological a priori.
The radical empiricism of the historicists went astray in ignoring this fact. No report about any man's conduct can do without reference to the praxeological a priori. There is something that is absolutely valid for all human action irrespective of time, geography, and the racial, national, and cultural characteristics of the actors. There is no human action that can be dealt with without reference to the categorical concepts of ends and means, of success and failure, of costs, of profit or loss. What the Ricardian law of association, better known as the law of comparative cost, describes is absolutely valid for any kind of voluntary human cooperation under the division of labor. What the much-derided economic laws describe is precisely what must always and everywhere happen provided the special conditions presupposed by them are present.
Willy nilly, people realize that there are things they cannot achieve because they are contrary to the laws of nature. But they are loath to admit that there are things that even the most powerful government cannot achieve because they are contrary to praxeological law.
VII. Historicist Self-ContradictionDifferent from the case of the historians who are loath to take cognizance of the praxeological a priori is the case of the authors who belong to the various historical, "realistic," and institutional schools of economics. If these scholars were consistent, they would limit their studies to what is called economic history; they would deal exclusively with the past and would carefully abstain from asserting anything about the future. Prediction about events to come can be made only on the ground of knowledge of a regularity in the succession of events that is valid for every action irrespective of the time and the geographical and cultural conditions of its occurrence. Whatever economists committed to historicism or institutionalism do, whether they advise their own governments or those backward foreign countries, is self-contradictory. If there is no universal law that describes the necessary effects of definite ways of acting, nothing can be predicted and no measure to bring about any definite results can be recommended or rejected.
It is the same with those authors who, while rejecting the idea that there are economic laws valid for all times, everywhere, and for all people, assume that every period of history has its own economic laws that have to be found a posteriori by studying the history of the period concerned. These authors may tell us that they have succeeded in discovering the laws governing events up to yesterday. But — from the point of view of their own epistemological doctrine — they are not free to assume that the same laws will also determine what will happen tomorrow. All that they are entitled to affirm is: experience of the past shows that A brought about B; but we do not know whether tomorrow A will not bring about some other effects than B.
Another variety of the denial of economics is the trend doctrine. Its supporters blithely assume that trends of evolution as manifested in the past will go on. However, they cannot deny that in the past trends did change and that there is no reason whatever to assume that present trends will not one day change too. Thus, this becomes especially manifest when businessmen, concerned about the continuation of prevailing trends, consult economists and statisticians. The answer they get is invariably this: statistics show us that the trend you are interested in was still continuing on the day to which our most recent statistical data refer; if no disturbing factors turn up, there is no reason why the trend should change; however, we do not know anything about the question whether or not such new factors will present themselves.
VIII. Ethical RelativismEpistemological relativism, the essential doctrine of historicism, must be clearly distinguished from the ethical relativism of other schools of thought. There are authors who combine praxeological relativism with ethical relativism. But there are also authors who display ethical absolutism while rejecting the concept of universally valid praxeological laws. Thus, many adepts of the Historical School of economics and of institutionalism judge the historical past from the point of view of what they consider as indisputable, never-changing moral precepts, e.g., equality of wealth and incomes. In the eyes of some of them private property is as such morally objectionable. They blame the economists for an alleged praise of material wealth and disparagement of more noble concerns. They condemn the system of private enterprise as immoral and advocate socialism on account of its presumed higher moral worth. As they see it, Soviet Russia complies better with the immutable principles of ethics than the nations of the West committed to the cult of Mammon.
As against all this emotional talk there is need to point out again: praxeology and economics, its up-to-now best- developed branch, are neutral with regard to any moral precepts. They deal with the striving after ends chosen by acting men without any regard whether these ends are approved or disapproved from any point of view. The fact that the immense majority of men prefer a richer supply of material goods to a less ample supply is a datum of history; it does not have any place in economic theory. Economics neither advocates capitalism nor rejects socialism. It merely tries to show what the necessary effects of each of these two systems are. He who disagrees with the teachings of economics ought to try to refute them by discursive reasoning, not by abuse, insinuations, and the appeal to arbitrary, allegedly ethical standards.
Editorial notes are by Richard M. Ebeling. All other notes are by Ludwig von Mises.
[This article is excerpted from an unpublished report to the Volker Fund, written in the summer of 1960, on their Symposium on Relativism, at which Ludwig von Mises presented the paper, "Epistemological Relativism in the Sciences of Human Action."]
I think it important to delineate briefly what relativism is and what the issues are on this important topic. Let us first consider the polar opposite of relativism: absolutism. The absolutist believes that man's mind, employing reason (which according to some absolutists is divinely inspired, according to others is given by nature), is capable of discovering and knowing truth: including the truth about reality, and the truth about what is best for man and best for himself as an individual.
The relativist denies this, denies that man's reason is capable of knowing truth, and does so by claiming that rather than being absolute, truth is relative to something else. This something else may be different things, and so there can be many kinds of relativist; some of these things have been the subject of psychology of each individual, the economic interests of the individual (or of the "class" to which he belongs), the "Spirit of the Age" in which the person happens to live, the social structure of the society in which he lives, his "culture," his race, etc. Philosophically, I believe that libertarianism — and the wider creed of sound individualism of which libertarianism is a part — must rest on absolutism and deny relativism.
The bulk of this essay by Mises, the preeminent economist and praxeologist of our time, deals in his profound and unique way with a defense of economics against such relativist opponents as the historicists, who claimed that economic laws must be relative to each historical epoch. There are many excellent points made: an exposition of the Windelband-Rickert refutation of positivist methods in the sciences of human action; a critique of the deficiencies of the classical economists in confining themselves to a study of wealth and production, and therefore in fragmenting action into the "economic" and "noneconomic" spheres; critiques of the radical empiricists such as the intuitionalists, of Max Weber, and of the nature of historical events
In short, Mises attacks the various schools of epistemological relativism in the sciences of human action, and defends the absolute and eternal truths arrived at by the science of praxeology. As a result, this paper, as is almost any by Mises, is excellent and worth reading by every scholar. (I would consider the fundamental axioms of praxeology as based empirically on the nature of man rather than on "the logical structure of the human mind" as Mises does, but this is not important here.)
Having said this, and never being able to express how much of an enormous intellectual debt I owe to Mises, I must record two important defects in the paper, which stem from what I consider basic weaknesses in the Mises worldview. One is Mises's attempt to deny anyone the use of the concept "irrational." Mises categorically denies that anyone can ever act irrationally, either in the means he undertakes or in the ends for which he strives. I think this is flatly wrong, especially since Mises wishes to retain the concept of rational, and apply it to all of man's actions. I cannot see how we can retain the term rational, while denying anyone the use of its opposite: "irrational." If Mises maintains that no one can ever act irrationally, then he is simply using "rational" as a synonym for "purposive," and this means that he is using the term rational in a sense that no one else uses and is therefore illegitimate. Instead of denying that anyone could act irrationally, Mises should simply not use rational or irrational at all, and leave the term to psychology and ethics.
Thus, Mises asserts that we cannot say that the tribe using medicine men or a person in the Middle Ages using magic to attain their ends was irrational; after all, says Mises, they believed that their means were helping them to attain their ends (say, rainmaking or cure of disease), and a hundred years from now a doctor could just as well say that present-day doctors are "irrational" for using such a quaint method of cure as penicillin. The belief of the people using magic, however, is irrelevant to the issues; nobody denies that they thought they were accomplishing something.
Furthermore, magic is not in the same category as penicillin; for the use of penicillin rests on a scientific method, on an epistemology that can discover, by reason and by sense experimentation analyzed by reason, that penicillin can be used as cures for disease. The fact that, fifty years from now, the advance of science will discover better cures does not make the present use of penicillin irrational — although, by the way, it would make the use of penicillin a hundred years from now irrational. But magic is in a completely different category; magic, by its very methodology is totally irrational and incapable of arriving at what it is supposed to achieve; and we can be assured that no "advance" a hundred years from now in the ritual of magic could ever improve its performance. The use of magic is therefore irrational, whether in the past, present, or future.
Moreover, not only can we say with absolute assurance that certain methods and means are irrational, but can also go on to say that certain ends are irrational. Suppose that A's end is to torture B, because A enjoys it. Even if it lies within A's power to do so, and even if A need not fear retaliation by the police or by B or B's friends, I think it can be demonstrated that such torture and love of torture is contrary to the nature of man and to what is required by that nature for man's true happiness; I think it can be demonstrated that such perversions of man's nature are profoundly irrational. Yet Mises would insist on adding "from my personal point of view." It is not just my or your subjective "point of view" that decrees this; it is our objective, absolute insight into the discoverable nature of man.
What has happened here, and elsewhere, is that Mises has strayed off his great stomping ground, praxeology, on to a field, ethics, where he is, I believe, tragically wrong. For irrationality or rationality of ends involve an ethical judgment, and Mises's subjectivity that we have just noted means simply this: that Mises, while a praxeological or epistemological absolutist, is, unfortunately, an ethical relativist. To Mises, there is no such a thing as absolute ethics; man, by the use of his mind, cannot discover a true, "scientific" ethics by insight into what is best for man's nature. Ultimate ends, values, ethics, are simply subjective, personal, and purely arbitrary. If they are arbitrary, Mises never explains where they come from: how any individual arrives at them. I can't see how he could arrive at any answer except the subjective, relative emotions of each individual.
This, Mises's ethical relativism, is his second great defect in this paper, and we have seen how it is intimately tied up with the first. As a result, Mises, excellent when he criticizes governments for opposing economics because economic science shows that governments cannot accomplish their objectives, falters when he tried to refute the ethical contentions of the statists.
Thus, Mises says, in his final section, that the enemies of economics and of capitalism blame private enterprise as immoral, and materialistic, and praise Soviet Russia as well as equality of incomes as more ethical. What can Mises reply to this? Only that it is all "emotional talk," that praxeology and economics are neutral to ethics (true, but irrelevant), and that these statists should try to refute economic teachings by "discursive reasoning, not by … appeal to arbitrary allegedly ethical standards."
We can surely agree that it is illegitimate for anyone, leftist or libertarian, to ignore and not fully consider the value-free laws of economics. But precisely because economics is neutral to ethics, this is hardly an answer. For to Mises, all ethics is "arbitrary," and yet, even Mises must admit that no one can decide any policy unless he does make an ethical judgment. The man who understands economics and then chooses liberty is, or should be, considered by Mises to be just as "arbitrary" as the man who chooses egalitarianism, after accepting, say, the economic consequences of lessened productivity. And since either decision, according to Mises, is ultimately arbitrary, he cannot finally refute the interventionists in this way. And as for the opposition being "emotional," this may well be, but we have seen that emotion is the only groundwork that Mises can find for ultimate values anyway.
How has Mises been able to be an ethical relativist and still be the great champion that he has been of economic liberty? By what I consider an illegitimate assumption. Thus: "Economics pointed out that many cherished (interventionist) policies … bring about … effects which — from the point of view of those who advocated and applied them — were even more unsatisfactory than the conditions which they were designed to alter…"
It is this assumption — that even the advocates really are worse off — that permits Mises to say that they are "bad." But how can Mises know what motivates the statists? Suppose, for example, the price controller wants power, and doesn't care if it creates shortages; he has power and the perquisites of a soft job in the bureaucracy; suppose that he is a Communist, and wants to create shortages (or is a nihilist and hates everyone, and wants to create shortages); suppose that someone who wants to confiscate the rich has a very high time preference and doesn't care if the economy will be wrecked in twenty years. What then?
In short, it is illegitimate for Mises to assume that, knowing all the consequences shown by economics, everyone will consider himself worse off from the statist measure. When Mises says that repeal of such measures "would benefit the rightly understood or long-run interests of all the people," and are championed by vested "short-run interests," suppose, as we have just indicated, the time preferences of the latter are high; or suppose, even aside from the time preference, that the amount X can mulct from everyone by some interventionist measure is greater than the amount he will lose as a consumer.
What I have been trying to say is that Mises's utilitarian, relativist approach to ethics is not nearly enough to establish a full case for liberty. It must be supplemented by an absolutist ethic — an ethic of liberty, as well as of other values needed for the health and development of the individual — grounded on natural law, i.e., discovery of the laws of man's nature. Failure to recognize this is the greatest flaw in Mises's philosophical worldview.
In his final section, Mises says that "there are authors who combine praxeological relativism with ethical relativism.… there are also authors who display ethical absolutism while rejecting the concept of universally valid praxeological laws."
Yes, and there is also a third category of writers: those who accept both praxeological and ethical absolutism, and recognize that both are vitally necessary for a complete philosophical view, as well as for the achievement of liberty.
I hope it is clear that this extended discussion is not intended to deny the great overall merits of Mises's paper and its importance for all scholars of human action.
The close followers of the work of Ludwig von Mises (1881–1973), one of the leading thinkers of the Austrian School of Economics, maintain that economics is an a priori science, "a science whose propositions can be given a rigorous logical justification, which distinguishes Austrians, or more precisely Misesians, from all other current economic schools."[1]
Indeed, such a view stands in very sharp contrast to today's state-of-the-art mainstream economics, which has fallen victim to the spell of positivism: in an attempt to investigate the truth of hypotheses in the field of social sciences, the positivists declare that measuring peoples' actions and their continual empirical testing (according to "if-then" statements) would be required, thereby allowing for scientific progress.[2]
However, the positivist-empiricist approach does not, and cannot, deliver on its promise. It promotes false economic doctrines, as it misconceives the logical status of the science of economics. Positivism-empiricism encourages, intellectually speaking, a drift away from the free-market order, paving the way towards collectivism, socialism, and even totalitarianism.
Positivism-empiricism encourages social relativism: it denies any a priori truth of the social reality of human action, adhering to the view that "anything goes." As such, social relativism plays into the hands of the enemies of the free societal order: there is nothing that could, as a rule, prevent recommendations derived from the positivist-empiricist doctrine from violating individuals' property rights.
In 1945, Friedrich August von Hayek (1899–1992) formulated the consequences of a social philosophy that ignores principles:
[T]he aversion to general principles, and the preference for proceeding from particular instance to particular instance, is the product of the movement which with the "inevitability of gradualness" leads us back from a social order resting on the general recognition of certain principles to a system in which order is created by direct command.[3]
In virtually all developed countries, government activity — as measured, for instance, in terms of state spending as a percentage of total income and the scope of authoritative regulation — has been expanding at the expense of individual freedom and the free-market order, acquiesced to — or even publicly advocated — by mainstream economists.
This is why Mises's work on the logical status of the science of economics needs to be brought back to public attention: his work actually forms the intellectual bulwark against the degeneration of the free societal order. So in what follows, the methodological foundations of Austrian economics will be reviewed briefly.[4] Our starting point is, and necessarily so, the field of epistemology.
Epistemology as a Starting PointEpistemology is the branch of philosophy concerned with the origin, possibility, scope and general basis of human knowledge. One of the key epistemological questions is, where does our knowledge come from?
Rationalism holds the view that our knowledge is based on reason. Knowledge does not come to us through experience (sensory perception). It derives solely from principles that the human mind possesses prior to it.
Empiricism maintains that our knowledge rests on experience. It has its root in the idea that all we can know about the world is what the world cares to tell us, and we must observe it carefully.
Rationalism would not maintain that we cannot gain any knowledge from experience. However, whenever one begins to be scientific, whenever rules and laws are to be identified that apply universally, a rationalist would argue that experience does not have the same validity as deductive reasoning.
That said, one may confirm rules and laws by experience, but they are acquired by logical deduction from higher — overarching — laws, which are already contained in reason. It is here we need to take a brief look at the great philosopher Immanuel Kant (1724–1804) and his revolutionary The Critique of Pure Reason.
Kant's Synthetic A Priori PropositionsKant tried to solve the epistemological problem by showing that human beings' knowledge of objects, or natural reality in general, does not depend on the objectives themselves. He maintained that empirical objects depend — somewhat paradoxically — on our knowledge of them.
Kant maintained that human beings' mental constitution itself would yield knowledge. Such knowledge does not come to us through experience and observation of reality. In fact, it is derived from overarching principles, which the minds of human beings possess prior to any experience.
Kant made a distinction between a priori and a posteriori. The former refers to a judgment that expresses knowledge acquired prior to any observation, while the latter refers to knowledge that is acquired on the basis of experience.
What is more, Kant drew a distinction between synthetic and analytical judgments. An analytic judgment is restricted to the information already contained in the definition of a concept, while a synthetic judgment means that a judgment about objects provides information about the subject under review.
His distinctions allow the following four combinations:
Analytic a posteriori judgments cannot arise, since there is never a need to take recourse to experience in support of a purely explicative assertion.
Synthetic a posteriori judgments are the relatively uncontroversial matters of fact we come to know by means of our sensory experience.
Analytic a priori judgments include all the logical truths and straightforward matters of definition; they are necessarily true.
Synthetic a priori judgments are the crucial case, since only they could provide new information that is necessarily true.
A priori synthetic judgments neither repeat the information content of definitions nor provide new information about the subject matter on the basis of experience. They refer to features the human mind possesses prior to experience and shape empirically derived knowledge, telling about the nature of the world, based on reason investigating itself.
The key question then is, how can we identify the truth of such synthetic a priori propositions, given that formal logic is not sufficient and observations are unnecessary? According to Kant, the truth of synthetic a priori propositions can be definitely established by self-evident material axioms. A proposition is self-evident because we cannot deny its truth without running into self-contradiction; an attempt to deny the truth of a synthetic a priori proposition would equate to admitting its truth.
Mises's Axiom of Human ActionMises's "axiom of action" — the proposition that humans act — is a true synthetic a priori proposition. The proposition that humans act cannot be refuted, since such a denial would itself qualify as an action; the truth of the statement cannot be undone.
All categories with which economics concerns itself — value, ends, means, choice, costs, etc. — are implied in Mises's axiom of action. They can be interpreted only if we assume that human beings act. They are a priori true, logically deduced from the axiom of action.
To Mises, the science of economics follows the discipline of applied logic, and he therefore applied the term praxeology — the science of the logic of human action — for characterizing the theory of logic of human action.[5]
Mises concluded about the science of economics,
Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.[6]
Hans-Hermann Hoppe put Mises's great insight succinctly:
Mises's great insight was that economic reasoning has its foundation in just this understanding of action; and that the status of economics as a sort of applied logic derives from the status of the action-axiom as an a priori-true synthetic proposition.[7]
Some Examples of A Priori Judgments in EconomicsLet us consider some implications that can be logically derived from Mises's axiom of human action. We know that humans act; it is a true a priori proposition, as one cannot logically think that humans do not act.[8]
Human action logically implies exchange, as action as such is exchanging one state of affairs for another state of affairs.
Human action takes place in time. The human mindset cannot think of anything different. If man could attain his desired ends instantaneously in the present, there wouldn't be any reason for him to act — but, as we know, acting is necessary to man's nature; one cannot think of man not acting.
Time is scarce, as man is mortal. And as man must make use of time for achieving his ends, time is a means for attaining a desired end.
With time being a scarce means, the necessity for making a choice among alternative ends arises: scarcity means that one end can only be achieved by giving up other ends.
Having to make choices, human action is actually purposeful behavior: it is aiming at attaining certain ends.
When deciding to pursue certain ends, the actor must assign ranks of value to ends, representing a process of valuation.
Acting man must have an idea of how to achieve his desired ends. If man thinks he cannot attain his ends, he cannot take action. But, as shown above, there is no such thing as man not acting.
What is more, causality — that is the link between cause and effect — is a category of human action. If there is no causal relation, man cannot act — which is impossible.
Man's future is uncertain. If man knew his future, his action could not change it, and therefore human action testifies that the future is uncertain to the actor.
Another truth related to Mises's axiom of human action is that only individuals act. Concepts such as "government," "groups" and "collectives" do not have an existence of their own. They do not have any reality; they just rest on the actions of individuals.
Hoppe provides insightful examples of Mises's a priori economic propositions:
Human action is an actor's purposeful pursuit of valued ends with scarce means. No one can purposefully not act. Every action is aimed at improving the actor's subjective well-being above what it otherwise would have been. A larger quantity of a good is valued more highly than a smaller quantity of the same good. Satisfaction earlier is preferred over satisfaction later. Production must precede consumption. What is consumed now cannot be consumed again in the future. If the price of a good is lowered, either the same quantity or more will be bought than otherwise. Prices fixed below market clearing prices will lead to lasting shortages. Without private property in factors of production there can be no factor prices, and without factor prices cost-accounting is impossible. Taxes are an imposition on producers and/or wealth owners and reduce production and/or wealth below what it otherwise would have been. Interpersonal conflict is possible only if and insofar as things are scarce. No thing or part of a thing can be owned exclusively by more than one person at a time. Democracy (majority rule) is incompatible with private property (individual ownership and rule). No form of taxation can be uniform (equal), but every taxation involves the creation of two distinct and unequal classes of taxpayers versus tax receiver-consumers. Property and property titles are distinct entities, and an increase of the latter without a corresponding increase of the former does not raise social wealth but leads to a redistribution of existing wealth.[9]
Mises's Methodological DualismIn his book Theory and History, Mises, right at the start, addresses the issue of methodological dualism: the insight that actions of human beings cannot be analyzed according to the methods applied by natural sciences, in which positivism-empiricism has become the dominant approach.
Murray N. Rothbard noted that the objects of natural sciences (stones, planets, atoms, etc.) would differ radically from human beings, as "it is the essence of human beings that they have goals and purposes, and that they try to achieve those goals. Stones, atoms, planets, have no goals or preferences; hence, they do not choose among alternative courses of action."[10]
And further,
atoms and stones can be investigated, their course charted, and their paths plotted and predicted, at least in principle, to the minutest quantitative detail. People cannot; every day, people learn, adopt new values and goals, and change their minds; people cannot be slotted and predicted as can objects without minds or without the capacity to learn and choose.[11]
The methodological approach taken by today's mainstream economics — following those applied in the field of natural sciences — is empiricism. Mises rejected this approach on the grounds of the incompatibility of the subject-matters of the two disciplines.[12]
Natural sciences rest on laboratory experiments: the effect of changes of an individual element on other elements can be observed in isolation. The researcher makes a hypothesis, and observations are required to find out whether it is right or wrong.
The empirical approach amounts to engaging in a never-ending trial-and-error procedure. Such an approach would reject the notion of a once-and-for-all established truth of propositions, today perhaps best illustrated by the (quasi-nihilistic) reasoning of Sir Karl Raimund Popper (1902–1994).
Popper suggested that a hypothesis cannot be verified (that is criticized by observation) once and for all, since no finite amount of observation could ever demonstrate its correctness. A theory may be provisionally retained until it is finally falsified; in that sense, true knowledge is provisional.
However, this approach is incompatible with economics, as "no laboratory experiment can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged."[13]
First, empirical tests are based on historical data, which must form the basis of the empirical approach to social science. These data are contingent, as they are always the result of complex phenomena.
Second — and this is categorically different from natural laws — people can and do learn from experience and tend to change their value scales and preferences. As a result, one cannot assume time-invariant relations between causes and effects, as can be observed in the natural sciences.
If economics is a logically deductive a priori science, as Mises laid out, what then is the role of empirical testing, a procedure that has attained central status in the current economic sciences? Any effort of empirical testing of logically deduced truths would be illustrative of intellectual confusion.
Take a synthetic a priori proposition such as the Pythagorean theorem: a² + b² = c². Would empirical testing of this logically derived theorem yield any additional knowledge? No, any such efforts would be in vain and signal a state of intellectual disorientation. The same holds true for efforts aimed at testing logically derived economic propositions.
Take, for example, the law of diminishing marginal utility. It holds that if the supply of a good increases by one unit, the value attached to this additional unit must necessarily decrease — because this additional unit can only be employed as a means for realizing a goal that is less valuable than the least valued goal satisfied by a unit of such a good if the supply were one unit shorter.
The Empiricist-Positivist Doctrine Leads to Social RelativismTo base economics on the doctrine of empiricism is, in fact, an erroneous undertaking leading to fallacious results as empiricism suffers from serious logical deficiencies. Empiricism holds that nothing can be known before empirical testing. But how can we arrive at such a conclusion?
It cannot be derived from making observations of reality — empiricism's alleged only source of knowledge. If we assume that empiricism's premise is categorically true — that means that we can say something which is a priori true about how certain events are related — it belies empiricism's thesis, namely that all knowledge is hypothetical in nature. Empiricism cannot provide a priori knowledge, as it (implicitly) professes to do.
What is more, empiricism makes the claim of being able to observe and measure human action. However, these concepts cannot be derived from observation itself, as empiricism claims. In fact, they require an understanding of peoples' observing and measuring. Again, empiricism must admit that it takes recourse to knowledge which rests on understanding rather than on observation.
In fact, empiricism carries a destructive seed: rejecting the possibility of any a priori truth, empiricism encourages putting into practice all kinds of hypotheses, however ill-conceived they might be. To the positivist, there is no reason to reject any hypothesis from the outset; he subscribes to the motto "anything goes," and he wants to let experience decide the matter. In that sense, the empiricist-positivist doctrine leads to harmful social relativism.
Whereas the empiricist approach might be relatively harmless in the field of natural sciences, its consequences in social sciences are a completely different matter. For instance, if a hypothesis predicts effects that are widely said to be desirable, the supporters of empiricism in the field of economics have a justification to try it out and see what happens.
If, however, the outcome is not as hypothesized, empiricism does not allow rejecting the hypothesis as wrong. In fact, empiricism immunizes the hypothesis by saying that the falsified experiment was accidental, suggesting that ongoing experimenting would prove its truth. Or, alternatively, the positivist would hold that the hypothesis's failure was due to uncontrolled (omitted) factors, thereby mustering support for continuing rather than stopping with social experimenting.
The supporters of the empiricist-positivistic doctrine can be expected to come predominantly from the camp of the social engineers: the group of people — that is the government and all its intellectual supporters — that wants to increase their power over other members of society.
Social Engineering the Money Supply — A Case in PointTake, for instance, the a priori truth that any increase in the money supply reduces the exchange value of money, as derived from the axiom of action, and that a government policy aiming at stabilizing the value of money is an impossible undertaking with disastrous consequences.
To start with, money is a good, and like any other good, money is subject to the law of diminishing marginal utility. The latter holds that the marginal utility of a money unit in the hands of a market agent declines if and when his money holdings increase (other things equal).[14]
As a result, under a money-supply regime that allows for an increase in the money supply over time — be it free-market money or government-controlled money — the exchange value of money cannot remain stable.
Humans act. Acting implies change in peoples' preferences and valuations of goods and services. Money is no exception. In fact, even if the stock of money remains unchanged, we must expect that its value vis-à-vis other goods and services changes over time, due to the undeniable fact that humans act.
Mises, building on the work of Carl Menger (1840–1921), showed logically with his regression theorem that money can only originate out of free-market barter, that money has a historical component to it. Therefore, money can be traced back to human action. It cannot be established by government's coercive action.[15]
This insight has important consequences for the monetary order.
Mises was aware that all that is needed for economic calculation — for which money is an indispensable tool — is to avoid great and abrupt fluctuations in the money supply. He provided a logical foundation that the market can provide for such a medium of exchange, without any need for government interventionism.
The positivist-empiricist doctrine, however, supported the concept of replacing the free-market money order by a government money-supply monopoly: it made popular the illusionary notion that stable money would be a desirable and indispensable requisite for economic calculation, and that only the government, and not the free market, could provide such money.
However, stable money is, without any logical doubt, incompatible with the axiom of human action:
The idea of rendering purchasing power stable did not originate from endeavors to make economic calculations more correct. Its source is the wish to create a sphere withdrawn from the ceaseless flux of human affairs, a realm which the historical process does not affect.[16]
As implied in the axiom of action, there cannot be stable money. The government control over the stock of money not only fails to deliver on its promise; it also becomes the very source of economic crises, paving the way toward ever greater doses of government interference with the free-market order — as outlined in the Austrian Monetary Theory of the Trade Cycle.
If money must arise from commodity money, government's control over the money supply cannot be established logically without a violation of property rights and only at the expense of economic efficiencies:
[A] government's plan concerning the determination of the quantity of money can never be impartial and fair to all members of society. Whatever a government does in the pursuit of aims to influence the height of purchasing power depends necessarily upon the rulers' personal judgment. It always furthers the interests of some groups of people at the expense of other groups. It never serves what is called the commonweal or the public welfare.[17]
Mises was well aware of the consequences of government-created economic inequalities and crises — both direct results of theories ignoring apriorism in the science of economics: that is, people becoming disenchanted with capitalism. They would see government interventionism — greatly helped by peoples' anti-free market sentiment — as a solution to crises, rather than their very cause, inviting ever greater doses of government control over the individual.
The Need for Returning to Mises's ApriorismThe positivist-empiricist doctrine, which forms the core of today's mainstream economics, is not only an intellectual failure; it also encourages — actually provokes — social relativism, thereby opening the door to anti-free-market policies, which, once set into motion, are difficult to reign in. In that sense, positivism is, if put into practice, an anti-capitalist doctrine.
A return to Mises's great intellectual insight — namely, that economics can be given a rigorous logical foundation, as epitomized by his praxeology — appears to be required for preventing further damage to the ideal of the free society.
Notes[1] Hoppe, H.-H. (2007), Economic Science and the Austrian Method, Ludwig von Mises Institute, Auburn, p. 8.
[2] The term positive economics can be ascribed to Friedman, M. (1953), Essays in Positive Economics, University of Chicago Press, Chicago, through which he actually set the epistemological course for today's mainstream economics.
[3] Hayek, F. A. v. (1980), "Individualism: True and False," Individualism and Economic Order, University of Chicago, p. 1.
[4] See, for instance, Hoppe, H.-H. (2006), "On Praxeology and the Praxeological Foundation of Epistemology," The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy, 2nd edition, Ludwig von Mises Institute, Auburn, pp. 265–294; idem, Economic Science and the Austrian Method, Ludwig von Mises Institute, Auburn. Also Leeson, P., and P. Boettke (2006), "Was Mises Right?" Review of Social Economy, Taylor and Francis Journals, Vol. 64, June, pp. 247–265.
[5] See in this context Rothbard, M. N. (1997), "Praxeology: The Methodology of Austrian Economics," The Logic of Action One: Method, Money, and the Austrian School, by Murray N. Rothbard, Cheltenham, UK: Edward Elgar, pp. 58-77.
[6] Mises, L. v. (1996), Human Action, 4th edition, Fox & Wilkes, San Francisco, p. 32.
[7] Hoppe, H.-H. (2007), p. 25.
[8] For an explanation, see Rothbard, M. N. (2004), Man, Economy, and State, with Power and Market, Ludwig von Mises Institute, Chapter 1.
[9] Hoppe, H.-H. (2001), Democracy: The God That Failed, New Brunswick, N. J., Transaction Publishers, pp. xvii.
[10] Murray N. Rothbard, Preface to Mises, L. v. (2007), Theory and History, Ludwig von Mises Institute, Auburn, p. xiii.
[11] Ibid.
[12] See Mises, L. v. (1978), The Ultimate Foundation of Economic Science, Sheed, Andrews & McMeel, Kansas City, pp. 6-7.
[13] Mises, L. v. (1996), p. 31.
[14] It is often argued that money's exchange value would remain unchanged if the increase in the supply of money is accompanied by an unchanged demand for money. While such a conclusion is indisputable, it does not rest on a partial analysis. According to the latter, the analyst would vary one factor while holding constant all other factors. By doing so, one can say that an increase in the money supply must ceteris paribus lead to a decline in the exchange value of money.
[15] Rothbard showed that a government money supply monopoly can only be established by an act of expropriation. See Rothbard, M. N. (1990), What Has Government Done to Our Money?, Ludwig von Mises Institute, Auburn, Alabama, chapter III "Government Meddling with Money."
[16] Mises, L. v. (1996), p. 224.
[17] Ibid, p. 422.
That Ludwig von Mises was the outstanding champion of laissez-faire and the free-market economy in this century is well known and needs no documentation. But in the course of refining and codifying his political views, Mises's followers have unwittingly distorted them and made them seem at one with the modern conservative movement in the United States. Mises is made to appear a sort of National Review intellectual concentrating on the free-market aspects of conservatism. While the image of Mises as an essential conservative is scarcely made up of the whole cloth, it totally overlooks rich strains of Misesian thought that can be described only as "laissez-faire radical." Unfortunately, these strands of Misesian thought have been all but lost. Perhaps this essay will help to right the balance.
There is no need here to try to define and distinguish laissez-faire "conservatism" from "radicalism." A setting forth of various radical positions taken by Mises should make the distinction clear enough.
Some anti-conservative aspects of Misesian thought are, again, too well known to require discussion. Thus, for Mises, personal liberty was required by logical consistency; for, if the government began to restrict or suppress one or a few consumption goods, why should they stop at regulating all? As a champion of consumer sovereignty and the consumer society, Mises also had no patience with aristocratic conservatives who scorned mass consumption or the rule of production by consumer demand.
War and ImperialismMises stood squarely for the classical liberal policy of a peaceful foreign policy and opposition to aggressive nationalism and imperialism. Thereby he took his stand in opposition to conservatives of his day and ours. Mises saw that internal peace through the division of labor and freedom of enterprise has as its counterpart a devotion to international peace and freedom of trade. He was proud to call himself a "citizen of the world, a cosmopolite," in contrast to chauvinist nationalism, and he touted classical liberalism "with its unconditional extolment of peace.""The goal of the domestic policy of liberalism is the same as that of its foreign policy: peace. It aims at peaceful cooperation just as much between nations as within each nation…. The ultimate ideal envisioned by liberalism is the perfect cooperation of all mankind…. Liberal thinking always has the whole of humanity in view and not just parts…. Its thinking is cosmopolitan and ecumenical: it takes in all men and the whole world. Liberalism is, in this sense, humanism; and the liberal, a citizen of the world, a cosmopolite" (Ludwig von Mises, Liberalism: A Socio-Economic Exposition [1927; 2nd ed., Kansas City: Sheed, Andrews and McMeel, 1978], pp. 105—106).
Mises perceptively saw that the general drive toward war was a reflection of the abandonment of free trade and minimal government at home. If, for example, government is small and abstains from any interference with the economy or society, then it doesn't matter much which State controls which territory. But if States develop restrictions which exclude goods or citizens of other States, then which State governs matters a great deal.
Mises boldly proclaimed his "pacifism," but made clear that it was to be distinguished from the older sentimental pacifism. Instead his was the "pacifism of the Enlightenment philosophy of natural law, of economic liberalism, and of political democracy, which has been cultivated since the 18th century." This kind of pacifism
does not arise from a sentiment that calls on the individual and the state to renounce the pursuit of their earthly interests out of thirst for fame or in hope of reward in the beyond; nor does it stand as a separate postulate without organic connection with other moral demands. Rather, pacifism here follows with logical necessity from the entire system of social life. He who, from the utilitarian standpoint, rejects the rule of some over others and demands the full right of self-determination for individuals and peoples has thereby rejected war also. He who has made the harmony of the rightly understood interests of all strata within a nation and of all nations among each other the basis of his world view can no longer find any rational basis for warfare. He to whom even protective tariffs and occupational prohibitions appear as harmful to everyone can still less understand how one could regard war as anything other than a destroyer and annihilator, in short, as an evil that strikes all, victor as well as vanquished.Mises, "Nation, State, and Economy: Contributions to the Politics and History of Our Time," translation by Leland Yeager, of Nation, Staat und Wirtschaft (1919), p. 91, (Humanities Press, forthcoming),Herbert Marcuse, in an attempt to smear classical liberalism with the brush of fascism and advocacy of war, engaged in a shameful distortion of Mises by wrenching a passage of Liberalism out of context in attempting to make Mises seem to be pro-fascist. If the context is examined, Mises engages in a fervent critique of fascism for its anti-liberalism and for its attempt to suppress ideas by violence. As for its foreign policy, fascism's glorification of force "cannot fail to give rise to an endless series of wars that must destroy all of modern civilization … " Mises's one sentence of approval of fascism was for its allegedly saving Italy from Bolshevism after World War I. Also disgraceful is Marcuse's total neglect of Mises's later Omnipotent Government, virtually a sustained philippic against Nazism and fascism.Marcuse's besmirching of Mises can be found in his Negations (Boston: Beacon Press, 1968), pp. 9–10. The passage from Mises (not footnoted by Marcuse) can be found in Liberalism, p. 51, and the full context of Mises's views on fascism in ibid., pp. 47–51. Also see Mises, Omnipotent Government (New Haven, Conn.: Yale University Press, 1944).
Mises also denounced the renewed Western imperialism of the late nineteenth century as the consequence of a turn away from free trade and free markets and a competing drive for exclusive State-controlled trading areas. Mises was unsparing toward the Western imperialist powers, including the relatively less dictatorial English empire, in his indictment:
We may date the beginning of modern imperialism from the late seventies of the last century, when the industrial countries of Europe started to abandon the policy of free trade and to engage in the race for colonial "markets" in Africa and Asia.
It was in reference to England that the term "imperialism" was first employed to characterize the modern policy of territorial expansion … [T]he end that the English imperialists sought to attain in the creation of a customs union embracing the dominions and the mother country was the same as that which the colonial acquisitions of Germany, Italy, France, Belgium, and other European countries were intended to serve, viz., the creation of protected export markets ...
In order to attain the goals that imperialism aimed at, it was not enough for the nations of Europe to occupy areas inhabited by savages incapable of resistance. They had to reach out for territories that were in the possession of peoples ready and able to defend themselves …
[E]verywhere we see the imperialist aggressors in retreat or at least already in difficulties.Mises, Liberalism, pp. 123–24. If Mises was harsh on the "imperialist aggressors," he was even harsher in his assessment of the European imperialist and colonialist policies pursued since the fifteenth century. He indicted European colonialism in Asia and Africa for racism, rapine, and genocidal policies of extermination:
The basic idea of colonial policy was to take advantage of the military superiority of the white race over the members of other races. The Europeans set out, equipped with all the weapons and contrivances that their civilization placed at their disposal, to subjugate weaker peoples, to rob them of their property, and to enslave them.Ibid., p. 125.
Mises adds scornfully that "attempts have been made to extenuate and gloss over the true motive of colonial policy with the excuse that its sole object was to make it possible for primitive peoples to share in the blessings of European civilization." But Mises rebuts that, if European civilization is truly superior, then "it should be able to prove its superiority by inspiring these peoples to adopt it of their own accord." And he adds the passionate indictment: "Could there be a more doleful proof of the sterility of European civilization than that it can be spread by no other means than fire and sword?"
Mises concludes his radical philippic against Western imperialism:
No chapter of history is steeped further in blood than the history of colonialism. Blood was shed uselessly and senselessly. Flourishing lands were laid waste; whole peoples destroyed and exterminated. All this can in no way be extenuated or justified. The dominion of Europeans in Africa and important parts of Asia is absolute. It stands in the sharpest contrast to all the principles of liberalism and democracy, and there can be no doubt that we must strive for its abolition.Ibid.
To the argument that total and immediate withdrawal of European governments from the colonies would lead to conflict and anarchy, Mises replied:
It may be safely taken for granted that up to now the natives have learned only evil ways from the Europeans, and not good ones. This is not the fault of the natives, but rather of their European conquerors, who have taught them nothing but evil. They have brought arms and engines of destruction of all kinds to the colonies; they have sent out their worst and most brutal individuals as officials and officers; at the point of the sword they have set up a colonial rule that in its sanguinary cruelty rivals the despotic system of the Bolsheviks. Europeans must not be surprised if the bad example that they themselves have set in their colonies now bears evil fruit…. Nor would they be justified in maintaining that the natives are not yet mature enough for freedom and that they still need at least several years of further education under the lash of foreign rulers before they are capable of being left on their own. For this "education" itself is at least partly responsible for the terrible conditions that exist today in the colonies, even though its consequences will not make themselves fully apparent until after the eventual withdrawal of European troops and officials.Ibid., p. 126.
As to the argument that the Europeans must remain in the colonial lands in the interests of the natives themselves Mises heaped scorn upon such sham expressions of altruism:
No one has a right to thrust himself into the affairs of others in order to further their interest, and no one ought, when he has his own interests in view, to pretend that he is acting selflessly only in the interest of others.
Self-Determination, National and IndividualIf it is radical and not conservative to be bitterly opposed to war and to Western imperialism, it is equally anti-conservative to be devoted to the concept of "national self-determination" In truth, national self-determination is the other side of the coin of anti-imperialism, for it means that the imperial power must be dislodged from its rule over subject nationalities.
Conservatives scorn the right of national self-determination as leading to the Balkanizing and dividing up of Great Powers and hence as inconsistent with power politics. But to Mises, self-determination of nations and nationalities was simply grounded in the rights of individuals. The right of self-determination of nationalities and sub-groups stems from the rights of man. Thus Mises states:
To the princely principle of subjecting just as much land as obtainable to one's rule, the doctrine of freedom opposes the principle of the right of self-determination of peoples, which follows necessarily from the principle of the rights of man. No people and no part of a people shall be held against its will in a political association that it does not want.Mises, "Nation, State and Economy," pp. 34–35.
Mises points out that he starts his analysis with the individual, and that nationalism too is grounded on the individual. In fact, he refers to nationalism as "the national aspect of the individual person."Ibid., p. 8 As an individualist, he is not content to leave the concept of self-determination with the national unit. On the contrary, the right of self-determination should be with individuals, the inhabitants of smaller as well as larger territorial areas, who should be able to exercise their will by means of freely-conducted plebiscites. Thus, Mises states:
To call this right of self-determination the "right of self-determination of nations" is to misunderstand it. It is not the right of self-determination of a delimited national unit, but the right of the inhabitants of every territory to decide on the state to which they wish to belong.Mises, Liberalism, p. 109. Mises adds that it therefore grossly violates true self-determination for one nation-state to try to incorporate citizens of other territories against their consent, and simply because of their ethnic or linguistic ties. In particular, he mentions the demand of the Italian Fascists to incorporate Italian-speaking Swiss cantons into Italy, and the Pan-German wishes to incorporate German Swiss cantons. Ibid.
Each local sub-group, to Mises, has then the right to choose what state to belong to, or even to set up its own independent state. Therefore:
The right of self-determination in regard to the question of membership in a state thus means: whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with. This is the only feasible and effective way of preventing revolutions and civil and international wars.Ibid., p. 109.
How far would Mises push the principle of secession, of self-determination? Down to a single village, he states; but would he press beyond even that? He calls the right of self-determination not of nations, "but rather the right of self-determination of the inhabitants of every territory large enough to form an independent administrative unit." But how about self-determination for the ultimate unit, for each individual? Allowing each individual to remain where he lives and yet secede from the State is tantamount to anarchism, and yet Mises comes very close to anarchism, blocked only by practical technical considerations:
If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. This is impracticable only because of compelling technical considerations, which make it necessary that the right of self-determination be restricted to the will of the majority of the inhabitants of areas large enough to count as territorial units in the administration of the country.Ibid., pp. 109–110.
That Mises, at least in theory, believed in the right of individual secession and therefore came close to anarchism can also be seen in his description of liberalism, that "it forces no one against his will into the structure of the State."Mises, "Nation, State and Economy," p. 41.
The Soviet ThreatIf there is anything that characterizes conservative foreign policy in the twentieth century it is a persistent policy of military confrontation with Soviet Russia. No domestic political and economic system could have been more abhorrent to Ludwig von Mises than Bolshevism. Russia's totalitarian collectivism cut against the grain of all Mises's ideals of a free market, democracy and minimal government.
Yet Mises consistently pursued a foreign policy of peace and nonintervention even here. First, "Let the Russians be Russians. Let them do what they want in their own country." There should be free importation of Russian writings: "Neurotics may enjoy them as much as they wish; the healthy will, in any case, eschew them." The Russians should even be permitted, Mises went on, to spread their propaganda and bribe people throughout the world: "If modern civilization were unable to defend itself against the attacks of hirelings, then it could not, in any case, remain in existence much longer." Further, Westerners should be permitted to visit Russia if they wish: "Let them view at first hand, at their own risk and on their own responsibility, the land of mass murder and mass misery." And capitalists should be permitted to grant loans or invest capital in Russia: "If they are foolish enough to believe that they will ever see any part of it again, let them make the venture."Mises, Liberalism, p. 153
But the corollary of a noninterventionist policy of refraining from war or prohibitions is also refraining from artificial subsidy. The Western governments, advised Mises, "must stop promoting Soviet destructionism by paying premiums for exports to Soviet Russia and thereby furthering the Russian Soviet system by financial contributions. Let them stop propagandizing for emigration and the export of capital to Soviet Russia."
Mises wisely concluded that "Whether or not the Russian people are to discard the Soviet system is for them to settle among themselves…. The only thing that needs to be resisted is any tendency on our part to support or promote the destructionist policy of the Soviets."Ibid., pp. 153–54.
Writing during World War II, Mises went so far as to look benignly on the prospect of a Communist Germany emerging after the war. For communism would succeed in wrecking Germany's industrial machine and thereby weaken its potential for making war in the future.
If Germany turns toward communism it cannot be the task of foreign nations to interfere…. The intelligent opponents of communism … will not understand why their nation should essay to prevent the Germans from inflicting harm upon themselves. The shortcomings of communism would paralyze and disintegrate Germany's industrial apparatus and thereby weaken its military power more effectively than any foreign intervention could ever do.Mises, Omnipotent Government, p. 264.
Immigration RestrictionsConservatism is invariably marked by a policy of immigration restrictions, to preserve the homogeneity of the national culture or ethnic character, and to raise the standard of living of national workers by keeping out laborers who would lower wage rates at home. Mises's laissez-faire radicalism was marked by uncompromising attachment to freedom of immigration. Not only that; so bitter was he at any immigration laws that at times he came close to calling for war against those nations, such as the United States and Australia, who persisted in locking up parts of the earth and keeping out other peoples.
First, Mises pointed out that immigration barriers are creatures of trade unions, who use them as a method of raising domestic wage rates by excluding foreign workers. The result is to keep foreign workers in a permanently less productive situation with lower wage rates, and to lower the productivity of human labor throughout the world. Wage exclusionism, plus racial fears of foreigners, account for the persistence of immigration barriers in the United States and Australia.
In Liberalism, Mises confined himself to pointing out that immigration barriers will only be able to be removed in a classical liberal world. In a world of minimal States, what difference would it make for Americans or Australians which ethnic or racial groups were in a majority in their country?Mises, Liberalism, pp. 141–42.
At other times, however, Mises was not so gentle. In Nation, State and Economy he called Australia "the imperialistic state par excellence in its immigration legislation," and linked this policy with its greater closeness to socialism than any of the other Anglo-Saxon states (in 1919).Mises, "Nation, State and Economy," p. 192n. What is more, he chastised the League of Nations for not doing something about the U.S./Australian policy of immigration restrictions:
It is still more serious that the League of Nations does not recognize the freedom of movement of the person, that the United States and Australia are still allowed to block themselves off from unwanted immigrants…. Never can Germans, Italians, Czechs, Japanese, Chinese, and others regard it as just that the immeasurable landed wealth of North America, Australia, and East India should remain the exclusive property of the Anglo-Saxon nation and that the French be allowed to hedge in millions of square kilometers of the best land like a private park.Ibid., p. 97.
Perhaps Mises's most bitter assault upon American and Australian immigration barriers came in an article for a Viennese newspaper at the end of 1935.Mises, "The Freedom to Move as an International Problem," trans. Bettina Bien Greaves from "Freizügigkeit als internationales Problem" (1935), in The Clash of Group Interests and Other Essays (New York: Center for Libertarian Studies, 1978), pp. 19–22. He points out that there are extensive tracts of land which are sparsely settled, notably in the U.S.A. and the British Commonwealth nations. As a result of their relatively scarce population, their productivity, and hence their wage rates, are higher than in Europe. Hence these lands
have been the goals of would-be European immigrants for more than 300 years. However, the descendants of those earlier emigrants now say: There has been enough migration. We do not want other Europeans to do what our forefathers did when they emigrated to improve their situation. We do not want our wages reduced by a new contingent of workers from the homeland of our fathers. We do not want the migration of workers to continue until it brings about the equalization of the height of wages. Kindly stay in your old homeland, you Europeans, and be satisfied with lower wages.Ibid., p. 20.
Mises continues sardonically that the oft-celebrated "miracle' of the high wages in the United States and Australia may be explained simply by the policy of trying to prevent a new immigration. For decades people have not dared to discuss these things in Europe."Ibid. But Mises made it clear that here was one European who was not afraid to discuss these issues. In fact, after pointing out that European workers suffer from these immigration barriers, he warns darkly that
it may be that one day they will reach the conclusion that only weapons can change this unsatisfactory situation. Thus, we may face a great coalition of the lands of would-be emigrants standing in opposition to the lands that erect barricades to shut out would-be immigrants.Ibid., pp. 21–22.
Mises concludes that the League of Nations is trying to rectify underlying conditions of conflict in order to avoid war. But he warns that simply rectifying the problem of raw materials or the colonies, or giving back German colonies, would not be enough, for
what the European emigrants seek is land where Europeans can work under climatic conditions that are tolerable for them and where they can earn more than they can in their homeland, which is overpopulated and less well provided for by nature. Under present circumstances this can be offered only in the New World, in America and Australia…. This is a problem of the right of immigration into the largest and most productive lands, the climates of which are suitable for white European workers. Without the reestablishment of freedom of migration throughout the world, there can be no lasting peace. Ibid., p. 22.
The Theory of Class ConflictThe idea that there are class conflicts in society, and that there is a ruling class or classes which governs and exploits a ruled, would seem to be Marxian concepts alien to classical liberalism. Classical liberals believe in the harmony of long-run interests of everyone in society, so that, it would seem, statist intervention is merely the product of unsound and erroneous ideas rather than the pursuit of common group or class interests at the expense of the rest of society.
It is true that the latter analysis is the dominant strain in Mises's thought. But there is another motif, which exists in Mises as well as in classical liberalism from Adam Smith onward. This is an attack on "special privilege," sought by various groups through the State at the expense of everyone else, pursuing what may be their short-run but is still their strongly felt advantage. Subsidies, compulsory cartels, protective tariffs and, as we have seen, immigration restrictions are among the many examples. But in that case common venality takes its place alongside error as a reason for statism.
In the history of thought, classical liberals rather than Marxists pioneered in the concept of the "ruling class"—defined not in the Marxian sense as including the hiring of wage workers on the market, but strictly as that group or groups that gets control of the State apparatus and uses it to benefit itself at the expense of the rest of the society. Perhaps the first "class conflict" theorists were the libertarian writers Charles Comte and Charles Dunoyer, in Reconstruction France after the final defeat of Napoleon.See the notable article by Leonard P. Liggio, "Charles Dunoyer and French Classical Liberalism," The Journal of Libertarian Studies 1 (Summer 1977): 153–78. The Comte-Dunoyer thesis, influenced by J. B. Say, was that "ruling class" may be defined simply as that class which manages to rule the State, while the ruled are those dominated by the former through the State. Thus, class conflict does not inhere in the free-market economy or society, but is strictly in relation of State. Class harmony exists only on the free market; class conflict is generated by statism and by the relation of classes to the State.
The dilettantish French nobleman, Count Claude Henri de Saint-Simon, was originally a disciple of Comte and Dunoyer, and picked up his own theory of class conflict from them. Unfortunately, as Saint-Simon and particularly his followers (the Saint-Simonians) became socialists, they changed the theory of class conflict to add a fatally inconsistent element. It was this self-contradictory theory of classes that was then picked up by Karl Marx and incorporated into the Marxist structure. Briefly, it held, with Comte and Dunoyer, that the major stages of statism had been, first, Oriental despotism, in which an emperor and his tax-supported bureaucracy constituted the ruling class exploiting and dominating the peasantry; and, second, feudalism, in which landlords dominated the State and used it to expropriate the peasantry and exact rents from them. In both cases, Oriental despotism and feudalism, the ruling classes were those who managed to seize control of the State apparatus, the organized engine of violence in society. But then the Saint-Simonians and Marx added another exploitative "ruling class": capitalists who hire workers on the market. Before capitalism, in short, conflicting classes are defined as those in different relations to the State. In contrast, capitalists who hire workers engage in a market transaction, have nothing to do with the State, and yet for some reason are supposed to have a common interest. What the socialists overlooked is that capitalists' hiring workers is a voluntary rather than a coercive transaction; and that capitalists have no class interests in common. On the contrary, capitalists compete with each other, just as workers do. There are no common "capitalist" or worker class interests on the free market.The fact that Marxists say that, as a second and further step, the "capitalists" then gain control of the State, which becomes the "executive committee of the ruling class," is not enough to save their theory. For the capitalists are supposed to be a "ruling class" simply by virtue of being capitalists, and before their alleged takeover of the State, which is only supposed to add an extra dimension to their class rule.
Ludwig von Mises, while showing no knowledge of previous classical liberal ruling class theory, arrived at a very similar analysis. He distinguished early between "classes," which could logically be any grouping of people on the free market and which had no common or conflicting in interests, and "estates" or what he later called "castes." Castes have common interests conflicting with those of other castes, for their relations to the State differ. In contrast to classes in the market, which have no common interests and therefore do not conflict with each other,
estates were legal institutions, not economically determined facts. Every man was born into an estate and generally remained in it until he died. All through life one possessed estate-membership, the quality of being a member of a certain estate. One was master or serf, freeman or slave, lord of the land or tied to it, patrician or plebeian, not because one occupied a certain position in economic life, but because one belonged to a certain estate.Mises, Socialism (1922; 2nd ed., New Haven: Yale University Press, 1951), p. 332. Mises also points out trenchantly that Marx and Engels continually confused the concepts of class and estate, and that Marx broke off the third volume of Capital just when he was finally about to tackle a task he had never accomplished: a precise definition of his much-used concept of "class" (ibid., pp. 328n., 332n., 336–342).
Mises goes on to scoff at the later whitewashing of feudalism as being reciprocal and somehow voluntary, as "the higher orders gave the lower protection, sustenance, the use of the land, and so on." But on the contrary,
such ideas were alien to the institution in its heyday, when the relationship was frankly one of violence, as may be clearly seen in the first essential distinction drawn by estate—the distinction between free and unfree. The reason why the slave looked on slavery as natural, resigning himself to his lot instead of continuing to rebel and run away … was not that he believed slavery to be a just institution, equally advantageous to master and slave, but simply that he did not want to endanger his life by insubordination.Ibid., p. 333.
What estates or castes have in common are their superior or inferior positions before the law. Thus: "In a society divided into estates all members of the estates who lack complete rights before the law have one interest in common with other members: they struggle to improve the legal position of their estate. All who are bound to the soil strive to have the burden of rent lightened; all slaves strive for freedom, that is, for a condition under which they can use their labour for themselves."Ibid., pp. 335–36.
Mises recognizes explicitly that common class interests are a function of state intervention:
competition is suspended by special interests only when economic liberty is limited in some way…. Liberal theory does not deny that state interference in trade creates special interests, nor that by this means particular groups can extract privileges for themselves. It merely says that such special favours … lead to violent political conflict, to revolts of the nonprivileged many against the privileged few, which by constantly disturbing the peace, hold up social development.Ibid., p. 337.
Perhaps Mises's clearest exposition of the difference between "class" and "caste" came in an article written in 1945. He points out:
Under a caste system … [s]ociety is divided into rigid castes. Caste membership assigns to each individual certain privileges (privilegia favorabilia) or certain disqualifications (privilegia odiosa). As a rule a man['s] … personal fate is inseparably linked with that of his caste. He cannot expect an improvement of his conditions except through an improvement in the conditions of his caste or estate. Thus there prevails a solidarity of interests among all caste members and conflict of interests among the various castes. Each privileged caste aims at the attainment of new privileges and at the preservation of the old ones. Each underprivileged caste aims at the abolition of its disqualifications. Within a caste society there is an irreconcilable antagonism between the interests of the various estates….
In a free-market society … there are neither privileged nor underprivileged. There are no castes and therefore no caste conflicts. There prevails the full harmony of the rightly understood (we say today, of the long-run) interests of all individuals and of all groups.
Our age is full of serious conflicts of economic group interests. But these conflicts are not inherent in the operation of an unhampered capitalist economy. They are the necessary outcome of government policies interfering with the operation of the market. They are not conflicts of Marxian classes. They are brought about by the fact that mankind has gone back to group privileges and thereby to a new caste system.Mises, "The Clash of Group Interests" (1945), in Mises, Clash of Group Interests and Other Essays, pp. 2–3, 5. In this essay, for the last time, Mises returned to his immigration theme, pointing out that, say in Australia and New Zealand , immigration laws had "integrated their whole citizenry into a privileged caste." By such immigration barriers, the workers of these countries "create those tensions which must result in war whenever those injured by such policies expect that they can brush away by violence the measures of foreign governments that are prejudicial to their own well-being" (ibid., pp. 4–6). Mises returned to the theme of caste vs. class in his last major work, Theory and History (New Haven: Yale University Press, 1957), pp. 113–16.
Christianity and the Social OrderOne of the hallmarks of conservatism, in this century as in the last, is devotion to Christianity both as a religion and as the foundation of the social order. Christianity is supposed to be the bulwark of the rights of private property.
In his brief discussion of religion in his magnum opus, Human Action, Ludwig von Mises took a moderate tone. Liberalism, Mises reiterates, is not anti-religion, but combats any theocratic attempt to impose a social order according to alleged divine commands."It would … be a serious mistake to conclude that the sciences of human action and the policy derived from their teachings, liberalism, are antitheistic and hostile to religion. They are radically opposed to all systems of theocracy. But they are entirely neutral with regard to religious beliefs which do not pretend to interfere with the conduct of social, political, and economic affairs." And: "It is a distortion of fact to say, as many champions of religious theocracy do, that liberalism fights religion. Where the principle of church interference with secular issues is in force, the various churches, denominations and sects are fighting one another. By separating church and state, liberalism established peace between the various religious factions and gives to each of them the opportunity to preach its gospel unmolested" (Mises, Human Action, 3rd rev. ed. [Chicago: Henry Regnery, 1966], pp. 155, 157). But in his earlier work, Socialism, he set forth a detailed critique of Christianity. Here Mises was far more caustic. Indeed, his chapter "Christianity and Socialism" is a virtual philippic against the social implications of the Christian Gospel.Mises, Socialism, pp. 409–29.
While he concedes that the Christian Gospels are formally neutral with respect to any social order, Mises sees several dire implications that necessarily follow from the Gospels. First, he claims that Jesus' teachings make sense only as admonitions for a Kingdom of God that was supposed to arrive imminently—hence the early voluntary "communism" of the Christians, the injunctions by Jesus to take no heed of work or toil, etc. So that at best, Jesus' teachings were supposed to apply not to life on earth but only for preparation for the imminent transmutation of the earth into the Kingdom of God. But then, when that Kingdom failed to arrive, the Gospels became disastrous if taken seriously as a social ethic. Furthermore, Jesus' teachings, for Mises, are filled with hatred and resentment of the rich—relatively harmless if earthly life is to end instantly, but fatal if taken seriously as an ethic for the world and for human society.
Hence, for Mises, the Christian Church, despite continuing attempts to come to terms with the world and to carve out a reasonable social ethic, is stuck because of its necessary groundwork in Jesus' Gospels, which Mises regards as ranging from silly to downright dangerous.
The following passage conveys the flavor of Mises's view of Jesus as nihilist waiting for the imminent arrival of the Kingdom:
"The Time is fulfilled, and the Kingdom of God is at hand: repent ye, and believe the gospel." These are the words with which in the Gospel of Mark, the Redeemer makes his entry (Mark I, 15). Jesus regards himself as the prophet of the approaching Kingdom of God, the Kingdom which according to ancient prophecy shall bring redemption from all earthly insufficiency, and with it from all economic cares. His followers have nothing to do but to prepare themselves for this Day. The time for worrying about earthly matters is past, for now, in expectation of the Kingdom men must attend to more important things. Jesus offers no rules for earthly action and struggle; his Kingdom is not of this world. Such rules of conduct as he gives his followers are valid only for the short interval of time which has still to be lived while waiting for the great things to come. There the believers will eat and drink at the Lord's table. (Luke XXII, 30).
It is only in this way that we can understand why, in the Sermon on the Mount, Jesus recommends his own people to take no thought for food, drink, and clothing; why he exhorts them not to sow or reap or gather in barns, not to labour or spin. It is the only explanation, too, of his disciples' "communism" … The primitive Christians do not produce, labour, or gather anything at all. The newly converted realize their possessions and divide the proceeds with the brethren and sisters. Such a way of living is untenable in the long run. It can be looked upon only as a temporary order which is what it was in fact intended to be. Christ's disciples lived in daily expectation of Salvation….
The expectation of God's own reorganization when the time came and the exclusive transfer of all action and thought to the future Kingdom of God, made Jesus' teaching utterly negative. He rejects everything that exists without offering anything to replace it. He arrives at dissolving all existing social ties…. The motive force behind the purity and power of this complete negation is ecstatic inspiration and enthusiastic hope of a new world. Hence his passionate attack upon everything that exists. Everything may be destroyed because God in His omnipotence will rebuild the future order…. The clearest modern parallel to the attitude of complete negation of primitive Christianity is Bolshevism. The Bolshevists, too, wish to destroy everything that exists because they regard it as hopelessly bad. But they have in mind ideas, indefinite and contradictory though they may be, of the future social order…. Jesus's teaching in this respect, on the other hand, is merely negation.Ibid., pp. 413–16.
This is not all, however, for in attempting to establish a worldly ethic, the Church finds that the Gospels are filled with attacks on the rich. In fact, for Mises, resentment against the rich is at the heart of Gospel teaching:
One thing of course is clear, and no skilful [sic] interpretation can obscure it. Jesus's words are full of resentment against the rich, and the Apostles are no meeker in this respect. The Rich Man is condemned because he is rich, the Beggar praised because he is poor…. In God's Kingdom the poor shall be rich, but the rich shall be made to suffer. Later revisers have tried to soften the words of Christ against the rich … but there is quite enough left to support those who incite the world to hatred of the rich, revenge, murder and arson…. This is a case in which the Redeemer's words bore evil seed. More harm has been done, and more blood shed, on account of them than by the persecution of heretics and the burning of witches. They have always rendered the Church defenceless against all movements which aim at destroying human society. The church as an organization has certainly always stood on the side of those who tried to ward off communistic attack. But it … was continually disarmed by the words: "Blessed be ye poor; for yours is the Kingdom of God."Ibid., pp. 419–20.
Mises then goes on to attack the common conservative idea that Christianity forms a vital bulwark "against doctrines inimical to property, and that it makes the masses unreceptive to the poison of social incitement." But much as the Church might wish to do so, it is stuck with the Gospels, which are "indifferent to all social questions on the one hand, full of resentment against all property and against all owners on the other." Hence, carried over to the real world, Christian doctrine "can be extremely destructive." For [n]ever and nowhere can a system of social ethics embracing social cooperation be built up on a doctrine which prohibits any concern for sustenance and work, while it expresses fierce resentment against the rich, preaches hatred of the family, and advocates voluntary castration.Ibid., pp. 420–21.
The notable cultural achievements of the Church over the centuries, according to Mises, were the work of the Church, and not of Christianity. "The Church's achievement," asserted Mises, was to "render them [the social ethics of Jesus] harmless," but it could necessarily do so for only a limited period of time. Therefore, he concludes, rather than the Enlightenment having cleared the way for socialism by undermining religious feeling, it is Christianity that has done so, bearing full fruit in the various forms of Christian Socialism. The Church has been harmful rather than helpful to private property and a free economy: "it is the resistance which the Church has offered to the spread of liberal ideas which has prepared the soil for the destructive resentment of modern socialist thought." The official Church tried to resist the Christian Socialist movements at first, "but it had to submit in the end, just because it was defenseless against the words of the Scriptures.Ibid., p. 420.
Furthermore, the Christian Church is always striving to dominate society, and hence is trying to suppress individual freedom:
As long as rationalism and the spiritual freedom of the individual are maintained in economic life, the Church will never succeed in fettering thought and shepherding the intellect in the desired direction. To do this it would first have to obtain supremacy over all human activity. Therefore it cannot rest content to live as a free Church in a free state; it must seek to dominate that state.Ibid., p. 427.
Mises concludes, then, by being highly pessimistic about the possibility of reconciling Christianity with a free social order based on private property. "A living Christianity cannot, it seems, exist side by side with Capitalism." He finds only one slim hope for an opposite conclusion: the thin possibility that the Roman Catholic Church, threatened by chauvinist nationalism and national (Protestant) churches, may abandon nationalism and adopt the true universalism of unconditional private property in the means of production.Ibid., pp. 428–29. For an excellent discussion of Mises as laissez-faire radical and particularly of Mises on Christianity, see Ralph Raico, "Ludwig von Mises," The Alternative: An American Spectator (February 1975), pp. 21–23.
Neither does Mises find any more hope in religions other than Christianity; to the contrary, they are dismissed brusquely and with contempt. Eastern religions are hopelessly anti-capitalist; the Greek Church "has been dead for over a thousand years"; and the "Islamic and Jewish religions are dead." Islam and Judaism "offer their adherents nothing more than a ritual"; they "suppress the soul, instead of elevating and saving it." They maintain themselves by "rejecting everything foreign and 'different', by traditionalism and conservatism. Only their hatred of everything foreign rouses them to great deeds from time to time."Mises, Socialism, p. 410. Also see ibid., p. 428.
The French RevolutionConservatism was born in bitter reaction against the French Revolution. From that day to this, all branches of conservatism unite in hostility to that Revolution, which they castigate as the precursor of the Bolshevik Revolution and of the other totalitarian evils of the twentieth century. The American Revolution, in contrast, was the "good" revolution because it was not really a revolution at all, but simply a conservative response to defend the status quo against the encroachments of the British Crown.
Ludwig von Mises, in contrast, was always a consistent admirer of the French Revolution which he perceived as a movement inspired by the American Revolution and its libertarian ideals. He regarded himself as a man of 1789, an heir of the Enlightenment.
Thus, writing after World War I, Mises asserted that "for us and for humanity there is only one salvation: return to the rationalistic liberalism of the ideas of 1789."Mises, "Nation, State and Economy," p. 239. In contrast, in the "League of Nations of Versailles the ideas of 1914 are in truth triumphing over those of 1789."Ibid., p. 238.
Conclusion: The Historical MisesThe purpose of this paper, in the light of the recent Mises centennial year, is to rescue the real, "historical" Mises from the image which has been generally formed of him and has been adopted by the bulk of his followers. This is the nonthreatening image of Mises as a quintessential National Review conservative.
But we find that, particularly in the years before his American "exile," Mises was virtually the diametric opposite of a modern conservative. These views were not stressed during his later American period, but neither were they repudiated. Discussion of them more or less dropped out of Misesian writings. But to ignore the earlier Mises is to ignore a basic theme of his thought, for his thought forms a remarkably consistent whole over the decades of his long and active life.
We find, then, a Mises with the following strongly held political views: a proclaimed pacifist, who trenchantly attacked war and national chauvinism; a bitter critic of Western imperialism and colonialism; a believer in nonintervention with regard to Soviet Russia; a strong proponent of national self-determination, not only for national groups, but for subgroups down to the village level—and in theory, at least, down to the right of individual secession, which approaches anarchism; someone so hostile to immigration restrictions that he almost endorsed war against such countries as the United States and Australia to force them to open up their borders; a believer in the importance of class conflict in relation to the State; a caustic rationalist critic of Christianity and of all religion; and an admirer of the French Revolution.
Whatever these views were, they were most emphatically not conservatism. On the contrary, they were something very different and in age-old conflict with conservatism. Ludwig von Mises was truly and proudly an heir of early-nineteenth-century laissez-faire radicalism, of Bentham, of James Mill, Cobden, and Spencer. He was a rationalist and a libertarian.
[This article is excerpted from chapter 21 of Mises: The Last Knight of Liberalism.]
In the early 1950s, Mises's NYU seminar dealt increasingly with epistemological questions. As he said to Ludwig Lachmann, he felt that the analysis of epistemological problems would be the number one task in the social sciences in the coming years.[1] It was the topic of his last two monographs: Theory and History (1957) and The Ultimate Foundation of Economic Science (1962).
The subject had been prominent in his thoughts and reflections since the publication of "Sociology and History" (1929) and "Conception and Understanding" (1930). It was one of the two areas in which he felt contemporary economics was most deficient (the other one being the theory of economic calculation). In Nationalökonomie and Human Action he had stressed the historical significance of the problem:
It is a complete misunderstanding of the meaning of the debates concerning the essence, scope, and logical character of economics to dismiss them as the scholastic quibbling of pedantic professors. It is a widespread misconception that while pedants squandered useless talk about the most appropriate method of procedure, economics itself, indifferent to these idle disputes, went quietly on its way. In the Methodenstreit between the Austrian economists and the Prussian Historical School, the self-styled "intellectual bodyguard of the House of Hohenzollern," and in the discussions between the school of John Bates Clark and American Institutionalism much more was at stake than the question of what kind of procedure was the most fruitful one. The real issue was the epistemological foundations of the science of human action and its logical legitimacy.[2]
He had come to the conclusion that political motivations were behind these epistemological critiques of economic science:
The main motive for the development of the doctrines of polylogism, historicism, and irrationalism was to provide a justification for disregarding the teachings of economics in the determination of economic policies. The socialists, racists, nationalists, and etatists failed in their endeavors to refute the theories of the economists and to demonstrate the correctness of their own spurious doctrines. It was precisely this frustration that prompted them to negate the logical and epistemological principles upon which all human reasoning both in mundane activities and in scientific research is founded.[3]
Thus the epistemology of economics was not just an idle pastime for ivory-tower intellectuals; it was of direct practical relevance. How does economic theory relate to reality? Most economists believed — and still believe today — that their propositions concern only hypothetical conditions never actually given in real life. To Mises, this point of view was paradoxical: "It is strange that some schools seem to approve of this opinion and nonetheless quietly proceed to draw their curves and to formulate their equations. They do not bother about the meaning of their reasoning and about its reference to the world of real life and action."[4] He himself felt it was a necessity to explain the epistemology of economic science and devoted chapters two and three of Human Action (a total of 62 pages) to these issues.
However, despite its fundamental importance, epistemology did play only an incidental role in Human Action. The great organizing theme of Human Action was the theory of economic calculation. Mises began with an analysis of the conditions under which no economic calculation could take place, then turned to the discussion of economic calculation in general, then within the market economy, and finally to those social settings that render economic calculation impossible (socialism) or pervert its use (interventionism). From a philosophical point of view, Human Action made a sweeping case for utilitarian social philosophy — "utilitarian" with a distinct Misesian flavor. And the scientific core of this case was economics and the theory of economic calculation in particular.
In his new book, Mises made another case for his utilitarian philosophy. This time, the argument turned on the epistemology of social analysis. Mises argued that the only scientific interpretation of social reality was based on economics and history, and that the conclusions of both these disciplines led to the more speculative generalizations of utilitarian philosophy as he understood it. He showed that the major alternative approaches — Marxism, positivism, and historicism — despite their pretensions to science, were untenable on epistemological grounds. They were essentially metaphysical doctrines; that is, their claims were not based on ascertainable fact, but on speculations (many of which, as Mises would show, were incoherent).
The new book was eventually published under the title Theory and History and subtitled An Interpretation of Social and Economic Evolution.[5] It has remained one of his least read and least understood works. The difficulty lay only partly in the abstract nature of its subject. The main hurdle was, as in several of his other writings, a lack of pedagogical effort on his part. Many people know what to expect when they consult a treatise on economics. But few have any idea about the relationship between theoretical and historical approaches to social analysis.
Mises's new book was not about narrating mankind's social and economic evolution. It dealt instead with the epistemological problems of the various competing narratives. In Human Action, he had referred to these problems incidentally. He had stressed that economic analysis, starting from the actions of individual persons, gave a purely fact-based account of the origin of human society. The holistic approaches had been unable to do this. They explained society by "theological or metaphysical professions of faith."[6] In Theory and History, he amplified this argument into a sweeping epistemological vindication of the case for liberty and capitalism.
The book is divided into four parts. Part one deals with the central phenomenon of the social sciences: value. Mises explains the nature of value and studies the implications for a scientific analysis of human behavior. In part two, he argues that, while all endeavors to discover scientific laws must be built on the assumption of strict determinism, all attempts to find laws that determine the origin of ideas and of value judgments have been in vain. Marxist dialectical materialism and other theories that explain ideas in terms of more fundamental material conditions are merely metaphysical speculation. The same holds true for those philosophies of history that explain the evolution of society in terms of some final destination. In part three, Mises gives an in-depth discussion of the problems of scientific historical analysis, developing the approach of the Southwest German School of historiography. In part four, finally, he critically dissects various speculations about history. In what follows, we will discuss the major elements of his contribution.
The Argument in a Nutshell
For Mises, the starting point is that "[a]ny epistemological speculation must lead toward determinism." This is so because the human mind is the instrument through which we learn about all things, and our human mind has a determinist bent. It cannot help thinking that all things are strictly determined by certain causes.
Whatever the true nature of the universe and of reality may be, man can learn about it only what the logical structure of his mind makes comprehensible to him. …
The logical structure of his mind enjoins upon man determinism and the category of causality. As man sees it, whatever happens in the universe is the necessary evolution of forces, powers, and qualities which were already present in the initial stage of the X out of which all things stem. All things in the universe are interconnected, and all changes are the effects of powers inherent in things. No change occurs that would not be the necessary consequence of the preceding state. All facts are dependent upon and conditioned by their causes. No deviation from the necessary course of affairs is possible. Eternal law regulates everything. In this sense determinism is the epistemological basis of the human search for knowledge. Man cannot even conceive the image of an undetermined universe. In such a world there could not be any awareness of material things and their changes. It would appear a senseless chaos. Nothing could be identified and distinguished from anything else. Nothing could be expected and predicted. In the midst of such an environment man would be as helpless as if spoken to in an unknown language. No action could be designed, still less put into execution. Man is what he is because he lives in a world of regularity and has the mental power to conceive the relation of cause and effect.[7]This point of view implies that human action could be explained, at least in theory, in terms of underlying material forces. We know that human action is immediately determined by the ideas and value judgments of the acting individuals. But these ideas and value judgments must in turn be determined by more fundamental causes. If such causes were physical or chemical processes, then the explanation of human behavior could become a branch of applied physics or applied chemistry.
However — and this is the crucial consideration that Mises had stressed already in previous work — at present nobody knows anything about the more fundamental causes of human behavior. Up to now all attempts to identify laws that would explain ideas and value judgments in terms of physical, chemical, or other processes have been in vain. There are various hypotheses about what such basic determination could look like. But not a single one of them has ever been validated.[8] All such hypotheses are therefore mere speculation. They are philosophical or metaphysical constructs, not scientific knowledge.[9]
Our deficient knowledge about the more remote causes of human behavior has two straightforward methodological implications. All efforts to explain the causes and consequences of human behavior must, at least for the time being, take individual human behavior as an ultimate point of departure. They must accept the principle of methodological individualism. The older economists had applied this principle intuitively and even Schumpeter, who coined the term, defended it merely on grounds of expediency. Mises delivered an epistemological demonstration of its necessity. Methodological individualism is rooted in deficient human knowledge.
The causal analysis of individual human behavior must take account of the fact that any human action has certain invariant consequences — that is, consequences that result from like action at any place and any time. For example, an increase of the quantity of money tends to entail an increase of the price level above the level it would otherwise have reached, irrespective of when and where the money supply is increased. The study of such consequences is the task of praxeology and economic science.
But human action also has contingent causes and consequences. The very same action — increasing the quantity of money — can be inspired by very different ideas and value judgments. And the objective consequences resulting from any action can provoke very different individual reactions at different times and places. In other words, the causal chains through which ideas and value judgments are connected with human action are contingent. The elucidation of these contingent causal chains is the task of historical research.[10]
Mises stressed that this is as far as scientific analysis of human action can go. Starting from observable human behavior we can explain its invariant consequences (with the help of economics); we can also explain its contingent consequences (by historical understanding); and we can to some extent explain how this behavior resulted from the ideas and value judgments of the acting person in the particular case under consideration (again by understanding).
Mises did not exclude the possibility that individual value judgments and ideas had invariant causes, but again, neither he himself nor anybody else knew what they were. At present, only some of the contingent causes of human action could be identified by historical understanding on a case by case basis. And even this analysis was not likely to give the full picture. There was an unfathomable remnant that defied any explanation whatever: historical individuality. Mises explained:
The characteristics of individual men, their ideas and judgments of value as well as the actions guided by those ideas and judgments, cannot be traced back to something of which they would be the derivatives. There is no answer to the question why Frederick II invaded Silesia except: because he was Frederick II.[11]
It follows that the social sciences, at least for the time being, cannot be bound with the natural sciences into a unified body of scientific knowledge. "This ignorance splits the realm of knowledge into two separate fields, the realm of external events, commonly called nature, and the realm of human thought and action."[12] For methodological reasons, the social sciences are separate from the natural sciences. Mises called this the principle of methodological dualism.
Social analysis, if it just sticks to the known facts, must explain all social phenomena as resulting from individual action, and the causal chain of events must start and end with the ideas and value judgments of individuals. Scientific endeavors within the constraints of methodological individualism and methodological dualism entail the development of the disciplines called "praxeology" and "history." The former is the discipline that describes the invariant consequences of human action that result regardless of time and place. The latter is the discipline that (1) describes value judgments from the point of view of the acting person and (2) describes how individual actions and other relevant factors combined with one another in a given objective context to produce a definite outcome. History describes in retrospect how the acting person perceived the situation in which he had to act, what he aimed at, what he believed to be the means at his disposition. And it uses the general laws provided by economics and the natural sciences to describe the objective impact that the acting person had through his behavior. Thus the mission of history is to describe the drama of social and economic evolution from the point of view of its protagonists. Its specific tool is "psychology" or "specific understanding" or — Mises's favorite expression — "thymology."
Of the two disciplines, economics had the most momentous practical implications.[13] In Human Action, Mises had shown that economic analysis leads directly to laissez faire conclusions. He demonstrated that government intervention entails consequences that are unwanted even from the point of view of the champions of these interventions.
In Theory and History, he completed the case for capitalism from the epistemological point of view. In particular, he took on those theories that were grounded on an explicit or implicit rejection of methodological individualism and methodological dualism. His basic argument against the approaches of Marxism, teleological philosophies of history, and positivism was that they had no scientific underpinning whatever. They were based on certain beliefs about social and economic evolution, but they had not delivered the goods. Their most fundamental tenets could neither be refuted nor verified with the tools of science: reason and observation.
Moreover, to the extent that they did make propositions about ascertainable facts, they were wrong (or incoherent) at the crucial junctures of the argument. For example, Marxism and the various philosophies of history could not explain how the general direction in which they believed society was moving resulted from individual action. Positivism blithely disregarded the fact that there are no constant relationships in observable human behavior. The champions of historicism contradicted themselves whenever they championed any government policy whatever, while holding to the notion that there was no such thing as economic law. Strictly speaking, these were metaphysical or quasi-religious doctrines, not science.
Notes
[1] He had said this in a July 1956 meeting with Lachmann. See Lachmann to Mises, letter dated September 17, 1956; Grove City Archive: Lachmann file.
[2] Mises, Human Action, p. 4.
[3] Ibid., p. 6.
[4] Ibid.
[5] Mises, Theory and History (New Haven: Yale University Press, 1957).
[6] Mises, Human Action, p. 145. See also ibid., pp. 145-147.
[7] Mises, Theory and History, pp. 73f. He emphasizes that from the point of view of a perfect being such as God, things might look completely different. This position can best be characterized as a Leibnizian rationalism. See G.W. Leibniz, Nouveaux essais sur l'entendement humain, preface, p. 28. On the importance of Leibnizian rationalism for Austrian intellectual life, see William M. Johnston, The Austrian Mind (Los Angeles: University of California Press, 1972), chap. 19. Johnston is however unconvinced that the Austrian School of economics was influenced by the Leibnizian tradition. See ibid, pp. 86f.
[8] Thirteen years before, he had written: "We may reasonably assume as hypothesis that man's mental abilities are the outcome of his bodily features. Of course, we cannot demonstrate the correctness of this hypothesis, but neither is it possible to demonstrate the correctness of the opposite view as expressed in the theological hypothesis. We are forced to recognize that we do not know how out of physiological processes thoughts result. We have some vague notions of the detrimental effects produced by traumatic or other damage inflicted on certain bodily organs; we know that such damage may restrict or completely destroy the mental abilities and functions of men. But that is all." Omnipotent Government (Spring Mills, Penn.: Libertarian Press, 1985 [1944]), p. 156.
[9] This point also applied to F.A. Hayek's Sensory Order (Chicago: University of Chicago Press, 1952), a book that Mises did not cite. Hayek had attempted to analyze the mechanism through which physiological impulses come to be translated into mental perception. Apparently, Mises was not convinced that Hayek delivered more than metaphysical speculation.
[10] Individual value judgments and actions "are ultimately given as they cannot be traced back to something of which they would appear to be the necessary consequence. If this were not the case, it would not be permissible to call them an ultimate given. But they are not, like the ultimate given in the natural sciences, a stopping point for human reflection. They are the starting point of a specific mode of reflection, of the specific understanding of the historical sciences of human action." Mises, Theory and History, p. 310, emphasis added.
[11] Mises, Theory and History, p. 183.
[12] Mises, Theory and History, p. 1.
[13] "Thymology has no special relation to praxeology and economics. The popular belief that modern subjective economics, the marginal utility school, is founded on or closely connected with 'psychology' is mistaken. [ … ] praxeology is not concerned with the events which within a man's soul or mind or brain produce a definite decision between an A and a B. It takes it for granted that the nature of the universe enjoins upon man choosing between incompatible ends. Its subject is not the content of these acts of choosing but what results from them: action. It does not care about what a man chooses but about the fact that he chooses and acts in compliance with a choice made." Mises, Theory and History, p. 271, emphasis added. "The thymological analysis of man is essential in the study of history. It conveys all we can know about ultimate ends and judgments of value. But as has been pointed out above, it is of no avail for praxeology and of little use in dealing with the means applied to attain ends sought." Mises, Theory and History, p. 280.
Human CooperationA Critique of the Holistic and Metaphysical View of SocietyPraxeology and LiberalismLiberalism and ReligionThe Division of LaborThe Ricardian Law of AssociationCurrent Errors Concerning the Law of AssociationThe Effects of the Division of LaborThe Individual Within SocietyThe Fable of the Mystic CommunionThe Great SocietyThe Instinct of Aggression and DestructionCurrent Misinterpretations of Modern Natural Science, Especially of Darwinisn[This article is excerpted from chapter 8 of Human Action, available in the store. Robert Murphy has written a study guide for this chapter, available in HTML and PDF. This chapter follows "Action Within the World."]
- Human CooperationSociety is concerted action, cooperation. Society is the outcome of conscious and purposeful behavior.
This does not mean that individuals have concluded contracts by virtue of which they have founded human society. The actions which have brought about social cooperation and daily bring it about anew do not aim at anything else than cooperation and coadjuvancy with others for the attainment of definite singular ends. The total complex of the mutual relations created by such concerted actions is called society. It substitutes collaboration for the — at least conceivable — isolated life of individuals. Society is division of labor and combination of labor. In his capacity as an acting animal man becomes a social animal.
Individual man is born into a socially organized environment. In this sense alone we may accept the saying that society is — logically or historically — antecedent to the individual. In every other sense this dictum is either empty or nonsensical. The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men. It is a delusion to search for it outside the actions of individuals. To speak of a society's autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors.
The questions whether society or the individual is to be considered as the ultimate end, and whether the interests of society should be subordinated to those of the individuals or the interests of the individuals to those of society are fruitless. Action is always action of individual men. The social or societal element is a certain orientation of the actions of individual men. The category end makes sense only when applied to action. Theology and the metaphysics of history may discuss the ends of society and the designs which God wants to realize with regard to society in the same way in which they discuss the purpose of all other parts of the created universe. For science, which is inseparable from reason, a tool manifestly unfit for the treatment of such problems, it would be hopeless to embark upon speculations concerning these matters.
Within the frame of social cooperation there can emerge between members of society feelings of sympathy and friendship and a sense of belonging together. These feelings are the source of man's most delightful and most sublime experiences. They are the most precious adornment of life; they lift the animal species man to the heights of a really human existence. However, they are not, as some have asserted, the agents that have brought about social relationships. They are fruits of social cooperation, they thrive only within its frame; they did not precede the establishment of social relations and are not the seed from which they spring.
The fundamental facts that brought about cooperation, society, and civilization and transformed the animal man into a human being are the facts that work performed under the division of labor is more productive than isolated work and that man's reason is capable of recognizing this truth. But for these facts men would have forever remained deadly foes of one another, irreconcilable rivals in their endeavors to secure a portion of the scarce supply of means of sustenance provided by nature. Each man would have been forced to view all other men as his enemies; his craving for the satisfaction of his own appetites would have brought him into an implacable conflict with all his neighbors. No sympathy could possibly develop under such a state of affairs.
Some sociologists have asserted that the original and elementary subjective fact in society is a "consciousness of kind."F.H. Giddings, The Principles of Sociology (New York, 1926), p. 17. Others maintain that there would be no social systems if there were no "sense of community or of belonging together."F.M. MacIver, Society (New York, 1937), pp. 6-7. One may agree, provided that these somewhat vague and ambiguous terms are correctly interpreted. We may call consciousness of kind, sense of community, or sense of belonging together the acknowledgment of the fact that all other human beings are potential collaborators in the struggle for survival because they are capable of recognizing the mutual benefits of cooperation, while the animals lack this faculty. However, we must not forget that the primary facts that bring about such consciousness or such a sense are the two mentioned above. In a hypothetical world in which the division of labor would not increase productivity, there would not be any society. There would not be any sentiments of benevolence and good will.
The principle of the division of labor is one of the great basic principles of cosmic becoming and evolutionary change. The biologists were right in borrowing the concept of the division of labor from social philosophy and in adapting it to their field of investigation. There is division of labor between the various parts of any living organism. There are, furthermore, organic entities composed of collaborating animal individuals; it is customary to call metaphorically such aggregations of the ants and bees "animal societies." But one must never forget that the characteristic feature of human society is purposeful cooperation; society is an outcome of human action, i.e., of a conscious aiming at the attainment of ends. No such element is present, as far as we can ascertain, in the processes which have resulted in the emergence of the structure-function systems of plant and animal bodies and in the operation of the societies of ants, bees, and hornets. Human society is an intellectual and spiritual phenomenon. It is the outcome of a purposeful utilization of a universal law determining cosmic becoming, viz., the higher productivity of the division of labor. As with every instance of action, the recognition of the laws of nature is put into the service of man's efforts to improve his conditions.
- A Critique of the Holistic and Metaphysical View of SocietyAccording to the doctrines of universalism, conceptual realism, holism, collectivism, and some representatives of Gestaltpsychologie, society is an entity living its own life, independent of and separate from the lives of the various individuals, acting on its own behalf and aiming at its own ends which are different from the ends sought by the individuals. Then, of course, an antagonism between the aims of society and those of its members can emerge. In order to safeguard the flowering and further development of society it becomes necessary to master the selfishness of the individuals and to compel them to sacrifice their egoistic designs to the benefit of society. At this point all these holistic doctrines are bound to abandon the secular methods of human science and logical reasoning and to shift to theological or metaphysical professions of faith. They must assume that Providence, through its prophets, apostles, and charismatic leaders, forces men who are constitutionally wicked, i.e., prone to pursue their own ends, to walk in the ways of righteousness which the Lord or Weltgeist or history wants them to walk.
This is the philosophy which has characterized from time immemorial the creeds of primitive tribes. It has been an element in all religious teachings. Man is bound to comply with the law issued by a superhuman power and to obey the authorities which this power has entrusted with the enforcement of the law. The order created by this law, human society, is consequently the work of the Deity and not of man. If the Lord had not interfered and had not given enlightenment to erring mankind, society would not have come into existence. It is true that social cooperation is a blessing for man; it is true that man could work his way up from barbarism and the moral and material distress of his primitive state only within the framework of society. However, if left alone he would never have seen the road to his own salvation. For adjustment to the requirements of social cooperation and subordination to the precepts of the moral law put heavy restraints upon him. From the point of view of his wretched intellect he would deem the abandonment of some expected advantage an evil and a privation. He would fail to recognize the incomparably greater, but later, advantages which renunciation of present and visible pleasures will procure. But for supernatural revelation he would never have learned what destiny wants him to do for his own good and that of his offspring.
The scientific theory as developed by the social philosophy of eighteenth-century rationalism and liberalism and by modern economics does not resort to any miraculous interference of superhuman powers. Every step by which an individual substitutes concerted action for isolated action results in an immediate and recognizable improvement in his conditions. The advantages derived from peaceful cooperation and division of labor are universal. They immediately benefit every generation, and not only later descendants. For what the individual must sacrifice for the sake of society he is amply compensated by greater advantages. His sacrifice is only apparent and temporary; he foregoes a smaller gain in order to reap a greater one later. No reasonable being can fail to see this obvious fact. When social cooperation is intensified by enlarging the field in which there is division of labor or when legal protection and the safeguarding of peace are strengthened, the incentive is the desire of all those concerned to improve their own conditions. In striving after his own — rightly understood — interests the individual works toward an intensification of social cooperation and peaceful intercourse. Society is a product of human action, i.e., the human urge to remove uneasiness as far as possible. In order to explain its becoming and its evolution it is not necessary to have recourse to a doctrine, certainly offensive to a truly religious mind, according to which the original creation was so defective that reiterated superhuman intervention is needed to prevent its failure.
The historical role of the theory of the division of labor as elaborated by British political economy from Hume to Ricardo consisted in the complete demolition of all metaphysical doctrines concerning the origin and the operation of social cooperation. It consummated the spiritual, moral and intellectual emancipation of mankind inaugurated by the philosophy of Epicureanism. It substituted an autonomous rational morality for the heteronomous and intuitionist ethics of older days. Law and legality, the moral code and social institutions are no longer revered as unfathomable decrees of Heaven. They are of human origin, and the only yardstick that must be applied to them is that of expediency with regard to human welfare. The utilitarian economist does not say: Fiat justitia, pereat mundus. He says: Fiat justitia, ne pereat mundus. He does not ask a man to renounce his well-being for the benefit of society. He advises him to recognize what his rightly understood interests are. In his eyes God's magnificence does not manifest itself in busy interference with sundry affairs of princes and politicians, but in endowing his creatures with reason and the urge toward the pursuit of happiness.Many economists, among them Adam Smith and Bastiat, believed in God. Hence they admired in the facts they had discovered the providential care of "the great Director of Nature." Atheist critics blame them for this attitude. However, these critics fail to realize that to sneer at the references to the "invisible hand" does not invalidate the essential teachings of the rationalist and utilitarian social philosophy. One must comprehend that the alternative is this: Either association is a human process because it best serves the aims of the individuals concerned and the individuals themselves have the ability to realize the advantages they derive from their adjustment to life in social cooperation. Or a superior being enjoins upon reluctant men subordination to the law and to the social authorities. It is of minor importance whether one calls this supreme being God, Weltgeist, Destiny, History, Wotan, or Material Productive Forces and what title one assigns to its apostles, the dictators.
The essential problem of all varieties of universalistic, collectivistic, and holistic social philosophy is: By what mark do I recognize the true law, the authentic apostle of God's word, and the legitimate authority. For many claim that Providence has sent them, and each of these prophets preaches another gospel. For the faithful believer there cannot be any doubt; he is fully confident that he has espoused the only true doctrine. But it is precisely the firmness of such beliefs that renders the antagonisms irreconcilable. Each party is prepared to make its own tenets prevail. But as logical argumentation cannot decide between various dissenting creeds, there is no means left for the settlement of such disputes other than armed conflict. The nonrationalist, nonutilitarian, and nonliberal social doctrines must beget wars and civil wars until one of the adversaries is annihilated or subdued. The history of the world's great religions is a record of battles and wars, as is the history of the present-day counterfeit religions, socialism, statolatry, and nationalism.
Intolerance and propaganda by the executioner's or the soldier's sword are inherent in any system of heteronomous ethics. The laws of God or Destiny claim universal validity, and to the authorities which they declare legitimate all men by rights owe obedience. As long as the prestige of heteronomous codes of morality and of their philosophical corollary, conceptual realism, was intact, there could not be any question of tolerance or of lasting peace. When fighting ceased, it was only to gather new strength for further battling. The idea of tolerance with regard to other people's dissenting views could take root only when the liberal doctrines had broken the spell of universalism. In the light of the utilitarian philosophy, society and state no longer appear as institutions for the maintenance of a world order that for considerations hidden to the human mind pleases the Deity although it manifestly hurts the secular interests of many or even of the immense majority of those living today. Society and state are on the contrary the primary means for all people to attain the ends they aim at of their own accord. They are created by human effort and their maintenance and most suitable organization are tasks not essentially different from all other concerns of human action. The supporters of a heteronomous morality and of the collectivistic doctrine cannot hope to demonstrate by ratiocination the correctness of their specific variety of ethical principles and the superiority and exclusive legitimacy of their particular social ideal. They are forced to ask people to accept credulously their ideological system and to surrender to the authority they consider the right one; they are intent upon silencing dissenters or upon beating them into submission.
Of course, there will always be individuals and groups of individuals whose intellect is so narrow that they cannot grasp the benefits which social cooperation brings them. There are others whose moral strength and will power are so weak that they cannot resist the temptation to strive for an ephemeral advantage by actions detrimental to the smooth functioning of the social system. For the adjustment of the individual to the requirements of social cooperation demands sacrifices. These are, it is true, only temporary and apparent sacrifices as they are more than compensated for by the incomparably greater advantages which living within society provides. However, at the instant, in the very act of renouncing an expected enjoyment, they are painful, and it is not for everybody to realize their later benefits and to behave accordingly. Anarchism believes that education could make all people comprehend what their own interests require them to do; rightly instructed they would of their own accord always comply with the rules of conduct indispensable for the preservation of society. The anarchists contend that a social order in which nobody enjoys privileges at the expense of his fellow-citizens could exist without any compulsion and coercion for the prevention of action detrimental to society. Such an ideal society could do without state and government, i.e., without a police force, the social apparatus of coercion and compulsion.
The anarchists overlook the undeniable fact that some people are either too narrow-minded or too weak to adjust themselves spontaneously to the conditions of social life. Even if we admit that every sane adult is endowed with the faculty of realizing the good of social cooperation and of acting accordingly, there still remains the problem of the infants, the aged, and the insane. We may agree that he who acts antisocially should be considered mentally sick and in need of care. But as long as not all are cured, and as long as there are infants and the senile, some provision must be taken lest they jeopardize society. An anarchistic society would be exposed to the mercy of every individual. Society cannot exist if the majority is not ready to hinder, by the application or threat of violent action, minorities from destroying the social order. This power is vested in the state or government.
State or government is the social apparatus of compulsion and coercion. It has the monopoly of violent action. No individual is free to use violence or the threat of violence if the government has not accorded this right to him. The state is essentially an institution for the preservation of peaceful interhuman relations. However, for the preservation of peace it must be prepared to crush the onslaughts of peace-breakers.
Liberal social doctrine, based on the teachings of utilitarian ethics and economics, sees the problem of the relation between the government and those ruled from a different angle than universalism and collectivism. Liberalism realizes that the rulers, who are always a minority, cannot lastingly remain in office if not supported by the consent of the majority of those ruled. Whatever the system of government may be, the foundation upon which it is built and rests is always the opinion of those ruled that to obey and to be loyal to this government better serves their own interests than insurrection and the establishment of another regime. The majority has the power to do away with an unpopular government and uses this power whenever it becomes convinced that its own welfare requires it. Civil war and revolution are the means by which the discontented majorities overthrow rulers and methods of government which do not suit them. For the sake of domestic peace liberalism aims at democratic government. Democracy is therefore not a revolutionary institution. On the contrary, it is the very means of preventing revolutions and civil wars. It provides a method for the peaceful adjustment of government to the will of the majority. When the men in office and their policies no longer please the majority of the nation, they will — in the next election — be eliminated and replaced by other men espousing different policies.
The principle of majority rule or government by the people as recommended by liberalism does not aim at the supremacy of the mean, of the lowbred, of the domestic barbarians. The liberals too believe that a nation should be ruled by those best fitted for this task. But they believe that a man's ability to rule proves itself better by convincing his fellow-citizens than by using force upon them. There is, of course, no guarantee that the voters will entrust office to the most competent candidate. But no other system could offer such a guarantee. If the majority of the nation is committed to unsound principles and prefers unworthy office-seekers, there is no remedy other than to try to change their mind by expounding more reasonable principles and recommending better men. A minority will never win lasting success by other means.
Universalism and collectivism cannot accept this democratic solution of the problem of government. In their opinion the individual in complying with the ethical code does not directly further his earthly concerns but, on the contrary, foregoes the attainment of his own ends for the benefit of the designs of the Deity or of the collective whole. Moreover reason alone is not capable of conceiving the supremacy of the absolute values and the unconditional validity of the sacred law and of interpreting correctly the canons and commandments. Hence it is in their eyes a hopeless task to try to convince the majority through persuasion and to lead them to righteousness by amicable admonition. Those blessed by heavenly inspiration, to whom their charisma has conveyed illumination, have the duty to propagate the gospel to the docile and to resort to violence against the intractable. The charismatic leader is the Deity's vicar, the mandatory of the collective whole, the tool of history. He is infallible and always right. His orders are the supreme norm.
Universalism and collectivism are by necessity systems of theocratic government. The common characteristic of all their varieties is that they postulate the existence of a superhuman entity which the individuals are bound to obey. What differentiates them from one another is only the appellation they give to this entity and the content of the laws they proclaim in its name. The dictatorial rule of a minority cannot find any legitimation other than the appeal to an alleged mandate obtained from a superhuman absolute authority. It does not matter whether the autocrat bases his claims on the divine rights of anointed kings or on the historical mission of the vanguard of the proletariat or whether the supreme being is called Geist (Hegel) or Humanité (Auguste Comte). The terms society and state as they are used by the contemporary advocates of socialism, planning, and social control of all the activities of individuals signify a deity. The priests of this new creed ascribe to their idol all those attributes which the theologians ascribe to God — omnipotence, omniscience, infinite goodness, and so on.
If one assumes that there exists above and beyond the individual's actions an imperishable entity aiming at its own ends, different from those of mortal men, one has already constructed the concept of a superhuman being. Then one cannot evade the question whose ends take precedence whenever an antagonism arises, those of the state or society or those of the individual. The answer to this question is already implied in the very concept of state or society as conceived by collectivism and universalism. If one postulates the existence of an entity which ex definitione is higher, nobler, and better than the individuals, then there cannot be any doubt that the aims of this eminent being must tower above those of the wretched individuals. (It is true that some lovers of paradox — for instance, Max Cf. Max Stirner (Johan Kaspar Schmidt). The Ego and His Own, trans. by S.T. Byington (New York, 1907).Stirner — took pleasure in turning the matter upside down and for all that asserted the precedence of the individual.) If society or state is an entity endowed with volition and intention and all the other qualities attributed to it by the collectivist doctrine, then it is simply nonsensical to set the shabby individual's trivial aims against its lofty designs.
The quasi-theological character of all collectivist doctrines becomes manifest in their mutual conflicts. A collectivist doctrine does not assert the superiority of a collective whole in abstracto; it always proclaims the eminence of a definite collectivist idol, and either flatly denies the existence of other such idols or relegates them to a subordinate and ancillary position with regard to its own idol. The worshipers of the state proclaim the excellence of a definite state, i.e., their own; the nationalists, the excellence of their own nation. If dissenters challenge their particular program by heralding the superiority of another collectivist idol, they resort to no objection other than to declare again and again:We are right because an inner voice tells us that we are right and you are wrong. The conflicts of antagonistic collectivist creeds and sects cannot be decided by ratiocination; they must be decided by arms. The alternatives to the liberal and democratic principle of majority rule are the militarist principles of armed conflict and dictatorial oppression.
All varieties of collectivist creeds are united in their implacable hostility to the fundamental political institutions of the liberal system: majority rule, tolerance of dissenting views, freedom of thought, speech, and the press, equality of all men under the law. This collaboration of collectivist creeds in their attempts to destroy freedom has brought about the mistaken belief that the issue in present-day political antagonisms is individualism versus collectivism. In fact it is a struggle between individualism on the one hand and a multitude of collectivist sects on the other hand whose mutual hatred and hostility is no less ferocious than their abomination of the liberal system. It is not a uniform Marxian sect that attacks capitalism, but a host of Marxian groups. These groups — for instance, Stalinists, Trotskyists, Mensheviks, supporters of the Second International, and so on — fight one another with the utmost brutality and inhumanity. And then there are again many other non-Marxian sects which apply the same atrocious methods in their mutual struggles. A substitution of collectivism for liberalism would result in endless bloody fighting.
The customary terminology misrepresents these things entirely. The philosophy commonly called individualism is a philosophy of social cooperation and the progressive intensification of the social nexus. On the other hand the application of the basic ideas of collectivism cannot result in anything but social disintegration and the perpetuation of armed conflict. It is true that every variety of collectivism promises eternal peace starting with the day of its own decisive victory and the final overthrow and extermination of all other ideologies and their supporters. However, the realization of these plans is conditioned upon a radical transformation in mankind. Men must be divided into two classes: the omnipotent godlike dictator on the one hand and the masses which must surrender volition and reasoning in order to become mere chessmen in the plans of the dictator. The masses must be dehumanized in order to make one man their godlike master. Thinking and acting, the foremost characteristics of man as man, would become the privilege of one man only. There is no need to point out that such designs are unrealizable. The chiliastic empires of dictators are doomed to failure; they have never lasted longer than a few years. We have just witnessed the breakdown of several of such "millennial" orders. Those remaining will hardly fare better.
The modern revival of the idea of collectivism, the main cause of all the agonies and disasters of our day, has succeeded so thoroughly that it has brought into oblivion the essential ideas of liberal social philosophy. Today even many of those favoring democratic institutions ignore these ideas. The arguments they bring forward for the justification of freedom and democracy are tainted with collectivist errors; their doctrines are rather a distortion than an endorsement of true liberalism. In their eyes majorities are always right simply because they have the power to crush any opposition; majority rule is the dictatorial rule of the most numerous party, and the ruling majority is not bound to restrain itself in the exercise of its power and in the conduct of political affairs. As soon as a faction has succeeded in winning the support of the majority of citizens and thereby attained control of the government machine, it is free to deny to the minority all those democratic rights by means of which it itself has previously carried on its own struggle for supremacy.
This pseudoliberalism is, of course, the very antithesis of the liberal doctrine. The liberals do not maintain that majorities are godlike and infallible; they do not contend that the mere fact that a policy is advocated by the many is a proof of its merits for the common weal. They do not recommend the dictatorship of the majority and the violent oppression of dissenting minorities. Liberalism aims at a political constitution which safeguards the smooth working of social cooperation and the progressive intensification of mutual social relations. Its main objective is the avoidance of violent conflicts, of wars and revolutions that must disintegrate the social collaboration of men and throw people back into the primitive conditions of barbarism where all tribes and political bodies endlessly fought one another. Because the division of labor requires undisturbed peace, liberalism aims at the establishment of a system of government that is likely to preserve peace, viz., democracy.
Praxeology and LiberalismLiberalism, in its 19th century sense, is a political doctrine. It is not a theory, but an application of the theories developed by praxeology and especially by economics to definite problems of human action within society.
As a political doctrine liberalism is not neutral with regard to values and the ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to these valuational principles.
While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, nourishment to starvation, abundance to poverty. It teaches man how to act in accordance with these valuations.
It is customary to call these concerns materialistic and to charge liberalism with an alleged crude materialism and a neglect of the "higher" and "nobler" pursuits of mankind. Man does not live by bread alone, say the critics, and they disparage the meanness and despicable baseness of the utilitarian philosophy. However, these passionate diatribes are wrong because they badly distort the teachings of liberalism.
First: The liberals do not assert that men ought to strive after the goals mentioned above. What they maintain is that the immense majority prefer a life of health and abundance to misery, starvation, and death. The correctness of this statement cannot be challenged. It is proved by the fact that all antiliberal doctrines — the theocratic tenets of the various religious, statist, nationalist, and socialist parties — adopt the same attitude with regard to these issues. They all promise their followers a life of plenty. They have never ventured to tell people that the realization of their program will impair their material well-being. They insist — on the contrary — that while the realization of the plans of their rival parties will result in indigence for the majority, they themselves want to provide their supporters with abundance. The Christian parties are no less eager in promising the masses a higher standard of living than the nationalists and the socialists. Present-day churches often speak more about raising wage rates and farm incomes than about the dogmas of the Christian doctrine.
Secondly: The liberals do not disdain the intellectual and spiritual aspirations of man. On the contrary. They are prompted by a passionate ardor for intellectual and moral perfection, for wisdom and for aesthetic excellence. But their view of these high and noble things is far from the crude representations of their adversaries. They do not share the naive opinion that any system of social organization can directly succeed in encouraging philosophical or scientific thinking, in producing masterpieces of art and literature and in rendering the masses more enlightened. They realize that all that society can achieve in these fields is to provide an environment which does not put insurmountable obstacles in the way of the genius and makes the common man free enough from material concerns to become interested in things other than mere breadwinning. In their opinion the foremost social means of making man more human is to fight poverty. Wisdom and science and the arts thrive better in a world of affluence than among needy peoples.
It is a distortion of facts to blame the age of liberalism for an alleged materialism. The nineteenth century was not only a century of unprecedented improvement in technical methods of production and in the material well-being of the masses. It did much more than extend the average length of human life. Its scientific and artistic accomplishments are imperishable. It was an age of immortal musicians, writers, poets, painters, and sculptors; it revolutionized philosophy, economics, mathematics, physics, chemistry, and biology. And, for the first time in history, it made the great works and the great thoughts accessible to the common man.
Liberalism and ReligionLiberalism is based upon a purely rational and scientific theory of social cooperation. The policies it recommends are the application of a system of knowledge which does not refer in any way to sentiments, intuitive creeds for which no logically sufficient proof can be provided, mystical experiences, and the personal awareness of superhuman phenomena. In this sense the often misunderstood and erroneously interpreted epithets atheistic and agnostic can be attributed to it. It would, however, be a serious mistake to conclude that the sciences of human action and the policy derived from their teachings, liberalism, are antitheistic and hostile to religion. They are radically opposed to all systems of theocracy. But they are entirely neutral with regard to religious beliefs which do not pretend to interfere with the conduct of social, political, and economic affairs.
Theocracy is a social system which lays claim to a superhuman title for its legitimation. The fundamental law of a theocratic regime is an insight not open to examination by reason and to demonstration by logical methods. Its ultimate standard is intuition providing the mind with subjective certainty about things which cannot be conceived by reason and ratiocination. If this intuition refers to one of the traditional systems of teaching concerning the existence of a Divine Creator and Ruler of the universe, we call it a religious belief. If it refers to another system we call it a metaphysical belief. Thus a system of theocratic government need not be founded on one of the great historical religions of the world. It may be the outcome of metaphysical tenets which reject all traditional churches and denominations and take pride in emphasizing their antitheistic and antimetaphysical character. In our time the most powerful theocratic parties are opposed to Christianity and to all other religions which evolved from Jewish monotheism. What characterizes them as theocratic is their craving to organize the earthly affairs of mankind according to the contents of a complex of ideas whose validity cannot be demonstrated by reasoning. They pretend that their leaders are blessed by a knowledge inaccessible to the rest of mankind and contrary to the ideas maintained by those to whom the charisma is denied. The charismatic leaders have been entrusted by a mystical higher power with the office of managing the affairs of erring mankind. They alone are enlightened; all other people are either blind and deaf or malefactors.
Liberalism presupposes that people prefer life to death, health to sickness, nourishment to starvation, abundance to poverty. It teaches man how to act in accordance with these valuations.It is a fact that many varieties of the great historical religions were affected by theocratic tendencies. Their apostles were inspired by a craving for power and the oppression and annihilation of all dissenting groups. However, we must not confuse the two things, religion and theocracy.
William James calls religious "the feelings, acts and experiences of individual men in their solitude, so far as they apprehend themselves to stand in relation to whatever they may consider the divine."W. James, The Varieties of Religious Experience (35th impression, New York, 1925), p. 31. He enumerates the following beliefs as the characteristics of the religious life: That the visible world is part of a more spiritual universe from which it draws its chief significance; that union or harmonious relation with that higher universe is our true end; that prayer or inner communion with the spirit thereof — be that spirit "God" or "law" — is a process wherein work is really done, and spiritual energy flows in and produces effects, psychological or material, within the phenomenal world. Religion, James goes on to say, also includes the following psychological characteristics: A zest which adds itself like a gift to life, and takes the form either of lyrical enchantment or of appeal to earnestness and heroism, and furthermore an assurance of safety and a temper of peace, and, in relation to others, a preponderance of loving affection.Ibid., pp. 485-486.
This characterization of mankind's religious experience and feelings does not make any reference to the arrangement of social cooperation. Religion, as James sees it, is a purely personal and individual relation between man and a holy, mysterious, and awe-inspiring divine Reality. It enjoins upon man a certain mode of individual conduct. But it does not assert anything with regard to the problems of social organization. St. Francis d'Assisi, the greatest religious genius of the West, did not concern himself with politics and economics. He wanted to teach his disciples how to live piously; he did not draft a plan for the organization of production and did not urge his followers to resort to violence against dissenters. He is not responsible for the interpretation of his teachings by the order he founded.
Liberalism puts no obstacles in the way of a man eager to adjust his personal conduct and his private affairs according to the mode in which he individually or his church or denomination interprets the teachings of the Gospels. But it is radically opposed to all endeavors to silence the rational discussion of problems of social welfare by an appeal to religious intuition and revelation. It does not enjoin divorce or the practice of birth control upon anybody. But it fights those who want to prevent other people from freely discussing the pros and cons of these matters.
In the liberal opinion the aim of the moral law is to impel individuals to adjust their conduct to the requirements of life in society, to abstain from all acts detrimental to the preservation of peaceful social cooperation and to the improvement of interhuman relations. Liberals welcome the support which religious teachings may give to those moral precepts of which they themselves approve, but they are opposed to all those norms which are bound to bring about social disintegration from whatever source they may stem.
It is a distortion of fact to say, as many champions of religious theocracy do, that liberalism fights religion. Where the principle of church interference with secular issues is in force, the various churches, denominations and sects are fighting one another. By separating church and state, liberalism establishes peace between the various religious factions and gives to each of them the opportunity to preach its gospel unmolested.
Liberalism is rationalistic. It maintains that it is possible to convince the immense majority that peaceful cooperation within the framework of society better serves their rightly understood interests than mutual battling and social disintegration. It has full confidence in man's reason. It may be that this optimism is unfounded and that the liberals have erred. But then there is no hope left for mankind's future.
- The Division of LaborThe fundamental social phenomenon is the division of labor and its counterpart human cooperation.
Experience teaches man that cooperative action is more efficient and productive than isolated action of self-sufficient individuals. The natural conditions determining man's life and effort are such that the division of labor increases output per unit of labor expended. These natural facts are:
First: the innate inequality of men with regard to their ability to perform various kinds of labor. Second: the unequal distribution of the nature-given, nonhuman opportunities of production on the surface of the earth. One may as well consider these two facts as one and the same fact, namely, the manifoldness of nature which makes the universe a complex of infinite varieties. If the earth's surface were such that the physical conditions of production were the same at every point and if one man were as equal to all other men as is a circle to another with the same diameter in Euclidian geometry, men would not have embarked upon the division of labor.
There is still a third fact, viz., that there are undertakings whose accomplishment exceeds the forces of a single man and requires the joint effort of several. Some of them require an expenditure of labor which no single man can perform because his capacity to work is not great enough. Others again could be accomplished by individuals; but the time which they would have to devote to the work would be so long that the result would only be attained late and would not compensate for the labor expended. In both cases only joint effort makes it possible to attain the end sought.
If only this third condition were present, temporary cooperation between men would have certainly emerged. However, such transient alliances to cope with specific tasks which are beyond the strength of an individual would not have brought about lasting social cooperation. Undertakings which could be performed only in this way were not very numerous at the early stages of civilization. Moreover, all those concerned may not often agree that the performance in question is more useful and urgent than the accomplishment of other tasks which they could perform alone. The great human society enclosing all men in all of their activities did not originate from such occasional alliances. Society is much more than a passing alliance concluded for a definite purpose and ceasing as soon as its objective is realized, even if the partners are ready to renew it should an occasion present itself.
The increase in productivity brought about by the division of labor is obvious whenever the inequality of the participants is such that every individual or every piece of land is superior at least in one regard to the other individuals or pieces of land concerned. If A is fit to produce in 1 unit of time 6 p or 4 q, and B only 2 p, but 8 q, they both, when working in isolation, will produce together 4 p + 6 q; when working under the division of labor, each of them producing only that commodity in whose production he is more efficient than his partner, they will produce 6 p + 8 q. But what will happen, if A is more efficient than B not only in the production of p but also in the production of q? This is the problem which Ricardo raised and solved immediately.
- The Ricardian Law of AssociationRicardo expounded the law of association in order to demonstrate what the consequences of the division of labor are when an individual or a group, more efficient in every regard, cooperates with an individual or a group less efficient in every regard. He investigated the effects of trade between two areas, unequally endowed by nature, under the assumption that the products, but not the workers and the accumulated factors of future production (capital goods), can freely move from each area into the other. The division of labor between two such areas will, as Ricardo's law shows, increase the productivity of labor and is therefore advantageous to all concerned, even if the physical conditions of production for any commodity are more favorable in one of these two areas than in the other. It is advantageous for the better endowed area to concentrate its efforts upon the production of those commodities for which its superiority is greater, and to leave to the less endowed area the production of other goods in which its own superiority is less. The paradox that it is more advantageous to leave more favorable domestic conditions of production unused and to procure the commodities they could produce from areas in which conditions for their production are less favorable, is the outcome of the immobility of labor and capital, to which the more favorable places of production are inaccessible.
Ricardo was fully aware of the fact that his law of comparative cost, which he expounded mainly in order to deal with a special problem of international trade, is a particular instance of the more universal law of association.
If A is in such a way more efficient than B that he needs for the production of 1 unit of the commodity p 3 hours compared with B's 5, and for the production of 1 unit of q 2 hours compared with B's 4, then both will gain if A confines himself to producing q and leaves B to produce p. If each of them gives 60 hours to producing p and 60 hours to producing q, the result of A's labor is 20 p + 30 q; of B's, 12 p +15 q; and for both together , 32 p + 45 q. If, however, A confines himself to producing q alone, he produces 60 q in 120 hours, while B, if he confines himself to producing p, produces in the same time 24 p. The result of their activities is then 24 p + 60 q, which, as p has for A a substitution ratio of 3/2 q and for B one of 5/4 q, signifies a larger output than 32 p + 45 q. Therefore it is manifest that the division of labor brings advantages to all who take part in it. Collaboration of the more talented, more able, and more industrious with the less talented, less able, and less industrious results in benefit for both. The gains derived from the division of labor are always mutual.
The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants. In order to comprehend why man did not remain solitary, searching like the animals for food and shelter for himself only and at most also for his consort and his helpless infants, we do not need to have recourse to a miraculous interference of the Deity or to the empty hypostasis of an innate urge toward association. Neither are we forced to assume that the isolated individuals or primitive hordes one day pledged themselves by a contract to establish social bonds. The factor that brought about primitive society and daily works toward its progressive intensification is human action that is animated by the insight into the higher productivity of labor achieved under the division of labor.
Neither history nor ethnology nor any other branch of knowledge can provide a description of the evolution which has led from the packs and flocks of mankind's nonhuman ancestors to the primitive, yet already highly differentiated, societal groups about which information is provided in excavations, in the most ancient documents of history, and in the reports of explorers and travelers who have met savage tribes. The task with which science is faced in respect of the origins of society can only consist in the demonstration of those factors which can and must result in association and its progressive intensification. Praxeology solves the problem. If and as far as labor under the division of labor is more productive than isolated labor, and if and as far as man is able to realize this fact, human action itself tends toward cooperation and association; man becomes a social being not in sacrificing his own concerns for the sake of a mythical Moloch, society, but in aiming at an improvement in his own welfare. Experience teaches that this condition — higher productivity achieved under the division of labor — is present because its cause — the inborn inequality of men and the inequality in the geographical distribution of the natural factors of production — is real. Thus we are in a position to comprehend the course of social evolution.
Current Errors Concerning the Law of AssociationPeople cavil much about Ricardo's law of association, better known under the name law of comparative cost. The reason is obvious. This law is an offense to all those eager to justify protection and national economic isolation from any point of view other than the selfish interests of some producers or the issues of war-preparedness.
Ricardo's first aim in expounding this law was to refute an objection raised against freedom of international trade. The protectionist asks: What under free trade will be the fate of a country in which the conditions for any kind of production are less favorable than in all other countries? Now, in a world in which there is free mobility not only for products, but no less for capital goods and for labor, a country so little suited for production would cease to be used as the seat of any human industry. If people fare better without exploiting the — comparatively unsatisfactory — physical conditions of production offered by this country, they will not settle here and will leave it as uninhabited as the polar regions, the tundras and the deserts. But Ricardo deals with a world whose conditions are determined by settlement in earlier days, a world in which capital goods and labor are bound to the soil by definite institutions. In such a milieu free trade, i.e., the free mobility of commodities only, cannot bring about a state of affairs in which capital and labor are distributed on the surface of the earth according to the better or poorer physical opportunities afforded to the productivity of labor. Here the law of comparative cost comes into operation. Each country turns toward those branches of production for which its conditions offer comparatively, although not absolutely, the most favorable opportunities. For the inhabitants of a country it is more advantageous to abstain from the exploitation of some opportunities which — absolutely and technologically — are more propitious and to import commodities produced abroad under conditions which — absolutely and technologically — are less favorable than the unused domestic resources. The case is analogous to that of a surgeon who finds it convenient to employ for the cleaning of the operating-room and the instruments a man whom he excels in this performance also and to devote himself exclusively to surgery, in which his superiority is higher.
Ricardo's law of association is an offense to all those eager to justify protection and national economic isolation from any point of view other than the selfish interests of some producers.The theorem of comparative cost is in no way connected with the value theory of classical economics. It does not deal with value or with prices. It is an analytic judgment; the conclusion is implied in the two propositions that the technically movable factors of production differ with regard to their productivity in various places and are institutionally restricted in their mobility. The theorem, without prejudice to the correctness of its conclusions, can disregard problems of valuation because it is free to resort to a set of simple assumptions. These are: that only two products are to be produced; that these products are freely movable; that for the production of each of them two factors are required; that one of these factors (it may be either labor or capital goods) is identical in the production of both, while the other factor (a specific property of the soil) is different for each of the two processes; that the greater scarcity of the factor common to both processes determines the extent of the exploitation of the different factor. In the frame of these assumptions, which make it possible to establish substitution ratios between the expenditure of the common factor and the output, the theorem answers the question raised.
The law of comparative cost is as independent of the classical theory of value as is the law of returns, which its reasoning resembles. In both cases we can content ourselves with comparing only physical input and physical output. With the law of returns we compare the output of the same product. With the law of comparative costs we compare the output of two different products. Such a comparison is feasible because we assume that for the production of each of them, apart from one specific factor, only nonspecific factors of the same kind are required.
Some critics blame the law of comparative cost for this simplification of assumptions. They believe that the modern theory of value would require a reformulation of the law in conformity with the principles of subjective value. Only such a formulation could provide a satisfactory conclusive demonstration. However, they do not want to calculate in terms of money. They prefer to resort to those methods of utility analysis which they consider a means for making value calculations in terms of utility. It will be shown in the further progress of our investigation that these attempts to eliminate monetary terms from economic calculation are delusive. Their fundamental assumptions are untenable and contradictory and all formulas derived from them are vicious. No method of economic calculation is possible other than one based on money prices as determined by the market.See below, pp. 201-209.
The meaning of the simple assumptions underlying the law of comparative cost is not precisely the same for the modern economists as it was for the classical economists. Some adherents of the classical school considered them as the starting point of a theory of value in international trade. We know now that they were mistaken in this belief. Besides, we realize that with regard to the determination of value and of prices there is no difference between domestic and foreign trade. What makes people distinguish between the home market and markets abroad is only a difference in the data, i.e., varying institutional conditions restricting the mobility of factors of production and of products.
If we do not want to deal with the law of comparative cost under the simplified assumptions applied by Ricardo, we must openly employ money calculation. We must not fall prey to the illusion that a comparison between the expenditure of factors of production of various kinds and of the output of products of various kinds can be achieved without the aid of money calculation. If we consider the case of the surgeon and his handyman we must say: If the surgeon can employ his limited working time for the performance of operations for which he is compensated at $50 per hour, it is to his interest to employ a handyman to keep his instruments in good order and to pay him $2 per hour, although this man needs 3 hours to accomplish what the surgeon could do in 1 hour. In comparing the conditions of two countries we must say: If conditions are such that in England the production of 1 unit of each of the two commodities a and b requires the expenditure of 1 working day of the same kind of labor, while in India with the same investment of capital for a 2 days and for b 3 days are required, and if capital goods and a and b are freely movable from England to India and vice versa, while there is no mobility of labor, wage rates in India in the production of a must tend to be 50 percent, and in the production of b 33 1/3 percent, of the English rates. If the English rate is 6 shillings, the rates in India would be the equivalent of 3 shillings in the production of a and the equivalent of 2 shillings in the production of b. Such a discrepancy in the remuneration of labor of the same kind cannot last if there is mobility of labor on the domestic Indian labor market. Workers would shift from the production of b into the production of a; their migration would tend to lower the remuneration in the a industry and to raise it in the b industry. Finally Indian wage rates would be equal in both industries. The production of a would tend to expand and to supplant English competition. On the other hand the production of b would become unprofitable in India and would have to be discontinued, while it would expand in England. The same reasoning is valid if we assume that the difference in the conditions of production consists also or exclusively in the amount of capital investment needed.
It has been asserted that Ricardo's law was valid only for his age and is of no avail for our time which offers other conditions. Ricardo saw the difference between domestic trade and foreign trade in differences in the mobility of capital and labor. If one assumes that capital, labor, and products are movable, then there exists a difference between regional and interregional trade only as far as the cost of transportation comes into play. Then it is superfluous to develop a theory of international trade as distinguished from national trade. Capital and labor are distributed on the earth's surface according to the better or poorer conditions which the various regions offer to production. There are areas more densely populated and better equipped with capital, there are others less densely populated and poorer in capital supply. There prevails on the whole earth a tendency toward an equalization of wage rates for the same kind of labor.
Ricardo, however, starts from the assumption that there is mobility of capital and labor only within each country, and not between the various countries. He raises the question what the consequences of the free mobility of products must be under such conditions. (If there is no mobility of products either, then every country is economically isolated and autarkic, and there is no international trade at all.) The theory of comparative cost answers this question. Now, Ricardo's assumptions by and large held good for his age. Later, in the course of the nineteenth century, conditions changed. The immobility of capital and labor gave way; international transfer of capital and labor became more and more common. Then came a reaction. Today capital and labor are again restricted in their mobility. Reality again corresponds to the Ricardian assumptions.
However, the teachings of the classical theory of interregional trade are above any change in institutional conditions. They enable us to study the problems involved under any imaginable assumptions.
- The Effects of the Division of LaborThe division of labor is the outcome of man's conscious reaction to the multiplicity of natural conditions. On the other hand it is itself a factor bringing about differentiation. It assigns to the various geographic areas specific functions in the complex of the processes of production. It makes some areas urban, others rural; it locates the various branches of manufacturing, mining, and agriculture in different places. Still more important, however, is the fact that it intensifies the innate inequality of men. Exercise and practice of specific tasks adjust individuals better to the requirements of their performance; men develop some of their inborn faculties and stunt the development of others. Vocational types emerge; people become specialists.
The division of labor splits the various processes of production into minute tasks, many of which can be performed by mechanical devices. It is this fact that made the use of machinery possible and brought about the amazing improvements in technical methods of production. Mechanization is the fruit of the division of labor, its most beneficial achievement, not its motive and fountain spring. Power-driven specialized machinery could be employed only in a social environment under the division of labor. Every step forward on the road toward the use of more specialized, more refined, and more productive machines requires a further specialization of tasks.
- The Individual Within SocietyIf praxeology speaks of the solitary individual, acting on his own behalf only and independent of fellow men, it does so for the sake of a better comprehension of the problems of social cooperation. We do not assert that such isolated autarkic human beings have ever lived and that the social stage of man's nonhuman ancestors and the emergence of the primitive social bonds were effected in the same process. Man appeared on the scene of earthly events as a social being. The isolated asocial man is a fictitious construction.
Seen from the point of view of the individual, society is the great means for the attainment of all his ends. The preservation of society is an essential condition of any plans an individual may want to realize by any action whatever. Even the refractory delinquent who fails to adjust his conduct to the requirements of life within the societal system of cooperation does not want to miss any of the advantages derived from the division of labor. He does not consciously aim at the destruction of society. He wants to lay his hands on a greater portion of the jointly produced wealth than the social order assigns to him. He would feel miserable if antisocial behavior were to become universal and its inevitable outcome, the return to primitive indigence, resulted.
It is illusory to maintain that individuals in renouncing the alleged blessings of a fabulous state of nature and entering into society have foregone some advantages and have a fair claim to be indemnified for what they have lost. The idea that anybody would have fared better under an asocial state of mankind and is wronged by the very existence of society is absurd. Thanks to the higher productivity of social cooperation the human species has multiplied far beyond the margin of subsistence offered by the conditions prevailing in ages with a rudimentary degree of the division of labor. Each man enjoys a standard of living much higher than that of his savage ancestors. The natural condition of man is extreme poverty and insecurity. It is romantic nonsense to lament the passing of the happy days of primitive barbarism. In a state of savagery the complainants would either not have reached the age of manhood, or if they had, they would have lacked the opportunities and amenities provided by civilization. Jean Jacques Rousseau and Frederick Engels, if they had lived in the primitive state which they describe with nostalgic yearning, would not have enjoyed the leisure required for their studies and for the writing of their books.
One of the privileges which society affords to the individual is the privilege of living in spite of sickness or physical disability. Sick animals are doomed. Their weakness handicaps them in their attempts to find food and to repel aggression on the part of other animals. Deaf, nearsighted, or crippled savages must perish. But such defects do not deprive a man of the opportunity to adjust himself to life in society. The majority of our contemporaries are afflicted with some bodily deficiencies which biology considers pathological. Our civilization is to a great extent the achievement of such men. The eliminative forces of natural selection are greatly reduced under social conditions. Hence some people say that civilization tends to deteriorate the hereditary qualities of the members of society.
Such judgments are reasonable if one looks at mankind with the eyes of a breeder intent upon raising a race of men equipped with certain qualities. But society is not a stud-farm operated for the production of a definite type of men. There is no "natural" standard to establish what is desirable and what is undesirable in the biological evolution of man. Any standard chosen is arbitrary, purely subjective, in short a judgment of value. The terms racial improvement and racial degeneration are meaningless when not based on definite plans for the future of mankind.
It is true, civilized man is adjusted to life in society and not to that of a hunter in virgin forests.
The Fable of the Mystic CommunionThe praxeological theory of society is assailed by the fable of the mystic communion.
Society, assert the supporters of this doctrine, is not the product of man's purposeful action; it is not cooperation and division of tasks. It stems from unfathomable depths, from an urge ingrained in man's essential nature. It is, says one group, engrossment by the Spirit which is Divine Reality and participation, by virtue of a unio mystica, in God's power and love. Another group sees society as a biological phenomenon; it is the work of the voice of the blood, the bond uniting the offspring of common ancestors with these ancestors and with one another, and the mystical harmony between the ploughman and the soil he tills.
That such psychical phenomena are really felt is true. There are people who experience the unio mystica and place this experience above everything else, and there are men who are convinced that they hear the voice of the blood and smell with heart and soul the unique scent of the cherished soil of their country. The mystical experience and the ecstatic rapture are facts which psychology must consider real, like any other psychical phenomenon. The error of the communion-doctrines does not consist in their assertion that such phenomena really occur, but in the belief that they are primary facts not dependent on any rational consideration.
The voice of the blood which brings the father close to his child was not heard by those savages who did not know the causal relation between cohabitation and pregnancy. Today, as this relation is known to everybody, a man who has full confidence in his wife's fidelity may perceive it. But if there are doubts concerning the wife's fidelity, the voice of the blood is of no use. Nobody ever ventured to assert that doubts concerning paternity could be resolved by the voice of the blood. A mother who has kept watch over her child since its birth can hear the voice of the blood. If she loses touch with the infant at an early date, she may later identify it by some bodily marks, for instance those moles and scars which once were popular with novel writers. But the blood is mute if such observations and the conclusions derived from them do not make it speak. The voice of the blood, contend the German racists, mysteriously unifies all members of the German people. But anthropology reveals the fact that the German nation is a mixture of the descendants of various races, subraces, and strains and not a homogeneous stock descended from a common ancestry. The recently germanized Slav who has only a short time since changed his paternal family name for a German-sounding name believes that he is substantially attached to all Germans. But he does not experience any such inner urge impelling him to join the ranks of his brothers or cousins who remained Czechs or Poles.
The voice of the blood is not an original and primordial phenomenon. It is prompted by rational considerations. Because a man believes that he is related to other people by a common ancestry, he develops those feelings and sentiments which are poetically described as the voice of the blood.
The same is true with regard to religious ecstasy and mysticism of the soil. The unio mystica of the devout mystic is conditioned by familiarity with the basic teachings of his religion. Only a man who has learned about the greatness and glory of God can experience direct communion with Him. Mysticism of the soil is connected with the development of definite geopolitical ideas. Thus it may happen that inhabitants of the plains or the seashore include in the image of the soil with which they claim to be fervently joined and united also mountain districts which are unfamiliar to them and to whose conditions they could not adapt themselves, only because this territory belongs to the political body of which they are members, or would like to be members. On the other hand they often fail to include in this image of the soil whose voice they claim to hear neighboring areas of a geographic structure very similar to that of their own country if these areas happen to belong to a foreign nation.
The various members of a nation or linguistic group and the clusters they form are not always united in friendship and good will. The history of every nation is a record of mutual dislike and even hatred between its subdivisions. Think of the English and the Scotch, the Yankees and the Southerners, the Prussians and the Bavarians. It was ideologies that overcame such animosities and inspired all members of a nation or linguistic group with those feelings of community and belonging together which present-day nationalists consider a natural and original phenomenon.
The mutual sexual attraction of male and female is inherent in man's animal nature and independent of any thinking and theorizing. It is permissible to call it original, vegetative, instinctive, or mysterious; there is no harm in asserting metaphorically that it makes one being out of two. We may call it a mystic communion of two bodies, a community. However, neither cohabitation, nor what precedes it and follows, generates social cooperation and societal modes of life. The animals too join together in mating, but they have not developed social relations. Family life is not merely a product of sexual intercourse. It is by no means natural and necessary that parents and children live together in the way in which they do in the family. The mating relation need not result in a family organization. The human family is an outcome of thinking, planning, and acting. It is this very fact which distinguishes it radically from those animal groups which we call per analogiam amimal families.
The mystical experience of communion or community is not the source of societal relations, but their product.
The counterpart of the fable of the mystical communion is the fable of a natural and original repulsion between races or nations. It is asserted that an instinct teaches man to distinguish congeners from strangers and to detest the latter. Scions of noble races abominate any contact with members of lower races. To refute this statement one need only mention the fact of racial mixture. As there are in present-day Europe no pure stocks, we must conclude that between members of the various stocks which once settled in that continent there was sexual attraction and not repulsion. Millions of mulattos and other half-breeds are living counterevidence to the assertion that there exists a natural repulsion between the various races.
Like the mystical sense of communion, racial hatred is not a natural phenomenon innate in man. It is the product of ideologies. But even if such a thing as a natural and inborn hatred between various races existed, it would not render social cooperation futile and would not invalidate Ricardo's theory of association. Social cooperation has nothing to do with personal love or with a general commandment to love one another. People do not cooperate under the division of labor because they love or should love one another. They cooperate because this best serves their own interests. Neither love not charity nor any other sympathetic sentiments but rightly understood selfishness is what originally impelled man to adjust himself to the requirements of society, to respect the rights and freedoms of his fellow men and to substitute peaceful collaboration for enmity and conflict.
- The Great SocietyNot every interhuman relation is a social relation. When groups of men rush upon one another in a war of outright extermination, when men fight against men as mercilessly as they crush pernicious animals and plants, there is, between the fighting parties, reciprocal effect and mutual relation, but no society. Society is joint action and cooperation in which each participant sees the other partner's success as a means for the attainment of his own.
"Millions of mulattos and other half-breeds are living counterevidence to the assertion that there exists a natural repulsion between the various races."The struggles in which primitive hordes and tribes fought one another for watering places, hunting and fishing grounds, pastures and booty were pitiless wars of annihilation. They were total wars. So in the nineteenth century were the first encounters of Europeans with the aborigines of territories newly made accessible. But already in the primeval age, long before the time of which historical records convey information, another mode of procedure began to develop. People preserved even in warfare some rudiments of social relations previously established; in fighting against peoples with whom they never before had had any contact, they began to take into account the idea that between human beings, notwithstanding their immediate enmity, a later arrangement and cooperation is possible. Wars were waged to hurt the foe; but the hostile acts were no longer merciless and pitiless in the full sense of these terms. The beligerents began to respect certain limits which in a struggle against men — as differentiated from that against beasts — should not be transcended. Above the implacable hatred and the frenzy of destruction and annihilation a societal element began to prevail. The idea emerged that every human adversary should be considered as a potential partner in a future cooperation, and that this fact should not be neglected in the conduct of military operations. War was no longer considered the normal state of interhuman relations. People recognized that peaceful cooperation is the best means to carry on the struggle for biological survival. We may even say that as soon as people realized that it is more advantageous to enslave the defeated than to kill them, the warriors, while still fighting, gave thought to the aftermath, the peace. Enslavement was by and large a preliminary step toward cooperation.
The ascendancy of the idea that even in war not every act is to be considered permissible, that there are legitimate and illicit acts of warfare, that there are laws, i.e., societal relationships which are above all nations, even above those momentarily fighting one another, has finally established the Great Society embracing all men and all nations. The various regional societies were merged into one ecumenical society.
Belligerents who do not wage war savagely in the manner of beasts, but according to "human" and social rules of warfare, renounce the use of some methods of destruction in order to attain the same concessions on the part of their foes. As far as such rules are complied with, social relations exist between the fighting parties. The hostile acts themselves are not only asocial, but antisocial. It is inexpedient to define the term "social relationships" in such a way as to include actions which aim at other people's annihilation and at the frustration of their actions.Such is the terminology used by Leopold von Wiese (Allgemeine Soziologie [Munich, 1924], I, 10 ff.). Where the only relations between men are those directed at mutual detriment, there is neither society nor societal relations.
Society is not merely interaction. There is interaction — reciprocal influence — between all parts of the universe: between the wolf and the sheep he devours; between the germ and the man it kills; between the falling stone and the thing upon which it falls. Society, on the other hand, always involves men acting in cooperation with other men in order to let all participants attain their own ends.
- The Instinct of Aggression and DestructionIt has been asserted that man is a beast of prey whose inborn natural instincts impel him to fight, to kill, and to destroy. Civilization, in creating unnatural humanitarian laxity which alienates man from his animal origin, has tried to quell these impulses and appetites. It has made civilized man a decadent weakling who is ashamed of his animality and proudly calls his depravity true humaneness. In order to prevent further degeneration of the species man, it is imperative to free him from the pernicious effects of civilization. For civilization is merely a cunning invention of inferior men. These underlings are too weak to be a match for the vigorous heroes, they are too cowardly to endure the well-deserved punishment of complete annihilation, and they are too lazy and too insolent to serve the masters as slaves. Thus they have resorted to a tricky makeshift. They have reversed the eternal standards of value, absolutely fixed by the immutable laws of the universe; they have propagated a morality which calls their own inferiority virtue and the eminence of the noble heroes vice. This moral rebellion of the slaves must be undone by a transvaluation of all values. The ethics of the slaves, this shameful product of the resentment of weaklings, must be entirely discarded; the ethics of the strong or, properly speaking, the nullification of any ethical restriction must be substituted for it. Man must become a worthy scion of his ancestors, the noble beasts of days gone by.
It is usual to call such doctrines social or sociological Darwinism. We need not decide here whether this terminology is appropriate or not. At any rate it is a mistake to assign the epithets evolutionary and biological to teachings which blithely disparage the whole of mankind's history from the ages in which man began to lift himself above the purely animal existence of his nonhuman ancestors as a continuous progression toward degeneration and decay. Biology does not provide any standard for the appraisal of changes occurring within living beings other than whether or not these changes succeeded in adjusting the individuals to the conditions of their environment and thereby in improving their chances in the struggle for survival. It is a fact that civilization, when judged from this point of view, is to be considered a benefit and not an evil. It has enabled man to hold his own in the struggle against all other living beings, both the big beasts of prey and the even more pernicious microbes; it has multiplied man's means of sustenance; it has made the average man taller, more agile, and more versatile and it has stretched his average length of life; it has given man the uncontested mastery of the earth; it has multiplied population figures and raised the standard of living to a level never dreamed of by the crude cave dwellers of prehistoric ages. It is true that this evolution stunted the development of certain knacks and gifts which were once useful in the struggle for survival and have lost their usefulness under changed conditions. On the other hand it developed other talents and skills which are indispensable for life within the frame of society. However, a biological and evolutionary view must not cavil at such changes. For primitive man hard fists and pugnacity were as useful as the ability to be clever at arithmetic and to spell correctly are for modern man. It is quite arbitrary and certainly contrary to any biological standard to call only those characteristics which were useful to primitive man natural and adequate to human nature and to condemn the talents and skills badly needed by civilized man as marks of degeneration and biological deterioration. To advise man to return to the physical and intellectual features of his prehistoric ancestors is no more reasonable than to ask him to renounce his upright gait and to grow a tail again.
It is noteworthy that the men who were foremost in extolling the eminence of the savage impulses of our barbarian forefathers were so frail that their bodies would not have come up to the requirements of "living dangerously." Nietzsche even before his mental breakdown was so sickly that the only climate he could stand was that of the Engadin valley and of some Italian districts. He would not have been in a position to accomplish his work if civilized society had not protected his delicate nerves against the roughness of life. The apostles of violence wrote their books under the sheltering roof of "bourgeois security" which they derided and disparaged. They were free to publish their incendiary sermons because the liberalism which they scorned safeguarded freedom of the press. They would have been desperate if they had had to forego the blessings of the civilization scorned by their philosophy. And what a spectacle was that timid writer Georges Sorel, who went so far in his praise of brutality as to blame the modern system of education for weakening man's inborn tendencies toward violence!Georges Sorel, Réflexions sur la violence (3d. ed., Paris, 1912), p. 269.
One may admit that in primitive man the propensity for killing and destroying and the disposition for cruelty were innate. We may also assume that under the conditions of earlier ages the inclination for aggression and murder was favorable to the preservation of life. Man was once a brutal beast. (There is no need to investigate whether prehistoric man was a carnivore or a herbivore.) But one must not forget that he was physically a weak animal; he would not have been a match for the big beasts of prey if he had not been equipped with a peculiar weapon, reason. The fact that man is a reasonable being, that he therefore does not yield without inhibitions to every impulse, but arranges his conduct according to reasonable deliberation, must not be called unnatural from a zoological point of view. Rational conduct means that man, in face of the fact that he cannot satisfy all his impulses, desires, and appetites, foregoes the satisfaction of those which he considers less urgent. In order not to endanger the working of social cooperation man is forced to abstain from satisfying those desires whose satisfaction would hinder the establishment of societal institutions. There is no doubt that such a renunciation is painful. However, man has made his choice. He has renounced the satisfaction of some desires incompatible with social life and has given priority to the satisfaction of those desires which can be realized only or in a more plentiful way under a system of the division of labor. He has entered upon the way toward civilization, social cooperation, and wealth.
This decision is not irrevocable and final. The choice of the fathers does not impair the sons' freedom to choose. They can reverse the resolution. Every day they can proceed to the transvaluation of values and prefer barbarism to civilization, or, as some authors say, the soul to the intellect, myths to reason, and violence to peace. But they must choose. It is impossible to have things incompatible with one another.
Science, from the point of view of its valuational neutrality, does not blame the apostles of the gospel of violence for praising the frenzy of murder and the mad delights of sadism. Value judgments are subjective, and liberal society grants to everybody the right to express his sentiments freely. Civilization has not extirpated the original tendency toward aggression, bloodthirstiness, and cruelty which characterized primitive man. In many civilized men they are dormant and burst forth as soon as the restraints developed by civilization give way. Remember the unspeakable horrors of the Nazi concentration camps. The newspapers continually report abominable crimes manifesting the latent urges toward bestiality. The most popular novels and moving pictures are those dealing with bloodshed and violent acts. Bull fights and cock fights attract large crowds.
If an author says: the rabble thirst for blood and I with them, he may be no less right than in asserting that primitive man too took delight in killing. But he errs if he passes over the fact that the satisfaction of such sadistic desires impairs the existence of society or if he asserts that "true" civilization and the "good" society are an achievement of people blithely indulging in their passion for violence, murder, and cruelty, that the repression of the impulses toward brutality endangers mankind's evolution and that a substitution of barbarism for humanitarianism would save man from degeneration. The social division of labor and cooperation rests upon conciliatory settlement of disputes. Not war, as Heraclitus said, but peace is the source of all social relations. To man desires other than that for bloodshed are inborn. If he wants to satisfy these other desires, he must forego his urge to kill. He who wants to preserve life and health as well and as long as possible, must realize that respect for other people's lives and health better serves his aim than the opposite mode of conduct. One may regret that such is the state of affairs. But no such lamentations can alter the hard facts.
It is useless to censure this statement by referring to irrationality. All instinctive impulses defy examination by reason because reason deals only with the means for attaining ends sought and not with ultimate ends. But what distinguishes man from other animals is precisely that he does not yield without any will of his own to an instinctive urge. Man uses reason in order to choose between the incompatible satisfactions of conflicting desires.
One must not tell the masses: Indulge in your urge for murder; it is genuinely human and best serves your well-being. One must tell them: If you satisfy your thirst for blood, you must forego many other desires. You want to eat, to drink, to live in fine homes, to clothe yourselves, and a thousand other things which only society can provide. You cannot have everything, you must choose. The dangerous life and the frenzy of sadism may please you, but they are incompatible with the security and plenty which you do not want to miss either.
Praxeology as a science cannot encroach upon the individual's right to choose and to act. The final decisions rest with acting men, not with the theorists. Science's contribution to life and action does not consist in establishing value judgments, but in clarification of the conditions under which man must act and in elucidation of the effects of various modes of action. It puts at the disposal of acting man all the information he needs in order to make his choices in full awareness of their consequences. It prepares an estimate of cost and yield, as it were. It would fail in this task if it were to omit from this statement one of the items which could influence people's choices and decisions.
Current Misinterpretations of Modern Natural Science, Especially of DarwinismSome present-day antiliberals, both of the right-wing and of the left-wing variety, base their teachings on misinterpretations of the achievements of modern biology.
- Men are unequal.Eighteenth-century liberalism and likewise present-day egalitarianism start from the "self-evident truth" that "all men are created equal, and that they are endowed by their Creator with certain unalienable Rights." However, say the advocates of a biological philosophy of society, natural science has demonstrated in an irrefutable way that men are different. There is no room left in the framework of an experimental observation of natural phenomena for such a concept as natural rights. Nature is unfeeling and insensible with regard to any being's life and happiness. Nature is iron necessity and regularity. It is metaphysical nonsense to link together the "slippery" and vague notion of liberty and the unchangeable absolute laws of cosmic order. Thus the fundamental idea of liberalism is unmasked as a fallacy.
Now it is true that the liberal and democratic movement of the eighteenth and nineteenth centuries drew a great part of its strength from the doctrine of natural law and the innate imprescriptible rights of the individual. These ideas, first developed by ancient philosophy and Jewish theology, permeated Christian thinking. Some anti-Catholic sects made them the focal point of their political programs. A long line of eminent philosophers substantiated them. They became popular and were the most powerful moving force in the prodemocratic evolution. They are still supported today. Their advocates do not concern themselves with the incontestable fact that God or nature did not create men equal since many are born hale and hearty while others are crippled and deformed. With them all differences between men are due to education, opportunity, and social institutions.
But the teachings of utilitarian philosophy and classical economics have nothing at all to do with the doctrine of natural right. With them the only point that matters is social utility. They recommend popular government, private property, tolerance, and freedom not because they are natural and just, but because they are beneficial. The core of Ricardo's philosophy is the demonstration that social cooperation and division of labor between men who are in every regard superior and more efficient and men who are in every regard inferior and less efficient is beneficial to both groups. Bentham, the radical, shouted: "Natural rights is simple nonsense: natural and imprescriptible rights, rhetorical nonsense."Bentham, Anarchical Fallacies; being an Examination of the Declaration of Rights issued during the French Revolution, in Work (ed. by Bowring), II, 501. With him "the sole object of government ought to be the greatest happiness of the greatest possible number of the community."Bentham, Principles of the Civil Code, in Works, I, 301. Accordingly, in investigating what ought to be right he does not care about preconceived ideas concerning God's or nature's plans and intentions, forever hidden to mortal men; he is intent upon discovering what best serves the promotion of human welfare and happiness. Malthus showed that nature in limiting the means of subsistence does not accord to any living being a right of existence, and that by indulging heedlessly in the natural impulse of proliferation man would never have risen above the verge of starvation. He contended that human civilization and well-being could develop only to the extent that man learned to rein his sexual appetites by moral restraint. The Utilitarians do not combat arbitrary government and privileges because they are against natural law but because they are detrimental to prosperity. They recommend equality under the civil law not because men are equal but because such a policy is beneficial to the commonweal. In rejecting the illusory notions of natural law and human equality modern biology only repeated what the utilitarian champions of liberalism and democracy long before had taught in a much more persuasive way. It is obvious that no biological doctrine can ever invalidate what utilitarian philosophy says about the social utility of democratic government, private property, freedom, and equality under the law.
The present-day prevalence of doctrines approving social disintegration and violent conflict is not the result of an alleged adaptation of social philosophy to the findings of biology but of the almost universal rejection of utilitarian philosophy and economic theory. People have substituted an ideology of irreconcilable class conflict and international conflict for the "orthodox" ideology of the harmony of the rightly understood, i.e., long-run, interests of all individuals, social groups, and nations. Men are fighting one another because they are convinced that the extermination and liquidation of adversaries is the only means of promoting their own well-being.
- The social implications of Darwinism.The theory of evolution as expounded by Darwin, says a school of social Darwinism, has clearly demonstrated that in nature there are no such things as peace and respect for the lives and welfare of others. In nature there is always struggle and merciless annihilation of the weak who do not succeed in defending themselves. Liberalism's plans for eternal peace — both in domestic and in foreign relations — are the outcome of an illusory rationalism contrary to the natural order.
However, the notion of the struggle for existence as Darwin borrowed it from Malthus and applied it in his theory, is to be understood in a metaphorical sense. Its meaning is that a living being actively resists the forces detrimental to its own life. This resistance, if it is to succeed, must be appropriate to the environmental conditions in which the being concerned has to hold its own. It need not always be a war of extermination such as in the relations between men and morbific microbes. Reason has demonstrated that, for man, the most adequate means of improving his condition is social cooperation and division of labor. They are man's foremost tool in his struggle for survival. But they can work only where there is peace. Wars, civil wars, and revolutions are detrimental to man's success in the struggle for existence because they disintegrate the apparatus of social cooperation.
- Reason and rational behavior called unnatural.Christian theology deprecated the animal functions of man's body and depicted the "soul" as something outside of all biological phenomena. In an excessive reaction against this philosophy some moderns are prone to disparage everything in which man differs from other animals. In their eyes human reason is inferior to the animal instincts and impulses; it is unnatural and therefore bad. With them the terms rationalism and rational behavior have an opprobrious connotation. The perfect man, the real man, is a being who obeys his primordial instincts more than his reason.
The obvious truth is that reason, man's most characteristic feature, is also a biological phenomenon. It is neither more nor less natural than any other feature of the species homo sapiens, for instance, the upright gait or the hairless skin.
[This article is from chapter 5 of Human Action. Robert Murphy has written a study guide for this chapter, available in HTML and PDF. This chapter follows "A First Analysis of the Category of Action."]
- Time as a Praxeological Factor The notion of change implies the notion of temporal sequence. A rigid, eternally immutable universe would be out of time, but it would be dead. The concepts of change and of time are inseparably linked together. Action aims at change and is therefore in the temporal order. Human reason is even incapable of conceiving the ideas of timeless existence and of timeless action.
He who acts distinguishes between the time before the action, the time absorbed by the action, and the time after the action has been finished. He cannot be neutral with regard to the lapse of time.
Logic and mathematics deal with an ideal system of thought. The relations and implications of their system are coexistent and interdependent. We may say as well that they are synchronous or that they are out of time. A perfect mind could grasp them all in one thought. Man's inability to accomplish this makes thinking itself an action, proceeding step by step from the less satisfactory state of insufficient cognition to the more satisfactory state of better insight. But the temporal order in which knowledge is acquired must not be confused with the logical simultaneity of all parts of an aprioristic deductive system. Within such a system the notions of anteriority and consequence are metaphorical only. They do not refer to the system, but to our action in grasping it. The system itself implies neither the category of time nor that of causality. There is functional correspondence between elements, but there is neither cause nor effect.
What distinguishes epistemologically the praxeological system from the logical system is precisely that it implies the categories both of time and of causality. The praxeological system too is aprioristic and deductive. As a system it is out of time. But change is one of its elements. The notions of sooner and later and of cause and effect are among its constituents. Anteriority and consequence are essential concepts of praxeological reasoning. So is the irreversibility of events. In the frame of the praxeological system any reference to functional correspondence is no less metaphorical and misleading than is the reference to anteriority and consequence in the frame of the logical system.In a treatise on economics there is no need to enter into a discussion of the endeavors to construct mechanics as an axiomatic system in which the concept of function is substituted for that of cause and effect. It will be shown later that axiomatic mechanics cannot serve as a model for the treatment of the economic system. Cf. below, pp. 353-357.
- Past, Present, and Future It is acting that provides man with the notion of time and makes him aware of the flux of time. The idea of time is a praxeological category.
Action is always directed toward the future; it is essentially and necessarily always a planning and acting for a better future. Its aim is always to render future conditions more satisfactory than they would be without the interference of action. The uneasiness that impels a man to act is caused by a dissatisfaction with expected future conditions as they would probably develop if nothing were done to alter them. In any case action can influence only the future, never the present that with every infinitesimal fraction of a second sinks down into the past. Man becomes conscious of time when he plans to convert a less satisfactory present state into a more satisfactory future state.
For contemplative meditation time is merely duration, "la durée pure, dont l'écoulement est continu, et où l'on passe, par gradations insensibles, d'un état à l'autre: Continuité réellement vécue."Henri Bergson, Matière et mémoire (7th ed. Paris, 1911), p. 205 The "now" of the present is continually shifted to the past and is retained in the memory only. Reflecting about the past, say the philosophers, man becomes aware of timeEdmund Husserl, "Vorlesungen zur Phänomenologie des inneren Zeitbewusstseins," Jahrbuch für Philosophie und Phänomenologische Forschung, IX (1928), 391ff.; A. Schütz, loc cit., pp. 45ff. However, it is not recollection that conveys to man the categories of change and of time, but the will to improve the conditions of his life.
Time as we measure it by various mechanical devices is always past, and time as the philosophers use this concept is always either past or future. The present is, from these aspects, nothing but an ideal boundary line separating the past from the future. But from the praxeological aspect there is between the past and the future a real extended present. Action is as such in the real present because it utilizes the instant and thus embodies its reality."Ce que j'appelle mon présent, c'est mon attitude vis-à-vis de l'avenir immédiat, c'est mon action imminente." Bergson, op. cit., p. 152. Later retrospective reflection discerns in the instant passed away first of all the action and the conditions which it offered to action. That which can no longer be done or consumed because the opportunity for it has passed away, contrasts the past with the present. That which cannot yet be done or consumed, because the conditions for undertaking it or the time for its ripening have not yet come, contrasts the future with the past. The present offers to acting opportunities and tasks for which it was hitherto too early and for which it will be hereafter too late.
The present qua duration is the continuation of the conditions and opportunities given for acting. Every kind of action requires special conditions to which it must be adjusted with regard to the aims sought. The concept of the present is therefore different for various fields of action. It has no reference whatever to the various methods of measuring the passing of time by spatial movements. The present encloses as much of the time passed away as still is actual, i.e., of importance for acting. The present contrasts itself, according to the various actions one has in view, with the Middle Ages, with the nineteenth century, with the past year, month, or day, but no less with the hour, minute, or second just passed away. If a man says: Nowadays Zeus is no longer worshipped, he has a present in mind other than that of the motorcar driver who thinks: Now it is still too early to turn.
As the future is uncertain it always remains undecided and vague how much of it we can consider as now and present. If a man had said in 1913: At present — now — in Europe freedom of thought is undisputed, he would have not foreseen that this present would very soon be a past.
- The Economization of Time Man is subject to the passing of time. He comes into existence, grows, becomes old, and passes away. His time is scarce. He must economize it as he economizes other scarce factors.
The economization of time has a peculiar character because of the uniqueness and irreversibility of the temporal order. The importance of these facts manifests itself in every part of the theory of action.
Only one fact must be stressed at this point. The economization of time is independent of the economization of economic goods and services. Even in the land of Cockaigne man would be forced to economize time, provided he were not immortal and not endowed with eternal youth and indestructible health and vigor. Although all his appetites could be satisfied immediately without any expenditure of labor, he would have to arrange his time schedule, as there are states of satisfaction which are incompatible and cannot be consummated at the same time. For this man, too, time would be scarce and subject to the aspect of sooner and later.
- The Temporal Relation between Actions Two actions of an individual are never synchronous; their temporal relation is that of sooner and later. Actions of various individuals can be considered as synchronous only in the light of the physical methods for the measurement of time. Synchronism is a praxeological notion only with regard to the concerted efforts of various acting men.In order to avoid any possible misunderstanding it may well be expedient to emphasize that this theorem has nothing at all to do with Einstein's theorem concerning the temporal relation of spatially distant events.
A man's individual actions succeed one another. They can never be effected at the same instant; they can only follow one another in more or less rapid succession. There are actions which serve several purposes at one blow. It would be misleading to refer to them as a coincidence of various actions.
People have often failed to recognize the meaning of the term "scale of value" and have disregarded the obstacles preventing the assumption of synchronism in the various actions of an individual. They have interpreted a man's various acts as the outcome of a scale of value, independent of these acts and preceding them, and of a previously devised plan whose realization they aim at. The scale of value and the plan to which duration and immutability for a certain period of time were attributed, were hypostatized into the cause and motive of the various individual actions. Synchronism which could not be asserted with regard to various acts was then easily discovered in the scale of value and in the plan. But this overlooks the fact that the scale of value is nothing but a constructed tool of thought. The scale of value manifests itself only in real acting; it can be discerned only from the observation of real acting. It is therefore impermissible to contrast it with real acting and to use it as a yardstick for the appraisal of real actions.
It is no less impermissible to differentiate between rational and allegedly irrational acting on the basis of a comparison of real acting with earlier drafts and plans for future actions. It may be very interesting that yesterday goals were set for today's acting other than those really aimed at today. But yesterday's plans do not provide us with any more objective and nonarbitrary standard for the appraisal of today's real acting than any other ideas and norms.
The attempt has been made to attain the notion of a nonrational action by this reasoning: If a is preferred to b and b to c, logically a should be preferred to c. But if actually c is preferred to a, we are faced with a mode of acting to which we cannot ascribe consistency and rationality.Cf. Felix Kaufmann, "On the Subject-Matter of Economic Science," Economica, XIII, 390. This reasoning disregards the fact that two acts of an individual can never be synchronous. If in one action a is preferred to b and in another action b to c, it is, however short the interval between the two actions may be, not permissible to construct a uniform scale of value in which a precedes b and b precedes c. Nor is it permissible to consider a later third action as coincident with the two previous actions. All that the example proves is that value judgments are not immutable and that therefore a scale of value, which is abstracted from various, necessarily nonsynchronous actions of an individual, may be self-contradictory.Cf. P.H. Wicksteed, The Common Sense of Political Economy, ed. Robbins (London, 1933), I, 32ff.; L. Robbins, An Essay on the Nature and Significance of Economic Science (2d ed. London, 1935), pp. 91ff.
One must not confuse the logical concept of consistency (viz., absence of contradiction) and the praxeological concept of consistency (viz., constancy or clinging to the same principles). Logical consistency has its place only in thinking, constancy has its place only in acting.
Constancy and rationality are entirely different notions. If one's valuations have changed, unremitting faithfulness to the once espoused principles of action merely for the sake of constancy would not be rational but simply stubborn. Only in one respect can acting be constant: in preferring the more valuable to the less valuable. If the valuations change, acting must change also. Faithfulness, under changed conditions, to an old plan would be nonsensical. A logical system must be consistent and free of contradictions because it implies the coexistence of all its parts and theorems. In acting, which is necessarily in the temporal order, there cannot be any question of such consistency. Acting must be suited to purpose, and purposefulness requires adjustment to changing conditions.
Presence of mind is considered a virtue in acting man. A man has presence of mind if he has the ability to think and to adjust his acting so quickly that the interval between the emergence of new conditions and the adaptation of his actions to them becomes as short as possible. If constancy is viewed as faithfulness to a plan once designed without regard to changes in conditions, then presence of mind and quick reaction are the very opposite of constancy.
When the speculator goes to the stock exchange, he may sketch a definite plan for his operations. Whether or not he clings to this plan, his actions are rational also in the sense which those eager to distinguish rational acting from irrational attribute to the term "rational." This speculator in the course of the day may embark upon transactions which an observer, not taking into account the changes occurring in market conditions, will not be able to interpret as the outcome of constant behavior. But the speculator is firm in his intention to make profits and to avoid losses. Accordingly he must adjust his conduct to the change in market conditions and in his own judgment concerning the future development of prices.Plans too, of course, may be self-contradictory. Sometimes their contradictions may be the effect of mistaken judgment. But sometimes such contradictions may be intentional and serve a definite purpose. If, for instance, a publicized program of a government or a political party promises high prices to the producers and at the same time low prices to the consumers., the purpose of such an espousal of incompatible goals may be demagogic. Then the program, the publicized plan, is self-contradictory; but the plan of its authors who wanted to attain a definite end through the endorsement of incompatible aims and their public announcement is free of any contradiction.
However one twists things, one will never succeed in formulating the notion of "irrational" action whose "irrationality" is not founded upon an arbitrary judgment of value. Let us suppose that somebody has chosen to act inconstantly for no other purpose than for the sake of refuting the praxeological assertion that there is no irrational action. What happens here is that a man aims at a peculiar goal, viz., the refutation of a praxeological theorem, and that he accordingly acts differently from what he would have done otherwise. He has chosen an unsuitable means for the refutation of praxeology, that is all.
Once, when my newborn son was barely back from the hospital, I was holding him in my arms with my wife looking on. I asked him, "Can you say marginal rate of substitution?"
My wife recognized that as a bit of economics jargon and accused me of trying to turn our son into an economist like me.
While it was said as a little joke between the two of us, the longer I teach and write, the more I seriously wish people actually thought in such marginal terms, because many of the times that we confuse ourselves and others are due to our failure to do so.
The marginal rate of substitution (MRS) is the term describing the rate at which a person would willingly give up one good or service in exchange for another, from his current situation (i.e., at the current margin of choice). Its focus is on the trade-offs, made necessary by scarcity, that individuals are willing to make between alternatives, a focus often absent in how we reason, which leads to serious misunderstandings and impaired choices.
The word "need" is a prime example of the failure to think in terms of marginal trade-offs.
Since many choices forced on us by scarcity are between different "needs," calling something a need diverts attention from the actual choices faced. For instance, a person's need for water to drink is irrelevant to virtually every choice they make about water. If the price of water rose from its current level, they would not cut back appreciably on water to drink. Instead, they would cut back on some of the many low-valued uses they put it to (and all of us frequently treat water as nearly valueless, because it is cheaply available, and we use it whenever the benefits of doing so exceed its very low price). That is, people's water needs will not be given up, so discussing water in terms of need adds confusion rather than insight. The same is true for innumerable other supposed needs.
The word "need" is also typically used to imply that someone ought to have something they don't. Therefore, "need" is used to imply that they should therefore be given the good (which is why "need" in political discourse really means "I want it but I do not want to pay for it"). But if you had sufficient resources at your disposal, you would buy something if you really needed it. Further, since to give you a good requires that someone else must have the resources taken from them, to talk in terms of need blinds people to the real choice: how much should A's supposed need force B to pay for A's benefit—when A will not.
The confusion generated by talking in terms of need is often compounded by using the word "we," as well, when things are to be provided to some from tax revenue raised from others. For example, people often argue for goods and services that "we" should provide. But the largest source of tax revenue is the income tax, which comes disproportionately from higher-income earners, while a large number pay zero income taxes (e.g., many students and retired people) or even negative income taxes (particularly those who receive EITC refunds).
As a result, when most people say "we" should pay for something, it really means "you, not I," making such arguments highly misleading, if not duplicitous. And when such spending will be financed not by current taxes but by deficits—which are just delayed taxes whose incidence is kept unknown until after the fact—the same argument applies. One cannot correctly analyze such programs or proposals without knowing who will actually be forced to pay how much, so we can recognize the real marginal trade-offs.
Misusing the word "need" is just one example of the problems caused by thinking in categorical language. For instance, someone might say that good A is more valuable than good B (e.g., food as a category is more important than sleep as a category). However, that is not true: the relative value of various goods in reality depends greatly on circumstances and preferences (e.g., as anyone who does not want to get up when their alarm goes off in the morning is aware, sleeping a few more minutes may often be more valuable to them than eating in the next few minutes). Basing decisions on such erroneous premises makes mistakes inevitable.
Failing to think at the appropriate margins of choice is a staple of politics, with adverse effects. For instance, politicians are always telling people what they are for. But that is typically not what citizens really want to know, since politicians are all "for" pretty much the same things (e.g., peace on earth, our "general welfare," Mom and apple pie, etc.).
Since politics consists of trade-offs, what we really want to know is the rate at which they would trade one thing they are for against other things they are also for, or the rate at which they would accept what they are against in order to get more of what they are for (i.e., at what price in other things that they are for will they "sell us out" on a particular issue). But what they are officially for or against gives us little insight into any of that.
Polls, after money the lifeblood of politics, also typically fail to ask the right marginal questions. One may ask, "Should we add another lane to the 101 freeway in the San Fernando Valley?" But the answer depends on what it is going to cost the person asked. Without knowing what costs respondents think they will pay when they answer, we have almost no idea what a yes or no response means. For that matter, even if the question specifies a cost of, say, $200 per year, we still can't be sure of what their answer means, because they may be answering based on the often very different costs they actually expect to bear, rather than the cost specified in the poll question.
The deceptive mirage of central planning is also a result of failing to think in marginal terms. Those who find the cure for everything in planning ignore the fact that market prices reveal people's MRS between goods, and without market processes to reveal that information, it is unknowable to planners. Central planning, which throws away the process by which relevant trade-offs are revealed, must throw away the wealth and mutual gain that acting on otherwise unknowable information makes possible, as both Mises and Hayek demonstrated.
Assertions of objective efficiency, and the regulatory impositions based on them, represent another failure to think at the margin. Preferences and circumstances differ, and anything that could alter the value of the expected marginal benefits or the marginal opportunity costs of a choice to a decisionmaker could change what people deem efficient. As a result, to regulate away allegedly inefficient options is either redundant (if an option is considered inefficient by everyone, no one will use the option anyway) or itself inherently inefficient (forcing people away from what they consider more beneficial choices).
For instance, where I live, air conditioners cannot be sold if they have less than a minimum level of thermal efficiency. But for someone cooling an infrequently used cabin, the added cost of the more energy-efficient air conditioner may easily be more than the value of the energy saved during use. And there are many other cases where supposedly technically inefficient choices are economically efficient (e.g., the fact that most of us choose to live in our current homes and drive our current cars, instead of "state of the art" new models).
Not only do objective efficiency claims mislead, but they also serve as cover for assertions that someone other than the owner of a good should be given the power to decide for them. Their reasoning is that since the owner isn't making the efficient choice (an oxymoron, from the owner's perspective) their judgment should "obviously" be substituted for that of owners—for their own good. But what they really mean is that effective ownership should be taken away from current owners and given for free to those who "know better," which is just a thinly disguised form of theft.
Failing to think at the margin makes some people blind to why trade is mutually beneficial. They think of market exchanges as involving equal values, so that no wealth is created by supposedly quid pro quo exchanges, rather than recognizing that exchanges take place only when all parties expect their marginal benefit to exceed their marginal cost (i.e., when they have different marginal rates of substitution between the goods or services involved). Failing to see the gains from trade, they also fail to see the harm imposed on society from restricting or penalizing it, a fallacy behind a host of very damaging restrictions on voluntary arrangements.
Marginal misunderstandings appear in all sorts of decisions, especially about public policy (especially because people have far worse incentives to think carefully when they are spending other people's money rather than their own).
For example, the current push to ensure that everyone has health insurance is supposedly motivated by the desire for everyone to have access to health care, but access to health care is a vastly different issue than health insurance (just as the absence of food insurance does not mean people will not eat). Food stamps are supported by people who don't trust recipients to spend assistance on food, yet by substituting for money that would have been spent on food, food stamps act just like money for most recipients, doing nothing toward the underlying rationale for their use.
And the list goes on.
One need not talk in terms of marginal rates of substitution to avoid confusion about issues such as these. However, thinking at the margin about the innumerable choices scarcity has faced us with is a valuable antidote against mistaken reasoning.
It is particularly important insurance against those who would "sell" some political panacea with misleading language and arguments. Given the vast sea of political rhetoric that uses just such misrepresentation and misdirection to win political power at the expense of individual rights (at an MRS that is appalling to lovers of liberty), it is an important part of the arsenal against the continuing expansion of the state. After all, only such careful thinking can force its proponents to defend their real positions to citizens, rather than baffling and befuddling, as they do now.
This article was originally published October 2007.
- Ends and Means The result sought by an action is called its end, goal, or aim. One uses these terms in ordinary speech also to signify intermediate ends, goals, or aims; these are points which acting man wants to attain only because he believes that he will reach his ultimate end, goal, or aim in passing beyond them. Strictly speaking the end, goal, or aim of any action is always the relief from a felt uneasiness.
A means is what serves to the attainment of any end, goal, or aim. Means are not in the given universe; in this universe there exist only things. A thing becomes a means when human reason plans to employ it for the attainment of some end and human action really employs it for this purpose. Thinking man sees the serviceableness of things, i.e., their ability to minister to his ends, and acting man makes them means.
It is of primary importance to realize that parts of the external world become means only through the operation of the human mind and its offshoot, human action. External objects are as such only phenomena of the physical universe and the subject matter of the natural sciences. It is human meaning and action which transform them into means. Praxeology does not deal with the external world, but with man's conduct with regard to it. Praxeological reality is not the physical universe, but man's conscious reaction to the given state of this universe. Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.
Praxeology and economics do not deal with human meaning and action as they should be or would be if all men were inspired by an absolutely valid philosophy and equipped with a perfect knowledge of technology. For such notions as absolute validity and omniscience there is no room in the frame of a science whose subject matter is erring man. An end is everything which men aim at. A means is everything which acting men consider as such.
It is the task of scientific technology and therapeutics to explode errors in their respective fields. It is the task of economics to expose erroneous doctrines in the field of social action. But if men do not follow the advice of science, but cling to their fallacious prejudices, these errors are reality and must be dealt with as such.
Economists consider foreign exchange control as inappropriate to attain the ends aimed at by those who take recourse to it. However, if public opinion does not abandon its delusions and governments consequently resort to foreign exchange control, the course of events is determined by this attitude.
Present-day medicine considers the doctrine of the therapeutic effects of mandrake as a fable. But as long as people took this fable as truth, mandrake was an economic good and prices were paid for its acquisition. In dealing with prices economics does not ask what things are in the eyes of other people, but only what they are in the meaning of those intent upon getting them. For it deals with real prices, paid and received in real transactions, not with prices as they would be if men were different from what they really are.
Means are necessarily always limited, i.e., scarce with regard to the services for which man wants to use them. If this were not the case, there would not be any action with regard to them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action.
It is customary to call the end the ultimate good and the means goods. In applying this terminology economists mainly used to think as technologists and not as praxeologists. They differentiated between free goods and economic goods. They called free goods those things which, being available in superfluous abundance, do not need to be economized. Such goods are, however, not the object of any action. They are general conditions of human welfare; they are parts of the natural environment in which man lives and acts. Only the economic goods are the substratum of action. They alone are dealt with in economics.
Economic goods which in themselves are fitted to satisfy human wants directly and whose serviceableness does not depend on the cooperation of other economic goods, are called consumers' goods or goods of the first order. Means which can satisfy wants only indirectly when complemented by cooperation of other goods are called producers' goods or factors of production or goods of a remoter or higher order. The services rendered by a producers' good consist in bringing about, by the cooperation of complementary producers' goods, a product. This product may be a consumers' good; it may be a producers' good which when combined with other producers' goods will finally bring about a consumers' good. It is possible to think of the producers' goods as arranged in orders according to their proximity to the consumers' good for whose production they can be used. Those producers' goods which are nearest to the production of a consumers' good are ranged in the second order, and accordingly those which are used for the production of goods of the second order in the third order and so on.
The purpose of such an arrangement of goods in orders is to provide a basis for the theory of value and prices of the factors of production. It will be shown later how the valuation and the prices of the goods of higher orders are dependent on the valuation and the prices of the goods of lower orders produced by their expenditure. The first and ultimate valuation of external things refers only to consumers' goods. All other things are valued according to the part they play in the production of consumers' goods.
It is therefore not necessary actually to arrange producers' goods in various orders from the second to the nth. It is no less superfluous to enter into pedantic discussions of whether a concrete good has to be called a good of the lowest order or should rather be attributed to one of the higher orders. Whether raw coffee beans or roast coffee beans or ground coffee or coffee prepared for drinking or only coffee prepared and mixed with cream and sugar are to be called a consumers' good ready for consumption is of no importance. It is immaterial which manner of speech we adopt. For with regard to the problem of valuation, all that we say about a consumers' good can be applied to any good of a higher order (except those of the highest order) if we consider it as a product.
An economic good does not necessarily have to be embodied in a tangible thing. Nonmaterial economic goods are called services.
- The Scale of Value Acting man chooses between various opportunities offered for choice. He prefers one alternative to others.
It is customary to say that acting man has a scale of wants or values in his mind when he arranges his actions. On the basis of such a scale he satisfies what is of higher value, i.e., his more urgent wants, and leaves unsatisfied what is of lower value, i.e., what is a less urgent want. There is no objection to such a presentation of the state of affairs. However, one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man's actions. Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man's acting.
Ethical doctrines are intent upon establishing scales of value according to which man should act but does not necessarily always act. They claim for themselves the vocation of telling right from wrong and of advising man concerning what he should aim at as the supreme good. They are normative disciplines aiming at the cognition of what ought to be. They are not neutral with regard to facts; they judge them from the point of view of freely adopted standards.
This is not the attitude of praxeology and economics. They are fully aware of the fact that the ultimate ends of human action are not open to examination from any absolute standard. Ultimate ends are ultimately given, they are purely subjective, they differ with various people and with the same people at various moments in their lives. Praxeology and economics deal with the means for the attainment of ends chosen by the acting individuals. They do not express any opinion with regard to such problems as whether or not sybaritism is better than asceticism. They apply to the means only one yardstick, viz., whether or not they are suitable to attain the ends at which the acting individuals aim.
The notions of abnormality and perversity therefore have no place in economics. It does not say that a man is perverse because he prefers the disagreeable, the detrimental, and the painful to the agreeable, the beneficial, and the pleasant. It says only that he is different from other people; that he likes what others detest; that he considers useful what others want to avoid; that he takes pleasure in enduring pain which others avoid because it hurts them.
The polar notions normal and perverse can be used anthropologically for the distinction between those who behave as most people do and outsiders and atypical exceptions; they can be applied biologically for the distinction between those whose behavior preserves the vital forces and those whose behavior is self-destructive; they can be applied in an ethical sense for the distinction between those who behave correctly and those who act otherwise than they should. However, in the frame of a theoretical science of human action, there is no room for such a distinction. Any examination of ultimate ends turns out to be purely subjective and therefore arbitrary.
Value is the importance that acting man attaches to ultimate ends. Only to ultimate ends is primary and original value assigned. Means are valued derivatively according to their serviceableness in contributing to the attainment of ultimate ends. Their valuation is derived from the valuation of the respective ends. They are important for man only as far as they make it possible for him to attain some ends.
Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment.
Neither is value in words and doctrines. It is reflected in human conduct. It is not what a man or groups of men say about value that counts, but how they act. The oratory of moralists and the pompousness of party programs are significant as such. But they influence the course of human events only as far as they really determine the actions of men.
- The Scale of Needs Notwithstanding all declarations to the contrary, the immense majority of men aim first of all at an improvement of the material conditions of well-being. They want more and better food, better homes and clothes, and a thousand other amenities. They strive after abundance and health. Taking these goals as given, applied physiology tries to determine what means are best suited to provide as much satisfaction as possible. It distinguishes, from this point of view, between man's "real" needs and imaginary and spurious appetites. It teaches people how they should act and what they should aim at as a means.
The importance of such doctrines is obvious. From his point of view the physiologist is right in distinguishing between sensible action and action contrary to purpose. He is right in contrasting judicious methods of nourishment from unwise methods. He may condemn certain modes of behavior as absurd and opposed to "real" needs. However, such judgments are beside the point for a science dealing with the reality of human action. Not what a man should do, but what he does, counts for praxeology and economics. Hygiene may be right or wrong in calling alcohol and nicotine poisons. But economics must explain the prices of tobacco and liquor as they are, not as they would be under different conditions.
There is no room left in the field of economics for a scale of needs different from the scale of values as reflected in man's actual behavior. Economics deals with real man, weak and subject to error as he is, not with ideal beings, omniscient and perfect as only gods could be.
- Action as an Exchange Action is an attempt to substitute a more satisfactory state of affairs for a less satisfactory one. We call such a willfully induced alteration an exchange. A less desirable condition is bartered for a more desirable. What gratifies less is abandoned in order to attain something that pleases more. That which is abandoned is called the price paid for the attainment of the end sought. The value of the price paid is called costs. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at.
The difference between the value of the price paid (the costs incurred) and that of the goal attained is called gain or profit or net yield. Profit in this primary sense is purely subjective, it is an increase in the acting man's happiness, it is a psychical phenomenon that can be neither measured nor weighed. There is a more and a less in the removal of uneasiness felt; but how much one satisfaction surpasses another one can only be felt; it cannot be established and determined in an objective way. A judgment of value does not measure, it arranges in a scale of degrees, it grades. It is expressive of an order of preference and sequence, but not expressive of measure and weight. Only the ordinal numbers can be applied to it, but not the cardinal numbers.
It is vain to speak of any calculation of values. Calculation is possible only with cardinal numbers. The difference between the valuation of two states of affairs is entirely psychical and personal. It is not open to any projection into the external world. It can be sensed only by the individual. It cannot be communicated or imparted to any fellow man. It is an intensive magnitude.
Physiology and psychology have developed various methods by means of which they pretend to have attained a substitute for the unfeasible measurement of intensive magnitudes. There is no need for economics to enter into an examination of these rather questionable makeshifts. Their supporters themselves realize that they are not applicable to value judgments. But even if they were, they would not have any bearing on economic problems. For economics deals with action as such, and not with the psychical facts that result in definite actions.
It happens again and again that an action does not attain the end sought. Sometimes the result, although inferior to the end aimed at, is still an improvement when compared with the previous state of affairs; then there is still a profit, although a smaller one than that expected. But it can happen that the action produces a state of affairs less desirable than the previous state it was intended to alter. Then the difference between the valuation of the result and the costs incurred is called loss.
This article is taken from chapter 4 of Human Action, Robert Murphy has written a study guide for this chapter, available in HTML and PDF. This chapter follows "Economics and the Revolt Against Reason."
[Here is the preface to Mises: The Last Knight of Liberalism (Mises Institute, 2007).]In the summer of 1940, with Hitler's troops moving through France to encircle Switzerland, Ludwig von Mises sat beside his wife Margit on a bus filled with Jews fleeing Europe. To avoid capture, the bus driver took back roads through the French countryside, stopping to ask locals if the Germans had been spotted ahead — reversing and finding alternative routes if they had been.
Mises was two months shy of his fifty-ninth birthday. He had left Vienna some years earlier, escaping only days before the Nazis ransacked his apartment, confiscated his records, and froze his assets. He had hoped to be safe in Geneva. Now nowhere in Europe seemed safe. Not only was he a prominent intellectual of Jewish descent; he was widely known to be an archenemy of National Socialism and of every other form of socialism. Some called him "The Last Knight of Liberalism."
Failing to catch him in Vienna, the Nazis tried to snatch him in Switzerland. Again they did not succeed. Mises did not assume his luck would last.
He had personally steered Austria away from Bolshevism, saved his country from the level of hyperinflation that destroyed interwar Germany, and convinced a generation of young socialist intellectuals to embrace the market. Now he was a political refugee headed for a foreign continent.
The couple arrived in the United States with barely any money and no prospects for income. Mises's former students and disciples had found prestigious positions in British and American universities (often with his help), but Mises himself was considered an anachronism. In an age of growing government and central planning, he was a defender of private property and an opponent of all government intervention in the economy. Perhaps worst of all, he was a proponent of verbal logic and deductive social science in an era of empiricism, positivism, and abstract mathematical models. No university would have him. Margit began to train as a secretary.
Over the next decade, they would slowly rebuild and Mises would find new allies. He would also publish his most important book, Human Action. It would earn him a following whose admiration and devotion were beyond anything he had known in Europe.
When he died in October 1973, he had only a small circle of admirers and disciples, but this group became the nucleus of a movement that has grown exponentially. Today his writings inspire economists and libertarians throughout the world, and are avidly read by an increasing number of students in all the social sciences. There is an entire school of "Misesian" economists flourishing most notably in the United States, but also in Spain, France, the Czech Republic, Argentina, Romania, and Italy. This movement is testimony to the lasting power and impact of his ideas.
The purpose of the present book is to tell the story of how these ideas emerged in their time. It is the story of an amazing economist, of his life and deeds. It is the story of his personal impact on the Austrian School and the libertarian movement. It is above all the story of a man who transformed himself in an uncompromising pursuit of the truth, of a man who adopted his ideas step-by-step, often against his initial inclinations.
Once a student of the historical method in the social sciences, he would become the dean of the opposition Austrian School and humanistic social theory. He went from left-leaning young idealist in Vienna to grand old man of the American Right. Dismissive of "the metallists" early in his career, he became an unwavering spokesman for a 100% gold standard. He even went from being the most radical free market liberal in Europe to being a libertarian leader in America whose students and followers would consider him too soft on government. His legacy would be a movement some of whose members would take Mises's message and his method further than Mises himself would go.
The portrait of Ludwig von Mises offered here is primarily concerned with his intellectual development in the context of his time. Not much is known about the emotional layer of his personality. Early on he conceived of himself as a public persona: Professor Mises. He took great care to destroy any evidence — from receipts to love letters — anything that could have been useful to potential opponents. We can report on some of the more intimate episodes of his life only because of the private records stolen from his Vienna apartment by the Nazis in March of 1938. These documents eventually fell into the hands of the Red Army, were rediscovered in a secret Moscow archive in 1991, and have been a precious source of information for the present work.
Those who love ideas — especially those who believe that ideas shape our world — may find the following pages worthwhile reading. If it does no more than raise further interest in Ludwig von Mises and his work, this book will have attained its goal.
Introduction: Utilitarian Social PhilosophyThe Unanimity and Compensation PrinciplesLudwig von Mises and "Value-Free" Laissez FaireNotes[This article is taken from chapter 26 of The Ethics of Liberty. Listen to this chapter in MP3, read by Jeff Riggenbach. The entire book is being prepared for podcast and download.]
A. Introduction: Utilitarian Social PhilosophyEconomics emerged as a distinct, self-conscious science or discipline in the nineteenth century, and hence this development unfortunately coincided with the dominance of utilitarianism in philosophy. The social philosophy of economists, therefore, whether the laissez-faire creed of the nineteenth century or the statism of the twentieth, has almost invariably been grounded in utilitarian social philosophy. Even today political economy abounds with discussion of the weighing of "social costs" and "social benefits" in deciding upon public policy.
We cannot engage here in a critique of utilitarianism as an ethical theory.For the beginning of a critique of utilitarianism in the context of the alternative of a natural-law ethics, see John Wild, Pluto's Modern Enemies and the Theory of Natural Law (Chicago: University of Chicago Press, 1953); Henry B. Veatch, For An Ontology of Morals: A Critique of Contemporary Ethical Theory (Evanston, Ill.: Northwestern University Press, 1971). On utilitarianism's inadequacy as a libertarian political philosophy see Herbert Spencer, Social Statics (New York: Robert Schalkenbach Foundation, 1970), pp. 3–16. Here we are interested in analyzing certain attempts to use a utilitarian ethic to provide a defensible groundwork for a libertarian or laissez-faire ideology. Our brief criticisms will concentrate, then, on utilitarianism insofar as it has been used as a groundwork for a libertarian, or quasi-libertarian, political philosophy.For preceding criticisms of utilitarian approaches in this work, see pp. 11–13 above.
In brief, utilitarian social philosophy holds the "good" policy to be the one that yields the "greatest good for the greatest number": in which each person counts for one in making up that number, and in which "the good" is held to be the fullest satisfaction of the purely subjective desires of the individuals in society. Utilitarians, like economists (see further below) like to think of themselves as "scientific" and "value free," and their doctrine supposedly permits them to adopt a virtually value-free stance; for they are presumably not imposing their own values, but simply recommending the greatest possible satisfaction of the desires and wants of the mass of the population.
But this doctrine is hardly scientific and by no means value free. For one thing, why the "greatest number"? Why is it ethically better to follow the wishes of the greater as against the lesser number? What's so good about the "greatest number"?And what if, even in utilitarian terms, more happiness can be obtained by following the wishes of the smaller number? For a discussion of this problem, see Peter Geach, The Virtues (Cambridge: Cambridge University Press, 1977), pp. 91ff. Suppose that the vast majority of people in a society hate and revile redheads, and greatly desire to murder them; and suppose further that there are only a few redheads extant at any time. Must we then say that it is "good" for the vast majority to slaughter redheads? And if not, why not? At the very least, then, utilitarianism scarcely suffices to make a case for liberty and laissez-faire. As Felix Adler wryly put it, utilitarians
pronounce the greatest happiness of the greatest number to be the social end, although they fail to make it intelligible why the happiness of the greater number should be cogent as an end upon those who happen to belong to the lesser number.Felix Adler, "The Relation of Ethics to Social Science," in H.J. Rogers, ed., Congress of Arts and Science (Boston: Houghton Mifflin, 1906), vol. 7, p. 673.
Secondly, what is the justification for each person counting for one? Why not some system of weighting? This, too, seems to be an unexamined and therefore unscientific article of faith in utilitarianism.
Thirdly, why is "the good" only fulfilling the subjective emotional desires of each person? Why can there be no supra-subjective critique of these desires? Indeed, utilitarianism implicitly assumes these subjective desires to be absolute givens which the social technician is somehow duty-bound to try to satisfy. But it is common human experience that individual desires are not absolute and unchanging. They are not hermetically sealed off from persuasion, rational or otherwise; experience and other individuals can and do persuade and convince people to change their values. But how could that be so if all individual desires and values are pure givens and therefore not subject to alteration by the inter-subjective persuasion of others? But if these desires are not givens, and they are changeable by the persuasion of moral argument, it would then appear that inter-subjective moral principles do exist that can be argued and can have an impact on others.
"Why is it ethically better to follow the wishes of the greater as against the lesser number? What's so good about the 'greatest number'?"Oddly enough, while utilitarianism assumes that morality, the good, is purely subjective to each individual, it assumes on the other hand that these subjective desires can be added, subtracted, and weighed across the various individuals in society. It assumes that individual subjective utilities and costs can be added, subtracted, and measured so as to arrive at a "net social utility" or social "cost," thus permitting the utilitarian to advise for or against a given social policy.Furthermore, some preferences, such as someone's desire to see an innocent person suffer, seem immoral on objective grounds. Yet a utilitarian must hold that they, fully as much as the most innocuous or altruistic preferences, must be included in the quantitative reckoning. I am indebted to Dr. David Gordon for this point. Modern welfare economics is particularly adept at arriving at estimates (even allegedly precise quantitative ones) of "social cost" and "social utility." But economics does correctly inform us, not that moral principles are subjective, but that utilities and costs are indeed subjective: individual utilities are purely subjective and ordinal, and therefore it is totally illegitimate to add or weight them to arrive at any estimate for "social" utility or cost.
B. The Unanimity and Compensation PrinciplesUtilitarian economists, even more than their philosophic confreres, are eager to make "scientific" and "value free" pronouncements on public policy. Believing, however, that ethics are purely arbitrary and subjective, how may economists then take policy positions? This chapter will explore ways in which utilitarian free-market economists presume to favor a free market while attempting to refrain from taking ethical positions.For an extended analysis of the relationship between economics, value judgments, and government policy, see Murray N. Rothbard, "Praxeology, Value Judgments, and Public Policy," in E. Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City: Sheed and Ward, 1976), pp. 89–111. Available in PDF.
One important utilitarian variant is the Unanimity Principle, based on the criterion of "Pareto optimality" that a political policy is "good" if one or more people are "better off" (in terms of satisfying utilities) from that policy while no one is "worse off." A strict version of Pareto optimality implies unanimity: that every person agrees to, hence believes that he will be better off or at least no worse off, from a particular government action.
In recent years, the Unanimity Principle as groundwork for a free market of voluntary and contractual agreements has been stressed by Professor James Buchanan. The Unanimity Principle has great attractions for "value-free" economists eager to make policy judgments, for far more than in the case of mere majority rule; surely the economist can safely advocate a policy if everyone in the society favors it. While the Unanimity Principle may at first appear superficially attractive to libertarians, however, there is at its heart a vital and irredeemable flaw: that the goodness of free contracts or unanimously approved changes from the existing situation depends completely on the goodness or justice of that existing situation itself. Yet neither Pareto Optimality, nor its Unanimity Principle variant, can say anything about the goodness or justice of the existing status quo, concentrating as they do solely on changes from that situation, or zero point.Neither does the Unanimity Principle, as will be shown further below, keep the economist from making his own value judgments and thus breaching his "value freedom"; for even if the economist merely shares in everyone else's value judgment, he is making a value judgment nevertheless.
Not only that, but the requirement of unanimous approval of changes necessarily freezes the existing status quo. If the status quo is unjust or repressive of liberty, then the Unanimity Principle is a grave barrier to justice and liberty rather than a bulwark on its behalf. The economist who advocates the Unanimity Principle as a seemingly value-free pronouncement for liberty is instead making a massive and totally unsupported value judgment on behalf of freezing the status quo.
The commonly accepted "Compensation Principle" variant of Pareto optimality contains all the flaws of the strict Unanimity Principle, while adding many of its own. The Compensation Principle asserts that a public policy is "good" if the gainers (in utility) from that policy can compensate the losers and still enjoy net gains. So that while there are losers in utility from this policy at the beginning, there are no such losers after the compensations take place.
But the Compensation Principle assumes that it is conceptually possible to add and subtract utilities interpersonally, and thereby to measure gains and losses; it also assumes that each individual's gains and losses can be precisely estimated. But economics informs us that "utility," and hence gains and losses in utility, are purely subjective and psychic concepts, and that they cannot possibly be measured or even estimated by outside observers. Gains and losses in utility therefore cannot be added, measured, or weighted against each other, and much less can precise compensations be discovered.
"Individual utilities are purely subjective and ordinal, and therefore it is totally illegitimate to add or weight them to arrive at any estimate for 'social' utility or cost."The usual assumption by economists is to measure psychic losses in utility by the monetary price of an asset; thus, if a railroad damages the land of a farmer by smoke, it is assumed by the compensationists that the farmer's loss can be measured by the market price of the land. But this assumption ignores the fact that the farmer may well have a psychic attachment to that land which is far greater than the market price, and that, furthermore, it is impossible to find out what the farmer's psychic attachment to the land may be. Asking the farmer is useless, since he may say, for example, that his attachment to the land is much higher than the market price, but he may well be lying. The government, or other outside observer, has no way of finding out one way or the other.Individuals demonstrate part of their utility rankings when they make free-market exchanges, but government actions, of course, are non-market phenomena. For a further analysis of this question, see Walter Block, "Coase and Demsetz on Private Property Rights," Journal of Libertarian Studies 1 (Spring 1977): 111–15, available in PDF. For more on demonstrated preference as opposed to the concept of social utility, see Rothbard, "Praxeology, Value Judgments, and Public Policy"; and Murray N. Rothbard, Toward A Reconstruction of Utility and Welfare Economics (New York: Center for Libertarian Studies, 1977).
Furthermore, the existence in the society of just one militant anarchist, whose psychic grievance against government is such that he cannot be compensated for his psychic disutility from the existence or activity of government, is enough by itself to destroy the Compensation Principle case for any government action whatsoever. And surely at least one such anarchist exists.
A stark but not atypical example of the fallacies and the unjust devotion to the status quo of the Compensation Principle was the debate in the British Parliament during the early nineteenth century on the abolition of slavery. Early adherents of the Compensation Principle were there maintaining that the masters must be compensated for the loss of their investment in slaves. At which point, Benjamin Pearson, a member of the libertarian Manchester School, declared that he "had thought it was the slaves who should have been compensated."William D. Grampp, The Manchester School of Economics (Stanford, Calif.: Stanford University Press, 1969), p. 59. See above, p. 60. Also see Murray N. Rothbard, "Value Implications of Economic Theory," The American Economist (Spring 1973): 38–39.
Precisely! Here is a striking example of the need, in advocating public policy, to have some ethical system, some concept of justice. Those of us ethicists who hold that slavery is criminal and unjust would always oppose the idea of compensating the masters, and would rather think in terms of requiring the masters to compensate the slaves for their years of oppression. But the "value-free economist," resting on the Unanimity and Compensation Principles, is, on the contrary, implicitly placing his unsupported and arbitrary value imprimatur on the unjust status quo.
In a fascinating exchange with a critic of the Unanimity Principle, Professor Buchanan concedes that
I am defending the status quo … not because I like it, I do not…. But my defense of the status quo stems from my unwillingness, indeed inability, to discuss changes other than those that are contractual in nature. I can, of course, lay down my own notions…. But, to me, this is simply wasted effort.
Thus, tragically, Buchanan, admitting that his idea of ethics is one of purely subjective and arbitrary "notions," is yet willing to promulgate what can only be an equally subjective and arbitrary notion on his own grounds — a defense of the status quo. Buchanan concedes that his procedure:
does allow me to take a limited step toward normative judgments or hypotheses, namely to suggest that the changes seem to be potentially agreeable to everyone. Pareto efficient changes, which must, of course, include compensations. The criterion in my scheme is agreement.
But what is the justification for this "limited step"? What's so great about agreement on changes from a possibly unjust status quo? Isn't such a limited step also an arbitrary "notion" for Buchanan? And if willing to proceed to such an unsatisfactory limit, why not go still further to question the status quo?
Buchanan proceeds to assert that
[O]ur task is really … that of trying to find, locate, invent, schemes that can command unanimous or quasi-unanimous consent and propose them. [What in the world is "quasi-unanimity?"] Since persons disagree on so much, these schemes may be a very limited set, and this may suggest to you that few changes are possible. Hence, the status quo defended indirectly. The status quo has no propriety at all save for its existence and it is all that exists. The point I always emphasize is that we start from here not from somewhere else.James M. Buchanan, in Buchanan and Warren J. Samuels, "On Some Fundamental Issues in Political Economy: An Exchange of Correspondence," Journal of Economic Issues (March 1975): 27f.
Here one longs for Lord Acton's noble dictum: "Liberalism wishes for what ought to be, irrespective of what is."Gertrude Himmelfarb, Lord Acton (Chicago: University of Chicago Press, 1962), p. 204.
Buchanan's critic, though far from a libertarian or a free-market liberal, here properly has the last word: "I certainly do not totally object to seeking contractual solutions; but I do think that they can't be projected in a vacuum which allows the status quo power structure to go unspecified and unexamined."Samuels, in Buchanan and Samuels, "Some Fundamental Issues," p. 37.
C. Ludwig von Mises and "Value-Free" Laissez FaireThis section is adapted from my "Praxeology, Value Judgments, and Public Policy." Let us now turn to the position of Ludwig von Mises on the entire matter of praxeology, value judgments, and the advocacy of public policy. The case of Mises is particularly interesting, for he was, of all the economists in the twentieth century, at one and the same time the most uncompromising and passionate adherent of laissez faire and the most rigorous and uncompromising advocate of value-free economics and opponent of any sort of objective ethics. How then did he attempt to reconcile these two positions?For a posing of this question, see William E. Rappard "On Reading Von Mises," in M. Sennholz, ed., On Freedom and Free Enterprise (Princeton, N.J.: D. Van Nostrand, 1956), pp. 17–33.
Mises offered two separate and very different solutions to this problem. The first is a variant of the Unanimity Principle. Essentially this variant affirms that an economist per se cannot say that a given governmental policy is "good" or "bad." However, if a given policy will lead to consequences, as explained by praxeology, which every one of the supporters of the policy will agree is bad, then the value-free economist is justified in calling the policy a "bad" one.
Thus, Mises writes:
An economist investigates whether a measure a can bring about the result p for the attainment of which it is recommended, and finds that a does not result in p but in g, an effect which even the supporters of the measure a consider undesirable. If the economist states the outcome of his investigation by saying that a is a bad measure, he does not pronounce a judgment of value. He merely says that from the point of view of those aiming at the goal p, the measure a is inappropriate.Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press 1949), p. 879.
And again:
Economics does not say that … government interference with the prices of only one commodity … is unfair, bad, or unfeasible. It says, that it makes conditions worse, not better, from the point of view of the government and those backing its interference.Ibid., p. 758. Italics in original.
Now this is surely an ingenious attempt to allow pronouncements of "good" or "bad" by the economist without making a value judgment; for the economist is supposed to be only a praxeologist, a technician, pointing out to his readers or listeners that they will all consider a policy "bad" once he reveals its full consequences.
But ingenious as it is, the attempt completely fails. For how does Mises know what the advocates of the particular policy consider desirable? How does he know what their value scales are now or what they will be when the consequences of the measure appear? One of the great contributions of praxeologic economics is that the economist realizes that he doesn't know what anyone's value scales are except as those value preferences are demonstrated by a person's concrete action. Mises himself emphasized that:
one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man's actions. Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man's acting.Ibid., p. 95.
Given Mises's own analysis, then, how can the economist know what the motives for advocating various policies really are, or how people will regard the consequences of these policies?
Thus, Mises, qua economist, may show that price control (to use his example) will lead to unforeseen shortages of a good to the consumers. But how does Mises know that some advocates of price control do not want shortages? They may, for example, be socialists, anxious to use the controls as a step toward full collectivism. Some may be egalitarians who prefer shortages because the rich will not be able to use their money to buy more of the product than poorer people. Some may be nihilists, eager to see shortages of goods. Others may be one of the numerous legion of contemporary intellectuals who are eternally complaining about the "excessive affluence" of our society, or about the great "waste" of energy; they may all delight in the shortages of goods. Still others may favor price control, even after learning of the shortages, because they, or their political allies, will enjoy well-paying jobs or power in the price-control bureaucracy.
All sorts of such possibilities exist, and none of them is compatible with Mises asserting, as a value-free economist, that all the supporters of the price control — or of any other government intervention — must concede, after learning economics, that the measure is bad. In fact, once Mises concedes that even a single advocate of price control or any other interventionist measure may acknowledge the economic consequences and still favor it, for whatever reason, then Mises, as a praxeologist and economist, can no longer call any of these measures "bad" or "good," or even "appropriate" or "inappropriate," without inserting into his economic policy pronouncements the very value judgments that Mises himself holds to be inadmissible in a scientist of human action.Mises himself concedes at one point that a government or a political party may advocate policies for "demagogic," i.e., for hidden and unannounced reasons. Ibid., p. 104n. For then he is no longer being a technical reporter to all advocates of a certain policy, but himself an advocate participating on one side of a value conflict.
Moreover, there is another fundamental reason for advocates of "inappropriate" policies to refuse to change their minds even after hearing and acknowledging the praxeological chain of consequences. For praxeology may indeed show that all types of government policies will have consequences that most people, at least, will tend to abhor; however, (and this is a vital qualification) most of these consequences take time, some a great deal of time.
No economist has done more than Ludwig von Mises to elucidate the universality of time preference in human affairs — the praxeologic law that everyone prefers to attain a given satisfaction sooner than later. And certainly, Mises, as a value-free scientist, could never presume to criticize anyone's rate of time preference, to say that A's was "too high" or B's "too low." But, in that case, what about the high–time preference people in society who may retort to the praxeologist: "perhaps this high tax and subsidy policy will lead to a decline of capital; perhaps even the price control will lead to shortages, but I don't care. Having a high time preference, I value more highly the short-run subsidies, or the short-run enjoyment of buying the current good at cheaper prices, than the prospect of suffering the future consequences." And Mises, as a value-free scientist and opponent of any concept of objective ethics, cannot call them wrong. There is no way that he can assert the superiority of the long run over the short run without overriding the values of the high–time preference people; and this cannot be cogently done without abandoning his own subjectivist ethics.
In this connection, one of Mises's basic arguments for the free market is that, on the market, there is a "harmony of the rightly understood interests of all members of the market society." It is clear from his discussion that he doesn't merely mean "interests" after learning the praxeological consequences of market activity or of government intervention. He also, and in particular, means people's "long-run" interests, for, as Mises states, "For 'rightly understood' interests we may as well say interests 'in the long run.'"Ibid., pp. 670 and 670n.
But what about the high–time preference folk, who prefer to consult their short-run interests? How can the long run be called "better" than the short run; why must "right understanding" necessarily be the long run?For a challenge to the notion that pursuit of one's desires against one's long-term interests is irrational, see Derek Parfit, "Personal Identity," Philosophical Review 80 (January 1971): 26. We see, therefore, that Mises's attempt to advocate laissez-faire while remaining value-free, by assuming that all of the advocates of government intervention will abandon their position once they learn of its consequences, falls completely to the ground.
There is another and very different way, however, that Mises attempts to reconcile his passionate advocacy of laissez faire with the absolute value freedom of the scientist. This is to take a position much more compatible with praxeology: by recognizing that the economist qua economist can only trace chains of cause and effect and may not engage in value judgments or advocate public policy.
This route of Mises concedes that the economic scientist cannot advocate laissez faire, but then adds that he as a citizen can do so. Mises, as a citizen, then proposes a value system but it is a curiously scanty one. For he is here caught in a dilemma. As a praxeologist he knows that he cannot (as an economic scientist) pronounce value judgments or advocate policy; yet he cannot bring himself simply to assert and inject arbitrary value judgments. And so, as a utilitarian (for Mises, along with most economists, is indeed a utilitarian in ethics, although a Kantian in epistemology), what he does is to make only one narrow value judgment: that he desires to fulfill the goals of the majority of the public (happily, in this formulation, Mises does not presume to know the goals of everyone).
As Mises explains, in his second variant:
Liberalism [i.e., laissez-faire liberalism] is a political doctrine…. As a political doctrine liberalism (in contrast to economic science) is not neutral with regard to values and ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to their valuational principles. While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness … abundance to poverty. It teaches men how to act in accordance with these valuations.Mises, Human Action, pp. 153–54.
In this second variant, Mises has successfully escaped the self-contradiction of being a value-free praxeologist advocating laissez faire. Granting in this variant that the economist may not make such advocacy, he takes his stand as a "citizen" willing to make value judgments. But he is not willing to simply assert an ad hoc value judgment; presumably he feels that a valuing intellectual must present some sort of ethical system to justify such value judgments. But, as a utilitarian, Mises's system is a curiously bloodless one; even as a valuing laissez-faire liberal, he is only willing to make the one value judgment that he joins the majority of the people in favoring their common peace, prosperity, and abundance. In this way as an opponent of objective ethics, and uncomfortable as he must be with making any value judgments even as a citizen, he makes the minimal possible degree of such judgments. True to his utilitarian position, his value judgment is the desirability of fulfilling the subjectively desired goals of the bulk of the populace.
A few points in critique of this position may here be made. In the first place, while praxeology can indeed demonstrate that laissez faire will lead to harmony, prosperity, and abundance, whereas government intervention leads to conflict and impoverishment,See Murray N. Rothbard, Power and Market, 2nd ed. (Kansas City: Sheed Andrews and McMeel, 1977), pp. 262–66. and while it is probably true that most people value the former highly, it is not true that these are their only goals or values.
The great analyst of ranked value scales and diminishing marginal utility should have been more aware of such competing values and goals. For example, many people, whether through envy or a misplaced theory of justice, may prefer far more equality of income than will be attained on the free market. Many people, pace the aforementioned intellectuals, may want less abundance in order to whittle down our allegedly "excessive" affluence. Others, as we have mentioned above, may prefer to loot the capital of the rich or the businessman in the short run, while acknowledging but dismissing the long-run ill effects, because they have a high time preference. Probably very few of these people will want to push statist measures to the point of total impoverishment and destruction — although this may well happen. But a majority coalition of the above might well opt for some reduction in wealth and prosperity on behalf of these other values. They may well decide that it is worth sacrificing a modicum of wealth and efficient production because of the high opportunity cost of not being able to enjoy an alleviation of envy, or a lust for power or submission to power, or, for example, the thrill of "national unity" which they might enjoy from a (short-lived) economic crisis.
What can Mises reply to a majority of the public who have indeed considered all the praxeological consequences, and still prefer a modicum — or, for that matter, even a drastic amount — of statism in order to achieve some of their competing goals? As a utilitarian, he cannot quarrel with the ethical nature of their chosen goals, for, as a utilitarian, he must confine himself to the one value judgment that he favors the majority achieving their chosen goals.
The only reply that Mises can make within his own framework is to point out that government intervention has a cumulative effect, that eventually the economy must move either toward the free market or toward full socialism, which praxeology shows will bring chaos and drastic impoverishment, at least to an industrial society. But this, too, is not a fully satisfactory answer. While many or most programs of statist intervention — especially price controls — are indeed cumulative, others are not. Furthermore, the cumulative impact takes such a long time that the time preferences of the majority might well lead them, in full acknowledgment of the consequences, to ignore the effect. And then what?
Mises attempted to use the cumulative argument to answer the contention that the majority of the public prefer egalitarian measures even knowingly at the expense of a portion of their own wealth. Mises's comment was that the "reserve fund" was on the point of being exhausted in Europe, and therefore that any further egalitarian measures would have to come directly out of the pockets of the masses through increased taxation. Mises assumed that once this became clear, the masses would no longer support interventionist measures.Thus, see Mises, Human Action, pp. 851ff.
But, in the first place, this is not a strong argument against the previous egalitarian measures, nor in favor of their repeal. But secondly, while the masses might well be convinced, there is certainly no apodictic certainty involved; and the masses have certainly in the past, and presumably will in the future continue knowingly to support egalitarian and other statist measures on behalf of others of their goals, despite the knowledge that their income and wealth would be reduced.
Thus, Dean Rappard pointed out in his thoughtful critique of Mises's position:
Does the British voter, for instance, favor confiscatory taxation of large incomes primarily in the hope that it will redound to his material advantage, or in the certainty that it tends to reduce unwelcome and irritating social inequalities? In general, is the urge towards equality in our modern democracies not often stronger than the desire to improve one's material lot?
And, on his own country, Switzerland, Dean Rappard pointed out that the urban industrial and commercial majority of the country have repeatedly, and often at popular referenda, endorsed measures to subsidize the minority of farmers in a deliberate effort to retard industrialization and the growth of their own incomes.
Rappard noted that the urban majority did not do so in the "absurd belief that they were thereby increasing their real income." Instead,
quite deliberately and expressly, political parties have sacrificed the immediate material welfare of their members in order to prevent, or at least somewhat to retard, the complete industrialization of the country. A more agricultural Switzerland, though poorer, such is the dominant wish of the Swiss people today.Rappard, "On Reading von Mises," pp. 32–33.
The point here is that Mises, not only as a praxeologist but even as a utilitarian liberal, can have no word of criticism against these statist measures once the majority of the public have taken their praxeological consequences into account and chosen them anyway on behalf of goals other than wealth and prosperity.
Furthermore, there are other types of statist intervention which clearly have little or no cumulative effect, and which may even have very little effect in diminishing production or prosperity. Let us for example assume again — and this assumption is not very farfetched in view of the record of human history — that the great majority of a society hate and revile redheads. Let us further assume that there are very few redheads in the society. This large majority then decides that it would like very much to murder all redheads. Here they are; the murder of redheads is high on the value scales of the great majority of the public; there are few redheads so that there will be little loss in production on the market. How can Mises rebut this proposed policy either as a praxeologist or as a utilitarian liberal? I submit that he cannot do so.
Mises makes one further attempt to establish his position, but it is even less successful. Criticizing the arguments for state intervention on behalf of equality or other moral concerns, he dismisses them as "emotional talk." After reaffirming that "praxeology and economics … are neutral with regard to any moral precepts," and asserting that "the fact that the immense majority of men prefer a richer supply of material goods to a less ample supply is a datum of history; it does not have any place in economic theory," he concludes by insisting that "he who disagrees with the teachings of economics ought to refute them by discursive reasoning, not by … the appeal to arbitrary, allegedly ethical standards."Ludwig von Mises, "Epistemological Relativism in the Sciences of Human Action," in H. Schoeck and J.W.Wiggins, eds., Relativism and the Study of Man (Princeton, N.J.: D. van Nostrand, 1961), p. 133.
But I submit that this will not do. For Mises must concede that no one can decide upon any policy whatever unless he makes an ultimate ethical or value judgment. But since this is so, and since according to Mises all ultimate value judgments or ethical standards are arbitrary, how then can he denounce these particular ethical judgments as "arbitrary"?
Furthermore, it is hardly correct for Mises to dismiss these judgments as "emotional," since for him as a utilitarian, reason cannot establish ultimate ethical principles, which can therefore only be established by subjective emotions. It is pointless for Mises to call for his critics to use "discursive reasoning," since he himself denies that discursive reasoning can ever be used to establish ultimate ethical values.
Furthermore, the man whose ultimate ethical principles would lead him to support the free market should also be dismissed by Mises as equally "arbitrary" and "emotional," even if he has taken the laws of praxeology into account before making his ultimately ethical decision. And we have seen above that the majority of the public very often has other goals which they hold, at least to a certain extent, higher than their own material well-being.
Thus, while praxeological economic theory is extremely useful for providing data and knowledge for framing economic policy, it cannot be sufficient by itself to enable the economist to make any value pronouncements or to advocate any public policy whatsoever. More specifically, Ludwig von Mises to the contrary notwithstanding, neither praxeological economics nor Mises's utilitarian liberalism is sufficient to make the case for laissez faire and the free-market economy.
To make such a case, one must go beyond economics and utilitarianism to establish an objective ethics which affirms the overriding value of liberty, and morally condemns all forms of statism, from egalitarianism to "the murder of redheads," as well as such goals as the lust for power and the satisfaction of envy.
To make the full case for liberty, one cannot be a methodological slave to every goal that the majority of the public might happen to cherish.
Uncertainty and ActingThe Meaning of ProbabilityClass ProbabilityCase ProbabilityNumerical Evaluation of Case ProbabilityBetting, Gambling, and Playing GamesPraxeological Prediction[This article is taken from chapter 6 of Human Action. A study guide is available in PDF and HTML.]
- Uncertainty and ActingThe uncertainty of the future is already implied in the very notion of action. That man acts and that the future is uncertain are by no means two independent matters. They are only two different modes of establishing one thing.
We may assume that the outcome of all events and changes is uniquely determined by eternal unchangeable laws governing becoming and development in the whole universe. We may consider the necessary connection and interdependence of all phenomena, i.e., their causal concatenation, as the fundamental and ultimate fact. We may entirely discard the notion of undetermined chance. But however that may be, or appear to the mind of a perfect intelligence, the fact remains that to acting man the future is hidden. If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own.
Some philosophers are prepared to explode the notion of man's will as an illusion and self-deception because man must unwittingly behave according to the inevitable laws of causality. They may be right or wrong from the point of view of the prime mover or the cause of itself. However, from the human point of view action is the ultimate thing. We do not assert that man is "free" in choosing and acting. We merely establish the fact that he chooses and acts and that we are at a loss to use the methods of the natural sciences for answering the question why he acts this way and not otherwise.
Natural science does not render the future predictable. It makes it possible to foretell the results to be obtained by definite actions. But it leaves unpredictable two spheres: that of insufficiently known natural phenomena and that of human acts of choice. Our ignorance with regard to these two spheres taints all human actions with uncertainty. Apodictic certainty is only within the orbit of the deductive system of aprioristic theory. The most that can be attained with regard to reality is probability.
It is not the task of praxeology to investigate whether or not it is permissible to consider as certain some of the theorems of the empirical natural sciences. This problem is without practical importance for praxeological considerations. At any rate, the theorems of physics and chemistry have such a high degree of probability that we are entitled to call them certain for all practical purposes. We can practically forecast the working of a machine constructed according to the rules of scientific technology. But the construction of a machine is only a part in a broader program that aims at supplying the consumers with the machine's products. Whether this was or was not the most appropriate plan depends on the development of future conditions which at the time of the plan's execution cannot be forecast with certainty. Thus the degree of certainty with regard to the technological outcome of the machine's construction, whatever it may be, does not remove the uncertainty inherent in the whole action. Future needs and valuations, the reaction of men to changes in conditions, future scientific and technological knowledge, future ideologies and policies can never be foretold with more than a greater or smaller degree of probability. Every action refers to an unknown future. It is in this sense always a risky speculation.
The problems of truth and certainty concern the general theory of human knowledge. The problem of probability, on the other hand, is a primary concern of praxeology.
- The Meaning of ProbabilityThe treatment of probability has been confused by the mathematicians. From the beginning there was an ambiguity in dealing with the calculus of probability. When the Chevalier de Méré consulted Pascal on the problems involved in the games of dice, the great mathematician should have frankly told his friend the truth, namely, that mathematics cannot be of any use to the gambler in a game of pure chance. Instead he wrapped his answer in the symbolic language of mathematics. What could easily be explained in a few sentences of mundane speech was expressed in a terminology which is unfamiliar to the immense majority and therefore regarded with reverential awe. People suspected that the puzzling formulas contain some important revelations, hidden to the uninitiated; they got the impression that a scientific method of gambling exists and that the esoteric teachings of mathematics provide a key for winning. The heavenly mystic Pascal unintentionally became the patron saint of gambling. The textbooks of the calculus of probability gratuitously propagandize for the gambling casinos precisely because they are sealed books to the layman.
No less havoc was spread by the equivocations of the calculus of probability in the field of scientific research. The history of every branch of knowledge records instances of the misapplication of the calculus of probability which, as John Stuart Mill observed, made it "the real opprobrium of mathematics."John Stuart Mill, A System of Logic Ratiocinative and Inductive (new impression, London, 1936), pp. 353.
The problem of probable inference is much bigger than those problems which constitute the field of the calculus of probability. Only preoccupation with the mathematical treatment could result in the prejudice that probability always means frequency.
A further error confused the problem of probability with the problem of inductive reasoning as applied by the natural sciences. The attempt to substitute a universal theory of probability for the category of causality characterizes an abortive mode of philosophizing, very fashionable only a few years ago.
A statement is probable if our knowledge concerning its content is deficient. We do not know everything which would be required for a definite decision between true and not true. But, on the other hand, we do know something about it; we are in a position to say more than simply non liquet or ignoramus.
There are two entirely different instances of probability; we may call them class probability (or frequency probability) and case probability (or the specific understanding of the sciences of human action). The field for the application of the former is the field of the natural sciences, entirely ruled by causality; the field for the application of the latter is the field of the sciences of human action, entirely ruled by teleology.
- Class ProbabilityClass probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class.
We know, for instance, that there are ninety tickets in a lottery and that five of them will be drawn. Thus we know all about the behavior of the whole class of tickets. But with regard to the singular tickets we do not know anything but that they are elements of this class of tickets.
We have a complete table of mortality for a definite period of the past in a definite area. If we assume that with regard to mortality no changes will occur, we may say that we know everything about the mortality of the whole population in question. But with regard to the life expectancy of the individuals we do not know anything but that they are members of this class of people.
For this defective knowledge the calculus of probability provides a presentation in symbols of the mathematical terminology. It neither expands nor deepens nor complements our knowledge. It translates it into mathematical language. Its calculations repeat in algebraic formulas what we knew beforehand. They do not lead to results that would tell us anything about the actual singular events. And, of course, they do not add anything to our knowledge concerning the behavior of the whole class, as this knowledge was already perfect — or was considered perfect — at the very outset of our consideration of the matter.
It is a serious mistake to believe that the calculus of probability provides the gambler with any information which could remove or lessen the risk of gambling. It is, contrary to popular fallacies, quite useless for the gambler, as is any other mode of logical or mathematical reasoning. It is the characteristic mark of gambling that it deals with the unknown, with pure chance. The gambler's hopes for success are not based on substantial considerations. The nonsuperstitious gambler thinks: "There is a slight chance [or, in other words: 'it is not impossible'] that I may win; I am ready to put up the stake required. I know very well that in putting it up I am behaving like a fool. But the biggest fools have the most luck. Anyway!"
Cool reasoning must show the gambler that he does not improve his chances by buying two tickets instead of one of a lottery in which the total amount of the winnings is smaller than the proceeds from the sale of all tickets. If he were to buy all the tickets, he would certainly lose a part of his outlay. Yet every lottery customer is firmly convinced that it is better to buy more tickets than less. The habitués of the casinos and slot machines never stop. They do not give a thought to the fact that, because the ruling odds favor the banker over the player, the outcome will the more certainly result in a loss for them the longer they continue to play. The lure of gambling consists precisely in its unpredictability and its adventurous vicissitudes.
Let us assume that ten tickets, each bearing the name of a different man, are put into a box. One ticket will be drawn, and the man whose name it bears will be liable to pay 100 dollars. Then an insurer can promise to the loser full indemnification if he is in a position to insure each of the ten for a premium of ten dollars. He will collect 100 dollars and will have to pay the same amount to one of the ten. But if he were to insure one only of them at a rate fixed by the calculus, he would embark not upon an insurance business, but upon gambling. He would substitute himself for the insured. He would collect ten dollars and would get the chance either of keeping it or of losing that ten dollars and ninety dollars more.
If a man promises to pay at the death of another man a definite sum and charges for this promise the amount adequate to the life expectancy as determined by the calculus of probability, he is not an insurer but a gambler. Insurance, whether conducted according to business principles or according to the principle of mutuality, requires the insurance of a whole class or what can reasonably be considered as such. Its basic idea is pooling and distribution of risks, not the calculus of probability. The mathematical operation that it requires are the four elementary operations of arithmetic. The calculus of probability is mere by-play.
This is clearly evidenced by the fact that the elimination of hazardous risk by pooling can also be effected without any recourse to actuarial methods. Everybody practices it in his daily life. Every businessman includes in his normal cost accounting the compensation for losses which regularly occur in the conduct of affairs. "Regularly" means in this context: The amount of these losses is known as far as the whole class of the various items is concerned. The fruit dealer may know, for instance, that one of every fifty apples will rot in this stock; but he does not know to which individual apple this will happen. He deals with such losses as with any other item in the bill of costs.
The definition of the essence of class probability as given above is the only logically satisfactory one. It avoids the crude circularity implied in all definitions referring to the equiprobability of possible events. In stating that we know nothing about actual singular events except that they are elements of a class the behavior of which is fully known, this vicious circle is disposed of. Moreover, it is superfluous to add a further condition called the absence of any regularity in the sequence of the singular events.
The characteristic mark of insurance is that it deals with the whole class of events. As we pretend to know everything about the behavior of the whole class, there seems to be no specific risk involved in the conduct of the business.
Neither is there any specific risk in the business of the keeper of a gambling bank or in the enterprise of a lottery. From the point of view of the lottery enterprise the outcome is predictable, provided that all tickets have been sold. If some tickets remain unsold, the enterpriser is in the same position with regard to them as every buyer of a ticket is with regard to the tickets he bought.
- Case ProbabilityCase probability means: We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing.
Case probability has nothing in common with class probability but the incompleteness of our knowledge. In every other regard the two are entirely different.
There are, of course, many instances in which men try to forecast particular future event on the basis of their knowledge about the behavior of the class. A doctor may determine the chances for the full recovery of his patient if he knows that 70 percent of those afflicted with the same disease recover. If he expresses his judgment correctly, he will not say more than that the probability of recovery is 0.7, that is, that out of ten patients not more than three on the average die. All such predictions about external events, i.e., events in the field of the natural sciences, are of this character. They are in fact not forecasts about the issue of the case in question, but statements about the frequency of the various possible outcomes. They are based either on statistical information or simply on the rough estimate of the frequency derived from nonstatistical experience.
So far as such types of probable statements are concerned, we are not faced with case probability. In fact we do not know anything about the case in question except that it is an instance of a class the behavior of which we know or think we know.
A surgeon tells a patient who considers submitting himself to an operation that thirty out of every hundred undergoing such an operation die. If the patient asks whether this number of deaths is already full, he has misunderstood the sense of the doctor's statement. He has fallen prey to the error known as the "gambler's fallacy." Like the roulette player who concludes from a run of ten red in succession that the probability of the next turn being black is now greater than it was before the run, he confuses case probability with class probability.
All medical prognoses, when based only on general physiological knowledge, deal with class probability. A doctor who hears that a man he does not know has been seized by a definite illness will, on the basis of his general medical experience, say: His chances for recovery are 7 to 3. If the doctor himself treats the patient, he may have a different opinion. The patient is a young, vigorous man; he was in good health before he was taken with the illness. In such cases, the doctor may think, the mortality figures are lower; the chances for this patient are not 7:3, but 9:1. The logical approach remains the same, although it may be based not on a collection of statistical data, but simply on a more or less exact resume of the doctor's own experience with previous cases. What the doctor knows is always only the behavior of classes. In our instance the class is the class of young, vigorous men seized by the illness in question.
Case probability is a particular feature of our dealing with problems of human action. Here any reference to frequency is inappropriate, as our statements always deal with unique events which as such — i.e., with regard to the problem in question — are not members of any class. We can form a class "American presidential elections." This class concept may prove useful or even necessary for various kinds of reasoning, as, for instance, for a treatment of the matter from the viewpoint of constitutional law. But if we are dealing with the election of 1944 — either, before the election, with its future outcome or, after the election, with an analysis of the factors which determined the outcome — we are grappling with an individual, unique, and nonrepeatable case. The case is characterized by its unique merits, it is a class by itself. All the marks which make it permissible to subsume it under any class are irrelevant for the problem in question.
Two football teams, the Blues and the Yellows, will play tomorrow. In the past the Blues have always defeated the Yellows. This knowledge is not knowledge about a class of events. If we were to consider it as such, we would have to conclude that the Blues are always victorious and that the Yellows are always defeated. We would not be uncertain with regard to the outcome of the game. We would know for certain that the Blues will win again. The mere fact that we consider our forecast about tomorrow's game as only probable shows that we do not argue this way.
On the other hand, we believe that the fact that the Blues were victorious in the past is not immaterial with regard to the outcome of tomorrow's game. We consider it as a favorable prognosis for the repeated success of the Blues. If we were to argue correctly according to the reasoning appropriate to class probability, we would not attach any importance to this fact. If we were not to resist the erroneous conclusion of the "gambler's fallacy," we would, on the contrary, argue that tomorrow's game will result in the success of the Yellows.
If we risk some money on the chance of one team's victory, the lawyers would qualify our action as a bet. They would call it gambling if class probability were involved.
Everything that outside the field of class probability is commonly implied in the term probability refers to the peculiar mode of reasoning involved in dealing with historical uniqueness or individuality, the specific understanding of the historical sciences.
Understanding is always based on incomplete knowledge. We may believe we know the motives of the acting men, the ends they are aiming at, and the means they plan to apply for the attainment of these ends. We have a definite opinion with regard to the effects to be expected from the operation of these factors. But this knowledge is defective. We cannot exclude beforehand the possibility that we have erred in the appraisal of their influence or have failed to take into consideration some factors whose interference we did not foresee at all, or not in a correct way.
Gambling, engineering, and speculating are three different modes of dealing with the future.
The gambler knows nothing about the event on which the outcome of his gambling depends. All that he knows is the frequency of a favorable outcome of a series of such events, knowledge which is useless for his undertaking. He trusts to good luck, that is his only plan.
Life itself is exposed to many risks. At any moment it is endangered by disastrous accidents which cannot be controlled, or at least not sufficiently. Every man banks on good luck. He counts upon not being struck by lightning and not being bitten by a viper. There is an element of gambling in human life. Man can remove some of the chrematistic consequences of such disasters and accidents by taking out insurance policies. In doing so he banks upon the opposite chances. On the part of the insured the insurance is gambling. His premiums were spent in vain if the disaster does not occur.In life insurance the insured's stake spent in vain consists only in the difference between the amount collected and the amount he could have accumulated by saving. With regard to noncontrollable natural events man is always in the position of a gambler.
The engineer, on the other hand, knows everything that is needed for a technologically satisfactory solution of his problem, the construction of a machine. As far as some fringes of uncertainty are left in his power to control, he tries to eliminate them by taking safety margins. The engineer knows only soluble problems and problems which cannot be solved under the present state of knowledge. He may sometimes discover from adverse experience that his knowledge was less complete than he had assumed and that he failed to recognize the indeterminateness of some issues which he thought he was able to control. Then he will try to render his knowledge more complete. Of course he can never eliminate altogether the element of gambling present in human life. But it is his principle to operate only within an orbit of certainty. He aims at full control of the elements of his action.
It is customary nowadays to speak of "social engineering." Like planning, this term is a synonym for dictatorship and totalitarian tyranny. The idea is to treat human beings in the same way in which the engineer treats the stuff out of which he builds bridges, roads, and machines. The social engineer's will is to be substituted for the will of the various people he plans to use for the construction of his utopia. Mankind is to be divided into two classes: the almighty dictator, on the one hand, and the underlings who are to be reduced to the status of mere pawns in his plans and cogs in his machinery, on the other. If this were feasible, then of course the social engineer would not have to bother about understanding other people's actions. He would be free to deal with them as technology deals with lumber and iron.
In the real world acting man is faced with the fact that there are fellow men acting on their own behalf as he himself acts. The necessity to adjust his actions to other people's actions makes him a speculator for whom success and failure depend on his greater or lesser ability to understand the future. Every action is speculation. There is in the course of human events no stability and consequently no safety.
- Numerical Evaluation of Case ProbabilityCase probability is not open to any kind of numerical evaluation. What is commonly considered as such exhibits, when more closely scrutinized, a different character.
On the eve of the 1944 presidential election people could have said:
I am ready to bet three dollars against one that Roosevelt will be elected.I guess that out of the total amount of electors 45 million will exercise their franchise, 25 million of whom will vote for Roosevelt.I estimate Roosevelt's chances as 9 to 1.I am certain that Roosevelt will be elected.Statement (d) is obviously inexact. If asked under oath on the witness stand whether he is as certain about Roosevelt's future victory as about the fact that a block of ice will melt when exposed to a temperature of 150 degrees, our man would have answered no. He would have rectified his statement and would have declared: I am personally fully convinced that Roosevelt will carry on. That is my opinion. But, of course, this is not certainty, only the way I understand the conditions involved.
The case of statement (a) is similar. This man believed that he risked very little when laying such a wager. The relation 3:1 is the outcome of the interplay of two factors: the opinion that Roosevelt will be elected and the man's propensity for betting.
Statement (b) is an evaluation of the outcome of the impending event. Its figures refer not to a greater or smaller degree of probability, but to the expected result of the voting. Such a statement may be based on a systematic investigation like the Gallup poll or simply on estimates.
It is different with statement (c). This is a proposition about the expected outcome couched in arithmetical terms. It certainly does not mean that out of ten cases of the same type nine are favorable for Roosevelt and one unfavorable. It cannot have any reference to class probability. But what else can it mean?
It is a metaphorical expression. Most of the metaphors used in daily speech imaginatively identify an abstract object with another object that can be apprehended directly by the senses. Yet this is not a necessary feature of metaphorical language, but merely a consequence of the fact that the concrete is as a rule more familiar to us than the abstract. As metaphors aim at an explanation of something which is less well known by comparing it with something better known, they consist for the most part in identifying something abstract with a better-known concrete. The specific mark of our case is that it is an attempt to elucidate a complicated state of affairs by resorting to an analogy borrowed from a branch of higher mathematics, the calculus of probability. As it happens, this mathematical discipline is more popular than the analysis of the epistemological nature of understanding.
There is no use in applying the yardstick of logic to a critique of metaphorical language. Analogies and metaphors are always defective and logically unsatisfactory. It is usual to search for the underlying tertium comparationis. But even this is not permissible with regard to the metaphor we are dealing with. For the comparison is based on a conception which is in itself faulty in the very frame of the calculus of probability, namely the gambler's fallacy. In asserting that Roosevelt's chances are 9:1, the idea is that Roosevelt is in regard to the impending election in the position of a man who owns 90 percent of all tickets of a lottery in regard to the first prize. It is implied that this ratio 9:1 tells us something substantial about the outcome of the unique case in which we are interested. There is no need to repeat that this is a mistaken idea.
No less impermissible is the recourse to the calculus of probability in dealing with hypotheses in the field of the natural sciences. Hypotheses are tentative explanations consciously based on logically insufficient arguments. With regard to them all that can be asserted is: The hypothesis does or does not contradict either logical principles or the facts as experimentally established and considered as true. In the first case it is untenable, in the second case it is — under the present state of our experimental knowledge — not untenable. (The intensity of personal conviction is purely subjective.) Neither frequency probability nor historical understanding enters into the matter.
The term hypothesis, applied to definite modes of understanding historical events, is a misnomer. If a historian asserts that in the fall of the Romanoff dynasty the fact that this house was of German background played a relevant role, he does not advance a hypothesis. The facts on which his understanding is founded are beyond question. There was a widespread animosity against Germans in Russia, and the ruling line of the Romanoffs, having for 200 years intermarried exclusively with scions of families of German descent, was viewed by many Russians as a germanized family, even by those who assumed that Tsar Paul was not the son of Peter III. But the question remains what the relevance of these facts was in the chain of events which brought about the dethronement of this dynasty. Such problems are not open to any elucidation other than that provided by understanding.
- Betting, Gambling, and Playing GamesA bet is the engagement to risk money or other things against another man on the result of an event about the outcome of which we know only so much as can be known on the ground of understanding. Thus people may bet on the result of an impending election or a tennis match. Or they may bet on whose opinion concerning the content of a factual assertion is right and whose is wrong.
Gambling is the engagement to risk money or other things against another man on the result of an event about which we do not know anything more than is known on the ground of knowledge concerning the behavior of the whole class.
Sometimes betting and gambling are combined. The outcome of horse racing depends both on human action — on the part of the owner of the horse, the trainer, and the jockey — and on nonhuman factors — the qualities of the horse. Most of those risking money on the turf are simply gamblers. But the experts believe they know something by understanding the people involved; as far as this factor influences their decision they are betters. Furthermore they pretend to know the horses; they make a prognosis on the ground of their knowledge about the behavior of the classes of horses to which they assign the various competing horses. So far they are gamblers.
Later chapters of this book deal with the methods business applies in handling the problem of the uncertainty of the future. On this point of our reasoning only one more observation must be made.
Embarking upon games can be either an end or a means. It is an end for people who yearn for the stimulation and excitement with which the vicissitudes of a game provide them, or whose vanity is flattered by the display of their skill and superiority in playing a game which requires cunning and expertness. It is a means for professionals who want to make money by winning.
Playing a game can therefore be called an action. But it is not permissible to reverse this statement and to call every action a game or to deal with all actions as if they were games. The immediate aim in playing a game is to defeat the partner according to the rules of the game. This is a peculiar and special case of acting. Most actions do not aim at anybody's defeat or loss. They aim at an improvement in conditions. It can happen that this improvement is attained at some other men's expense. But this is certainly not always the case. It is, to put it mildly, certainly not the case within the regular operation of a social system based on the division of labor.
There is not the slightest analogy between playing games and the conduct of business within a market society. The card player wins money by outsmarting his antagonist. The businessman makes money by supplying customers with goods they want to acquire. There may exist an analogy between the strategy of a card player and that of a bluffer. There is no need to investigate this problem. He who interprets the conduct of business as trickery is on the wrong path.
The characteristic feature of games is the antagonism of two or more players or groups of players.Patience" or "Solitaire" is not a one-person game, but a pastime, a means of escaping boredom. It certainly dos not represent a pattern for what is going on in a communistic society, as John von Neumann and Oscar Morgenstern (Theory of Games and Economic Behavior [Princeton, 1944], p. 86) assert. The characteristic feature of business within a society, i.e., within an order based on the division of labor, is concord in the endeavors of its members. As soon as they begin to antagonize one another, a tendency toward social disintegration emerges.
Within the frame of a market economy competition does not involve antagonism in the sense in which this term is applied to the hostile clash of incompatible interests. Competition, it is true, may sometimes or even often evoke in the competitors those passions of hatred and malice which usually accompany the intention of inflicting evil on other people. Psychologists are therefore prone to confuse combat and competition. But praxeology must beware of such artificial and misleading difference between catallactic competition and combat. Competitors aim at excellence and preeminence in accomplishments within a system of mutual cooperation. The function of competition is to assign to every member of a social system that position in which he can best serve the whole of society and all its members. It is a method of selecting the most able man for each performance. Where there is social cooperation, there some variety of selection must be applied. Only where the assignment of various individuals to various tasks is effected by the dictator's decisions alone and the individuals concerned do not aid the dictator by endeavors to represent their own virtues and abilities in the most favorable light, is there no competition.
We will have to deal at a later stage of our investigations with the function of competition. At this point we must only emphasize that it is misleading to apply the terminology of mutual extermination to the problems of mutual cooperation as it works within a society. Military terms are inappropriate for the description of business operations. It is, e.g., a bad metaphor to speak of the conquest of a market. There is no conquest in the fact that one firm offers better or cheaper products than its competitors. Only in a metaphorical sense is there strategy in business operations.
- Praxeological Prediction Praxeological knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But, of course, such prediction can never imply anything regarding quantitative matters. Quantitative problems are in the field of human action open to no other elucidation than that by understanding.
We can predict, as will be shown later, that — other things being equal — a fall in the demand for a will result in a drop in the price of a. But we cannot predict the extent of this drop. This question can be answered only by understanding.
The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its methods unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.
This article is taken from chapter 6 of Human Action. A study guide is available in PDF and HTML.
Praxeology and HistoryThe Formal and Aprioristic Character of PraxeologyThe Alleged Logical Heterogeneity of Primitive ManThe A Priori and RealityThe Principle of Methodological IndividualismI and WeThe Principle of Methodological SingularismThe Individual and Changing Features of Human ActionThe Scope and the Specific Method of HistoryConception and UnderstandingNatural history and Human HistoryOn Ideal TypesThe Procedure of EconomicsThe Limitations on Praxeological ConceptsNotes[This article is excerpted from chapter 2 of Human Action. Robert Murphy has written a study guide for this chapter.]
- Praxeology and HistoryThere are two main branches of the sciences of human action: praxeology and history. History is the collection and systematic arrangement of all the data of experience concerning human action. It deals with the concrete content of human action. It studies all human endeavors in their infinite multiplicity and variety and all individual actions with all their accidental, special, and particular implications. It scrutinizes the ideas guiding acting men and the outcome of the actions performed. It embraces every aspect of human activities. It is on the one hand general history and on the other hand the history of various narrower fields. There is the history of political and military action, of ideas and philosophy, of economic activities, of technology, of literature, art, and science, of religion, of mores and customs, and of many other realms of human life. There is ethnology and anthropology, as far as they are not a part of biology, and there is psychology as far as it is neither physiology nor epistemology nor philosophy. There is linguistics as far as it is neither logic nor the physiology of speech.Economic history, descriptive economics, and economic statistics are, of course, history. The term sociology is used in two different meanings. Descriptive sociology deals with those historical phenomena of human action which are not viewed in descriptive economics; it overlaps to some extent the field claimed by ethnology and anthropology. General sociology, on the other hand, approaches historical experience from a more nearly universal point of view than that of the other branches of history. History proper, for instance, deals with people or with a certain geographical area. Max Weber in his main treatise (Wirtschaft und Gesellschaft [Tübingen, 1922], pp. 513–600) deals with the town in general, i.e., with the whole historical experience concerning towns without any limitation to historical periods, geographical areas, or individual peoples, nations, races, and civilizations.
The subject matter of all historical sciences is the past. They cannot teach us anything which would be valid for all human actions, that is, for the future too. The study of history makes a man wise and judicious. But it does not by itself provide any knowledge and skill which could be utilized for handling concrete tasks.
The natural sciences too deal with past events. Every experience is an experience of something passed away; there is no experience of future happenings. But the experience to which the natural sciences owe all their success is the experience of the experiment in which the individual elements of change can be observed in isolation. The facts amassed in this way can be used for induction, a peculiar procedure of inference which has given pragmatic evidence of its expediency, although its satisfactory epistemological characterization is still an unsolved problem.
The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to various interpretations, and is in fact interpreted in different ways.
The postulates of positivism and kindred schools of metaphysics are therefore illusory. It is impossible to reform the sciences of human action according to the pattern of physics and the other natural sciences. There is no means to establish an a posteriori theory of human conduct and social events. History can neither prove nor disprove any general statement in the manner in which the natural sciences accept or reject a hypothesis on the ground of laboratory experiments. Neither experimental verification nor experimental falsification of a general proposition is possible in its field.
Complex phenomena in the production of which various causal chains are interlaced cannot test any theory. Such phenomena, on the contrary, become intelligible only through an interpretation in terms of theories previously developed from other sources. In the case of natural phenomena the interpretation of an event must not be at variance with the theories satisfactorily verified by experiments. In the case of historical events there is no such restriction. Commentators would be free to resort to quite arbitrary explanations. Where there is something to explain, the human mind has never been at a loss to invent ad hoc some imaginary theories, lacking any logical justification.
In the field of human history a limitation similar to that which the experimentally tested theories enjoin upon the attempts to interpret and elucidate individual physical, chemical, and physiological events is provided by praxeology. Praxeology is a theoretical and systematic, not a historical, science. Its scope is human action as such, irrespective of all environmental, accidental, and individual circumstances of the concrete acts. Its cognition is purely formal and general without reference to the material content and the particular features of the actual case. It aims at knowledge valid for all instances in which the conditions exactly correspond to those implied in its assumptions and inferences. Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events. Without them we should not be able to see in the course of events anything else than kaleidoscopic change and chaotic muddle.
- The Formal and Aprioristic Character of PraxeologyA fashionable tendency in contemporary philosophy is to deny the existence of any a priori knowledge. All human knowledge, it is contended, is derived from experience. This attitude can easily be understood as an excessive reaction against the extravagances of theology and a spurious philosophy of history and of nature. Metaphysicians were eager to discover by intuition moral precepts, the meaning of historical evolution, the properties of soul and matter, and the laws governing physical, chemical, and physiological events. Their volatile speculations manifested a blithe disregard for matter-of-fact knowledge. They were convinced that, without reference to experience, reason could explain all things and answer all questions.
The modern natural sciences owe their success to the method of observation and experiment. There is no doubt that empiricism and pragmatism are right as far as they merely describe the procedures of the natural sciences. But it is no less certain that they are entirely wrong in their endeavors to reject any kind of a priori knowledge and to characterize logic, mathematics, and praxeology either as empirical and experimental disciplines or as mere tautologies.
With regard to praxeology the errors of the philosophers are due to their complete ignorance of economicsHardly any philosopher had a more universal familiarity with various branches of contemporary knowledge than Bergson. Yet a casual remark in his last great book clearly proves that Bergson was completely ignorant of the fundamental theorem of the modern theory of value and exchange. Speaking of exchange he remarks "l'on ne peut le pratiquer sans s'être demandé si les deux objets échangés sont bien de même valeur, c'est-à-die échangeables contre un même troisième." (Les Deux Sources de law morale et de la religion [Paris, 1932], p. 68.) and very often to their shockingly insufficient knowledge of history. In the eyes of the philosopher the treatment of philosophical issues is a sublime and noble vocation which must not be put upon the low level of other gainful employments. The professor resents the fact that he derives an income from philosophizing; he is offended by the thought that he earns money like the artisan and the farm hand. Monetary matters are mean things, and the philosopher investigating the eminent problems of truth and absolute eternal values should not soil his mind by paying attention to problems of economics.
The problem of whether there are or whether there are not a priori elements of thought — i.e., necessary and ineluctable intellectual conditions of thinking, anterior to any actual instance of conception and experience — must not be confused with the genetic problem of how man acquired his characteristically human mental ability. Man is descended from non-human ancestors who lacked this ability. These ancestors were endowed with some potentiality which in the course of ages of evolution converted them into reasonable beings. This transformation was achieved by the influence of a changing cosmic environment operating upon succeeding generations. Hence the empiricist concludes that the fundamental principles of reasoning are an outcome of experience and represent an adaptation of man to the conditions of his environment.
This idea leads, when consistently followed, to the further conclusion that there were between our prehuman ancestors and homo sapiens various intermediate stages. There were beings which, although not yet equipped with the human faculty of reason, were endowed with some rudimentary elements of ratiocination. Theirs was not yet a logical mind, but a prelogical (or rather imperfectly logical) mind. Their desultory and defective logical functions evolved step by step from the prelogical state toward the logical state. Reason, intellect, and logic are historical phenomena. There is a history of logic as there is a history of technology. Nothing suggests that logic as we know it is the last and final stage of intellectual evolution. Human logic is a historical phase between pre-human non-logic on the one hand and superhuman logic on the other hand. Reason and mind, the human beings' most efficacious equipment in their struggle for survival, are embedded in the continuous flow of zoological events. They are neither eternal nor unchangeable. They are transitory.
Furthermore, there is no doubt that every human being repeats in his personal evolution not only the physiological metamorphosis from a simple cell into a highly complicated mammal organism but no less the spiritual metamorphosis from a purely vegetative and animal existence into a reasonable mind. This transformation is not completed in the prenatal life of the embryo, but only later when the newborn child step by step awakens to human consciousness. Thus every man in his early youth, starting from the depths of darkness, proceeds through various states of the mind's logical structure.
Then there is the case of the animals. We are fully aware of the unbridgeable gulf separating our reason from the reactive processes of their brains and nerves. But at the same time we divine that forces are desperately struggling in them toward the light of comprehension. They are like prisoners anxious to break out from the doom of eternal darkness and inescapable automatism. We feel with them because we ourselves are in a similar position: pressing in vain against the limitation of our intellectual apparatus, striving unavailingly after unattainable perfect cognition.
But the problem of the a priori is of a different character. It does not deal with the problem of how consciousness and reason have emerged. It refers to the essential and necessary character of the logical structure of the human mind.
The fundamental logical relations are not subject to proof or disproof. Every attempt to prove them must presuppose their validity. It is impossible to explain them to a being who would not possess them on his own account. Efforts to define them according to the rules of definition must fail. They are primary propositions antecedent to any nominal or real definition. They are ultimate unanalyzable categories. The human mind is utterly incapable of imagining logical categories at variance with them. No matter how they may appear to superhuman beings, they are for man inescapable and absolutely necessary. They are the indispensable prerequisite of perception, apperception, and experience.
They are no less an indispensable prerequisite of memory. There is a tendency in the natural sciences to describe memory as an instance of a more general phenomenon. Every living organism conserves the effects of earlier stimulation, and the present state of inorganic matter is shaped by the effects of all the influences to which it was exposed in the past. The present state of the universe is the product of its past. We may, therefore, in a loose metaphorical sense, say that the geological structure of our globe conserves the memory of all earlier cosmic changes, and that a man's body is the sedimentation of his ancestors' and his own destinies and vicissitudes. But memory is something entirely different from the fact of the structural unity and continuity of cosmic evolution. It is a phenomenon of consciousness and as such conditioned by the logical a priori. Psychologists have been puzzled by the fact that man does not remember anything from the time of his existence as an embryo and as a suckling. Freud tried to explain this absence of recollection as brought about by suppression of undesired reminiscences. The truth is that there is nothing to be remembered of unconscious states. Animal automatism and unconscious response to physiological stimulations are neither for embryos and sucklings nor for adults material for remembrance. Only conscious states can be remembered.
The human mind is not a tabula rasa on which the external events write their own history. It is equipped with a set of tools for grasping reality. Man acquired these tools, i.e., the logical structure of his mind, in the course of his evolution from an amoeba to his present state. But these tools are logically prior to any experience.
Man is not only an animal totally subject to the stimuli unavoidably determining the circumstances of his life. He is also an acting being. And the category of action is logically antecedent to any concrete act.
The fact that man does not have the creative power to imagine categories at variance with the fundamental logical relations and with the principles of causality and teleology enjoins upon us what may be called methodological apriorism.
Everybody in his daily behavior again and again bears witness to the immutability and universality of the categories of thought and action. He who addresses fellow men, who wants to inform and convince them, who asks questions and answers other people's questions, can proceed in this way only because he can appeal to something common to all men — namely, the logical structure of human reason. The idea that A could at the same time be non-A or that to prefer A to B could at the same time be to prefer B to A is simply inconceivable and absurd to a human mind. We are not in the position to comprehend any kind of prelogical or metalogical thinking. We cannot think of a world without causality and teleology.
It does not matter for man whether or not beyond the sphere accessible to the human mind there are other spheres in which there is something categorially different from human thinking and acting. No knowledge from such spheres penetrates to the human mind. It is idle to ask whether things-in-themselves are different from what they appear to us, and whether there are worlds which we cannot divine and ideas which we cannot comprehend. These are problems beyond the scope of human cognition. Human knowledge is conditioned by the structure of the human mind. If it chooses human action as the subject matter of its inquiries, it cannot mean anything else than the categories of action which are proper to the human mind and are its projection into the external world of becoming and change. All the theorems of praxeology refer only to these categories of action and are valid only in the orbit of their operation. They do not pretend to convey any information about never-dreamed-of and unimaginable worlds and relations.
Thus praxeology is human in a double sense. It is human because it claims for its theorems, within the sphere precisely defined in the underlying assumptions, universal validity for all human action. It is human moreover because it deals only with human action and does not aspire to know anything about non-human — whether subhuman or superhuman — action.
The Alleged Logical Heterogeneity of Primitive ManIt is a general fallacy to believe that the writings of Lucien Lévy-Bruhl give support to the doctrine that the logical structure of mind of primitive man was and is categorially different from that of civilized man. On the contrary, what Lévy-Bruhl, on the basis of a careful scrutiny of the entire ethnological material available, reports about the mental functions of primitive man proves clearly that the fundamental logical relations and the categories of thought and action play in the intellectual activities of savages the same role they play in our own life. The content of primitive man's thoughts differs from the content of our thoughts, but the formal and logical structure is common to both.
It is true that Lévy-Bruhl himself maintains that the mentality of primitive peoples is essentially "mystic and prelogical" in character; primitive man's collective representations are regulated by the "law of participation" and are consequently indifferent to the law of contradiction. However, Lévy-Bruhl's distinction between prelogical and logical thinking refers to the content and not to the form and categorial structure of thinking. For he declares that also among peoples like ourselves ideas and relations between ideas governed by the "law of participation" exist, more or less independently, more or less impaired, but yet ineradicable, side by side, with those subject to the law of reasoning. "The prelogical and the mystic are co-existent with the logical."Lévy-Bruhl, How Natives Think, trans. by L.A. Clare (New York, 1932), p. 386.
Lévy-Bruhl relegates the essential teachings of Christianity to the realm of the prelogical mind.Ibid., p. 377. Now, many objections can possibly be raised and have been raised against the Christian doctrines and their interpretation by theology. But nobody ever ventured to contend that the Christian fathers and philosophers — among them St. Augustine and St. Thomas — had minds whose logical structure was categorially different from that of our contemporaries. The dispute between a man who believes in miracles and another who does not refers to the content of thought, not to its logical form. A man who tries to demonstrate the possibility and reality of miracles may err. But to unmask his error is — as the brilliant essays of Hume and Mill show — certainly no less logically intricate than to explode any philosophical or economic fallacy.
Explorers and missionaries report that in Africa and Polynesia primitive man stops short at his earliest perception of things and never reasons if he can in any way avoid it.Lévy-Bruhl, Primitive Mentality, trans. by L.A. Clare (New York, 1923), pp. 27–29. European and American educators sometimes report the same of their students. With regard to the Mossi on the Niger Lévy-Bruhl quotes a missionary's observation: "Conversation with them turns only upon women, food, and (in the rainy season) the crops."Ibid., p. 27. What other subjects did many contemporaries and neighbors of Newton, Kant, and Lévy-Bruhl prefer?
The conclusion to be drawn from Lévy-Bruhl's studies is best expressed in his own words: "The primitive mind, like our own, is anxious to find the reasons for what happens, but it does not seek these in the same direction as we do."Ibid., p. 437.
A peasant eager to get a rich crop may — according to the content of his ideas — choose various methods. He may perform some magical rites, he may embark upon a pilgrimage, he may offer a candle to the image of his patron saint, or he may employ more and better fertilizer. But whatever he does, it is always action, i.e., the employment of means for the attainment of ends. Magic is in a broader sense a variety of technology. Exorcism is a deliberate purposeful action based on a worldview which most of our contemporaries condemn as superstitious and therefore as inappropriate. But the concept of action does not imply that the action is guided by a correct theory and a technology promising success and that it attains the end aimed at. It only implies that the performer of the action believes that the means applied will produce the desired effect.
No facts provided by ethnology or history contradict the assertion that the logical structure of mind is uniform with all men of all races, ages, and countries.Cf. the brilliant statements of Ernst Cassirer, Philosophie der symbolischen Formen (Berlin, 1925), II, 78.
- The A Priori and RealityAprioristic reasoning is purely conceptual and deductive. It cannot produce anything else but tautologies and analytic judgments. All its implications are logically derived from the premises and were already contained in them. Hence, according to a popular objection, it cannot add anything to our knowledge.
All geometrical theorems are already implied in the axioms. The concept of a rectangular triangle already implies the theorem of Pythagoras. This theorem is a tautology, its deduction results in an analytic judgment. Nonetheless nobody would contend that geometry in general and the theorem of Pythagoras in particular do not enlarge our knowledge. Cognition from purely deductive reasoning is also creative and opens for our mind access to previously barred spheres. The significant task of aprioristic reasoning is on the one hand to bring into relief all that is implied in the categories, concepts, and premises and, on the other hand, to show what they do not imply. It is its vocation to render manifest and obvious what was hidden and unknown before.Science, says Meyerson is "l'acte per lequel nous ramenons àl'identique ce qui nous a, tout d'abord, paru n'être pas tel." (De L'Explication dans dles sciences [Paris, 1927], p. 154). Cf. also Morris R. Cohen, A Preface to Logic (New York, 1944), pp. 11–14.
In the concept of money all the theorems of monetary theory are already implied. The quantity theory does not add to our knowledge anything which is not virtually contained in the concept of money. It transforms, develops, and unfolds; it only analyzes and is therefore tautological like the theorem of Pythagoras in relation to the concept of the rectangular triangle. However, nobody would deny the cognitive value of the quantity theory. To a mind not enlightened by economic reasoning it remains unknown. A long line of abortive attempts to solve the problems concerned shows that it was certainly not easy to attain the present state of knowledge.
It is not a deficiency of the system of aprioristic science that it does not convey to us full cognition of reality. Its concepts and theorems are mental tools opening the approach to a complete grasp of reality; they are, to be sure, not in themselves already the totality of factual knowledge about all things. Theory and the comprehension of living and changing reality are not in opposition to one another. Without theory, the general aprioristic science of human action, there is no comprehension of the reality of human action.
The relation between reason and experience has long been one of the fundamental philosophical problems. Like all other problems of the critique of knowledge, philosophers have approached it only with reference to the natural sciences. They have ignored the sciences of human action. Their contributions have been useless for praxeology.
It is customary in the treatment of the epistemological problems of economics to adopt one of the solutions suggested for the natural sciences. Some authors recommend Poincaré's conventionalism.Henri Poincaré, La Science et l'hypothése (Paris, 1918), p. 69. They regard the premises of economic reasoning as a matter of linguistic or postulational convention.Felix Kaufmann, Methodology of the Social Sciences (London, 1944), pp. 46–47. Others prefer to acquiesce in ideas advanced by Einstein. Einstein raises the question: "How can mathematics, a product of human reason that does not depend on any experience, so exquisitely fit the objects of reality? Is human reason able to discover, unaided by experience through pure reasoning the features of real things?" And his answer is: "As far as the theorems of mathematics refer to reality, they are not certain, and as far as they are certain, they do not refer to reality."Albert Eistein, Geometrie und Erfahrung (Berlin, 1923), p. 3.
However, the sciences of human action differ radically from the natural sciences. All authors eager to construct an epistemological system of the sciences of human action according to the pattern of the natural sciences err lamentably.
The real thing which is the subject matter of praxeology, human action, stems from the same source as human reasoning. Action and reason are congeneric and homogeneous; they may even be called two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason. The theorems attained by correct praxeological reasoning are not only perfectly certain and incontestable, like the correct mathematical theorems. They refer, moreover, with the full rigidity of their apodictic certainty and incontestability to the reality of action as it appears in life and history. Praxeology conveys exact and precise knowledge of real things.
The starting point of praxeology is not a choice of axioms and a decision about methods of procedure, but reflection about the essence of action. There is no action in which the praxeological categories do not appear fully and perfectly. There is no mode of action thinkable in which means and ends or costs and proceeds cannot be clearly distinguished and precisely separated. There is nothing which only approximately or incompletely fits the economic category of an exchange. There are only exchange and non-exchange; and with regard to any exchange all the general theorems concerning exchanges are valid in their full rigidity and with all their implications. There are no transitions from exchange to non-exchange or from direct exchange to indirect exchange. No experience can ever be had which would contradict these statements.
Such an experience would be impossible in the first place for the reason that all experience concerning human action is conditioned by the praxeological categories and becomes possible only through their application. If we had not in our mind the schemes provided by praxeological reasoning, we should never be in a position to discern and to grasp any action. We would perceive motions, but neither buying nor selling, nor prices, wage rates, interest rates, and so on. It is only through the utilization of the praxeological scheme that we become able to have an experience concerning an act of buying and selling, but then independently of the fact of whether or not our senses concomitantly perceive any motions of men and of non-human elements of the external world. Unaided by praxeological knowledge we would never learn anything about media of exchange. If we approach coins without such preexisting knowledge, we would see in them only round plates of metal, nothing more. Experience concerning money requires familiarity with the praxeological category medium of exchange.
Experience concerning human action differs from that concerning natural phenomena in that it requires and presupposes praxeological knowledge. This is why the methods of the natural sciences are inappropriate for the study of praxeology, economics, and history.
In asserting the a priori character of praxeology we are not drafting a plan for a future new science different from the traditional sciences of human action. We do not maintain that the theoretical science of human action should be aprioristic, but that it is and always has been so. Every attempt to reflect upon the problems raised by human action is necessarily bound to aprioristic reasoning. It does not make any difference in this regard whether the men discussing a problem are theorists aiming at pure knowledge only or statesmen, politicians, and regular citizens eager to comprehend occurring changes and to discover what kind of public policy or private conduct would best suit their own interests. People may begin arguing about the significance of any concrete experience, but the debate inevitably turns away from the accidental and environmental features of the event concerned to an analysis of fundamental principles, and imperceptibly abandons any reference to the factual happenings which evoked the argument.
The history of the natural sciences is a record of theories and hypotheses discarded because they were disproved by experience. Remember for instance the fallacies of older mechanics disproved by Galileo or the fate of the phlogiston theory. No such case is recorded by the history of economics. The champions of logically incompatible theories claim the same events as the proof that their point of view has been tested by experience. The truth is that the experience of a complex phenomenon — and there is no other experience in the realm of human action — can always be interpreted on the ground of various antithetic theories. Whether the interpretation is considered satisfactory or unsatisfactory depends on the appreciation of the theories in question established beforehand on the ground of aprioristic reasoning.Cf. E.P. Cheyney, Law in History and Other Essays (New York, 1927), p. 27.
History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies. The data of history would be nothing but a clumsy accumulation of disconnected occurrences, a heap of confusion, if they could not be clarified, arranged, and interpreted by systematic praxeological knowledge.
- The Principle of Methodological IndividualismPraxeology deals with the actions of individual men. It is only in the further course of its inquiries that cognition of human cooperation is attained and social action is treated as a special case of the more universal category of human action as such.
This methodological individualism has been vehemently attacked by various metaphysical schools and disparaged as a nominalistic fallacy. The notion of an individual, say the critics, is an empty abstraction. Real man is necessarily always a member of a social whole. It is even impossible to imagine the existence of a man separated from the rest of mankind and not connected with society. Man as man is the product of a social evolution. His most eminent feature, reason, could only emerge within the framework of social mutuality. There is no thinking which does not depend on the concepts and notions of language. But speech is manifestly a social phenomenon. Man is always the member of a collective. As the whole is both logically and temporally prior to its parts or members, the study of the individual is posterior to the study of society. The only adequate method for the scientific treatment of human problems is the method of universalism or collectivism.
Now the controversy whether the whole or its parts are logically prior is vain. Logically the notions of a whole and its parts are correlative. As logical concepts they are both apart from time.
No less inappropriate with regard to our problem is the reference to the antagonism of realism and nominalism, both these terms being understood in the meaning which medieval scholasticism attached to them. It is uncontested that in the sphere of human action social entities have real existence. Nobody ventures to deny that nations, states, municipalities, parties, religious communities, are real factors determining the course of human events. Methodological individualism, far from contesting the significance of such collective wholes, considers it as one of its main tasks to describe and to analyze their becoming and their disappearing, their changing structures, and their operation. And it chooses the only method fitted to solve this problem satisfactorily.
First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character. It is the meaning that marks one action as the action of an individual and another action as the action of the state or of the municipality. The hangman, not the state, executes a criminal. It is the meaning of those concerned that discerns in the hangman's action an action of the state. A group of armed men occupies a place. It is the meaning of those concerned which imputes this occupation not to the officers and soldiers on the spot, but to their nation.
If we scrutinize the meaning of the various actions performed by individuals we must necessarily learn everything about the actions of collective wholes. For a social collective has no existence and reality outside of the individual members' actions. The life of a collective is lived in the actions of the individuals constituting its body. There is no social collective conceivable which is not operative in the actions of some individuals. The reality of a social integer consists in its directing and releasing definite actions on the part of individuals. Thus the way to a cognition of collective wholes is through an analysis of the individuals' actions.
As a thinking and acting being, man emerges from his prehuman existence already as a social being. The evolution of reason, language, and cooperation is the outcome of the same process; they were inseparably and necessarily linked together. But this process took place in individuals. It consisted in changes in the behavior of individuals. There is no other substance in which it occurred than the individuals. There is no substratum of society other than the actions of individuals.
That there are nations, states, and churches, that there is social cooperation under the division of labor, becomes discernible only in the actions of certain individuals. Nobody ever perceived a nation without perceiving its members. In this sense one may say that a social collective comes into being through the actions of individuals. That does not mean that the individual is temporally antecedent. It merely means that definite actions of individuals constitute the collective.
There is no need to argue whether a collective is the sum resulting from the addition of its elements or more, whether it is a being sui generis, and whether it is reasonable or not to speak of its will, plans, aims, and actions and to attribute to it a distinct "soul." Such pedantic talk is idle. A collective whole is a particular aspect of the actions of various individuals and as such a real thing determining the course of events.
It is illusory to believe that it is possible to visualize collective wholes. They are never visible; their cognition is always the outcome of the understanding of the meaning which acting men attribute to their acts. We can see a crowd, i.e., a multitude of people. Whether this crowd is a mere gathering or a mass (in the sense in which this term is used in contemporary psychology) or an organized body or any other kind of social entity is a question which can only be answered by understanding the meaning which they themselves attach to their presence. And this meaning is always the meaning of individuals. Not our senses, but understanding, a mental process, makes us recognize social entities.
Those who want to start the study of human action from the collective units encounter an insurmountable obstacle in the fact that an individual at the same time can belong and — with the exception of the most primitive tribesmen — really belongs to various collective entities. The problems raised by the multiplicity of coexisting social units and their mutual antagonisms can be solved only by methodological individualism.See below, pp. 145–153, the critique of the collectivist theory of society.
I and We
The Ego is the unity of the acting being. It is unquestionably given and cannot be dissolved or conjured away by any reasoning or quibbling.
The We is always the result of a summing up which puts together two or more Egos. If somebody says I, no further questioning is necessary in order to establish the meaning. The same is valid with regard to the Thou and, provided the person in view is precisely indicated, with regard to the He. But if a man says We, further information is needed to denote who the Egos are who are comprised in this We. It is always single individuals who say We; even if they say it in chorus, it yet remains an utterance of single individuals.
The We cannot act otherwise than each of them acting on his own behalf. They can either all act together in accord, or one of them may act for them all. In the latter case the cooperation of the others consists in their bringing about the situation which makes one man's action effective for them too. Only in this sense does the officer of a social entity act for the whole; the individual members of the collective body either cause or allow a single man's action to concern them too.
The endeavors of psychology to dissolve the Ego and to unmask it as an illusion are idle. The praxeological Ego is beyond any doubts. No matter what a man was and what he may become later, in the very act of choosing and acting he is an Ego.
From the pluralis logicus (and from the merely ceremonial pluralis majestaticus) we must distinguish the pluralis gloriosus. If a Canadian who never tried skating says, "We are the world's foremost ice hockey players," or if an Italian boor proudly contends, "We are the world's most eminent painters," nobody is fooled. But with reference to political and economic problems the pluralis gloriosus evolves into the pluralis imperialis and as such plays a significant role in paving the way for the acceptance of doctrines determining international economic policies.
- The Principle of Methodological SingularismNo less than from the action of an individual praxeology begins its investigations from the individual action. It does not deal in vague terms with human action in general, but with concrete action which a definite man has performed at a definite date and at a definite place. But, of course, it does not concern itself with the accidental and environmental features of this action and with what distinguishes it from all other actions, but only with what is necessary and universal in its performance.
The philosophy of universalism has from time immemorial blocked access to a satisfactory grasp of praxeological problems, and contemporary universalists are utterly incapable of finding an approach to them. Universalism, collectivism, and conceptual realism see only wholes and universals. They speculate about mankind, nations, states, classes, about virtue and vice, right and wrong, about entire classes of wants and of commodities. They ask, for instance: Why is the value of "gold" higher than that of "iron"? Thus they never find solutions, but antinomies and paradoxes only. The best-known instance is the value-paradox which frustrated even the work of the classical economists.
Praxeology asks: What happens in acting? What does it mean to say that an individual then and there, today and here, at any time and at any place, acts? What results if he chooses one thing and rejects another?
The act of choosing is always a decision among various opportunities open to the choosing individual. Man never chooses between virtue and vice, but only between two modes of action which we call from an adopted point of view virtuous or vicious. A man never chooses between "gold" and "iron" in general, but always only between a definite quantity of gold and a definite quantity of iron. Every single action is strictly limited in its immediate consequences. If we want to reach correct conclusions, we must first of all look at these limitations.
Human life is an unceasing sequence of single actions. But the single action is by no means isolated. It is a link in a chain of actions which together form an action on a higher level aiming at a more distant end. Every action has two aspects. It is on the one hand a partial action in the framework of a further-stretching action, the performance of a fraction of the aims set by a more far-reaching action. It is on the other hand itself a whole with regard to the actions aimed at by the performance of its own parts.
It depends upon the scope of the project on which acting man is intent at the instant whether the more far-reaching action or a partial action directed to a more immediate end only is thrown into relief. There is no need for praxeology to raise questions of the type of those raised by Gestaltpsychologie. The road to the performance of great things must always lead through the performance of partial tasks. A cathedral is something other than a heap of stones joined together. But the only procedure for constructing a cathedral is to lay one stone upon another. For the architect the whole project is the main thing. For the mason it is the single wall, and for the bricklayer the single stones. What counts for praxeology is the fact that the only method to achieve greater tasks is to build from the foundations step by step, part by part.
- The Individual and Changing Features of Human ActionThe content of human action, i.e., the ends aimed at and the means chosen and applied for the attainment of these ends, is determined by the personal qualities of every acting man. Individual man is the product of a long line of zoological evolution which has shaped his physiological inheritance. He is born the offspring and the heir of his ancestors, and the precipitate and sediment of all that his forefathers experienced are his biological patrimony. When he is born, he does not enter the world in general as such, but a definite environment. The innate and inherited biological qualities and all that life has worked upon him make a man what he is at any instant of his pilgrimage. They are his fate and destiny. His will is not "free" in the metaphysical sense of this term. It is determined by his background and all the influences to which he himself and his ancestors were exposed.
Inheritance and environment direct a man's actions. They suggest to him both the ends and the means. He lives not simply as man in abstracto; he lives as a son of his family, his race, his people, and his age; as a citizen of his country; as a member of a definite social group; as a practitioner of a certain vocation; as a follower of definite religious, metaphysical, philosophical, and political ideas; as a partisan in many feuds and controversies. He does not himself create his ideas and standards of value; he borrows them from other people. His ideology is what his environment enjoins upon him. Only very few men have the gift of thinking new and original ideas and of changing the traditional body of creeds and doctrines.
Common man does not speculate about the great problems. With regard to them he relies upon other people's authority, he behaves as "every decent fellow must behave," he is like a sheep in the herd. It is precisely this intellectual inertia that characterizes a man as a common man. Yet the common man does choose. He chooses to adopt traditional patterns or patterns adopted by other people because he is convinced that this procedure is best fitted to achieve his own welfare. And he is ready to change his ideology and consequently his mode of action whenever he becomes convinced that this would better serve his own interests.
Most of a man's daily behavior is simple routine. He performs certain acts without paying special attention to them. He does many things because he was trained in his childhood to do them, because other people behave in the same way, and because it is customary in his environment. He acquires habits, he develops automatic reactions. But he indulges in these habits only because he welcomes their effects. As soon as he discovers that the pursuit of the habitual way may hinder the attainment of ends considered as more desirable, he changes his attitude.
A man brought up in an area in which the water is clean acquires the habit of heedlessly drinking, washing, and bathing. When he moves to a place in which the water is polluted by morbific germs, he will devote the most careful attention to procedures about which he never bothered before. He will watch himself permanently in order not to hurt himself by indulging unthinkingly in his traditional routine and his automatic reactions. The fact that an action is in the regular course of affairs performed spontaneously, as it were, does not mean that it is not due to a conscious volition and to a deliberate choice. Indulgence in a routine which possibly could be changed is action.
Praxeology is not concerned with the changing content of acting, but with its pure form and its categorial structure. The study of the accidental and environmental features of human action is the task of history.
- The Scope and the Specific Method of HistoryThe study of all the data of experience concerning human action is the scope of history. The historian collects and critically sifts all available documents. On the ground of this evidence he approaches his genuine task.
It has been asserted that the task of history is to show how events actually happened, without imposing presuppositions and values (wertfrei, i.e., neutral with regard to all value judgments). The historian's report should be a faithful image of the past, an intellectual photograph, as it were, giving a complete and unbiased description of all facts. It should reproduce before our intellectual eye the past with all its features.
Now, a real reproduction of the past would require a duplication not humanly possible. History is not an intellectual reproduction, but a condensed representation of the past in conceptual terms. The historian does not simply let the events speak for themselves. He arranges them from the aspect of the ideas underlying the formation of the general notions he uses in their presentation. He does not report facts as they happened, but only relevant facts. He does not approach the documents without presuppositions, but equipped with the whole apparatus of his age's scientific knowledge, that is, with all the teachings of contemporary logic, mathematics, praxeology, and natural science.
It is obvious that the historian must not be biased by any prejudices and party tenets. Those writers who consider historical events as an arsenal of weapons for the conduct of their party feuds are not historians but propagandists and apologists. They are not eager to acquire knowledge but to justify the program of their parties. They are fighting for the dogmas of a metaphysical, religious, national, political, or social doctrine. They usurp the name of history for their writings as a blind in order to deceive the credulous. A historian must first of all aim at cognition. He must free himself from any partiality. He must in this sense be neutral with regard to any value judgments.
This postulate of Wertfreiheit can easily be satisfied in the field of the aprioristic science — logic, mathematics, and praxeology — and in the field of the experimental natural sciences. It is logically not difficult to draw a sharp line between a scientific, unbiased treatment of these disciplines and a treatment distorted by superstition, preconceived ideas, and passion. It is much more difficult to comply with the requirement of valuational neutrality in history. For the subject matter of history, the concrete accidental and environmental content of human action, is value judgments and their projection into the reality of change. At every step of his activities the historian is concerned with value judgments. The value judgments of the men whose actions he reports are the substratum of his investigations.
It has been asserted that the historian himself cannot avoid judgments of value. No historian — not even the naive chronicler or newspaper reporter — registers all facts as they happen. He must discriminate, he must select some events which he deems worthy of being registered and pass over in silence other events. This choice, it is said, implies in itself a value judgment. It is necessarily conditioned by the historian's worldview and thus not impartial but an outcome of preconceived ideas. History can never be anything else than distortion of facts; it can never be really scientific, that is, neutral with regard to values and intent only upon discovering truth.
There is, of course, no doubt that the discretion which the selection of facts places in the hands of the historian can be abused. It can and does happen that the historian's choice is guided by party bias. However, the problems involved are much more intricate than this popular doctrine would have us believe. Their solution must be sought on the ground of a much more thorough scrutiny of the methods of history.
In dealing with a historical problem the historian makes use of all the knowledge provided by logic, mathematics, the natural sciences, and especially by praxeology. However, the mental tools of these non-historical disciplines do not suffice for his task. They are indispensable auxiliaries for him, but in themselves they do not make it possible to answer those questions he has to deal with.
The course of history is determined by the actions of individuals and by the effects of these actions. The actions are determined by the value judgments of the acting individuals, i.e., the ends which they were eager to attain, and by the means which they applied for the attainment of these ends. The choice of the means is an outcome of the whole body of technological knowledge of the acting individuals. It is in many instances possible to appreciate the effects of the means applied from the point of view of praxeology or of the natural sciences. But there remain a great many things for the elucidation of which no such help is available.
The specific task of history for which it uses a specific method is the study of these value judgments and of the effects of the actions as far as they cannot be analyzed by the teachings of all other branches of knowledge. The historian's genuine problem is always to interpret things as they happened. But he cannot solve this problem on the ground of the theorems provided by all other sciences alone. There always remains at the bottom of each of his problems something which resists analysis at the hand of these teachings of other sciences. It is these individual and unique characteristics of each event which are studied by the understanding.
The uniqueness or individuality which remains at the bottom of every historical fact, when all the means for its interpretation provided by logic, mathematics, praxeology, and the natural sciences have been exhausted, is an ultimate datum. But whereas the natural sciences cannot say anything about their ultimate data than that they are such, history can try to make its ultimate data intelligible. Although it is impossible to reduce them to their causes — they would not be ultimate data if such a reduction were possible — the historian can understand them because he is himself a human being.
In the philosophy of Bergson this understanding is called an intuition, viz., "la sympathie par laquelle on se transporte a l'interieur d'un objet pour coïncider avec ce qu'il a d'unique et par consequent d'inexprimable."Henri Bergson, La Penseé et le mouvant (4th ed. Paris, 1934), p. 205. ["The sympathy by which one is transported inside an object to coexist with that which is unique and therefore inexpressible." -Ed.] German epistemology calls this act das spezifische Verstehen der Geisteswissenschaften or simply Verstehen. It is the method which all historians and all other people always apply in commenting upon human events of the past and in forecasting future events. The discovery and the delimitation of understanding was one of the most important contributions of modern epistemology. It is, to be sure, neither a project for a new science which does not yet exist and is to be founded nor the recommendation of a new method of procedure for any of the already existing sciences.
The understanding must not be confused with approval, be it only conditional and circumstantial. The historian, the ethnologist, and the psychologist sometimes register actions which are for their feelings simply repulsive and disgusting; they understand them only as actions, i.e., in establishing the underlying aims and the technological and praxeological methods applied for their execution. To understand an individual case does not mean to justify or to excuse it.
Neither must understanding be confused with the act of aesthetic enjoyment of a phenomenon. Empathy (Einfühlung) and understanding are two radically different attitudes. It is a different thing, on the one hand, to understand a work of art historically, to determine its place, its meaning, and its importance in the flux of events, and, on the other hand, to appreciate it emotionally as a work of art. One can look at a cathedral with the eyes of a historian. But one can look at the same cathedral either as an enthusiastic admirer or as an unaffected and indifferent sightseer. The same individuals are capable of both modes of reaction, of the aesthetic appreciation and of the scientific grasp of understanding.
The understanding establishes the fact that an individual or a group of individuals have engaged in a definite action emanating from definite value judgments and choices and aiming at definite ends, and that they have applied for the attainment of these ends definite means suggested by definite technological, therapeutical, and praxeological doctrines. It furthermore tries to appreciate the effects and the intensity of the effects brought about by an action; it tries to assign to every action its relevance, i.e., its bearing upon the course of events.
The scope of understanding is the mental grasp of phenomena which cannot be totally elucidated by logic, mathematics, praxeology, and the natural sciences to the extent that they cannot be cleared up by all these sciences. It must never contradict the teachings of these other branches of knowledge.Cf. Ch. V. Langlois and Ch. Seignobos, Introduction to the Study of History, trans. by G.G. Berry (London, 1925), pp. 205–208. The real corporeal existence of the devil is attested by innumerable historical documents which are rather reliable in all other regards. Many tribunals in due process of law have on the basis of the testimony of witnesses and the confessions of defendants established the fact that the devil had carnal intercourse with witches. However, no appeal to understanding could justify a historian's attempt to maintain that the devil really existed and interfered with human events otherwise than in the visions of an excited human brain.
While this is generally admitted with regard to the natural sciences, there are some historians who adopt another attitude with regard to economic theory. They try to oppose to the theorems of economics an appeal to documents allegedly proving things incompatible with these theorems. They do not realize that complex phenomena can neither prove nor disprove any theorem and therefore cannot bear witness against any statement of a theory. Economic history is possible only because there is an economic theory capable of throwing light upon economic actions. If there were no economic theory, reports concerning economic facts would be nothing more than a collection of unconnected data open to any arbitrary interpretation.
- Conception and UnderstandingThe task of the sciences of human action is the comprehension of the meaning and relevance of human action. They apply for this purpose two different epistemological procedures: conception and understanding. Conception is the mental tool of praxeology; understanding is the specific mental tool of history.
The cognition of praxeology is conceptual cognition. It refers to what is necessary in human action. It is cognition of universals and categories.
The cognition of history refers to what is unique and individual in each event or class of events. It analyzes first each object of its studies with the aid of the mental tools provided by all other sciences. Having achieved this preliminary work, it faces its own specific problem; the elucidation of the unique and individual features of the case by means of the understanding.
As was mentioned above, it has been asserted that history can never be scientific because historical understanding depends on the historian's subjective value judgments. Understanding, it is maintained, is only a euphemistic term for arbitrariness. The writings of historians are always one-sided and partial; they do not report the facts; they distort them.
It is, of course, a fact that we have historical books written from various points of view. There are histories of the Reformation written from the Catholic point of view and others written from the Protestant point of view. There are "proletarian" histories and "bourgeois" histories, Tory historians and Whig historians; every nation, party, and linguistic group has its own historians and its own ideas about history.
But the problem which these differences of interpretation offer must not be confused with the intentional distortion of facts by propagandists and apologists parading as historians. Those facts which can be established in an unquestionable way on the ground of the source material available must be established as the preliminary work of the historian. This is not a field for understanding. It is a task to be accomplished by the employment of the tools provided by all non-historical sciences. The phenomena are gathered by cautious critical observation of the records available. As far as the theories of the non-historical sciences on which the historian grounds his critical examination of the sources are reasonably reliable and certain, there cannot be any arbitrary disagreement with regard to the establishment of the phenomena as such. What a historian asserts is either correct or contrary to fact, is either proved or disproved by the documents available, or vague because the sources do not provide us with sufficient information. The experts may disagree, but only on the ground of a reasonable interpretation of the evidence available. The discussion does not allow any arbitrary statements.
However, the historians very often do not agree with regard to the teachings of the non-historical sciences. Then, of course, disagreement with regard to the critical examination of the records and to the conclusions to be drawn from them can ensue. An unbridgeable conflict arises. But its cause is not an arbitrariness with regard to the concrete historical phenomenon. It stems from an undecided issue referring to the non-historical sciences.
An ancient Chinese historian could report that the emperor's sin brought about a catastrophic drought and that rain fell again when the ruler had atoned for his sin. No modern historian would accept such a report. The underlying meteorological doctrine is contrary to uncontested fundamentals of contemporary natural science. But no such unanimity exists in regard to many theological, biological, and economic issues. Accordingly historians disagree.
A supporter of the racial doctrine of Nordic-Aryanism will disregard as fabulous and simply unbelievable any report concerning intellectual and moral achievements of "inferior" races. He will treat such reports in the same way in which all modern historians deal with the above-mentioned Chinese report. No agreement with regard to any phenomenon of the history of Christianity can be attained between people for whom the gospels are Holy Writ and people in whose eyes they are human documents. Catholic and Protestant historians disagree about many questions of fact because they start from different theological ideas. A Mercantilist or Neo-Mercantilist must necessarily be at variance with an economist. An account of German monetary history in the years 1914 to 1923 is conditioned by the author's monetary doctrines. The facts of the French Revolution are presented in a quite different manner by those who believe in the sacred rights of the anointed king and those who hold other views.
The historians disagree on such issues not in their capacity as historians, but in their application of the non-historical sciences to the subject matter of history. They disagree as agnostic doctors disagree in regard to the miracles of Lourdes with the members of the medical committee for the collection of evidence concerning these miracles. Only those who believe that facts write their own story into the tabula rasa of the human mind blame the historians for such differences of opinion. They fail to realize that history can never be studied without presuppositions, and that dissension with regard to the presuppositions, i.e., the whole content of the non-historical branches of knowledge, must determine the establishment of historical facts.
These presuppositions also determine the historian's decision concerning the choice of facts to be mentioned and those to be omitted as irrelevant. In searching for the causes of a cow's not giving milk a modern veterinarian will disregard entirely all reports concerning a witch's evil eye; his view would have been different three hundred years ago. In the same way the historian selects from the indefinite multitude of events that preceded the fact he is dealing with those which could have contributed to its emergence — or have delayed it — and neglects those which, according to his grasp of the non-historical sciences, could not have influenced it.
Changes in the teachings of the non-historical sciences consequently must involve a rewriting of history. Every generation must treat anew the same historical problems because they appear to it in a different light. The theological worldview of older times led to a treatment of history other than the theorems of modern natural science. Subjective economics produces historical works very different from those based on mercantilist doctrines. As far as divergences in the books of historians stem from these disagreements, they are not an outcome of alleged vagueness and precariousness in historical studies. They are, on the contrary, the result of the lack of unanimity in the realm of those other sciences which are popularly called certain and exact.
To avoid any possible misunderstanding it is expedient to emphasize some further points. The divergences referred to above must not be confused:
With purposeful ill-intentioned distortion of facts.
With attempts to justify or to condemn any actions from a legal or moral point of view.
With the merely incidental insertion of remarks expressing value judgments in a strictly objective representation of the state of affairs. A treatise on bacteriology does not lose its objectivity if the author, accepting the human viewpoint, considers the preservation of human life as an ultimate end and, applying this standard, labels effective methods of fighting germs good and fruitless methods bad. A germ writing such a book would reverse these judgments, but the material content of its book would not differ from that of the human bacteriologist. In the same way a European historian dealing with the Mongol invasions of the thirteenth century may speak of "favorable" and "unfavorable" events because he takes the standpoint of the European defenders of Western civilization. But this approval of one party's standard of value need not necessarily interfere with the material content of his study. It may — from the viewpoint of contemporary knowledge — be absolutely objective. A Mongolian historian could endorse it completely but for such casual remarks.
With a representation of one party's action in diplomatic or military antagonisms. The clash of conflicting groups can be dealt with from the point of view of the ideas, motives, and aims which impelled either side's acts. For a full comprehension of what happened it is necessary to take account of what was done on both sides. The outcome was the result of the interaction of both parties. But in order to understand their actions the historian must try to see things as they appeared to the acting men at the critical time, not only as we wee them now from the point of view of our present-day knowledge. A history of Lincoln's policy in the weeks and months preceding the outbreak of the Civil War is of course incomplete. But no historical study is complete. Regardless of whether the historian sympathizes with the Unionists or with the Confederates or whether he is absolutely neutral, he can deal in an objective way with Lincoln's policy in the spring of 1861. Such an investigation is an indispensable preliminary to answering the broader question of how the Civil War broke out.
Now finally, having settled these problems, it is possible to attack the genuine question: Is there any subjective element in historical understanding, and, if so, in what manner does it determine the result of historical studies?
As far as the task of understanding is to establish the facts that people were motivated by definite value judgments and aimed at definite means, there cannot be any disagreement among true historians, i.e., people intent upon cognition of past events. There may be uncertainty because of the insufficient information provided by the sources available. But this has nothing to do with understanding. It refers to the preliminary work to be achieved by the historian.
But understanding has a second task to fulfill. It must appraise the effects and the intensity of the effects brought about by an action; it must deal with the relevance of each motive and each action.
Here we are faced with one of the main differences between physics and chemistry on the one hand and the sciences of human action on the other. In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations between magnitudes, and man is capable of discovering these constants with a reasonable degree of precision by means of laboratory experiments. No such constant relations exist in the field of human action outside of physical and chemical technology and therapeutics. For some time economists believed that they had discovered such a constant relation in the effects of changes in the quantity of money upon commodity prices. It was asserted that a rise or fall in the quantity of money in circulation must result in proportional changes of commodity prices. Modern economics has clearly and irrefutably exposed the fallaciousness of this statement.See below, pp. 412–414.
Those economists who want to substitute "quantitative economics" for what they call "qualitative economics" are utterly mistaken. There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 per cent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 per cent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or at another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique and individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes, and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions.Cf. below, p. 351.
Outside of the field of economic history nobody ever ventured to maintain that constant relations prevail in human history. It is a fact that in the armed conflicts fought in the past between Europeans and backward peoples of other races, one European soldier was usually a match for several native fighters. But nobody was ever foolish enough to "measure" the magnitude of European superiority.
The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations. If it were only caused by technical insufficiency, at least an approximate estimation would be possible in some cases. But the main fact is that there are no constant relations. Economics is not, as ignorant positivists repeat again and again, backward because it is not "quantitative." It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a non-repeatable historical case. Physical events can be interpreted on the ground of our knowledge concerning constant relations established by experiments. Historical events are not open to such an interpretation.
The historian can enumerate all the factors which cooperated in bringing about a known effect and all the factors which worked against them and may have resulted in delaying and mitigating the final outcome. But he cannot coordinate, except by understanding, the various causative factors in a quantitative way to the effects produced. He cannot, except by understanding, assign to each of n factors its role in producing the effect P. Understanding is in the realm of history the equivalent, as it were, of quantitative analysis and measurement.
Technology can tell us how thick a steel plate must be in order not to be pierced by a bullet fired at a distance of 300 yards from a Winchester rifle. It can thus answer the question why a man who took shelter behind a steel plate of a known thickness was hurt or not hurt by a shot fired. History is at a loss to explain with the same assurance why there was a rise in the price of milk of 10 per cent or why President Roosevelt defeated Governor Dewey in the election of 1944 or why France was from 1870 to 1940 under a republican constitution. Such problems do not allow any treatment other than that of understanding.
To every historical factor understanding tries to assign its relevance. In the exercise of understanding there is no room for arbitrariness and capriciousness. The freedom of the historian is limited by his endeavor to provide a satisfactory explanation of reality. His guiding star must be the search for truth. But there necessarily enters into understanding an element of subjectivity. The understanding of the historian is always tinged with the marks of his personality. It reflects the mind of its author.
The a priori sciences — logic, mathematics, and praxeology — aim at a knowledge unconditionally valid for all beings endowed with the logical structure of the human mind. The natural sciences aim at a cognition valid for all those beings which are not only endowed with the faculty of human reason but with human senses. The uniformity of human logic and sensation bestows upon these branches of knowledge the character of universal validity. Such at least is the principle guiding the study of the physicists. Only in recent years have they begun to see the limits of their endeavors and, abandoning the excessive pretensions of older physicists, discovered the "uncertainty principle." They realize today that there are unobservables whose unobservability is a matter of epistemological principle.Cf. A. Eddington, The Philosophy of Physical Science (New York, 1939), pp. 28–48.
Historical understanding can never produce results which must be accepted by all men. Two historians who fully agree with regard to the teachings of the non-historical sciences and with regard to the establishment of the facts as far as they can be established without recourse to the understanding of relevance, may disagree in their understanding of the relevance of these facts. They may fully agree in establishing that the factors a, b, and c worked together in producing the effect P; nonetheless they can widely disagree with regard to the relevance of the respective contributions of a, b, and c to the final outcome. As far as understanding aims at assigning its relevance to each factor, it is open to the influence of subjective judgments. Of course, these are not judgments of value, they do not express preferences of the historian. They are judgments of relevance.As this is not a dissertation on general epistemology, but the indispensiable foundation of a treatise of economics, there is no need to stress the analogies between the understanding of historical relevance and the tasks to be accomplished by a diagnosing physician. The epistemology of biology is outside of the scope of our inquiries.
Historians may disagree for various reasons. They may hold different views with regard to the teachings of the non-historical sciences; they may base their reasoning on a more or less complete familiarity with the records; they may differ in the understanding of the motives and aims of the acting men and of the means applied by them. All these differences are open to a settlement by "objective" reasoning; it is possible to reach a universal agreement with regard to them. But as far as historians disagree with regard to judgments of relevance it is impossible to find a solution which all sane men must accept.
The intellectual methods of science do not differ in kind from those applied by the common man in his daily mundane reasoning. The scientist uses the same tools which the layman uses; he merely uses them more skillfully and cautiously. Understanding is not a privilege of the historians. It is everybody's business. In observing the conditions of his environment everybody is a historian. Everybody uses understanding in dealing with the uncertainty of future events to which he must adjust his own actions. The distinctive reasoning of the speculator is an understanding of the relevance of the various factors determining future events. And — let us emphasize it even at this early point of our investigations — action necessarily always aims at future and therefore uncertain conditions and thus is always speculation. Acting man looks, as it were, with the eyes of a historian into the future.
Natural history and Human History
Cosmogony, geology, and the history of biological changes are historical disciplines as they deal with unique events of the past. However, they operate exclusively with the epistemological methods of the natural sciences and have no need for understanding. They must sometimes take recourse to only approximate estimates of magnitudes. But such estimates are not judgments of relevance. They are a less perfect method of determining quantitative relations than is "exact" measurement. They must not be confused with the state of affairs in the field of human action which is characterized by the absence of constant relations.
If we speak of history, what we have in mind is only the history of human action, whose specific mental tool is understanding.
The assertion that modern natural science owes all its achievements to the experimental method is sometimes assailed by referring to astronomy. Now, modern astronomy is essentially an application of the physical laws, experimentally discovered on the earth, to the celestial bodies. In earlier days astronomy was mainly based on the assumption that the movements of the celestial bodies would not change their course. Copernicus and Kepler simply tried to guess in what kind of curve the earth moves around the sun. As the circle was considered the "most perfect" curve, Copernicus chose it for his theory. Later, by similar guesswork, Kepler substituted the ellipse for the circle. Only since Newton's discoveries has astronomy become a natural science in the strict sense.
- On Ideal TypesHistory deals with unique and unrepeatable events, with the irreversible flux of human affairs. A historical event cannot be described without reference to the persons involved and to the place and date of its occurrence. As far as a happening can be narrated without such a reference, it is not a historical event but a fact of the natural sciences. The report that Professor X on February 20, 1945, performed a certain experiment in his laboratory is an account of a historical event. The physicist believes that he is right in abstracting from the person of the experimenter and the date and place of the experiment. He relates only those circumstances which, in his opinion, are relevant for the production of the result achieved and, when repeated, will produce the same result again. He transforms the historical event into a fact of the empirical natural sciences. He disregards the active interference of the experimenter and tries to imagine him as an indifferent observer and relater of unadulterated reality. It is not the task of praxeology to deal with the epistemological issues of this philosophy.
Although unique and unrepeatable, historical events have one common feature: they are human action. History comprehends them as human actions; it conceives their meaning by the instrumentality of praxeological cognition and understands their meaning in looking at their individual and unique features. What counts for history is always the meaning of the men concerned: the meaning that they attach to the state of affairs they want to alter, the meaning they attach to their actions, and the meaning they attach to the effects produced by the actions.
The aspect from which history arranges and assorts the infinite multiplicity of events is their meaning. The only principle which it applies for the systemization of its objects — men, ideas, institutions, social entities, and artifacts — is meaning affinity. According to meaning affinity it arranges the elements into ideal types.
Ideal types are specific notions employed in historical research and in the representation of its results. They are concepts of understanding. As such they are entirely different from praxeological categories and concepts and from the concepts of the natural sciences. An ideal type is not a class concept, because its description does not indicate the marks whose presence definitely and unambiguously determines class membership. An ideal type cannot be defined: it must be characterized by an enumeration of those features whose presence by and large decides whether in a concrete instance we are or are not faced with a specimen belonging to the ideal type in question. It is peculiar to the ideal type that not all its characteristics need to be present in any one example. Whether or not the absence of some characteristics prevents the inclusion of a concrete specimen in the ideal type in question, depends on a relevance judgment by understanding. The ideal type itself is an outcome of an understanding of the motives, ideas, and aims of the acting individuals and of the means they apply.
An ideal type has nothing at all to do with statistical means and averages. Most of the characteristics concerned are not open to a numerical determination, and for this reason alone they could not enter into a calculation of averages. But the main reason is to be seen in something else. Statistical averages denote the behavior of the members of a class or a type, already constituted by means of a definition or characterization referring to other marks, with regard to features not referred to in the definition or characterization. The membership of the class or type must be known before the statistician can start investigating special features and use the result of this investigation for the establishment of an average. We can establish the average age of the United States Senators or we can reckon averages concerning the behavior of an age class of the population with regard to a special problem. But it is logically impossible to make the membership of a class or type depend upon an average.
No historical problem can be treated without the aid of ideal types. Even when the historian deals with an individual person or with a single event, he cannot avoid referring to ideal types. If he speaks of Napoleon, he must refer to such ideal types as commander, dictator, revolutionary leader; and if he deals with the French Revolution he must refer to ideal types such as revolution, disintegration of an established regime, anarchy. It may be that the reference to an ideal type consists merely in rejecting its applicability to the case in question. But all historical events are described and interpreted by means of ideal types. The layman too, in dealing with events of the past or of the future, must always make use of ideal types and unwittingly always does so.
Whether or not the employment of a definite ideal type is expedient and conducive to an adequate grasp of phenomena can only be decided by understanding. It is not the ideal type that determines the mode of understanding; it is the mode of understanding that requires the construction and use of corresponding ideal types.
The ideal types are constructed with the use of ideas and concepts developed by all non-historical branches of knowledge. Every cognition of history is, of course, conditioned by the findings of the other sciences, depends upon them, and must never contradict them. But historical knowledge has another subject matter and another method than these other sciences, and they in turn have no use for understanding. Thus the ideal types must not be confused with concepts of the non-historical sciences. This is valid also with regard to the praxeological categories and concepts. They provide, to be sure, the indispensable mental tools for the study of history. However, they do not refer to the understanding of the unique and individual events which are the subject matter of history. An ideal type can therefore never be a simple adoption of a praxeological concept.
It happens in many instances that a term used by praxeology to signify a praxeological concept serves to signify an ideal type for the historian. Then the historian uses one word for the expression of two different things. He applies the term sometimes to signify its praxeological connotation, but more often to signify an ideal type. In the latter case the historian attaches to the word a meaning different from its praxeological meaning; he transforms it by transferring it to a different field of inquiry. The economic concept "entrepreneur" belongs to a stratum other than the ideal type "entrepreneur" as used by economic history and descriptive economics. (On a third stratum lies the legal term "entrepreneur.") The economic term "entrepreneur" is a precisely defined concept which in the framework of a theory of market economy signifies a clearly integrated function.See below, pp. 251–255. The historical ideal type "entrepreneur" does not include the same members. Nobody in using it thinks of shoeshine boys, cab drivers who own their cars, small businessmen, and small farmers. What economics establishes with regard to entrepreneurs is rigidly valid for all members of the class without any regard to temporal and geographical conditions and to the various branches of business. What economic history establishes for its ideal types can differ according to the particular circumstances of various ages, countries, branches of business, and many other conditions. History has little use for a general ideal type of entrepreneur. It is more concerned with such types as: the American entrepreneur of the time of Jefferson, German heavy industries in the age of William II, New England textile manufacturing in the last decades preceding the first World War, the Protestant haute finance of Paris, self-made entrepreneurs, and so on.
Whether the use of a definite ideal type is to be recommended or not depends entirely on the mode of understanding. It is quite common nowadays to employ two ideal types: Left-Wing Parties (Progressives) and Right-Wing Parties (Fascists). The former includes the Western democracies, some Latin American dictatorships, and Russian Bolshevism; the latter Italian Fascism and German Nazism. This typification is the outcome of a definite mode of understanding. Another mode would contrast Democracy and Dictatorship. Then Russian Bolshevism, Italian Fascism, and German Nazism belong to the ideal type of dictatorial government, and the Western systems to the ideal type of democratic government.
It was a fundamental mistake of the Historical School of Wirtschaftliche Staatswissenshaften in Germany and of Institutionalism in America to interpret economics as the characterization of the behavior of an ideal type, the homo œconomicus. According to this doctrine traditional or orthodox economics does not deal with the behavior of man as he really is and acts, but with a fictitious or hypothetical image. It pictures a being driven exclusively by "economic" motives, i.e., solely by the intention of making the greatest possible material or monetary profit. Such a being, say these critics, does not have and never did have a counterpart in reality; it is a phantom of a spurious armchair philosophy. No man is exclusively motivated by the desire to become as rich as possible; many are not at all influenced by this mean craving. It is vain to refer to such an illusory homunculus in dealing with life and history.
Even if this really were the meaning of classical economics, the homo œconomicus would certainly not be an ideal type. The ideal type is not an embodiment of one side or aspect of man's various aims and desires. It is always the representation of complex phenomena of reality, either of men, of institutions, or of ideologies.
The classical economist sought to explain the formation of prices. They were fully aware of the fact that prices are not a product of the activities of a special group of people, but the result of an interplay of all members of the market society. This was the meaning of their statement that demand and supply determine the formation of prices. However, the classical economists failed in their endeavors to provide a satisfactory theory of value. They were at a loss to find a solution for the apparent paradox of value. They were puzzled by the alleged paradox that "gold" is more highly valued than "iron," although the latter is more "useful" than the former. Thus they could not construct a general theory of value and could not trace back the phenomena of market exchange and of production to their ultimate sources, the behavior of the consumers.
This shortcoming forced them to abandon their ambitious plan to develop a general theory of human action. They had to satisfy themselves with a theory explaining only the activities of the businessman without going back to the choices of everybody as the ultimate determinants. They dealt only with the actions of businessmen eager to buy in the cheapest market and to sell in the dearest. The consumer was left outside the field of their theorizing. Later the epigones of classical economics explained and justified this insufficiency as an intentional and methodologically necessary procedure. It was, they asserted, the deliberate design of economists to restrict their investigations to only one aspect of human endeavor — namely, to the "economic" aspect. It was their intention to use the fictitious image of a man driven solely by "economic" motives and to neglect all others although they were fully aware of the fact that real men are driven by many other, "non-economic" motives. To deal with these other motives, one group of these interpreters maintained, is not the task of economics but of other branches of knowledge. Another group admitted that the treatment of these "non-economic" motives and their influence on the formation of prices was a task of economics also, but they believed that it must be left to later generations.
It will be shown at a later stage of our investigations that this distinction between "economic" and "non-economic" motives of human action is untenable.See below, pp. 232–234 and 239–244. At this point it is only important to realize that this doctrine of the "economic" side of human action utterly misrepresents the teachings of the classical economists. They never intended to do what this doctrine ascribes to them. They wanted to conceive the real formation of prices — not fictitious prices as they would be determined if men were acting under the sway of hypothetical conditions different from those really influencing them. The prices they try to explain and do explain — although without tracing them back to the choices of the consumers — are real market prices. The demand and supply of which they speak are real factors determined by all motives instigating men to buy or to sell. What was wrong with their theory was that they did not trace demand back to the choices of the consumers; they lacked a satisfactory theory of demand. But it was not their idea that demand as they used this concept in their dissertations was exclusively determined by "economic" motives as distinguished from "non-economic" motives. As they restricted their theorizing to the actions of businessmen, they did not deal with the motives of the ultimate consumers. Nonetheless their theory of prices was intended as an explanation of real prices irrespective of the motives and ideas instigating the consumers.
Modern subjective economics starts with the solution of the apparent paradox of value. It neither limits its theorems to the actions of businessmen alone nor deals with a fictitious homo œconomicus. It treats the inexorable categories of everybody's action. Its theorems concerning commodity prices, wage rates, and interest rates refer to all these phenomena without any regard to the motives causing people to buy or to sell or to abstain from buying or selling. It is time to discard entirely any reference to the abortive attempt to justify the shortcoming of older economists through the appeal to the homo œconomicus phantom.
- The Procedure of EconomicsThe scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action. It is a knowledge that is our own because we are men; no being of human descent that pathological conditions have not reduced to a merely vegetative existence lacks it. No special experience is needed in order to comprehend these theorems, and no experience, however rich, could disclose them to a being who did not know a priori what human action is. The only way to a cognition of these theorems is logical analysis of our inherent knowledge of the category of action. We must bethink ourselves and reflect upon the structure of human action. Like logic and mathematics, praxeological knowledge is in us; it does not come from without.
All the concepts and theorems of praxeology are implied in the category of human action. The first task is to extract and to deduce them, to expound their implications and to define the universal conditions of acting as such. Having shown what conditions are required by any action, one must go further and define — of course, in a categorial and formal sense — the less general conditions required for special modes of acting. It would be possible to deal with this second task by delineating all thinkable conditions and deducing from them all inferences logically permissible. Such an all-comprehensive system would provide a theory referring not only to human action as it is under the conditions and circumstances given in the real world in which man lives and acts. It would deal no less with hypothetical acting such as would take place under the unrealizable conditions of imaginary worlds.
But the end of science is to know reality. It is not mental gymnastics or a logical pastime. Therefore praxeology restricts its inquiries to the study of acting under those conditions and presuppositions which are given in reality. It studies acting under unrealized and unrealizable conditions only from two points of view. It deals with states of affairs which, although not real in the present and past world, could possibly become real at some future date. And it examines unreal and unrealizable conditions if such an inquiry is needed for a satisfactory grasp of what is going on under the conditions present in reality.
However, this reference to experience does not impair the aprioristic character of praxeology and economics. Experience merely directs our curiosity toward certain problems and diverts it from other problems. It tells us what we should explore, but it does not tell us how we could proceed in our search for knowledge. Moreover, it is not experience but thinking alone which teaches us that, and in what instances, it is necessary to investigate unrealizable hypothetical conditions in order to conceive what is going on in the real world.
The disutility of labor is not of a categorial and aprioristic character. We can without contradiction think of a world in which labor does not cause uneasiness, and we can depict the state of affairs prevailing in such a world.See below, pp. 131–133. But the real world is conditioned by the disutility of labor. Only theorems based on the assumption that labor is a source of uneasiness are applicable for the comprehension of what is going on in this world.
Experience teaches that there is disutility of labor. But it does not teach it directly. There is no phenomenon that introduces itself as disutility of labor. There are only data of experience which are interpreted, on the ground of aprioristic knowledge, to mean that men consider leisure — i.e., the absence of labor — other things being equal, as a more desirable condition than the expenditure of labor. We see that men renounce advantages which they could get by working more — that is, that they are ready to make sacrifices for the attainment of leisure. We infer from this fact that leisure is valued as a good and that labor is regarded as a burden. But for previous praxeological insight, we would never be in a position to reach this conclusion.
A theory of indirect exchange and all further theories built upon it — as the theory of circulation credit — are applicable only to the interpretation of events within a world in which indirect exchange is practiced. In a world of barter trade only it would be mere intellectual play. It is unlikely that the economists of such a world, if economic science could have emerged at all in it, would have given any thought to the problems of indirect exchange, money, and all the rest. In our actual world, however, such studies are an essential part of economic theory.
The fact that praxeology, in fixing its eye on the comprehension of reality, concentrates upon the investigation of those problems which are useful for this, does not alter the aprioristic character of its reasoning. But it marks the way in which economics, up to now the only elaborated part of praxeology, presents the results of its endeavors.
Economics does not follow the procedure of logic and mathematics. It does not present an integrated system of pure aprioristic ratiocination severed from any reference to reality. In introducing assumptions into its reasoning, it satisfies itself that the treatment of the assumptions concerned can render useful services for the comprehension of reality. It does not strictly separate in its treatises and monographs pure science from the application of its theorems to the solution of concrete historical and political problems. It adopts for the organized presentation of its results a form in which aprioristic theory and the interpretation of historical phenomena are intertwined.
It is obvious that this mode of procedure is enjoined upon economics by the very nature and essence of its subject matter. It has given proof of its expediency. However, one must not overlook the fact that the manipulation of this singular and logically somewhat strange procedure requires caution and subtlety, and that uncritical and superficial minds have again and again been led astray by careless confusion of the two epistemologically different methods implied.
There are no such things as a historical method of economics or a discipline of institutional economics. There is economics and there is economic history. The two must never be confused. All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given. Of course, they have no practical significance in situations where these conditions are not present. The theorems referring to indirect exchange are not applicable to conditions where there is no indirect exchange. But this does not impair their validity.Cf. F.H. Knight, The Ethics of Competition and Other Essays (New York, 1935), p. 139.
The issue has been obfuscated by the endeavors of governments and powerful pressure groups to disparage economics and to defame the economists. Despots and democratic majorities are drunk with power. They must reluctantly admit that they are subject to the laws of nature. But they reject the very notion of economic law. Are they not the supreme legislators? Don't they have the power to crush every opponent? No war lord is prone to acknowledge any limits other than those imposed on him by a superior armed force. Servile scribblers are always ready to foster such complacency by expounding the appropriate doctrines. They call their garbled presumptions "historical economics." In fact, economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics.
It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him.
In the face of all this frenzied agitation it is expedient to establish the fact that the starting point of all praxeological and economic reasoning, the category of human action, is proof against any criticisms and objections. No appeal to any historical or empirical considerations whatever can discover any fault in the proposition that men purposefully aim at certain chosen ends. No talk about irrationality, the unfathomable depths of the human soul, the spontaneity of the phenomena of life, automatisms, reflexes, and tropisms, can invalidate the statement that man makes use of his reason for the realization of wishes and desires. From the unshakable foundation of the category of human action praxeology and economics proceed step by step by means of discursive reasoning. Precisely defining assumptions and conditions, they construct a system of concepts and draw all the inferences implied by logically unassailable ratiocination. With regard to the results thus obtained only two attitudes are possible; either one can unmask logical errors in the chain of the deductions which produced these results, or one must acknowledge their correctness and validity.
It is vain to object that life and reality are not logical. Life and reality are neither logical nor illogical; they are simply given. But logic is the only tool available to man for the comprehension of both. It is vain to object that life and history are inscrutable and ineffable and that human reason can never penetrate to their inner core. The critics contradict themselves in uttering words about the ineffable and expounding theories — of course, spurious theories — about the unfathomable. There are many things beyond the reach of the human mind. But as far as man is able to attain any knowledge, however limited, he can use only one avenue of approach, that opened by reason.
No less illusory are the endeavors to play off understanding against the theorems of economics. The domain of historical understanding is exclusively the elucidation of those problems which cannot be entirely elucidated by the non-historical sciences. Understanding must never contradict the theories developed by the non-historical sciences. Understanding can never do anything but, on the one hand, establish the fact that people were motivated by certain ideas, aimed at certain ends, and applied certain means for the attainment of these ends, and, on the other hand, assign to the various historical factors their relevance so far as this cannot be achieved by the non-historical sciences. Understanding does not entitle the modern historian to assert that exorcism ever was an appropriate means to cure sick cows. Neither does it permit him to maintain that an economic law was not valid in ancient Rome or in the empire of the Incas.
Man is not infallible. He searches for truth — that is, for the most adequate comprehension of reality as far as the structure of his mind and reason makes it accessible to him. Man can never become omniscient. He can never be absolutely certain that his inquiries were not misled and that what he considers as certain truth is not error. All that man can do is to submit all his theories again and again to the most critical reexamination. This means for the economist to trace back all theorems to their unquestionable and certain ultimate basis, the category of human action, and to test by the most careful scrutiny all assumptions and inferences leading from this basis to the theorem under examination. It cannot be contended that this procedure is a guarantee against error. But it is undoubtedly the most effective method of avoiding error.
Praxeology — and consequently economics too — is a deductive system. It draws its strength from the starting point of its deductions, from the category of action. No economic theorem can be considered sound that is not solidly fastened upon this foundation by an irrefutable chain of reasoning. A statement proclaimed without such a connection is arbitrary and floats in midair. It is impossible to deal with a special segment of economics if one does not encase it in a complete system of action.
The empirical sciences start from singular events and proceed from the unique and individual to the more universal. Their treatment is subject to specialization. They can deal with segments without paying attention to the whole field. The economist must never be a specialist. In dealing with any problem he must always fix his glance upon the whole system.
Historians often sin in this respect. They are ready to invent theorems ad hoc. They sometimes fail to recognize that it is impossible to abstract any causal relations from the study of complex phenomena. Their pretension to investigate reality without any reference to what they disparage as preconceived ideas is vain. In fact they unwittingly apply popular doctrines long since unmasked as fallacious and contradictory.
- The Limitations on Praxeological ConceptsThe praxeological categories and concepts are devised for the comprehension of human action. They become self-contradictory and nonsensical if one tries to apply them in dealing with conditions different from those of human life. The naive anthropomorphism of primitive religions is unpalatable to the philosophic mind. However, the endeavors of philosophers to define, by the use of praxeological concepts, the attributes of an absolute being, free from all the limitations and frailties of human existence, are no less questionable.
Scholastic philosophers and theologians and likewise Theists and Deists of the Age of Reason conceived an absolute and perfect being, unchangeable, omnipotent, and omniscient, and yet planning and acting, aiming at ends and employing means for the attainment of these ends. But action can only be imputed to a discontented being, and repeated action only to a being who lacks the power to remove his uneasiness once and for all at one stroke. An acting being is discontented and therefore not almighty. If he were contented, he would not act, and if he were almighty, he would have long since radically removed his discontent. For an all-powerful being there is no pressure to choose between various states of uneasiness; he is not under the necessity of acquiescing in the lesser evil.
Omnipotence would mean the power to achieve everything and to enjoy full satisfaction without being restrained by any limitations. But this is incompatible with the very concept of action. For an almighty being the categories of ends and means do not exist. He is above all human comprehension, concepts, and understanding. For the almighty being every "means" renders unlimited services, he can apply every "means" for the attainment of any ends, he can achieve every end without the employment of any means. It is beyond the faculties of the human mind to think the concept of almightiness consistently to its ultimate logical consequences. The paradoxes are insoluble. Has the almighty being the power to achieve something which is immune to his later interference? If he has this power, then there are limits to his might and he is no longer almighty; if he lacks this power, he is by virtue of this fact alone not almighty.
Are omnipotence and omniscience compatible? Omniscience presupposes that all future happenings are already unalterably determined. If there is omniscience, omnipotence is inconceivable. Impotence to change anything in the predetermined course of events would restrict the power of any agent.
Action is a display of potency and control that are limited. It is a manifestation of man who is restrained by the circumscribed powers of his mind, the physiological nature of his body, the vicissitudes of his environment, and the scarcity of the external factors on which his welfare depends. It is vain to refer to the imperfections and weaknesses of human life if one aims at depicting something absolutely perfect. The very idea of absolute perfection is in every way self-contradictory. The state of absolute perfection must be conceived as complete, final, and not exposed to any change. Change could only impair its perfection and transform it into a less perfect state; the mere possibility that a change can occur is incompatible with the concept of absolute perfection. But the absence of change — i.e., perfect immutability, rigidity and immobility — is tantamount to the absence of life. Life and perfection are incompatible, but so are death and perfection.
The living is not perfect because it is liable to change; the dead is not perfect because it does not live.
The language of living and acting men can form comparatives and superlatives in comparing degrees. But absoluteness is not a degree; it is a limiting notion. The absolute is indeterminable, unthinkable, and ineffable. It is a chimerical conception. There are no such things as perfect happiness, perfect men, eternal bliss. Every attempt to describe the conditions of a land of Cockaigne, or the life off the Angels, results in paradoxes. Where there are conditions, there are limitations and not perfection; there are endeavors to conquer obstacles, there are frustration and discontent.
After the philosophers had abandoned the search for the absolute, the utopians took it up. They weave dreams about the perfect state. They do not realize that the state, the social apparatus of compulsion and coercion, is an institution to cope with human imperfection and that its essential function is to inflict punishment upon minorities in order to protect majorities against the detrimental consequences of certain actions. With "perfect" men there would not be any need for compulsion and coercion. But utopians do not pay heed to human nature and the inalterable conditions of human life. Godwin thought that man might become immortal after the abolition of private property.William Godwin, An Enquiry Concerning Political Justice and Its Influence on General Virtue and Happiness (Dublin, 1793), II, 393–403. Charles Fourier babbled about the ocean containing lemonade instead of salt water.Charles Fourier, Théorie des quatre mouvements (Oeuvres complètes, 3d ed. Paris, 1846), I, 43. Marx's economic system blithely ignored the fact of the scarcity of material factors of production. Trotsky revealed that in the proletarian paradise "the average human type will rise to the heights of an Aristotle, a Goethe, or a Marx. And above this ridge new peaks will rise."Leon Trotsky, Literature and Revolution, trans. by R. Strunsky (London, 1925), p. 256.
Nowadays the most popular chimeras are stabilization and security. We will test these catchwords later.
We have seen that the law of diminishing marginal utility is the key in the process of forming prices of present goods. This law is also the foundation for the establishment of the rate of exchange between present and future goods. This rate of exchange is also known as interest.
The essence of the phenomenon of interest is what a lender or an investor receives for having given up present consumption.
For instance, John the baker has produced four loaves of bread. The four loaves are John's means that he wants to employ to attain various goals. Let us say that John plans to use his first loaf to accommodate his most important need, which is the consumption of bread. With the second loaf John is planning to reach his second most important end, which is to have five tomatoes. The third loaf is planned to secure the third most important end — a shirt. The fourth loaf is aimed at the fourth (and least) most important end — securing a piece of chocolate.
Eat breadFive tomatoesShirtchocolateIrrespective of whether an individual exchanges present goods for present goods or present goods for future goods, he pays a price by entering an exchange. The individual gives up the marginal end in return for a much higher end. Remember that the loaves are interchangeable: when John exchanges a loaf of bread for a shirt, he sacrifices a loaf of bread, which is valued in accordance with his fourth and least important end, which is having a piece of chocolate. As a result of the exchange John makes a gain and improves his living standard — he exchanges something that he values less for something that he values more.
In the exchange of a present good for a future good there is also going to be a cost, which is the sacrifice of the marginal end. In order to be able to assess the cost that is made at present with future returns we have to add to the cost a premium for the time factor. The more we have to pay in terms of time to secure a good, the higher the cost that an individual endures. The cost refers to not being able to improve his well-being for the duration of waiting. Conversely, the less we pay in terms of time the more benefits we secure as far as life and well-being are concerned. On this Menger wrote,
To the extent that the maintenance of our lives depends on the satisfaction of our needs, guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones. And even where not our lives but merely our continuing well-being (above all our health) is dependent on command of a quantity of goods, the attainment of well-being in a nearer period is, as a rule, a prerequisite of well-being in a later period. …All experience teaches that a present enjoyment or one in the near future usually appears more important to men than one of equal intensity at a more remote time in the future.
Likewise according to Mises,
Satisfaction of a want in the nearer future is, other things being equal, preferred to that in the farther distant future. Present goods are more valuable than future goods.
Hence an individual will undertake the act of investment only if the return on investment will be in excess of the cost of investment adjusted for the time factor. (In short, the overall cost then is the sacrifice of the marginal end and the price of time.)
Let us say that John has agreed to exchange one loaf of bread for 1.2 loaves in one year's time. This means that 1.2 future loaves are expected to secure more benefit to John than the present one loaf of bread. Benefits that the 1.2 loaves of bread are going to secure in one year's time are valued more highly than the benefit from the marginal end that was given up as a result of lending the loaf of bread.
The introduction of money is not going to alter the essence of what has been said so far. Instead of trading bread for various goods, John will exchange his loaves of bread for money and then use the money to secure things he wants. Let us say that he has exchanged the four loaves of bread for four dollars. He can now exchange his dollars for goods he wants. So when he decides to lend a dollar, John still gives up the marginal end — having a piece of chocolate. In return he will be paid in one year's time $1.20, or an annual interest of 20%. With $1.20 John holds that he could improve his life and well being in the future to a greater extent than by not engaging in lending.
Note again that John agrees to lend at above a certain positive level of the interest rate. As we have already shown, this level of the interest rate must be above a figure that in addition to the incurred cost (giving up a marginal end) also incorporates a premium for the time factor. Let us say that below 15% John will not agree to become a lender. This means that his cost of funding is 15%. This cost emanates from sacrificing the marginal end and the time factor. From this we can infer that, once the rate of interest falls to below 15%, John may find it attractive to become a borrower. He can now secure resources at below cost.
As John's pool of resources expands, all other things being equal, the cost of lending for John will fall. Note that with more resources, all other things being equal, he would have to sacrifice less important ends than before the increase in the pool of resources. Consequently, he could afford to charge a lower interest rate. Also, if he wants to lend out more of his resources than before, he would have to lower his interest rates, all other things being equal.
We can thus see that a baker in his particular setup, has concluded that he will be ready to lend one dollar — which he has secured by selling one loaf of bread — for a borrowers promise to repay $1.20 in a one year's time. His cost coupled with a time premium factor is less than 20%.
Similarly a shoemaker in his particular setup has concluded that he will be a willing borrower at this rate of exchange. His cost coupled with a time premium factor is above 20%. In short, once the deal is accomplished, both parties have benefited. The baker will get $1.20 in one year's time that he values much more than his present one dollar. For the shoemaker the value of the present borrowed dollar exceeds the value of $1.20 in one year's time.
Note that the baker has exchanged the one loaf of bread for money first, i.e., one dollar. He then offers to lend the one dollar for $1.20 in one year. The asked interest rate is 20%. Whether or not the baker's offer is going to be successful is dependent on the existence of willing borrowers. We can conclude that while the lender sets the interest rate, it is the borrower who must provide the final approval for the rate that the lender has set. We have seen that the shoemaker has accepted the rate of exchange asked by the lender, John the baker.
Observe that without the existence of money — the medium of exchange — the baker isn't able to establish how much of future goods he must be paid for his loaf of bread that would comply with the rate of return of 20%.
In a world without money, all that one would have are the rates of exchanges between various present and future real goods. For instance, one present apple is exchanged for two potatoes in a one year's time. Or, one present shirt is exchanged for three tomatoes a year. Again all that we have here are various ratios. There is, however, no way to establish from these ratios what the rate of return is for one present apple in terms of future potatoes. It is not possible to calculate the percentage since potatoes and apples are not the same goods. Likewise we cannot establish the rate of return on a shirt in terms of future tomatoes. Only in the framework of the existence of money can the rate of return be established.
So if the rate of return cannot be established in the real economy apart from money it also cannot be established in the world of money apart from real goods — after all the role of money is to facilitate the exchange of real goods and services.
Consequently, there cannot be any separation between the real interest rate and the financial market interest rate — there is only one rate. Hence, the commonly accepted practice of calculating the so-called real interest rate by subtracting percentage changes in the consumer price index from the market interest rate is erroneous.
Increase in money supply and interest ratesAn increase in money supply resulting from loose monetary policy benefits the earlier receivers of money. With more money in their possession they have more resources at their disposal. As a result of the increase in the pool of resources of the earlier recipients of money, their cost of funding has fallen — this enables them to lower interest rates. Borrowers who previously had to pay a higher interest rate will find the lower interest rate more appealing, all other things being equal. In short, the lowering of interest rates will enable the lender to lend out a greater amount of money at his disposal.
As time goes by, loose monetary policy undermines real wealth formation — this is manifested by a general increase in prices of goods and services. Because of the erosion in real wealth formation, the cost of lending has increased (fewer ends can now be accommodated with fewer resources—leads to a higher marginal end). Borrowers discover that with a general increase in prices they require more money. All this puts upward pressure on interest rates.
ConclusionWe can thus see that the law of marginal utility is not only instrumental in establishing the prices of present goods but also in establishing the rate of exchange between present and future goods. The essence of the phenomenon of interest is the cost that a lender or an investor endures. This cost stems from the fact that the lender or the investor has given up some present benefit. The cost is the value of the least important end adjusted for the time factor that the lender or investor must give up in order to secure benefits from future goods.
The Revolt Against Reason It is true that some philosophers were ready to overrate the power of human reason. They believed that man can discover by ratiocination the final causes of cosmic events, the inherent ends the prime mover aims at in creating the universe and determining the course of its evolution. They expatiated on the "Absolute" as if it were their pocket watch. They did not shrink from announcing eternal absolute values and from establishing moral codes unconditionally binding on all men.
Then there was the long line of utopian authors. They drafted schemes for an earthly paradise in which pure reason alone should rule. They failed to realize that what they called absolute reason and manifest truth was the fancy of their own minds. They blithely arrogated to themselves infallibility and often advocated intolerance, the violent oppression of all dissenters and heretics. They aimed at dictatorship either for themselves or for men who would accurately put their plans into execution. There was, in their opinion, no other salvation for suffering mankind.
There was Hegel. He was a profound thinker and his writings are a treasury of stimulating ideas. But he was laboring under the delusion that Geist, the Absolute, revealed itself through his words. There was nothing in the universe that was hidden to Hegel. It was a pity that his language was so ambiguous that it could be interpreted in various ways. The right-wing Hegelians interpreted it as an endorsement of the Prussian system of autocratic government and of the dogmas of the Prussian Church. The left-wing Hegelians read out of it atheism, intransigent revolutionary radicalism, and anarchistic doctrines.
There was Auguste Comte. He knew precisely what the future had in store for mankind. And, of course, he considered himself as the supreme legislator. For example, he regarded certain astronomical studies as useless and wanted to prohibit them. He planned to substitute a new religion for Christianity, and selected a lady who in this new church was destined to replace the Virgin. Comte can be exculpated, as he was insane in the full sense which pathology attaches to this term. But what about his followers?
Many more facts of this kind could be mentioned. But they are no argument against reason, rationalism, and rationality. These dreams have nothing at all to do with the question of whether or not reason is the right and only instrument available for man in his endeavors to attain as much knowledge as is accessible to him. The honest and conscientious truth-seekers have never pretended that reason and scientific research can answer all questions. They were fully aware of the limitations imposed upon the human mind. They cannot be taxed with responsibility for the crudities of the philosophy of Haeckel and the simplism of the various materialist schools.
The rationalist philosophers themselves were always intent upon showing the boundaries both of aprioristic theory and of empirical research.Cf., for instance, Louis Rougier, Les Paralogismes du rationalisme (Paris, 1920). The first representative of British political economy, David Hume, the Utilitarians, and the American Pragmatists are certainly not guilty of having exaggerated the power of man to attain truth. It would be more justifiable to blame the philosophy of the last two hundred years for too much agnosticism and skepticism than for overconfidence in what could be achieved by the human mind.
The revolt against reason, the characteristic mental attitude of our age, was not caused by a lack of modesty, caution, and self-examination on the part of the philosophers. Neither was it due to failures in the evolution of modern natural science. The amazing achievements of technology and therapeutics speak a language which nobody can ignore. It is hopeless to attack modern science, whether from the angle of intuitionism and mysticism, or from any other point of view. The revolt against reason was directed against another target. It did not aim at the natural sciences, but at economics. The attack against the natural sciences was only the logically necessary outcome of the attack against economics. It was impermissible to dethrone reason in one field only and not to question it in other branches of knowledge also.
The great upheaval was born out of the historical situation existing in the middle of the nineteenth century. The economists had entirely demolished the fantastic delusions of the socialist utopians. The deficiencies of the classical system prevented them from comprehending why every socialist plan must be unrealizable; but they knew enough to demonstrate the futility of all socialist schemes produced up to their time. The communist ideas were done for. The socialists were absolutely unable to raise any objection to the devastating criticism of their schemes and to advance any argument in their favor. It seemed as if socialism was dead forever.
Only one way could lead the socialists out of this impasse. They could attack logic and reason and substitute mystical intuition for ratiocination. It was the historical role of Karl Marx to propose this solution. On the basis of Hegel's dialectic mysticism, he blithely arrogated to himself the ability to predict the future. Hegel pretended to know that Geist, in creating the universe, wanted to bring about the Prussian monarchy of Frederick William III. But Marx was better informed about Geist's plans. He knew that the final cause of historical evolution was the establishment of the socialist millennium. Socialism is bound to come "with the inexorability of a law of nature." And as, according to Hegel, every later stage of history is a higher and better stage, there cannot be any doubt that socialism, the final and ultimate stage of mankind's evolution, will be perfect from any point of view. It is consequently useless to discuss the details of the operation of a socialist commonwealth. History, in due time, will arrange everything for the best. It does not need the advice of mortal men.
There was still the main obstacle to overcome: the devastating criticism of the economists. Marx had a solution at hand. Human reason, he asserted, is constitutionally unfitted to find truth. The logical structure of mind is different with various social classes. There is no such thing as a universally valid logic. What mind produces can never be anything but "ideology," that is, in the Marxian terminology, a set of ideas disguising the selfish interests of the thinker's own social class. Hence, the "bourgeois" mind of the economists is utterly incapable of producing more than an apology for capitalism. The teachings of "bourgeois" science, an offshoot of "bourgeois" logic, are of no avail for the proletarians, the rising class destined to abolish all classes and to convert the earth into a Garden of Eden.
But, of course, the logic of the proletarians is not merely a class logic. "The ideas of proletarian logic are not party ideas, but emanations of logic pure and simple."Cf. Joseph Dietzgen, Briefe über Logik, speziell demokratisch-proletarische Logik, 2d ed. (Stuttgart, 1903), p. 112. Moreover, by virtue of a special privilege, the logic of certain elect bourgeois is not tainted with the original sin of being bourgeois. Karl Marx, the son of a well-to-do lawyer, married to the daughter of a Prussian noble, and his collaborator Frederick Engels, a wealthy textile manufacturer, never doubted that they themselves were above the law and, notwithstanding their bourgeois background, were endowed with the power to discover absolute truth.
It is the task of history to describe the historical conditions which made such a crude doctrine popular. Economics has another task. It must analyze both Marxian polylogism and the other brands of polylogism formed after its pattern, and expose their fallacies and contradictions.
The Logical Aspect of Polylogism Marxian polylogism asserts that the logical structure of the mind is different with the members of various social classes. Racial polylogism differs from Marxian polylogism only in so far as it ascribes to each race a peculiar logical structure of mind and maintains that all members of a definite race, no matter what their class affiliation may be, are endowed with this peculiar logical structure.
There is no need to enter here into a critique of the concepts social class and race as applied by these doctrines. It is not necessary to ask the Marxians when and how a proletarian who succeeds in joining the ranks of the bourgeoisie changes his proletarian mind into a bourgeois mind. It is superfluous to ask the racists to explain what kind of logic is peculiar to people who are not of pure racial stock. There are much more serious objections to be raised.
Neither the Marxians nor the racists nor the supporters of any other brand of polylogism ever went further than to declare that the logical structure of mind is different with various classes, races, or nations. They never ventured to demonstrate precisely in what the logic of the proletarians differs from the logic of the bourgeois, or in what the logic of the Aryans differs from the logic of the non-Aryans, or the logic of the Germans from the logic of the French or the British. In the eyes of the Marxians, the Ricardian theory of comparative cost is spurious because Ricardo was a bourgeois. The German racists condemn the same theory because Ricardo was a Jew, and the German nationalists because he was an Englishman. Some German professors advanced all these three arguments together against the validity of Ricardo's teachings.
However, it is not enough to reject a theory wholesale by unmasking the background of its author. What is wanted is first to expound a system of logic different from that applied by the criticized author. Then it would be necessary to examine the contested theory point by point and to show where in its reasoning inferences are made which — although correct from the point of view of its author's logic — are invalid from the point of view of the proletarian, Aryan, or German logic. And finally, it should be explained what kind of conclusions the replacement of the author's vicious inferences by the correct inferences of the critic's own logic must lead to. As everybody knows, this never has been and never can be attempted by anybody.
Then there is the fact that there is disagreement concerning essential problems among people belonging to the same class, race, or nation. Unfortunately there are, say the Nazis, Germans who do not think in a correct German way. But if a German does not always necessarily think as he should, but may think in the manner of a man equipped with a non-German logic, who is to decide which German's ideas are truly German and which un-German? Says the late Professor Franz Oppenheimer: "The individual errs often in looking after his interests; a class never errs in the long run."Cf. Franz Oppenheimer, System der Soziologie (Jena, 1926), vol. II, 559. This would suggest the infallibility of a majority vote. However, the Nazis rejected decision by majority vote as manifestly un-German. The Marxians pay lip service to the democratic principle of majority vote.It must be emphasized that the case for democracy is not based on the assumption that majorities are always right, still less that they are infallible. Cf. below, pp. 149–51. But whenever it comes to a test they favor minority rule, provided it is the rule of their own party. Let us remember how Lenin dispersed by force the Constituent Assembly elected, under the auspices of his own government, by adult franchise, because only about one-fifth of its members were Bolshevik.
A consistent supporter of polylogism would have to maintain that ideas are correct because their author is a member of the right class, nation, or race. But consistency is not one of their virtues. Thus the Marxians are prepared to assign the epithet "proletarian thinker" to everybody whose doctrines they approve. All the others they disparage either as foes of their class or as social traitors. Hitler was even frank enough to admit that the only method available for him to sift the true Germans from the mongrels and the aliens was to enunciate a genuinely German program and to see who were ready to support it.Cf. his speech on the Party Convention in Nuremberg, September 3, 1933 (Frankfurter Zeitung, September 4, 1933, p. 2). A dark-haired man whose bodily features by no means fitted the prototype of the fair-haired Aryan master race, arrogated to himself the gift of discovering the only doctrine adequate to the German mind and of expelling from the ranks of the Germans all those who did not accept this doctrine whatever their bodily characteristics might be. No further proof is needed of the insincerity of the whole doctrine.
The Praxeological Aspect of Polylogism An ideology in the Marxian sense of this term is a doctrine which, although erroneous from the point of view of the correct logic of the proletarians, is beneficial to the selfish interests of the class which has developed it. An ideology is objectively vicious, but it furthers the interests of the thinker's class precisely on account of its viciousness. Many Marxians believe that they have proved this tenet by stressing the point that people do not thirst for knowledge only for its own sake. The aim of the scientist is to pave the way for successful action. Theories are always developed with a view to practical application. There are no such things as pure science and the disinterested search for truth.
For the sake of argument we may admit that every effort to attain truth is motivated by considerations of its practical utilization for the attainment of some end. But this does not answer the question why an "ideological" — i.e., a false — theory should render better service than a correct one. The fact that the practical application of a theory results in the outcome predicted on the basis of this theory is universally considered a confirmation of its correctness. It is paradoxical to assert that a vicious theory is from any point of view more useful than a correct one.
Men use firearms. In order to improve these weapons they developed the science of ballistics. But, of course, precisely because they were eager to hunt game and to kill one another, a correct ballistics. A merely "ideological" ballistics would not have been of any use.
For the Marxians the view that scientists labor for knowledge alone is nothing but an "arrogant pretense" of the scientists. Thus they declare that Maxwell was led to his theory of electromagnetic waves by the craving of business for wireless telegraphs.Cf. Lancelot Hogben, Science for the Citizen (New York, 1938), pp. 726–28. It is of no relevance for the problem of ideology whether this is true or not. The question is whether the alleged fact that nineteenth-century industrialism considered telegraphy without wires "the philosopher's stone and the elixir of youth"Ibid., p. 726. impelled Maxwell to formulate a correct theory or an ideological superstructure of the selfish class interests of the bourgeoisie. There is no doubt that bacteriological research was instigated not only by the desire to fight contagious diseases, but also by the desire of the producers of wine and of cheese to improve their methods of production. But the result obtained was certainly not "ideological" in the Marxian sense.
What induced Marx to invent his ideology-doctrine was the wish to sap the prestige of economics. He was fully aware of his impotence to refute the objections raised by the economists to the practicability of the socialist schemes. In fact he was so fascinated by the theoretical system of British classical economics that he firmly believed in its impregnability. He either never learned about the doubts that the classical theory of value raised in the minds of judicious scholars, or, if he ever heard of them, he did not comprehend their weight. His own economic ideas are hardly more than a garbled version of Ricardianism. When Jevons and Menger inaugurated a new era of economic thought, his career as an author of economic writings had already come to an end; the first volume of Das Kapital had already been published several years previously. Marx's only reaction to the marginal theory of value was that he postponed the publication of the later volumes of his main treatise. They were made accessible to the public only after his death.
In developing the ideology-doctrine Marx exclusively aims at economics and the social philosophy of Utilitarianism. His only intention was to destroy the reputation of economic teachings which he was unable to refute by means of logic and ratiocination. He gave to his doctrine the form of a universal law valid for the whole historical age of social classes because a statement which is applicable only to one individual historical event could not be considered as a law. For the same reasons he did not restrict its validity to economic thought only, but included every branch of knowledge.
The service which bourgeois economics rendered to the bourgeoisie was in Marx's eyes twofold. It aided them first in their fight against feudalism and royal despotism and then later again in their fight against the rising proletarian class. It provided a rational and moral justification for capitalist exploitation. It was, if we want to use a notion developed after Marx's death, a rationalization of the claims of the capitalists.Although the term rationalization is new, the thing itself was known long ago; cf., for instance, the words of Benjamin Franklin: "So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do." (Henry Steele Commager, ed., The Autobiography of Benjamin Franklin (New York: Carlton House, 1944), p. 41.) The capitalists, in their subconsciousness ashamed of the mean greed motivating their own conduct and anxious to avoid social disapproval, encouraged their sycophants, the economists, to proclaim doctrines which could rehabilitate them in public opinion.
Now, recourse to the notion of rationalization provides a psychological description of the incentives which impelled a man or a group of men to formulate a theorem or a whole theory. But it does not predicate anything about the validity or invalidity of the theory advanced. If it is proved that the theory concerned is untenable, the notion of rationalization is a psychological interpretation of the causes which made their authors liable to error. But if we are not in a position to find any fault in the theory advanced, no appeal to the concept of rationalization can possibly explode its validity. If it were true that the economists had in their subconsciousness no design other than that of justifying the unfair claims of the capitalists, their theories could nevertheless be quite correct. There is no means to expose a faulty theory other than to refute it by discursive reasoning and to substitute a better theory for it. In dealing with the theorem of Pythagoras or with the theory of comparative cost, we are not interested in the psychological factors that impelled Pythagoras and Ricardo to construct these theorems, although these things may be important for the historian and the biographer. For science the only relevant question is whether or not these theorems can stand the test of rational examination. The social or racial background of their authors is beside the point.
It is a fact that people in the pursuit of their selfish interests try to use doctrines more or less universally accepted by public opinion. Moreover, they are eager to invent and to propagate doctrines which they could possibly use for furthering their own interests. But this does not explain why such doctrines, favoring the interests of a minority and contrary to the interests of the rest of the people, are endorsed by public opinion. No matter whether such "ideological" doctrines are the product of a "false consciousness," forcing a man to think unwittingly in a manner that serves the interests of his class, or whether they are the product of a purposeful distortion of truth, they must encounter the ideologies of other classes and try to supplant them. Then a rivalry between antagonistic ideologies emerges. The Marxians explain victory and defeat in such conflicts as an outcome of the interference of historical providence.
Geist, the mythical prime mover, operates according to a definite plan. He leads mankind through various preliminary stages to the final bliss of socialism. Every stage is the product of a certain state of technology; all its other characteristics are the necessary ideological superstructure of this technological state. Geist causes man to bring about in due time the technological ideas adequate to the stage in which he lives, and to realize them. All the rest is an outgrowth of the state of technology. The hand-mill made feudal society; the steam-mill made capitalism."Le moulin à bras vous donnera la société avec le souzerain; le moulin à vapeur, la société avec le capitaliste industriel." Marx, Misére de la philosophie (Paris and Brussels, 1847), p. 100. Human will and reason play only an ancillary role in these changes. The inexorable law of historical development forces men — independently of their wills — to think and to behave according to the patterns corresponding to the material basis of their age. Men fool themselves in believing that they are free to choose between various ideas and between what they call truth and error. They themselves do not think; it is historical providence that manifests itself in their thoughts.
This is a purely mystical doctrine. The only proof given in its support is the recourse of Hegelian dialectics. Capitalistic private property is the first negation of individual private property. It begets, with the inexorability of a law of nature, its own negation, namely common ownership of the means of production.Marx, Das Kapital, 7th ed. (Hamburg, 1914), vol. I, 728–29.
However, a mystical doctrine based on intuition does not lose its mysticism by referring to another no less mystical doctrine. This makeshift by no means answers the question why a thinker must necessarily develop an ideology in accordance with the interests of his class. For the sake of argument we may admit that man's thoughts must result in doctrines beneficial to his interests. But are a man's interests necessarily identical with those of his whole class? Marx himself had to admit that the organization of the proletarians into a class, and consequently into a political party, is continually being upset again by the competition between the workers themselves.The Communist Manifesto, I.
It is an undeniable fact that there prevails an irreconcilable conflict of interests between those workers who are employed at union wage rates and those who remain unemployed because the enforcement of union rates prevents the demand for and the supply of labor from finding the appropriate price for meeting. It is no less true that the interests of the workers of the comparatively overpopulated countries and those of the comparatively underpopulated countries are antagonistic with regard to migration barriers. The statement that the interests of all proletarians uniformly require the substitution of socialism for capitalism is an arbitrary postulate of Marx and the other socialists. It cannot be proved by the mere assertion that the socialist idea is the emanation of proletarian thought and therefore certainly beneficial to the interests of the proletariat as such.
A popular interpretation of the vicissitudes of British foreign trade policies, based on the ideas of Sismondi, Frederick List, Marx, and the German Historical School, runs this way: in the second part of the eighteenth century and in the greater part of the nineteenth century the class interests of the British bourgeoisie required a free trade policy. Therefore British political economy elaborated a free trade doctrine, and the British manufacturers organized a popular movement which finally succeeded in abolishing protective tariffs. Then later conditions changed. The British bourgeoisie could no longer stand the competition of foreign manufacturing and badly needed protective tariffs. Consequently the economists substituted a theory of protection for the antiquated free trade ideology, and Great Britain returned to protectionism.
The first error in this interpretation is that it considers the "bourgeoisie" as a homogeneous class composed of members whose interests are identical. A businessman is always under the necessity of adjusting the conduct of his business to the institutional conditions of his country. In the long run he is, in his capacity as entrepreneur and capitalist, neither favored nor injured by tariffs or the absence of tariffs. He will turn to the production of those commodities which under the given state of affairs he can most profitably produce. What may hurt or further his short-run interests are only changes in the institutional setting. But such changes do not affect the various branches of business and the various enterprises in the same way and to the same extent. A measure that benefits one branch or enterprise may be detrimental to other branches or enterprises. What counts for a businessman is only a limited number of customs items. And with regard to these items the interests of various branches and firms are mostly antagonistic.
The interests of every branch or firm can be favored by all kinds of privileges granted to it by the government. But if privileges are granted to the same extent also to the other branches and firms, every businessman loses — not only in his capacity as consumer, but also in his capacity as buyer of raw materials, half-finished products, machines and other equipment — on the one hand as much as he profits on the other. Selfish group interests may impel a man to ask for protection for his own branch or firm. They can never motivate him to ask for universal protection for all branches or firms if he is not sure to be protected to a greater extent than the other industries or enterprises.
Neither were the British manufacturers from the point of view of their class concerns more interested in the abolition of the Corn Laws than other British citizens. The landowners were opposed to the repeal of these laws because a lowering of the prices for agricultural products reduced the rent of land. A special class interest of the manufacturers can only be construed on the basis of the long since discarded iron law of wages and the no less untenable doctrine that profits are an outcome of the exploitation of the workers.
Within a world organized on the basis of the division of labor, every change must in one way or another affect the short-run interests of many groups. It is therefore always easy to expose every doctrine supporting an alteration of existing conditions as an "ideological" disguise of the selfish interests of a special group of people. The main occupation of many present-day authors is such unmasking. Marx did not invent this procedure. It was known long before him. Its most curious manifestation was the attempts of some eighteenth-century writers to explain religious creeds as a fraudulent deception on the part of the priests eager to gain power and wealth both for themselves and for their allies, the exploiters. The Marxians endorsed this statement in labeling religion "opium for the masses."The meaning that contemporary Marxism attaches to this phrase, viz., that the religious drug has been purposely administered to the people, may have been the meaning of Marx too. But it was not implied in the passage in which — in 1843 — Marx coined this phrase. Cf., R. P. Case, Religion in Russia (New York, 1946), pp. 67–69. It never occurred to the supporters of such teachings that where there are selfish interests pro there must necessarily be selfish interests contra too. It is by no means a satisfactory explanation of any event that it favored a special class. The question to be answered is why the rest of the population whose interests it injured did not succeed in frustrating the endeavors of those favored by it.
Every firm and every branch of business is in the short run interested in increased sales of its products. In the long run, however, there prevails a tendency toward an equalization of returns in the various branches of production. If demand for the products of a branch increases and raises profits, more capital flows into it and the competition of the new enterprises cuts down the profits. Returns are by no means higher in the sale of socially detrimental articles than in the sale of socially beneficial articles. If a certain branch of business is outlawed and those engaged in it risk prosecution, penalties, and imprisonment, gross profits must be high enough to compensate for the risks involved. But this does not interfere with the height of net returns.
The rich, the owners of the already operating plants, have no particular class interest in the maintenance of free competition. They are opposed to confiscation and expropriation of their fortunes, but their vested interests are rather in favor of measures preventing newcomers from challenging their position. Those fighting for free enterprise and free competition do not defend the interests of those rich today. They want a free hand left to unknown men who will be the entrepreneurs of tomorrow and whose ingenuity will make the life of coming generations more agreeable. They want the way left open to further economic improvements. They are the spokesmen of material progress.
The nineteenth-century success of free trade ideas was effected by the theories of classical economics. The prestige of these ideas was so great that those whose selfish class interests they hurt could not hinder their endorsements by public opinion and their realization by legislative measures. It is ideas that make history, and not history that makes ideas.
It is useless to argue with mystics and seers. They base their assertions on intuition and are not prepared to submit them to rational examination. The Marxians pretend that what their inner voice proclaims is history's self-revelation. If other people do not hear this voice, it is only a proof that they are not chosen. It is insolence that those groping in darkness dare to contradict the inspired ones. Decency should impel them to creep into a corner and keep silent.
However, science cannot abstain from thinking although it is obvious that it will never succeed in convincing those who dispute the supremacy of reason. Science must emphasize that the appeal to intuition cannot settle the question which of several antagonistic doctrines is the right one and which are wrong. It is an undeniable fact that Marxism is not the only doctrine advanced in our time. There are other "ideologies" besides Marxism. The Marxians assert that the application of these other doctrines would hurt the interests of the many. But the supporters of these doctrines say precisely the same with regard to Marxism.
Of course, the Marxians consider a doctrine vicious if its author's background is not proletarian. But who is proletarian? Doctor Marx, the manufacturer and "exploiter" Engels, and Lenin, the scion of the Russian gentry, were certainly not of proletarian background. But Hitler and Mussolini were genuine proletarians and spent their youth in poverty. The conflict of the Bolsheviks and the Mensheviks or that between Stalin and Trotsky cannot be presented as class conflicts. They were conflicts between various sects of fanatics who called one another traitors.
The essence of Marxian philosophy is this: we are right because we are the spokesmen of the rising proletarian class. Discursive reasoning cannot invalidate our teachings, for they are inspired by the supreme power that determines the destiny of mankind. Our adversaries are wrong because they lack the intuition that guides our minds. It is, of course, not their fault that on account of their class affiliation they are not equipped with the genuine proletarian logic and are blinded by ideologies. The unfathomable decrees of history that have elected us have doomed them. The future is ours.
Racial Polylogism Marxian polylogism is an abortive makeshift to salvage the untenable doctrines of socialism. Its attempt to substitute intuition for ratiocination appeals to popular superstitions. But it is precisely this attitude that places Marxian polylogism and its offshoot, the so-called "sociology of knowledge," in irreconcilable antagonism to science and reason.
It is different with the polylogism of the racists. This brand of polylogism is in agreement with fashionable, although mistaken, tendencies in present-day empiricism. It is an established fact that mankind is divided into various races. The races differ in bodily features. Materialist philosophers assert that thoughts are a secretion of the brain as bile is a secretion of the gall-bladder. It would be inconsistent for them to reject beforehand the hypothesis that the thought-secretion of the various races may differ in essential qualities. The fact that anatomy has not succeeded up to now in discovering anatomical differences in the brain cells of various races cannot invalidate the doctrine that the logical structure of mind is different with different races. It does not exclude the assumption that later research may discover such anatomical peculiarities.
Some ethnologists tell us that it is a mistake to speak of higher and lower civilizations and of an alleged backwardness of alien races. The civilizations of various races are different from the Western civilization of the peoples of Caucasian stock, but they are not inferior. Every race has its peculiar mentality. It is faulty to apply to the civilization of any of them yardsticks abstracted from the achievements of other races. Westerners call the civilization of China an arrested civilization and that of the inhabitants of New Guinea primitive barbarism. But the Chinese and the natives of New Guinea despise our civilization no less than we despise theirs. Such estimates are judgments of value and hence arbitrary. Those other races have a different structure of mind. Their civilizations are adequate to their mind as our civilization is adequate to our mind. We are incapable of comprehending that what we call backwardness does not appear such to them. It is, from the point of view of their logic, a better method of coming to a satisfactory arrangement with given natural conditions of life than is our progressivism.
These ethnologists are right in emphasizing that it is not the task of a historian — and the ethnologist too is a historian — to express value judgments. But they are utterly mistaken in contending that these other races have been guided in their activities by motives other than those which haver actuated the white race. The Asiatics and the Africans no less than the peoples of European descent have been eager to struggle successfully for survival and to use reason as the foremost weapon in these endeavors. They have sought to get rid of the beasts of prey and of disease, to prevent famines and to raise the productivity of labor. There can be no doubt that in the pursuit of these aims they have been less successful than the whites. The proof is that they are eager to profit from all achievements of the West. Those ethnologists would be right, if Mongols or Africans, tormented by a painful disease, were to renounce the aid of a European doctor because their mentality or their world view led them to believe that it is better to suffer than to be relieved of pain. Mahatma Gandhi disavowed his whole philosophy when he entered a modern hospital to be treated for appendicitis.
The North American Indians lacked the ingenuity to invent the wheel. The inhabitants of the Alps were not keen enough to construct skis which would have rendered their hard life much more agreeable. Such shortcomings were not due to a mentality different from those of the races which had long since used wheels and skis; they were failures, even when judged from the point of view of the Indians and the Alpine mountaineers.
However, these considerations refer only to the motives determining concrete actions, not to the only relevant problem of whether or not there exists between various races a difference in the logical structure of mind. It is precisely this that the racists assert.Cf. L. G. Tirala, Rasse, Geist und Seele (Munich, 1935), pp. 190 ff.
We may refer to what has been said in the preceding chapters about the fundamental issues of the logical structure of mind and the categorial principles of thought and action. Some additional observations will suffice to give the finishing stroke to racial polylogism and to any other brand of polylogism.
The categories of human thought and action are neither arbitrary products of the human mind nor conventions. They are not outside of the universe and of the course of cosmic events. They are biological facts and have a definite function in life and reality. They are instruments in man's struggle for existence and in his endeavors to adjust himself as much as possible to the real state of the universe and to remove uneasiness as much as it is in his power to do so. They are therefore appropriate to the structure of the external world and reflect properties of the world and of reality. They work, and are in this sense true and valid.
It is consequently incorrect to assert that aprioristic insight and pure reasoning do not convey any information about reality and the structure of the universe. The fundamental logical relations and the categories of thought and action are the ultimate source of all human knowledge. They are adequate to the structure of reality, they reveal this structure to the human mind and, in this sense, they are for man basic ontological facts.Cf. Morris R. Cohen, Reason and Nature (New York, 1931), pp. 202–5; A Preface to Logic (New York, 1944), pp. 42–44, 54–56, 92, 180–87. We do not know what a superhuman intellect may think and comprehend. For man every cognition is conditioned by the logical structure of his mind and implied in this structure. It is precisely the satisfactory results of the empirical sciences and their practical application that evidence this truth. Within the orbit in which human action is able to attain ends aimed at there is no room left for agnosticism.
If there had been races which had developed a different logical structure of the mind, they would have failed in the use of reason as an aid in the struggle for existence. The only means for survival that could have protected them against extermination would have been their instinctive reactions. Natural selection would have eliminated those specimens of such races that tried to employ reasoning for the direction of their behavior. Those individuals alone would have survived that relied upon instincts only. This means that only those would have had a chance to survive that did not rise above the mental level of animals.
The scholars of the West have amassed an enormous amount of material concerning the high civilizations of China and India and the primitive civilizations of the Asiatic, American, Australian, and African aborigines. It is safe to say that all that is worth knowing about the ideas of these races is known. But never has any supporter of polylogism tried to use these data for a description of the allegedly different logic of these peoples and civilizations.
Polylogism and Understanding Some supporters of the tenets of Marxism and racism interpret the epistemological teachings of their parties in a peculiar way. They are ready to admit that the logical structure of mind is uniform for all races, nations, and classes. Marxism or racism, they assert, never intended to deny this undeniable fact. What they really wanted to say was that historical understanding, aesthetic empathy, and value judgments are conditioned by a man's background. It is obvious that this interpretation cannot be supported on the basis of the writings of the champions of polylogism. However, it must be analyzed as a doctrine of its own.
There is no need to emphasize again that a man's value judgments and his choice of ends reflect his inborn bodily features and all the vicissitudes of his life.Cf. above, pp. 46–47. But it is a far cry from the acknowledgment of this fact to the belief that racial inheritance or class affiliation ultimately determines judgments of value and the choice of ends. The fundamental discrepancies in world view and patterns of behavior do not correspond to differences in race, nationality, or class affiliation.
There is hardly any greater divergence in value judgments than that between ascetics and those eager to enjoy life lightheartedly. An unbridgeable gulf separates devout monks and nuns from the rest of mankind. But there have been people dedicated to the monkish ideals among all races, nations, classes, and castes. Some of them were sons and daughters of kings and wealthy noblemen, others were beggars. St. Francis, Santa Clara, and their ardent followers were natives of Italy, whose other inhabitants cannot be described as weary of temporal things. Puritanism was Anglo-Saxon, but so was the lasciviousness of the British under the Tudors, the Stuarts, and the Hanoverians. The nineteenth century's outstanding champion of asceticism was Count Leo Tolstoy, a wealthy member of the profligate Russian aristocracy. Tolstoy saw the pith of the philosophy he attacked embodied in Beethoven's Kreutzer Sonata, a masterpiece of the son of extremely poor parents.
It is the same with aesthetic values. All races and nations have had both classic and romantic art. With all their ardent propaganda the Marxians have not succeeded in bringing about a specifically proletarian art or literature. The "proletarian" writers, painters, and musicians have not created new styles and have not established new aesthetic values. What characterizes them is solely their tendency to call everything they detest "bourgeois" and everything they like "proletarian."
Historical understanding both of the historian and of the acting man always reflects the personality of its author. But if the historian and the politician are imbued with the desire for truth, they will never let themselves be deluded by party bias, provided they are efficient and not inept. It is immaterial whether a historian or a politician considers the interference of a certain factor beneficial or detrimental. He cannot derive any advantage from underrating or overrating the relevance of one of the operating factors. Only clumsy would-be historians believe that they can serve their cause by distortion.
This is no less true of the statesman's understanding. What use could a champion of Protestantism derive from misunderstanding the tremendous power and prestige of Catholicism, or a liberal from misunderstanding the relevance of socialist ideas? In order to succeed a politician must see things as they are; whoever indulges in wishful thinking will certainly fail. Judgments of relevance differ from judgments of value in that they aim at the appraisal of a state of affairs not dependent on the author's arbitrariness. They are colored by their author's personality and can therefore never be unanimously agreed upon by all people. But here again we must raise the question: What advantage could a race or class derive from an "ideological" distortion of understanding?
As has already been pointed out, the serious discrepancies to be found in historical studies are an outcome of differences in the field of the nonhistorical sciences and not in various modes of understanding.
Today many historians and writers are imbued with the Marxian dogma that the realization of the socialist plans is both unavoidable and the supreme good, and that the labor movement is entrusted with the historical mission of accomplishing this task by a violent overthrow of the capitalistic system. Starting from this tenet, they take it as a matter of course that the parties of the "Left," the elect, in the pursuit of their policies, should resort to acts of violence and to murder. A revolution cannot be consummated by peaceful methods. It is not worthwhile to dwell upon such trifles as the butchering of the four daughters of the last Tsar, of Leon Trotsky, of tens of thousands of Russian bourgeois and so on. "You can't make an omelet without breaking eggs"; why explicitly mention the eggs broken? But, of course, it is different if one of those assailed ventures to defend himself or even to strike back. Few only mention the acts of sabotage, destruction, and violence committed by strikers. But all authors enlarge upon the attempts of the companies to protect their property and the lives of their employees and their customers against such onslaughts.
Such discrepancies are due neither to judgments of value nor to differences in understanding. They are the outcome of antagonistic theories of economic and historical evolution. If the coming of socialism is unavoidable and can be achieved only by revolutionary methods, murders committed by the "progressives" are minor incidents of no significance. But the self-defense and counterattacks of the "reactionaries" which can possibly delay the final victory of socialism are of the greatest importance. They are remarkable events, while the revolutionary acts are simply routine.
The Case for Reason Judicious rationalists do not pretend that human reason can ever make man omniscient. They are fully aware of the fact that, however knowledge may increase, there will always remain things ultimately given and not liable to any further elucidation. But, they say, as far as man is able to attain cognition, he must rely upon reason. The ultimate given is the irrational. The knowable is, as far as it is known already, necessarily rational. There is neither an irrational mode of cognition nor a science of irrationality.
With regard to unsolved problems, various hypotheses are permissible provided they do not contradict logic and the uncontested data of experience. But these are hypotheses only.
We do not know what causes the inborn differences in human abilities. Science is at a loss to explain why Newton and Mozart were full of creative genius and why most people are not. But it is by all means an unsatisfactory answer to say that a genius owes his greatness to his ancestry or to his race. The question is precisely why such a man differs from his brothers and from the other members of his race.
It is a little bit less faulty to attribute the great achievements of the white race to racial superiority. Yet this is no more than vague hypothesis which is at variance with the fact that the early foundations of civilization were laid by peoples of other races. We cannot know whether or not at a later date other races will supplant Western civilization.
However, such a hypothesis must be appraised on its own merits. It must not be condemned beforehand because the racists base on it their postulate that there is an irreconcilable conflict between various racial groups and that the superior races must enslave the inferior ones. Ricardo's law of association has long since discarded this mistaken interpretation of the inequality of men.See below, pp. 158–63. It is nonsensical to fight the racial hypothesis by negating obvious facts. It is vain to deny that up to now certain races have contributed nothing or very little to the development of civilization and can, in this sense, be called inferior.
If somebody were eager to distill at any cost a grain of truth out of the Marxian teachings, he could say that emotions influence a man's reasoning very much. Nobody ever ventured to deny this obvious fact, and Marxism cannot be credited with its discovery. But it is without any significance for epistemology. There are many sources both of success and of error. It is the task of psychology to enumerate and to classify them.
Envy is a widespread frailty. It is certain that many intellectuals envy the higher income of prosperous businessmen and that these feelings drive them toward socialism. They believe that the authorities of a socialist commonwealth would pay them higher salaries than those that they earn under capitalism. But to prove the existence of this envy does not relieve science of the duty of making the most careful examination of the socialist doctrines. Scientists are bound to deal with every doctrine as if its supporters were inspired by nothing else than the thirst for knowledge. The various brands of polylogism substitute for a purely theoretical examination of opposite doctrines the unmasking of the background and the motives of their authors. Such a procedure is incompatible with the first principles of ratiocination.
It is a poor makeshift to dispose of a theory by referring to its historical background, to the "spirit" of its time, to the material conditions of the country of its origin, and to any personal qualities of its authors. A theory is subject to the tribunal of reason only. The yardstick to be applied is always the yardstick of reason. A theory is either correct or incorrect. It may happen that the present state of our knowledge does not allow a decision with regard to its correctness or incorrectness. But a theory can never be valid for a bourgeois or an American if it is invalid for a proletarian or a Chinese.
If the Marxians and the racists were right, it would be impossible to explain why those in power are anxious to suppress dissenting theories and to persecute their supporters. The very fact that there are intolerant governments and political parties intent upon outlawing and exterminating dissenters is a proof of the excellence of reason. It is not a conclusive proof of a doctrine's correctness that its adversaries use the police, the hangman, and violent mobs to fight it. But it is a proof of the fact that those taking recourse to violent oppression are in their subconsciousness convinced of the untenability of their own doctrines.
It is impossible to demonstrate the validity of the a priori foundations of logic and praxeology without referring to these foundations themselves. Reason is an ultimate given and cannot be analyzed or questioned by itself. The very existence of human reason is a nonrational fact. The only statement that can be predicated with regard to reason is that it is the mark that distinguishes man from animals and has brought about everything that is specifically human.
To those pretending that man would be happier if he were to renounce the use of reason and try to let himself be guided by intuition and instincts only, no other answer can be given than an analysis of the achievements of human society. In describing the genesis and working of social cooperation, economics provides all the information required for an ultimate decision between reason and unreason. If man reconsiders freeing himself from the supremacy of reason, he must know what he will have to forsake.
According to the doctrines of universalism, conceptual realism, holism, collectivism, and some representatives of Gestaltpsychologie, society is an entity living its own life, independent of and separate from the lives of the various individuals, acting on its own behalf and aiming at its own ends which are different from the ends sought by the individuals. Then, of course, an antagonism between the aims of society and those of its members can emerge. In order to safeguard the flowering and further development of society it becomes necessary to master the selfishness of the individuals and to compel them to sacrifice their egoistic designs to the benefit of society.
At this point all these holistic doctrines are bound to abandon the secular methods of human science and logical reasoning and to shift to theological or metaphysical professions of faith. They must assume that Providence, through its prophets, apostles, and charismatic leaders, forces men who are constitutionally wicked, i.e., prone to pursue their own ends, to walk in the ways of righteousness which the Lord or Weltgeist or history wants them to walk.
This is the philosophy which has characterized from time immemorial the creeds of primitive tribes. It has been an element in all religious teachings. Man is bound to comply with the law issued by a superhuman power and to obey the authorities which this power has entrusted with the enforcement of the law. The order created by this law, human society, is consequently the work of the Deity and not of man. If the Lord had not interfered and had not given enlightenment to erring mankind, society would not have come into existence.
It is true that social cooperation is a blessing for man; it is true that man could work his way up from barbarism and the moral and material distress of his primitive state only within the framework of society. However, if left alone he would never have seen the road to his own salvation. For adjustment to the requirements of social cooperation and subordination to the precepts of the moral law put heavy restraints upon him. From the point of view of his wretched intellect he would deem the abandonment of some expected advantage an evil and a privation. He would fail to recognize the incomparably greater, but later, advantages which renunciation of present and visible pleasures will procure. But for supernatural revelation he would never have learned what destiny wants him to do for his own good and that of his offspring.
The scientific theory as developed by the social philosophy of eighteenth-century rationalism and liberalism and by modern economics does not resort to any miraculous interference of superhuman powers. Every step by which an individual substitutes concerted action for isolated action results in an immediate and recognizable improvement in his conditions. The advantages derived from peaceful cooperation and division of labor are universal. They immediately benefit every generation, and not only later descendants. For what the individual must sacrifice for the sake of society he is amply compensated by greater advantages. His sacrifice is only apparent and temporary; he foregoes a smaller gain in order to reap a greater one later. No reasonable being can fail to see this obvious fact. When social cooperation is intensified by enlarging the field in which there is division of labor or when legal protection and the safeguarding of peace are strengthened, the incentive is the desire of all those concerned to improve their own conditions. In striving after his own—rightly understood—interests the individual works toward an intensification of social cooperation and peaceful intercourse. Society is a product of human action, i.e., the human urge to remove uneasiness as far as possible. In order to explain its becoming and its evolution it is not necessary to have recourse to a doctrine, certainly offensive to a truly religious mind, according to which the original creation was so defective that reiterated superhuman intervention is needed to prevent its failure.
The historical role of the theory of the division of labor as elaborated by British political economy from Hume to Ricardo consisted in the complete demolition of all metaphysical doctrines concerning the origin and the operation of social cooperation. It consummated the spiritual, moral and intellectual emancipation of mankind inaugurated by the philosophy of Epicureanism. It substituted an autonomous rational morality for the heteronomous and intuitionist ethics of older days. Law and legality, the moral code and social institutions are no longer revered as unfathomable decrees of Heaven. They are of human origin, and the only yardstick that must be applied to them is that of expediency with regard to human welfare.
The utilitarian economist does not say: Fiat justitia, pereat mundus. He says: Fiat justitia, ne pereat mundus. He does not ask a man to renounce his well-being for the benefit of society. He advises him to recognize what his rightly understood interests are. In his eyes God's magnificence does not manifest itself in busy interference with sundry affairs of princes and politicians, but in endowing his creatures with reason and the urge toward the pursuit of happiness.Many economists, among them Adam Smith and Bastiat, believed in God. Hence they admired in the facts they had discovered the providential care of "the great Director of Nature." Atheist critics blame them for this attitude. However, these critics fail to realize that to sneer at the references to the "invisible hand" does not invalidate the essential teachings of the rationalist and utilitarian social philosophy. One must comprehend that the alternative is this: Either association is a human process because it best serves the aims of the individuals concerned and the individuals themselves have the ability to realize the advantages they derive from their adjustment to life in social cooperation. Or a superior being enjoins upon reluctant men subordination to the law and to the social authorities. It is of minor importance whether one calls this supreme being God, Weltgeist, Destiny, History, Wotan, or Material Productive Forces and what title one assigns to its apostles, the dictators.
The essential problem of all varieties of universalistic, collectivistic, and holistic social philosophy is: by what mark do I recognize the true law, the authentic apostle of God's word, and the legitimate authority. For many claim that Providence has sent them, and each of these prophets preaches another gospel. For the faithful believer there cannot be any doubt; he is fully confident that he has espoused the only true doctrine. But it is precisely the firmness of such beliefs that renders the antagonisms irreconcilable. Each party is prepared to make its own tenets prevail. But as logical argumentation cannot decide between various dissenting creeds, there is no means left for the settlement of such disputes other than armed conflict. The nonrationalist, nonutilitarian, and nonliberal social doctrines must beget wars and civil wars until one of the adversaries is annihilated or subdued. The history of the world's great religions is a record of battles and wars, as is the history of the present-day counterfeit religions, socialism, statolatry, and nationalism.
Intolerance and propaganda by the executioner's or the soldier's sword are inherent in any system of heteronomous ethics. The laws of God or Destiny claim universal validity, and to the authorities which they declare legitimate all men by rights owe obedience. As long as the prestige of heteronomous codes of morality and of their philosophical corollary, conceptual realism, was intact, there could not be any question of tolerance or of lasting peace. When fighting ceased, it was only to gather new strength for further battling.
The idea of tolerance with regard to other people's dissenting views could take root only when the liberal doctrines had broken the spell of universalism. In the light of the utilitarian philosophy, society and state no longer appear as institutions for the maintenance of a world order that for considerations hidden to the human mind pleases the Deity although it manifestly hurts the secular interests of many or even of the immense majority of those living today. Society and state are on the contrary the primary means for all people to attain the ends they aim at of their own accord. They are created by human effort and their maintenance and most suitable organization are tasks not essentially different from all other concerns of human action.
The supporters of a heteronomous morality and of the collectivistic doctrine cannot hope to demonstrate by ratiocination the correctness of their specific variety of ethical principles and the superiority and exclusive legitimacy of their particular social ideal. They are forced to ask people to accept credulously their ideological system and to surrender to the authority they consider the right one; they are intent upon silencing dissenters or upon beating them into submission.
Of course, there will always be individuals and groups of individuals whose intellect is so narrow that they cannot grasp the benefits which social cooperation brings them. There are others whose moral strength and will power are so weak that they cannot resist the temptation to strive for an ephemeral advantage by actions detrimental to the smooth functioning of the social system. For the adjustment of the individual to the requirements of social cooperation demands sacrifices. These are, it is true, only temporary and apparent sacrifices as they are more than compensated for by the incomparably greater advantages which living within society provides.
However, at the instant, in the very act of renouncing an expected enjoyment, they are painful, and it is not for everybody to realize their later benefits and to behave accordingly. Anarchism believes that education could make all people comprehend what their own interests require them to do; rightly instructed they would of their own accord always comply with the rules of conduct indispensable for the preservation of society. The anarchists contend that a social order in which nobody enjoys privileges at the expense of his fellow-citizens could exist without any compulsion and coercion for the prevention of action detrimental to society. Such an ideal society could do without state and government, i.e., without a police force, the social apparatus of coercion and compulsion.
The anarchists overlook the undeniable fact that some people are either too narrow-minded or too weak to adjust themselves spontaneously to the conditions of social life. Even if we admit that every sane adult is endowed with the faculty of realizing the good of social cooperation and of acting accordingly, there still remains the problem of the infants, the aged, and the insane. We may agree that he who acts antisocially should be considered mentally sick and in need of care. But as long as not all are cured, and as long as there are infants and the senile, some provision must be taken lest they jeopardize society. An anarchistic society would be exposed to the mercy of every individual. Society cannot exist if the majority is not ready to hinder, by the application or threat of violent action, minorities from destroying the social order. This power is vested in the state or government.
State or government is the social apparatus of compulsion and coercion. It has the monopoly of violent action. No individual is free to use violence or the threat of violence if the government has not accorded this right to him. The state is essentially an institution for the preservation of peaceful interhuman relations. However, for the preservation of peace it must be prepared to crush the onslaughts of peace-breakers.
Liberal social doctrine, based on the teachings of utilitarian ethics and economics, sees the problem of the relation between the government and those ruled from a different angle than universalism and collectivism. Liberalism realizes that the rulers, who are always a minority, cannot lastingly remain in office if not supported by the consent of the majority of those ruled. Whatever the system of government may be, the foundation upon which it is built and rests is always the opinion of those ruled that to obey and to be loyal to this government better serves their own interests than insurrection and the establishment of another regime. The majority has the power to do away with an unpopular government and uses this power whenever it becomes convinced that its own welfare requires it.
Civil war and revolution are the means by which the discontented majorities overthrow rulers and methods of government which do not suit them. For the sake of domestic peace liberalism aims at democratic government. Democracy is therefore not a revolutionary institution. On the contrary, it is the very means of preventing revolutions and civil wars. It provides a method for the peaceful adjustment of government to the will of the majority. When the men in office and their policies no longer please the majority of the nation, they will—in the next election—be eliminated and replaced by other men espousing different policies.
The principle of majority rule or government by the people as recommended by liberalism does not aim at the supremacy of the mean, of the lowbred, of the domestic barbarians. The liberals too believe that a nation should be ruled by those best fitted for this task. But they believe that a man's ability to rule proves itself better by convincing his fellow-citizens than by using force upon them. There is, of course, no guarantee that the voters will entrust office to the most competent candidate. But no other system could offer such a guarantee. If the majority of the nation is committed to unsound principles and prefers unworthy office-seekers, there is no remedy other than to try to change their mind by expounding more reasonable principles and recommending better men. A minority will never win lasting success by other means.
Universalism and collectivism cannot accept this democratic solution of the problem of government. In their opinion the individual in complying with the ethical code does not directly further his earthly concerns but, on the contrary, foregoes the attainment of his own ends for the benefit of the designs of the Deity or of the collective whole. Moreover reason alone is not capable of conceiving the supremacy of the absolute values and the unconditional validity of the sacred law and of interpreting correctly the canons and commandments. Hence it is in their eyes a hopeless task to try to convince the majority through persuasion and to lead them to righteousness by amicable admonition. Those blessed by heavenly inspiration, to whom their charisma has conveyed illumination, have the duty to propagate the gospel to the docile and to resort to violence against the intractable. The charismatic leader is the Deity's vicar, the mandatory of the collective whole, the tool of history. He is infallible and always right. His orders are the supreme norm.
Universalism and collectivism are by necessity systems of theocratic government. The common characteristic of all their varieties is that they postulate the existence of a superhuman entity which the individuals are bound to obey. What differentiates them from one another is only the appellation they give to this entity and the content of the laws they proclaim in its name. The dictatorial rule of a minority cannot find any legitimation other than the appeal to an alleged mandate obtained from a superhuman absolute authority. It does not matter whether the autocrat bases his claims on the divine rights of anointed kings or on the historical mission of the vanguard of the proletariat or whether the supreme being is called Geist (Hegel) or Humanite (Auguste Comte). The terms society and state as they are used by the contemporary advocates of socialism, planning, and social control of all the activities of individuals signify a deity. The priests of this new creed ascribe to their idol all those attributes which the theologians ascribe to God—omnipotence, omniscience, infinite goodness, and so on.
If one assumes that there exists above and beyond the individual's actions an imperishable entity aiming at its own ends, different from those of mortal men, one has already constructed the concept of a superhuman being. Then one cannot evade the question whose ends take precedence whenever an antagonism arises, those of the state or society or those of the individual. The answer to this question is already implied in the very concept of state or society as conceived by collectivism and universalism. If one postulates the existence of an entity which ex definitione is higher, nobler, and better than the individuals, then there cannot be any doubt that the aims of this eminent being must tower above those of the wretched individuals. (It is true that some lovers of paradox—for instance, Max Cf. Max Stirner (Johan Kaspar Schmidt). The Ego and His Own, trans. by S.T. Byington (New York, 1907).Stirner—took pleasure in turning the matter upside down and for all that asserted the precedence of the individual.) If society or state is an entity endowed with volition and intention and all the other qualities attributed to it by the collectivist doctrine, then it is simply nonsensical to set the shabby individual's trivial aims against its lofty designs.
The quasi-theological character of all collectivist doctrines becomes manifest in their mutual conflicts. A collectivist doctrine does not assert the superiority of a collective whole in abstracto; it always proclaims the eminence of a definite collectivist idol, and either flatly denies the existence of other such idols or relegates them to a subordinate and ancillary position with regard to its own idol. The worshipers of the state proclaim the excellence of a definite state, i.e., their own; the nationalists, the excellence of their own nation. If dissenters challenge their particular program by heralding the superiority of another collectivist idol, they resort to no objection other than to declare again and again: we are right because an inner voice tells us that we are right and you are wrong. The conflicts of antagonistic collectivist creeds and sects cannot be decided by ratiocination; they must be decided by arms. The alternatives to the liberal and democratic principle of majority rule are the militarist principles of armed conflict and dictatorial oppression.
All varieties of collectivist creeds are united in their implacable hostility to the fundamental political institutions of the liberal system: majority rule, tolerance of dissenting views, freedom of thought, speech, and the press, equality of all men under the law. This collaboration of collectivist creeds in their attempts to destroy freedom has brought about the mistaken belief that the issue in present-day political antagonisms is individualism versus collectivism. In fact it is a struggle between individualism on the one hand and a multitude of collectivist sects on the other hand whose mutual hatred and hostility is no less ferocious than their abomination of the liberal system.
It is not a uniform Marxian sect that attacks capitalism, but a host of Marxian groups. These groups—for instance, Stalinists, Trotskyists, Mensheviks, supporters of the Second International, and so on—fight one another with the utmost brutality and inhumanity. And then there are again many other non-Marxian sects which apply the same atrocious methods in their mutual struggles. A substitution of collectivism for liberalism would result in endless bloody fighting.
The customary terminology misrepresents these things entirely. The philosophy commonly called individualism is a philosophy of social cooperation and the progressive intensification of the social nexus. On the other hand the application of the basic ideas of collectivism cannot result in anything but social disintegration and the perpetuation of armed conflict. It is true that every variety of collectivism promises eternal peace starting with the day of its own decisive victory and the final overthrow and extermination of all other ideologies and their supporters.
However, the realization of these plans is conditioned upon a radical transformation in mankind. Men must be divided into two classes: the omnipotent godlike dictator on the one hand and the masses which must surrender volition and reasoning in order to become mere chessmen in the plans of the dictator. The masses must be dehumanized in order to make one man their godlike master. Thinking and acting, the foremost characteristics of man as man, would become the privilege of one man only. There is no need to point out that such designs are unrealizable. The chiliastic empires of dictators are doomed to failure; they have never lasted longer than a few years. We have just witnessed the breakdown of several of such "millennial" orders. Those remaining will hardly fare better.
The modern revival of the idea of collectivism, the main cause of all the agonies and disasters of our day, has succeeded so thoroughly that it has brought into oblivion the essential ideas of liberal social philosophy. Today even many of those favoring democratic institutions ignore these ideas. The arguments they bring forward for the justification of freedom and democracy are tainted with collectivist errors; their doctrines are rather a distortion than an endorsement of true liberalism. In their eyes majorities are always right simply because they have the power to crush any opposition; majority rule is the dictatorial rule of the most numerous party, and the ruling majority is not bound to restrain itself in the exercise of its power and in the conduct of political affairs. As soon as a faction has succeeded in winning the support of the majority of citizens and thereby attained control of the government machine, it is free to deny to the minority all those democratic rights by means of which it itself has previously carried on its own struggle for supremacy.
This pseudo-liberalism is, of course, the very antithesis of the liberal doctrine. The liberals do not maintain that majorities are godlike and infallible; they do not contend that the mere fact that a policy is advocated by the many is a proof of its merits for the common weal. They do not recommend the dictatorship of the majority and the violent oppression of dissenting minorities. Liberalism aims at a political constitution which safeguards the smooth working of social cooperation and the progressive intensification of mutual social relations. Its main objective is the avoidance of violent conflicts, of wars and revolutions that must disintegrate the social collaboration of men and throw people back into the primitive conditions of barbarism where all tribes and political bodies endlessly fought one another. Because the division of labor requires undisturbed peace, liberalism aims at the establishment of a system of government that is likely to preserve peace, viz., democracy.
Praxeology and Liberalism Liberalism, in its nineteenth-century sense, is a political doctrine. It is not a theory, but an application of the theories developed by praxeology and especially by economics to definite problems of human action within society.
As a political doctrine liberalism is not neutral with regard to values and the ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to these valuational principles.
While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, nourishment to starvation, abundance to poverty. It teaches man how to act in accordance with these valuations.
It is customary to call these concerns materialistic and to charge liberalism with an alleged crude materialism and a neglect of the "higher" and "nobler" pursuits of mankind. Man does not live by bread alone, say the critics, and they disparage the meanness and despicable baseness of the utilitarian philosophy. However, these passionate diatribes are wrong because they badly distort the teachings of liberalism.
First: The liberals do not assert that men ought to strive after the goals mentioned above. What they maintain is that the immense majority prefer a life of health and abundance to misery, starvation, and death. The correctness of this statement cannot be challenged. It is proved by the fact that all antiliberal doctrines—the theocratic tenets of the various religious, statist, nationalist, and socialist parties—adopt the same attitude with regard to these issues. They all promise their followers a life of plenty. They have never ventured to tell people that the realization of their program will impair their material well-being. They insist—on the contrary—that while the realization of the plans of their rival parties will result in indigence for the majority, they themselves want to provide their supporters with abundance. The Christian parties are no less eager in promising the masses a higher standard of living than the nationalists and the socialists. Present-day churches often speak more about raising wage rates and farm incomes than about the dogmas of the Christian doctrine.
Secondly: The liberals do not disdain the intellectual and spiritual aspirations of man. On the contrary. They are prompted by a passionate ardor for intellectual and moral perfection, for wisdom and for aesthetic excellence. But their view of these high and noble things is far from the crude representations of their adversaries. They do not share the naive opinion that any system of social organization can directly succeed in encouraging philosophical or scientific thinking, in producing masterpieces of art and literature and in rendering the masses more enlightened. They realize that all that society can achieve in these fields is to provide an environment which does not put insurmountable obstacles in the way of the genius and makes the common man free enough from material concerns to become interested in things other than mere breadwinning. In their opinion the foremost social means of making man more human is to fight poverty. Wisdom and science and the arts thrive better in a world of affluence than among needy peoples.
It is a distortion of facts to blame the age of liberalism for an alleged materialism. The nineteenth century was not only a century of unprecedented improvement in technical methods of production and in the material well-being of the masses. It did much more than extend the average length of human life. Its scientific and artistic accomplishments are imperishable. It was an age of immortal musicians, writers, poets, painters, and sculptors; it revolutionized philosophy, economics, mathematics, physics, chemistry, and biology. And, for the first time in history, it made the great works and the great thoughts accessible to the common man.
Liberalism and Religion Liberalism is based upon a purely rational and scientific theory of social cooperation. The policies it recommends are the application of a system of knowledge which does not refer in any way to sentiments, intuitive creeds for which no logically sufficient proof can be provided, mystical experiences, and the personal awareness of superhuman phenomena. In this sense the often misunderstood and erroneously interpreted epithets atheistic and agnostic can be attributed to it. It would, however, be a serious mistake to conclude that the sciences of human action and the policy derived from their teachings, liberalism, are antitheistic and hostile to religion. They are radically opposed to all systems of theocracy. But they are entirely neutral with regard to religious beliefs which do not pretend to interfere with the conduct of social, political, and economic affairs.
Theocracy is a social system which lays claim to a superhuman title for its legitimation. The fundamental law of a theocratic regime is an insight not open to examination by reason and to demonstration by logical methods. Its ultimate standard is intuition providing the mind with subjective certainty about things which cannot be conceived by reason and ratiocination. If this intuition refers to one of the traditional systems of teaching concerning the existence of a Divine Creator and Ruler of the universe, we call it a religious belief. If it refers to another system we call it a metaphysical belief.
Thus a system of theocratic government need not be founded on one of the great historical religions of the world. It may be the outcome of metaphysical tenets which reject all traditional churches and denominations and take pride in emphasizing their antitheistic and antimetaphysical character. In our time the most powerful theocratic parties are opposed to Christianity and to all other religions which evolved from Jewish monotheism. What characterizes them as theocratic is their craving to organize the earthly affairs of mankind according to the contents of a complex of ideas whose validity cannot be demonstrated by reasoning. They pretend that their leaders are blessed by a knowledge inaccessible to the rest of mankind and contrary to the ideas maintained by those to whom the charisma is denied. The charismatic leaders have been entrusted by a mystical higher power with the office of managing the affairs of erring mankind. They alone are enlightened; all other people are either blind and deaf or malefactors.
It is a fact that many varieties of the great historical religions were affected by theocratic tendencies. Their apostles were inspired by a craving for power and the oppression and annihilation of all dissenting groups. However, we must not confuse the two things, religion and theocracy.
William James calls religious "the feelings, acts and experiences of individual men in their solitude, so far as they apprehend themselves to stand in relation to whatever they may consider the divine." W. James, The Varieties of Religious Experience (35th impression, New York, 1925), p. 31. He enumerates the following beliefs as the characteristics of the religious life: that the visible world is part of a more spiritual universe from which it draws its chief significance; that union or harmonious relation with that higher universe is our true end; that prayer or inner communion with the spirit thereof—be that spirit "God" or "law"—is a process wherein work is really done, and spiritual energy flows in and produces effects, psychological or material, within the phenomenal world. Religion, James goes on to say, also includes the following psychological characteristics: a zest which adds itself like a gift to life, and takes the form either of lyrical enchantment or of appeal to earnestness and heroism, and furthermore an assurance of safety and a temper of peace, and, in relation to others, a preponderance of loving affection.Ibid., pp. 485–486.
This characterization of mankind's religious experience and feelings does not make any reference to the arrangement of social cooperation. Religion, as James sees it, is a purely personal and individual relation between man and a holy, mysterious, and awe-inspiring divine Reality. It enjoins upon man a certain mode of individual conduct. But it does not assert anything with regard to the problems of social organization. St. Francis d'Assisi, the greatest religious genius of the West, did not concern himself with politics and economics. He wanted to teach his disciples how to live piously; he did not draft a plan for the organization of production and did not urge his followers to resort to violence against dissenters. He is not responsible for the interpretation of his teachings by the order he founded.
Liberalism puts no obstacles in the way of a man eager to adjust his personal conduct and his private affairs according to the mode in which he individually or his church or denomination interprets the teachings of the Gospels. But it is radically opposed to all endeavors to silence the rational discussion of problems of social welfare by an appeal to religious intuition and revelation. It does not enjoin divorce or the practice of birth control upon anybody. But it fights those who want to prevent other people from freely discussing the pros and cons of these matters.
In the liberal opinion the aim of the moral law is to impel individuals to adjust their conduct to the requirements of life in society, to abstain from all acts detrimental to the preservation of peaceful social cooperation and to the improvement of interhuman relations. Liberals welcome the support which religious teachings may give to those moral precepts of which they themselves approve, but they are opposed to all those norms which are bound to bring about social disintegration from whatever source they may stem.
It is a distortion of fact to say, as many champions of religious theocracy do, that liberalism fights religion. Where the principle of church interference with secular issues is in force, the various churches, denominations and sects are fighting one another. By separating church and state, liberalism establishes peace between the various religious factions and gives to each of them the opportunity to preach its gospel unmolested.
Liberalism is rationalistic. It maintains that it is possible to convince the immense majority that peaceful cooperation within the framework of society better serves their rightly understood interests than mutual battling and social disintegration. It has full confidence in man's reason. It may be that this optimism is unfounded and that the liberals have erred. But then there is no hope left for mankind's future.
This article is excerpted from chapter 8 of Human Action: "A Critique of the Holistic and Metaphysical View of Society."
- Purposeful Action and Animal Reaction Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life. Such paraphrases may clarify the definition given and prevent possible misinterpretations. But the definition itself is adequate and does not need complement of commentary.
Conscious or purposeful behavior is in sharp contrast to unconscious behavior, i.e., the reflexes and the involuntary responses of the body's cells and nerves to stimuli. People are sometimes prepared to believe that the boundaries between conscious behavior and the involuntary reaction of the forces operating within man's body are more or less indefinite. This is correct only as far as it is sometimes not easy to establish whether concrete behavior is to be considered voluntary or involuntary. But the distinction between consciousness and unconsciousness is nonetheless sharp and can be clearly determined.
The unconscious behavior of the bodily organs and cells is for the acting ego no less a datum than any other fact of the external world. Acting man must take into account all that goes on within his own body as well as other data, e.g., the weather or the attitudes of his neighbors. There is, of course, a margin within which purposeful behavior has the power to neutralize the working of bodily factors. It is feasible within certain limits to get the body under control. Man can sometimes succeed through the power of his will in overcoming sickness, in compensating for the innate or acquired insufficiency of his physical constitution, or in suppressing reflexes. As far as this is possible, the field of purposeful action is extended. If a man abstains from controlling the involuntary reaction of cells and nerve centers, although he would be in a position to do so, his behavior is from our point of view purposeful.
The field of our science is human action, not the psychological events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology. The theme of psychology is the internal events that result or can result in a definite action. The theme of praxeology is action as such. This also settles the relation of praxeology to the psychoanalytical concept of the subconscious. Psychoanalysis too is psychology and does not investigate action but the forces and factors that impel a man toward a definite action. The psychoanalytical subconscious is a psychological and not a praxeological category. Whether an action stems from clear deliberation, or from forgotten memories and suppressed desires which from submerged regions, as it were, direct the will, does not influence the nature of the action. The murderer whom a subconscious urge (the Id) drives toward his crime and the neurotic whose aberrant behavior seems to be simply meaningless to an untrained observer both act; they like anybody else are aiming at certain ends. It is the merit of psychoanalysis that it has demonstrated that even the behavior of neurotics and psychopaths is meaningful, that they too act and aim at ends, although we who consider ourselves normal and sane call the reasoning determining their choice of ends nonsensical and the means they choose for the attainment of these ends contrary to purpose.
The term "unconscious" as used by praxeology and the terms "subconscious" and "unconscious" as applied by psychoanalysis belong to two different systems of thought and research. Praxeology no less than other branches of knowledge owes much to psychoanalysis. The more necessary is it then to become aware of the line which separates praxeology from psychoanalysis.
Action is not simply giving preference. Man also shows preference in situations in which things and events are unavoidable or are believed to be so. Thus a man may prefer sunshine to rain and may wish that the sun would dispel the clouds. He who only wishes and hopes does not interfere actively with the course of events and with the shaping of his own destiny. But acting man chooses, determines, and tries to reach an end. Of two things both of which he cannot have together he selects one and gives up the other. Action therefore always involves both taking and renunciation.
To express wishes and hopes and to announce planned action may be forms of action in so far as they aim in themselves at the realization of a certain purpose. But they must not be confused with the actions to which they refer. They are not identical with the actions they announce, recommend, or reject. Action is a real thing. What counts is a man's total behavior, and not his talk about planned but not realized acts. On the other hand action must be clearly distinguished from the application of labor. Action means the employment of means for the attainment of ends. As a rule one of the means employed is the acting man's labor. But this is not always the case. Under special conditions a word is all that is needed. He who gives orders or interdictions may act without any expenditure of labor. To talk or not to talk, to smile or to remain serious, may be action. To consume and to enjoy are no less action than to abstain from accessible consumption and enjoyment.
Praxeology consequently does not distinguish between "active" or energetic and "passive" or indolent man. The vigorous man industriously striving for the improvement of his condition acts neither more nor less than the lethargic man who sluggishly takes things as they come. For to do nothing and to be idle are also action, they too determine the course of events. Wherever the conditions for human interference are present, man acts no matter whether he interferes or refrains from interfering. He who endures what he could change acts no less than he who interferes in order to attain another result. A man who abstains from influencing the operation of physiological and instinctive factors which he could influence also acts. Action is not only doing but no less omitting to do what possibly could be done.
We may say that action is the manifestation of a man's will. But this would not add anything to our knowledge. For the term will means nothing else than man's faculty to choose between different states of affairs, to prefer one, to set aside the other, and to behave according to the decision made in aiming at the chosen state and forsaking the other.
- The Prerequisites of Human Action We call contentment or satisfaction that state of a human being which does not and cannot result in any action. Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better, and his action aims at bringing about this desired state. The incentive that impels a man to act is always some uneasiness.Cf. Lock, An Essay Concerning Human Understanding, ed. Fraser (Oxford, 1894), I, 331–333; Leibniz, Nouveaux essais sur l'entendement humain, ed. Fammarion, p. 119. A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care.
But to make a man act, uneasiness and the image of a more satisfactory state alone are not sufficient. A third condition is required: the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.
These are the general conditions of human action. Man is the being that lives under these conditions. He is not only homo sapiens, but no less homo agens. Beings of human descent who either from birth or from acquired defects are unchangeably unfit for any action (in the strict sense of the term and not merely in the legal sense) are practically not human. Although the statutes and biology consider them to be men, they lack the essential feature of humanity. The newborn child too is not an acting being. It has not yet gone the whole way from conception to the full development of its human qualities. But at the end of this evolution it becomes an acting being.
On Happiness
In colloquial speech we call a man "happy" who has succeeded in attaining his ends. A more adequate description of his state would be that he is happier than he was before. There is however no valid objection to a usage that defines human action as the striving for happiness.
But we must avoid current misunderstandings. The ultimate goal of human action is always the satisfaction of the acting man's desire. There is no standard of greater or lesser satisfaction other than individual judgments of value, different for various people and for the same people at various times. What makes a man feel uneasy and less uneasy is established by him from the standard of his own will and judgment, from his personal and subjective valuation. Nobody is in a position to decree what should make a fellow man happier.
To establish this fact does not refer in any way to the antitheses of egoism and altruism, of materialism and idealism, of individualism and collectivism, of atheism and religion. There are people whose only aim is to improve the condition of their own ego. There are other people with whom awareness of the troubles of their fellow men causes as much uneasiness as or even more uneasiness than their own wants. There are people who desire nothing else than the satisfaction of their appetites for sexual intercourse, food, drinks, fine homes, and other material things. But other men care more for the satisfactions commonly called "higher" and "ideal." There are individuals eager to adjust their actions to the requirements of social cooperation; there are, on the other hand, refractory people who defy the rules of social life. There are people for whom the ultimate goal of the earthly pilgrimage is the preparation for a life of bliss. There are other people who do not believe in the teachings of any religion and do not allow their actions to be influenced by them.
Praxeology is indifferent to the ultimate goals of action. Its findings are valid for all kinds of action irrespective of the ends aimed at. It is a science of means, not of ends. It applies the term happiness in a purely formal sense. In the praxeological terminology the proposition: man's unique aim is to attain happiness, is tautological. It does not imply any statement about the state of affairs from which man expects happiness.
The idea that the incentive of human activity is always some uneasiness and its aim always to remove such uneasiness as far as possible, that is, to make the acting men feel happier, is the essence of the teachings of Eudaemonism and Hedonism. Epicurean αταραιξα is that state of perfect happiness and contentment at which all human activity aims without ever wholly attaining it. In the face of the grandeur of this cognition it is of little avail only that many representatives of this philosophy failed to recognize the purely formal character of the notions pain and pleasure and gave them a material and carnal meaning. The theological, mystical, and other schools of a heteronomous ethic did not shake the core of Epicureanism because they could not raise any other objection than its neglect of the "higher" and "nobler" pleasures. It is true that the writings of many earlier champions of Eudaemonism, Hedonism, and Utilitarianism are in some points open to misinterpretation. But the language of modern philosophers and still more that of the modern economists is so precise and straightforward that no misinterpretation can possibly occur.
On Instincts and Impulses
One does not further the comprehension of the fundamental problem of human action by the methods of instinct-sociology. This school classifies the various concrete goals of human action and assigns to each class a special instinct as its motive. Man appears as a being driven by various innate instincts and dispositions. It is assumed that this explanation demolishes once for all the odious teachings of economics and utilitarian ethics. However, Feuerbach has already justly observed that every instinct is an instinct to happiness.Cf. Feuerbach, Sämmtliche Werke, ed. Bolin and Jodl (Stuttgart, 1907), X, 231. The method of instinct-psychology and instinct-sociology consists in an arbitrary classification of the immediate goals of action and in a hypostasis of each. Whereas praxeology says that the goal of an action is to remove a certain uneasiness, instinct-psychology says it is the satisfaction of an instinctive urge.
Many champions of the instinct school are convinced that they have proved that action is not determined by reason, but stems from the profound depths of innate forces, impulses, instincts, and dispositions which are not open to any rational elucidation. They are certain they have succeeded in exposing the shallowness of rationalism and disparage economics as "a tissue of false conclusions drawn from false psychological assumptions."Cf. William McDougall, An Introduction to Social Psychology (14th ed. Boston, 1921), p. 11. Yet rationalism, praxeology, and economics do not deal with the ultimate springs and goals of action, but with the means applied for the attainment of an end sought. However unfathomable the depths may be from which an impulse or instinct emerges, the means which man chooses for its satisfaction are determined by a rational consideration of expense and success.Cf. Mises, Epistemological Problems of Economics, trans. by G. Reisman (New York, 1960), pp. 52ff.
He who acts under an emotional impulse also acts. What distinguishes an emotional action from other actions is the valuation of input and output. Emotions disarrange valuations. Inflamed with passion, man sees the goal as more desirable and the price he has to pay for it as less burdensome than he would in cool deliberation. Men have never doubted that even in the state of emotion means and ends are pondered and that it is possible to influence the outcome of this deliberation by rendering more costly the yielding to the passionate impulse. To punish criminal offenses committed in a state of emotional excitement or intoxication more mildly than other offenses is tantamount to encouraging such excesses. The threat of severe retaliation does not fail to deter even people driven by seemingly irresistible passion.
We interpret animal behavior on the assumption that the animal yields to the impulse which prevails at the moment. As we observe that the animal feeds, cohabits, and attacks other animals or men, we speak of its instincts of nourishment, of reproduction, and of aggression. We assume that such instincts are innate and peremptorily ask for satisfaction.
But it is different with man. Man is not a being who cannot help yielding to the impulse that most urgently asks for satisfaction. Man is a being capable of subduing his instincts, emotions, and impulses; he can rationalize his behavior. He renounces the satisfaction of a burning impulse in order to satisfy other desires. He is not a puppet of his appetites. A man does not ravish every female that stirs his senses; he does not devour every piece of food that entices him; he does not knock down every fellow he would like to kill. He arranges his wishes and desires into a scale, he chooses; in short, he acts. What distinguishes man from beasts is precisely that he adjusts his behavior deliberatively. Man is the being that has inhibitions, that can master his impulses and desires, that has the power to suppress instinctive desires and impulses.
It may happen that an impulse emerges with such vehemence that no disadvantage which its satisfaction may cause appears great enough to prevent the individual from satisfying it. In this case too there is choosing. Man decides in favor of yielding to the desire concerned.In such cases a great role is played by the circumstances that the two satisfactions concerned—that expected from yielding to the impulse and that expected from the avoidance of its undesirable consequences—are not simultaneous. Cf. below, pp. 479–490.
- Human Action as an Ultimate Given Since time immemorial men have been eager to know the prime mover, the cause of all being and of all change, the ultimate substance from which everything stems and which is the cause of itself. Science is more modest. It is aware of the limits of the human mind and of the human search for knowledge. It aims at tracing back every phenomenon to its cause. But it realizes that these endeavors must necessarily strike against insurmountable walls. There are phenomena which cannot be analyzed and traced back to other phenomena. They are the ultimate given. The progress of scientific research may succeed in demonstrating that something previously considered as an ultimate given can be reduced to components. But there will always be some irreducible and unanalyzable phenomena, some ultimate given.
Monism teaches that there is but one ultimate substance, dualism that there are two, pluralism that there are many. There is no point quarreling about these problems. Such metaphysical disputes are interminable. The present state of our knowledge does not provide the means to solve them with an answer which every reasonable man must consider satisfactory.
Materialist monism contends that human thoughts and volitions are the product of the operation of bodily organs, the cells of the brain and the nerves. Human thought, will, and action are solely brought about by material processes which one day will be completely explained by the methods of physical and chemical inquiry. This too is a metaphysical hypothesis, although it supporters consider it as an unshakable and undeniable scientific truth.
Various doctrines have been advanced to explain the relation between mind and body. They are mere surmises without any reference to observed facts. All that can be said with certainty is that there are relations between mental and physiological processes. With regard to the nature and operation of this connection we know little if anything.
Concrete value judgments and definite human actions are not open to further analysis. We may fairly assume or believe that they are absolutely dependent upon and conditioned by their causes. But as long as we do not know how external facts—physical and physiological—produce in a human mind definite thoughts and volitions resulting in concrete acts, we have to face an insurmountable methodological dualism. In the present state of our knowledge the fundamental statements of positivism, monism, and panphysicalism are mere metaphysical postulates devoid of any scientific foundation and both meaningless and useless for scientific research. Reason and experience show us two separate realms: the external world of physical, chemical, and physiological phenomena and the internal world of thought, feeling, valuation, and purposeful action. No bridge connects—as far as we can see today—these two spheres. Identical external events result sometimes in different human responses, and different external events produce sometimes the same human response. We do not know why.
In the face of this state of affairs we cannot help withholding judgment on the essential statements of monism and materialism. We may or may not believe that the natural sciences will succeed one day in explaining the production of definite ideas, judgments of value, and actions in the same way in which they explain the production of a chemical compound as the necessary and unavoidable outcome of a certain combination of elements. In the meantime we are bound to acquiesce in a methodological dualism.
Human action is one of the agencies bringing about change. It is an element of cosmic activity and becoming. Therefore it is a legitimate object of scientific investigation. As—at least under present conditions—it cannot be traced back to its causes, it must be considered as an ultimate given and must be studied as such.
It is true that the changes brought about by human action are but trifling when compared with the effects of the operation of the great cosmic forces. From the point of view of eternity and the infinite universe man is an infinitesimal speck. But for man human action and its vicissitudes are the real thing. Action is the essence of his nature and existence, his means of preserving his life and raising himself above the level of animals and plants. However perishable and evanescent all human efforts may be, for man and for human science they are of primary importance.
- Rationality and Irrationality; Subjectivism and Objectivity of Praxeological Research Human action is necessarily always rational. The term "rational action" is therefore pleonastic and must be rejected as such. When applied to the ultimate ends of action, the terms rational and irrational are inappropriate and meaningless. The ultimate end of action is always the satisfaction of some desires of the acting man. Since nobody is in a position to substitute his own value judgments for those of the acting individual, it is vain to pass judgment on other people's aims and volitions. No man is qualified to declare what would make another man happier or less discontented. The critic either tells us what he believes he would aim at if he were in the place of his fellow; or, in dictatorial arrogance blithely disposing of his fellow's will and aspirations, declares what condition of this other man would better suit himself, the critic.
It is usual to call an action irrational if it aims, at the expense of "material" and tangible advantages, at the attainment of "ideal" or "higher" satisfactions. In this sense people say, for instance—sometimes with approval, sometimes with disapproval—that a man who sacrifices life, health, or wealth to the attainment of "higher" goods—like fidelity to his religious, philosophical, and political convictions or the freedom and flowering of his nation—is motivated by irrational considerations. However, the striving after these higher ends is neither more nor less rational or irrational than that after other human ends. It is a mistake to assume that the desire to procure the bare necessities of life and health is more rational, natural, or justified than the striving after other goods or amenities. It is true that the appetite for food and warmth is common to men and other mammals and that as a rule a man who lacks food and shelter concentrates his efforts upon the satisfaction of these urgent needs and does not care much for other things. The impulse to live, to preserve one's own life, and to take advantage of every opportunity of strengthening one's vital forces is a primal feature of life, present in every living being. However, to yield to this impulse is not—for man—an inevitable necessity.
While all other animals are unconditionally driven by the impulse to preserve their own lives and by the impulse of proliferation, man has the power to master even these impulses. He can control both his sexual desires and his will to live. He can give up his life when the conditions under which alone he could preserve it seem intolerable. Man is capable of dying for a cause or of committing suicide. To live is for man the outcome of a choice, of a judgment of value.
It is the same with the desire to live in affluence. The very existence of ascetics and of men who renounce material gains for the sake of clinging to their convictions and of preserving their dignity and self-respect is evidence that the striving after more tangible amenities is not inevitable but rather the result of a choice. Of course, the immense majority prefer life to death and wealth to poverty.
It is arbitrary to consider only the satisfaction of the body's physiological needs as "natural" and therefore "rational" and everything else as "artificial" and therefore "irrational." It is the characteristic feature of human nature that man seeks not only food, shelter, and cohabitation like all other animals, but that he aims also at other kinds of satisfaction. Man has specifically human desires and needs which we may call "higher" than those which he has in common with the other mammals.On the errors involved in the iron law of wages see below, pp. 603 f.; on the misunderstanding of the Malthusian theory see below, pp. 667–672.
When applied to the means chosen for the attainment of ends, the terms rational and irrational imply a judgment about the expediency and adequacy of the procedure employed. The critic approves or disapproves of the method from the point of view of whether or not it is best suited to attain the end in question. It is a fact that human reason is not infallible and that man very often errs in selecting and applying means. An action unsuited to the end sought falls short of expectation. It is contrary to purpose, but it is rational, i.e., the outcome of a reasonable—although faulty—deliberation and an attempt—although an ineffectual attempt—to attain a definite goal. The doctors who a hundred years ago employed certain methods for the treatment of cancer which our contemporary doctors reject were—from the point of view of present-day pathology—badly instructed and therefore inefficient. But they did not act irrationally; they did their best. It is probable that in a hundred years more doctors will have more efficient methods at hand for the treatment of this disease. They will be more efficient but not more rational than our physicians.
The opposite of action is not irrational behavior, but a reactive response to stimuli on the part of the bodily organs and instincts which cannot be controlled by the volition of the person concerned. To the same stimulus man can under certain conditions respond both by reactive response and by action. If a man absorbs a poison, the organs react by setting up their forces of antidotal defense; in addition, action may interfere by applying counterpoison.
With regard to the problem involved in the antithesis, rational and irrational, there is no difference between the natural sciences and the social sciences. Science always is and must be rational. It is the endeavor to attain a mental grasp of the phenomena of the universe by a systematic arrangement of the whole body of available knowledge. However, as has been pointed out above, the analysis of objects into their constituent elements must sooner or later necessarily reach a point beyond which it cannot go. The human mind is not even capable of conceiving a kind of knowledge not limited by an ultimate given inaccessible to further analysis and reduction. The scientific method that carries the mind up to this point is entirely rational. The ultimate given may be called an irrational fact.
It is fashionable nowadays to find fault with the social sciences for being purely rational. The most popular objection raised against economics is that it neglects the irrationality of life and reality and tries to press into dry rational schemes and bloodless abstractions the infinite variety of phenomena. No censure could be more absurd. Like every branch of knowledge economics goes as far as it can be carried by rational methods. Then it stops by establishing the fact that it is faced with an ultimate given, i.e., a phenomenon which cannot—at least in the present state of our knowledge—be further analyzed.We shall see later (pp. 49–58) how the empirical social sciences deal with the ultimate given.
The teachings of praxeology and economics are valid for every human action without regard to its underlying motives, causes, and goals. The ultimate judgments of value and the ultimate ends of human action are given for any kind of scientific inquiry; they are not open to any further analysis. Praxeology deals with the ways and means chosen for the attainment of such ultimate ends. Its object is means, not ends.
In this sense we speak of the subjectivism of the general science of human action. It takes the ultimate ends chosen by acting man as data, it is entirely neutral with regard to them, and it refrains from passing any value judgments. The only standard which it applies is whether or not the means chosen are fit for the attainment of the ends aimed at. If Eudaemonism says happiness, if Utilitarianism and economics say utility, we must interpret these terms in a subjectivistic way as that which acting man aims at because it is desirable in his eyes. It is in this formalism that the progress of the modern meaning of Eudaemonism, Hedonism, and Utilitarianism consists as opposed to the older material meaning and the progress of the modern subjectivistic theory of value as opposed to the objectivistic theory of value as expounded by classical political economy. At the same time it is in this subjectivism that the objectivity of our science lies. Because it is subjectivistic and takes the value judgments of acting man as ultimate data not open to any further critical examination, it is itself above all strife of parties and factions, it is indifferent to the conflicts of all schools of dogmatism and ethical doctrines, it is free from valuations and preconceived ideas and judgments, it is universally valid and absolutely and plainly human.
- Causality as a Requirement of Action Man is in a position to act because he has the ability to discover causal relations which determine change and becoming in the universe. Acting requires and presupposes the category of causality. Only a man who sees the world in the light of causality is fitted to act. In this sense we may say that causality is a category of action. The category means and ends presupposes the category cause and effect. In a world without causality and regularity of phenomena there would be no field for human reasoning and human action. Such a world would be a chaos in which man would be at a loss to find any orientation and guidance. Man is not even capable of imagining the conditions of such a chaotic universe.
Where man does not see any causal relation, he cannot act. This statement is not reversible. Even when he knows the causal relation involved, man cannot act if he is not in a position to influence the cause.
The archetype of causality research was: where and how must I interfere in order to divert the course of events from the way it would go in the absence of my interference in a direction which better suits my wishes? In this sense man raises the question: who or what is at the bottom of things? He searches for the regularity and the "law," because he wants to interfere. Only later was this search more extensively interpreted by metaphysics as a search after the ultimate cause of being and existence. Centuries were needed to bring these exaggerated and extravagant ideas back again to the more modest question of where one must interfere or should one be able to interfere in order to attain this or that end.
The treatment accorded to the problem of causality in the last decades has been, due to a confusion brought about by some eminent physicists, rather unsatisfactory. We may hope that this unpleasant chapter in the history of philosophy will be a warning to future philosophers.
There are changes whose causes are, at least for the present time, unknown to us. Sometimes we succeed in acquiring a partial knowledge so that we are able to say: in 70 per cent of all cases A results in B, in the remaining cases in C, or even in D, E, F, and so on. In order to substitute for this fragmentary information more precise information it would be necessary to break up A into its elements. As long as this is not achieved, we must acquiesce in what is called a statistical law. But this does not affect the praxeological meaning of causality. Total or partial ignorance in some areas does not demolish the category of causality.
The philosophical, epistemological, and metaphysical problems of causality and of imperfect induction are beyond the scope of praxeology. We must simply establish the fact that in order to act, man must know the causal relationship between events, processes, or states of affairs. And only as far as he knows this relationship, can his action attain the ends sought. We are fully aware that in asserting this we are moving in a circle. For the evidence that we have correctly perceived a causal relation is provided only by the fact that action guided by this knowledge results in the expected outcome. But we cannot avoid this vicious circular evidence precisely because causality is a category of action. And because it is such a category, praxeology cannot help bestowing some attention on this fundamental problem of philosophy.
- The Alter Ego If we are prepared to take the term causality in its broadest sense, teleology can be called a variety of causal inquiry. Final causes are first of all causes. The cause of an event is seen as an action or quasi-action aiming at some end.
Both primitive man and the infant, in a naive anthropomorphic attitude, consider it quite plausible that every change and event is the outcome of the action of a being acting in the same way as they themselves do. They believe that animals, plants, mountains, rivers, and fountains, even stones and celestial bodies, are, like themselves, feeling, willing, and acting beings. Only at a later stage of cultural development does man renounce these animistic ideas and substitute the mechanistic world view for them. Mechanicalism proves to be so satisfactory a principle of conduct that people finally believe it capable of solving all the problems of thought and scientific research. Materialism and panphysicalism proclaim mechanicalism as the essence of all knowledge and the experimental and mathematical methods of the natural sciences as the sole scientific mode of thinking.
All changes are to be comprehended as motions subject to the laws of mechanics.
The champions of mechanicalism do not bother about the still unsolved problems of the logical and epistemological basis of the principles of causality and imperfect induction. In their eyes these principles are sound because they work. The fact that experiments in the laboratory bring about the results predicted by the theories and that machines in the factories run in the way predicted by technology proves, they say, the soundness of the methods and findings of modern natural science. Granted that science cannot give us truth—and who knows what truth really means?—at any rate it is certain that it works in leading us to success.
But it is precisely when we accept this pragmatic point of view that the emptiness of the panphysicalist dogma becomes manifest. Science, as has been pointed out above, has not succeeded in solving the problems of the mind-body relations. The panphysicalists certainly cannot contend that the procedures they recommend have ever worked in the field of interhuman relations and of the social sciences. But it is beyond doubt that the principle according to which an Ego deals with every human being as if the other were a thinking and acting being like himself has evidenced its usefulness both in mundane life and in scientific research. It cannot be denied that it works.
It is beyond doubt that the practice of considering fellow men as beings who think and act as I, the Ego, do has turned out well; on the other hand the prospect seems hopeless of getting a similar pragmatic verification for the postulate requiring them to be treated in the same manner as the objects of the natural sciences. The epistemological problems raised by the comprehension of other people's behavior are no less intricate than those of causality and incomplete induction. It may be admitted that it is impossible to provide conclusive evidence for the propositions that my logic is the logic of all other people and by all means absolutely the only human logic and that the categories of my action are the categories of all other people's action and by all means absolutely the categories of all human action. However, the pragmatist must remember that these propositions work both in practice and in science, and the positivist must not overlook the fact that in addressing his fellow men he presupposes—tacitly and implicitly—the intersubjective validity of logic and thereby the reality of the realm of the alter Ego's thought and action, of his eminent human character.Cf. Alfred Schütz, Der sinnhafte Aufbau der sozialen Welt (Vinna, 1932), p. 18.
Thinking and acting are the specific human features of man. They are peculiar to all human beings. They are, beyond membership in the zoological species homo sapiens, the characteristic mark of man as man. It is not the scope of praxeology to investigate the relation of thinking and acting. For praxeology it is enough to establish the fact that there is only one logic that is intelligible to the human mind, and that there is only one mode of action which is human and comprehensible to the human mind. Whether there are or can be somewhere other beings—superhuman or subhuman—who think and act in a different way, is beyond the reach of the human mind. We must restrict our endeavors to the study of human action.
This human action which is inextricably linked with human thought is conditioned by logical necessity. It is impossible for the human mind to conceive logical relations at variance with the logical structure of our mind. It is impossible for the human mind to conceive a mode of action whose categories would differ from the categories which determine our own actions.
There are for man only two principles available for a mental grasp of reality, namely, those of teleology and causality. What cannot be brought under either of these categories is absolutely hidden to the human mind. An event not open to an interpretation by one of these two principles is for man inconceivable and mysterious. Change can be conceived as the outcome either of the operation of mechanistic causality or of purposeful behavior; for the human mind there is no third way available.Dr. Karel Englis, Begründung der Teleologie als Form des empirischen Erkennens (Brünn, 1930), pp. 15ff. It is true, as has already been mentioned, that teleology can be viewed as a variety of causality. But the establishment of this fact does not annul the essential differences between the two categories.
The panmechanistic world view is committed to a methodological monism; it acknowledges only mechanistic causality because it attributes to it alone any cognitive value or at least a higher cognitive value than teleology. This is a metaphysical superstition. Both principles of cognition—causality and teleology—are, owing to the limitations of human reason, imperfect and do not convey ultimate knowledge. Causality leads to a regressus in infinitum which reason can never exhaust. Teleology is found wanting as soon as the question is raised of what moves the prime mover. Either method stops short at an ultimate given which cannot be analyzed and interpreted. Reasoning and scientific inquiry can never bring full ease of mind, apodictic certainty, and perfect cognition of all things. He who seeks this must apply to faith and try to quiet his conscience by embracing a creed or a metaphysical doctrine.
If we do not transcend the realm of reason and experience, we cannot help acknowledging that our fellow men act. We are not free to disregard this fact for the sake of a fashionable prepossession and an arbitrary opinion. Daily experience proves not only that the sole suitable method for studying the conditions of our nonhuman environment is provided by the category of causality; it proves no less convincingly that our fellow men are acting beings as we ourselves are. For the comprehension of action there is but one scheme of interpretation and analysis available, namely, that provided by the cognition and analysis of our own purposeful behavior.
The problem of the study and analysis of other people's action is in no way connected with the problem of the existence of a soul or of an immortal soul. As far as the objections of empiricism, behaviorism, and positivism are directed against any variety of the soul-theory, they are of no avail for our problem. The question we have to deal with is whether it is possible to grasp human action intellectually if one refuses to comprehend it as meaningful and purposeful behavior aiming at the attainment of definite ends. Behaviorism and positivism want to apply the methods of the empirical natural sciences to the reality of human action. They interpret it as a response to stimuli.
But these stimuli themselves are not open to description by the methods of the natural sciences. Every attempt to describe them must refer to the meaning which acting men attach to them. We may call the offering of a commodity for sale a "stimulus." But what is essential in such an offer and distinguishes it from other offers cannot be described without entering into the meaning which the acting parties attribute to the situation. No dialectical artifice can spirit away the fact that man is driven by the aim to attain certain ends. It is this purposeful behavior—viz., action—that is the subject matter of our science. We cannot approach our subject if we disregard the meaning which acting man attaches to the situation, i.e., the given state of affairs, and to his own behavior with regard to this situation.
It is not appropriate for the physicist to search for final causes because there is no indication that the events which are the subject matter of physics are to be interpreted as the outcome of actions of a being, aiming at ends in a human way. Nor is it appropriate for the praxeologist to disregard the operation of the acting being's volition and intention; they are undoubtedly given facts. If he were to disregard it, he would cease to study human action. Very often—but not always—the events concerned can be investigated both from the point of view of praxeology and from that of the natural sciences. But he who deals with the discharging of a firearm from the physical and chemical point of view is not a praxeologist. He neglects the very problems which the science of purposeful human behavior aims to clarify.
On the Serviceableness of Instincts
The proof of the fact that only two avenues of approach are available for human research, causality or teleology, is provided by the problems raised in reference to the serviceableness of instincts. There are types of behavior which on the one hand cannot be thoroughly interpreted with the causal methods of the natural sciences, but on the other hand cannot be considered as purposeful human action. In order to grasp such behavior we are forced to resort to a makeshift. We assign to it the character of a quasi-action; we speak of serviceable instincts.
We observe two things: first the inherent tendency of a living organism to respond to a stimulus according to a regular pattern, and second the favorable effects of this kind of behavior for the strengthening or preservation of the organism's vital forces. If we were in a position to interpret such behavior as the outcome of purposeful aiming at certain ends, we would call it action and deal with it according to the teleological methods of praxeology. But as we found no trace of a conscious mind behind this behavior, we suppose that an unknown factor—we call it instinct—was instrumental. We say that the instinct directs quasi-purposeful animal behavior and unconscious but nonetheless serviceable responses of human muscles and nerves. Yet, the mere fact that we hypostatize the unexplained element of this behavior as a force and call it instinct does not enlarge our knowledge. We must never forget that this word instinct is nothing but a landmark to indicate a point beyond which we are unable, up to the present at least, to carry our scientific scrutiny.
Biology has succeeded in discovering a "natural," i.e., mechanistic, explanation for many processes which in earlier days were attributed to the operation of instincts. Nonetheless many others have remained which cannot be interpreted as mechanical or chemical responses to mechanical or chemical stimuli. Animals display attitudes which cannot be comprehended otherwise than through the assumption that a directing factor was operative.
The aim of behaviorism to study human action from without with the methods of animal psychology is illusory. As far as animal behavior goes beyond mere physiological processes like breathing and metabolism, it can only be investigated with the aid of the meaning-concepts developed by praxeology. The behaviorist approaches the object of his investigations with the human notions of purpose and success. He unwittingly applies to the subject matter of his studies the human concepts of serviceableness and perniciousness. He deceives himself in excluding all verbal reference to consciousness and aiming at ends.
In fact his mind searches everywhere for ends and measures every attitude with the yardstick of a garbled notion of serviceableness. The science of human behavior—as far as it is not physiology—cannot abandon reference to meaning and purpose. It cannot learn anything from animal psychology and the observation of the unconscious reactions of newborn infants. It is, on the contrary, animal psychology and infant psychology which cannot renounce the aid afforded by the science of human action. Without praxeological categories we would be at a loss to conceive and to understand the behavior both of animals and of infants.
The observation of the instinctive behavior of animals fills man with astonishment and raises questions which nobody can answer satisfactorily. Yet the fact that animals and even plants react in a quasi-purposeful way is neither more nor less miraculous than that man thinks and acts, that in the inorganic universe those functional correspondences prevail which physics describes, and that in the organic universe biological processes occur. All this is miraculous in the sense that it is an ultimate given for our searching mind.
Such an ultimate given is also what we call animal instinct. Like the concepts of motion, force, life, and consciousness, the concept of instinct too is merely a term to signify an ultimate given. To be sure, it neither "explains" anything nor indicates a cause or an ultimate cause."La vie est une cause premiere qui nous échappe comme toutes les causes premières et dont la science expérimentale n'a pas à se préoccuper." Claude Bernard, Law Science expérimentale (Paris, 1878), p. 137.
The Absolute End
In order to avoid any possible misinterpretation of the praxeological categories it seems expedient to emphasize a truism.
Praxeology, like the historical sciences of human action, deals with purposeful human action. If it mentions ends, what it has in view is the ends at which acting men aim. If it speaks of meaning, it refers to the meaning which acting men attach to their actions.
Praxeology and history are manifestations of the human mind and as such are conditioned by the intellectual abilities of mortal men. Praxeology and history do not pretend to know anything about the intentions of an absolute and objective mind, about an objective meaning inherent in the course of events and of historical evolution, and about the plans which God or Nature or On the philosophy of history, cf. Mises, Theory and History (New Haven, 1957), pp. 159ff.Weltgeist or Manifest Destiny is trying to realize in directing the universe and human affairs. They have nothing in common with what is called philosophy of history. They do not, like the works of Hegel, Comte, Marx, and a host of other writers, claim to reveal information about the true, objective, and absolute meaning of life and history.
Vegetative Man
Some philosophies advise men to seek as the ultimate end of conduct the complete renunciation of any action. They look upon life as an absolute evil full of pain, suffering, and anguish, and apodictically deny that any purposeful human effort can render it tolerable. Happiness can be attained only by complete extinction of consciousness, volition, and life. The only way toward bliss and salvation is to become perfectly passive, indifferent, and inert like the plants. The sovereign good is the abandonment of thinking and acting.
Such is the essence of the teachings of various Indian philosophies, especially of Buddhism, and of Schopenhauer. Praxeology does not comment upon them. It is neutral with regard to all judgments of value and the choice of ultimate ends. Its task is not to approve or to disapprove, but to describe what is.
The subject matter of praxeology is human action. It deals with acting man, not with man transformed into a plant and reduced to a merely vegetative existence.
This article is excerpted from part I of Human Action. See the Study Guide (PDF).
Praxeology and WarThe Meaning of Imperialist WarWar Making and Class ConflictDemocracy and Imperialist War MakingSevering The Sinews of Imperialist WarConclusionNotes[This is a revised version of a talk given October 28th at this year's Mises Institute Supporter's Summit, "Imperialism: Enemy of Freedom." The original talk, "Taxation, Inflation, and War" is available in MP3 audio from Mises Media.]
Praxeology and WarCommentaries on war stretching back more than two millennia to the Peloponnesian Wars have enshrouded the fundamental causes of war in an almost impenetrable fog of myths, fallacies, and outright lies. In most studies, war is generally portrayed as the inevitable outcome of either complex historical forces or accidental circumstances generally beyond the understanding or control of the human combatants.
Fortunately, there exists a science of human action that is applicable to all purposeful activities. This science is referred to as "praxeology." Although economics is its most developed branch, the basic principles of this science can also be applied to analyzing violent action including warfare. Thus Murray Rothbard wrote:
The rest of praxeology [besides economics] is an unexplored area. Attempts have been made to formulate a logical theory of war and violent action, and violence in the form of government has been treated by political philosophy and by praxeology in tracing the effects of violent intervention in the free market.Murray N. Rothbard, Man, Economy and State: A Treatise on Economic Principles, 2nd ed., Scholar's ed. with Power and Market: Government and the Economy, 3rd ed., Scholar's ed. (Auburn, AL: Ludwig von Mises Institute, 2004), p. 74
As Rothbard suggested, what we might call the "Logic of War Making" is a relatively undeveloped area of the science of human action. Its elaboration is therefore especially necessary if we are to dispel the mythology of war and elucidate its true origin and character. The basic axiom of this praxeological discipline is that war is the objective outcome of the human endeavor of war making.
As a human endeavor like any other, war making is the product of reason, purpose and choice. Therefore a proper analysis of war must take into account the goals of the war makers, the means at their disposal, the benefits they anticipate from the war and the costs they expect to incur in executing it. It also must distinguish in a general way between the individual beneficiaries and victims of war. These victims include not only the vanquished group of war makers and those who reside in the territory they control but especially the productive inhabitants of the region controlled by the victorious organization of war makers.
The Meaning of Imperialist WarAt this point it is necessary to define war and distinguish it from other forms of inter-human violence in order to circumscribe the bounds of the logic of war making within the general praxeological system. For not all violent conflict constitutes war making. War is here defined as violent interaction between two groups of humans, one or both of which is a state. We adopt the definition of the state given by the anthropologist and historian of primitive warfare, Lawrence H. Keeley:
States are political organizations [that] have a central government empowered to collect taxes, draft labor for public works or war, decree laws, and physically enforce those laws. Essentially states are class-stratified political units that maintain a "monopoly of deadly force" — a monopoly institutionalized as permanent police and military forces.Lawrence H. Keeley, War before Civilization: The Myth of the Peaceful Savage (New York: Oxford University Press, 1996), p. 27.
Pre-civilized social groups such as bands, tribes and even chiefdoms are not states because, according to Keeley, "a chief, unlike a king, does not have the power to coerce people into obedience physically," instead employing economic means or exploiting a belief in magic to enforce his decrees.Ibid. Although Keeley refers to "pre-state warfare" or "primitive war," for the purposes of praxeological analysis, we restrict the term the "war" to violent conflicts involving at least one state.
Combat between looser social groupings was most commonly motivated by vengeance for previous homicides or economic issues, especially access to natural resources and crude capital goods. For example in Minnesota the Chippewa and Dakota Sioux tribes battled one another for over 150 years over access to hunting territories and wild rice fields, while tribes in the Pacific Northwest frequently fought for frontage on the ocean and rivers giving access to the salmon run.Ibid., p. 115. Anthropological studies show that, while most of these conflicts involved savage violence and extreme cruelty, often resulting in the expropriation, enslavement, expulsion or annihilation of the vanquished tribe, their purpose was never to establish a hegemonic relationship and exact regular tribute from the foe. As Kelley explains, "Polities that lack the physical power to subjugate their own populations or to extract involuntary tribute or taxes from them are extremely unlikely to make war against others for these purposes, since they lack the institutional and administrative means to convert victory into hegemony or taxation."Ibid., p. 116.
Thus, while both non-state social groups and states have historically engaged in the violent annexation of territories to acquire natural resources, only states possess the institutional means necessary to pursue a policy of imperialism i.e., the ongoing subjugation and economic exploitation of other peoples. Imperialist wars waged by states in every epoch of history are not accidental; they are the outcome of the powerful tendency to war making inherent in the very nature of the state.
War Making and Class ConflictAll governments past and present, regardless of their formal organization, involve the rule of the many by the few. In other words, all governments are fundamentally oligarchic. The reasons are twofold. First, governments are nonproductive organizations and can only subsist by extracting goods and services from the productive class in their territorial domain. Thus the ruling class must remain a minority of the population if they are to continually extract resources from their subjects or citizens. Genuine "majority rule" on a permanent basis is impossible because it would result in an economic collapse as the tribute or taxes expropriated by the more numerous rulers deprived the minority engaged in peaceful productive activities of the resources needed to sustain and reproduce itself. Majority rule would therefore eventually bring about a violent conflict between factions of the previous ruling class, which would terminate with one group establishing oligarchic rule and economically exploiting its former confederates.
The second factor that renders oligarchic rule practically inevitable is related to the law of comparative advantage. The tendency toward division of labor and specialization based on the unequal endowment of skills pervades all sectors of human endeavor. Just as a small segment of the population is adept at playing professional football or dispensing financial advice, so a tiny fraction of the population tends to excel at wielding coercive power. As one writer summed up this Iron Law of Oligarchy: "[In] all human groups at all times there are the few who rule and the many who are ruled."Arthur Livingston, Introduction in Gaetano Mosca, The Ruling Class: Elementi di Scienza Politica, ed. Arthur Livingston, trans. Hannah D. Kahn (New York: McGraw-Hill Book Company, 1939), p. x. On the Iron Law of Oligarchy, also see Murray N. Rothbard, For a New Liberty: The Libertarian Manifesto, 2nd ed. (San Francisco: Wilkes & Fox, 1996), pp. 45–69.
The inherently nonproductive and oligarchic nature of government thus ensures that all nations under political rule are divided into two classes: a productive class and a parasitic class or, in the apt terminology of the American political theorist John C. Calhoun, "taxpayers" and "tax-consumers."John C. Calhoun, "A Disquisition on Government," in Union and Liberty: The Political Philosophy of John C. Calhoun, ed. Ross M. Lence (Indianapolis, IN: Liberty Fund, 1992), pp. 15–21.
The king and his court, elected politicians and their bureaucratic and special-interest allies, the dictator and his party apparatchiks — these are historically the tax-consumers and, not coincidentally, the war makers. War has a number of advantages for the ruling class. First and foremost, war against a foreign enemy obscures the class conflict that is going on domestically in which the minority ruling class coercively siphons off the resources and lowers the living standards of the majority of the population, who produce and pay taxes. Convinced that their lives and property are being secured against a foreign threat, the exploited taxpayers develop a "false consciousness" of political and economic solidarity with their domestic rulers. An imperialist war against a weak foreign state, e.g., Grenada, Panama, Haiti, Iraq, Afghanistan, Iran, etc. is especially enticing to the ruling class of a powerful nation such as the United States because it minimizes the cost of losing the war and being displaced by domestic revolution or by the rulers of the victorious foreign state.
A second advantage of war is that it provides the ruling class with an extraordinary opportunity to intensify its economic exploitation of the domestic producers through emergency war taxes, monetary inflation, conscripted labor, and the like. The productive class generally succumbs to these increased depredations on its income and wealth with some grumbling but little real resistance because it is persuaded that its interests are one with the war makers. Also, in the short run at least, modern war appears to bring prosperity to much of the civilian population because it is financed in large part by money creation.
We thus arrive at a universal, praxeological truth about war. War is the outcome of class conflict inherent in the political relationship — the relationship between ruler and ruled, parasite and producer, tax-consumer and taxpayer. The parasitic class makes war with purpose and deliberation in order to conceal and ratchet up their exploitation of the much larger productive class. It may also resort to war making to suppress growing dissension among members of the productive class (libertarians, anarchists, etc.) who have become aware of the fundamentally exploitative nature of the political relationship and become a greater threat to propagate this insight to the masses as the means of communication become cheaper and more accessible, e.g., desktop publishing, AM radio, cable television, the Internet, etc. Furthermore, the conflict between ruler and ruled is a permanent condition. This truth is reflected — perhaps half consciously — in the old saying that equates death and taxes as the two unavoidable features of the human condition.
Thus, a permanent state of war or preparedness for war is optimal from the point of view of the ruling elite, especially one that controls a large and powerful state. Take the current US government as an example. It rules over a relatively populous, wealthy, and progressive economy from which it can extract ever larger boodles of loot without destroying the productive class. Nevertheless, it is subject to the real and abiding fear that sooner or later productive Americans will come to recognize the continually increasing burden of taxation, inflation, and regulation for what it really is — naked exploitation. So the US government, the most powerful mega-state in history, is driven by the very logic of the political relationship to pursue a policy of permanent war.
From "The War to Make the World Safe for Democracy" to "The War to End All Wars" to "The Cold War" and on to the current "War on Terror," the wars fought by US rulers in the twentieth century have progressed from episodic wars restricted to well-defined theaters and enemies to a war without spatial or temporal bounds against an incorporeal enemy named "Terror." A more appropriate name for this neoconservative-contrived war would involve a simple change in the preposition to a "War of Terror" — because the American state is terrified of productive, work-a-day Americans, who may someday awaken and put an end to its massive predations on their lives and property and maybe to the American ruling class itself.
In the meantime, the War on Terror is an open-ended imperialist war the likes of which were undreamt of by infamous war makers of yore from the Roman patricians to German National Socialists. The economist Joseph Schumpeter was one of the few non-Marxists to grasp that the primary stimulus for imperialist war is the inescapable clash of interests between rulers and ruled. Taking an early mega-state, Imperial Rome, as his example, Schumpeter wrote:
Here is the classic example … of that policy which pretends to aspire to peace but unerringly generates war, the policy of continual preparation for war, the policy of meddlesome interventionism. There was no corner of the known world where some interest was not alleged to be in danger or under actual attack. If the interests were not Roman, they were those of Rome's allies; and if Rome had no allies, then allies would be invented. When it was utterly impossible to contrive such an interest — why, then it was national honor that had been insulted. The fight was always invested with an aura of legality. Rome was always being attacked by evil minded neighbors, always fighting for a breathing space. The whole world was pervaded by a host of enemies, and it was manifestly Rome's duty to guard against their indubitably aggressive designs. They were enemies who only waited to fall upon the Roman people. [No] attempt [can] be made to comprehend these wars of conquest from the point of view of concrete objectives…. Thus there is but one way to an understanding: scrutiny of domestic class interests, the question of who stood to gain…. Owing to its peculiar position as the democratic puppet of ambitious politicians and as the mouthpiece of a popular will inspired by the rulers [the Roman proletariat] did indeed get the benefit of the [war] booty. So long as there was good reason to maintain the fiction that the population of Rome constituted the Roman people and could decide the destinies of the empire, much did depend on its good temper…. But again, the very existence, in such large numbers, of this proletariat, as well as its political importance, was the consequence of a social process that also explains the policy of conquest. For this was the causal connection: The occupation of public land and the robbery of peasant land formed the basis of a system of large estates, operating extensively and with slave labor. At the same time the displaced peasants streamed into the city and the soldiers remained landless — hence the war policy.
The latifundian landowners were, of course, deeply interested in waging war…. . The alternative to war was agrarian reform. The landed aristocracy could counter the perpetual threat of revolution only with the glory of victorious leadership. [I]t was an aristocracy of landlords, large-scale agricultural entrepreneurs, born of struggle against their own people. It rested solely on control of the state machine. Its only safeguard lay in national glory…. An unstable social structure of this kind merely creates a general disposition to watch for pretexts for war — often held to be adequate with entire good faith — and to turn to questions of foreign policy whenever the discussion of social problems grew too troublesome for comfort. The ruling class was always inclined to declare that the country was in danger, when it really was only class interests that were threatened.
This lengthy quotation from Schumpeter vividly describes how the expropriation of peasants by the ruling aristocracy created a permanent and irreparable class division in Roman society that led to a policy of unrestrained imperialism and perpetual war. This policy was designed to submerge beneath a tide of national glory and war booty the deep-seated conflict of interests between expropriated proletarians and landed aristocracy.
Democracy and Imperialist War MakingSchumpeter's analysis explains the particularly strong propensity of democratic states to engage in imperialist war making and why the Age of Democracy has coincided with the Age of Imperialism. The term "democratic" is here being used in the broad sense that includes "totalitarian democracies" controlled by "parties" such as the Nationalist Socialist Workers Party in Germany and the Communist Party in the Soviet Union. These political parties, as opposed to purely ideological movements, came into being during the age of nationalist mass democracy that dawned in the late nineteenth century.On the concept of "totalitarian democracy," see J.L. Talmon, The Origins of Totalitarian Democracy (New York: W. W. Norton & Company, Inc., [1951] 1970). My conception of totalitarian democracy differs from Talmon's because he applies the term only to "Totalitarianism of the Left" and but not to "Totalitarianism of the Right" (ibid., pp. 6–8).
Because the masses in a democratic polity are deeply imbued with the ideology of egalitarianism and the myth of majority rule, the ruling elites who control and benefit from the state recognize the utmost importance of concealing its oligarchic and exploitative nature from the masses. Continual war making against foreign enemies is a perfect way to disguise the naked clash of interests between the taxpaying and tax-consuming classes.
In this vein, it is noteworthy that the first instance of sustained global imperialism in the Western world was the democratic city-state of Athens. Victor Davis Hanson has emphasized this in his path-breaking work on the Peloponnesian War. Hanson writes:
"Athenianism" was the Western world's first example of globalization. There was a special word of sorts for Athenian expansionism in the Greek language, attikizô, "to Atticize," to become like or join the Athenians.Victor Hanson Davis, A War Like No Other: How the Athenians and Spartans Dought the Peloponnesian War (New York: Random House, 2005), p. 14.
By the standards of the time, the expanse of the Athenian empire was breath-taking. By the outbreak of the Peloponnesian War, the Athenian empire had swelled to "nearly two hundred states run by seven hundred imperial overseers." According to Hanson, "To maintain such an empire, in the fifth century [B.C.] Athens had fought three out of every four years, a remarkable record of constant mobilization, unrivaled even in modern times."[10] Ibid., p. 27 Moreover, unlike its openly oligarchic rival Sparta who led a loose voluntary coalition of states that genuinely feared a "proselytizing and expansionary" Athenian democracy, Athens unilaterally formulated and imposed a single strategy on its imperial subject-states and allies.Ibid., pp. 13, 29.
Hanson does not shrink from noting the parallels between the imperialism of ancient Athens and the modern US mega-state, writing:
Although Americans offer the world a radically egalitarian popular culture and, more recently, in a very Athenian mood, have sought to remove oligarchs and impose democracy — in Grenada, Panama, Serbia, Afghanistan and Iraq — enemies, allies, and neutrals alike are not so impressed. They understandably fear American power and intentions while our successive governments, in the manner of confident and proud Athenians, assure them of our morality and selflessness. Military power and idealism about bringing perceived civilization to others are a prescription for conflict in any age — and no ancient state made war more often than did fifth-century imperial Athens.Ibid., p. 8.
Severing The Sinews of Imperialist WarErnest Hemingway once wrote, "The sinews of war are five — men, money, materials, maintenance (food) and morale."Ernest Hemingway, Brainy Quote. In a modern market economy, Hemingway's five M's, in practice, boil down to one: money. A political oligarchy that rules and exploits a large and productive economy need only get its hands on sufficient monetary funds in order to obtain the men, material, and maintenance necessary to carry out its war plans. Furthermore, an ever expanding supply of money and credit also boosts the morale of the civilian population by distorting economic calculation and creating the temporary illusion that war brings prosperity. Thus Cicero spoke more truly when he said, "The sinews of war, a limitless supply of money."Marcus Tullio Cicero, Brainy Quote.
Explaining the connection between monetary inflation and civilian morale during wartime, Mises wrote in 1919:
In every great war monetary calculation was disrupted by inflation…. The economic behavior of the belligerents was thereby led astray; the true consequences of the war were removed from their view. One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time, trans. Leland B. Yeager (New York,: New York University Press, 1983), pp. 163.
However, the initial stages of war inflation must eventually give way to crisis and depression. The reason is that war entails a massive consumption of capital because of the diversion of real resources from production for present and especially future civilian needs — that is, the maintenance and replacement of capital goods — to production for immediate military purposes. The productive class only becomes aware of the enormous destruction of its real income and wealth when inflation ceases and the ensuing crisis and recession reveal the true costs of the war, aside from its physical destruction of lives and property.For an explanation of how financing war through money creation distorts and conceals its actual costs, see Joseph T. Salerno, "War and the Money Machine: Concealing the Costs of War beneath the Veil of Inflation," Journal des Economistes et des Etudes Humaines 6 (March 1995): 153–73. At this point the bitterly disillusioned and demoralized producers begin to realize that their own interests are not identical with those of their imperialist rulers.
In the two World Wars of the twentieth century the war makers on both sides were able to forestall this day of reckoning by abrogating the freedom to produce and exchange and instituting a more or less thoroughgoing command economy featuring pervasive price controls and central direction of production and distribution by legal fiat.For a description of the process by which the US economy was transformed into a command economy during World War II, see Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of the American Government (New York: Oxford University Press, 1987), pp. 196–236. Things are different in contemporary imperialist wars, such as those fought by the United States since the end of the Cold War. The reason is that the vast disparity in military and economic power between the imperial state and the state it wishes to subjugate obviates recourse to massive monetary expansion.
For example, the current US war on Iraq is estimated to have cost roughly $346 billion from its inception in 2003 until the present.National Priorities Project, Cost of War. During this time, the change in the Adjusted Monetary Base (MB), which is completely controlled by the Fed and represents the "seigniorage" or inflation tax that the government realizes from money creation, has been about $137 billion. But the rate of growth of MB has steadily declined from mid-2002 from 10 percent to below 5 percent currently. This is reflected in a decline in the rates of growth of broader monetary aggregates such as MZM, M2, and M3. Yet at the same time, US Federal Government debt has ballooned by nearly $2 trillion since March 2003, expanding the total debt accumulated since the inception of the American Republic by over 30 percent! How has this flood of new debt been financed if not by money creation?
The answer is by borrowing from foreigners. In March 2003, foreign investors held about $1,286.3 billion of Federal government debt. By June 2006, foreign investors were holding $2091.7 billion of the debt, an increase of $805.4 billion or over 40 percent of the increase of the total debt since March 2003.The data in this paragraph are drawn from Federal Reserve Bank of St. Louis Monetary Trends (December 2006) and National Economic Trends (November 2006). In other words, foreigners have by and large financed the US imperialist adventure in Iraq, greatly mitigating the economic burden of the war borne by US taxpayers and consumers — at least until foreigners refuse to absorb any more US debt. At this point increased taxation and more rapid money creation must be resorted to in continuing to finance the war as well as the interest payments on the outstanding debt.
In the meantime, an interesting issue to contemplate is whether an aroused and disgruntled taxpaying class has any means at its disposal short of violent revolution for putting an end to the never-ending series of imperialist wars sucking the lifeblood (accumulated capital) out of the economy and consuming its real wealth and income. Vladimir Lenin's answer was, "[C]onvert the imperialist war into a civil war; all consistently waged class struggles in wartime and all seriously conducted 'mass-action' tactics inevitably lead to this."Vladimir Ilyich Lenin, "Socialism and War in The Lenin Anthology, ed. Robert C. Tucker (New York: W. W. Norton & Company, 1975), p. 195. The logic of war making in conjunction with its cognate praxeological discipline, economics, reveals that Lenin's dictum is indeed practicable and that there are a number of peaceful tactics available to the productive masses that strike directly at the sinews of the imperialist war machine.
The first is the general strike, an Atlas Shrugged scenario writ large, in which the producers go on strike for lengthy periods of time and live off their accumulated savings. This chokes off the current taxes that pay for the war as well as the military supplies needed to execute it. Mass boycotts of goods and services produced by enterprises directly profiting from the war as well as central government enterprises such as the post office strike directly at the revenues of the tax-consuming class. So do economic boycotts of the mass media, including establishment newspapers and periodicals and the major television broadcast networks. In the contemporary United States, the latter, in particular, are little more than legally licensed cartelists spewing forth government war propaganda.
Withdrawing all bank deposits and using only cash or barter arrangements in exchange would cause the fractional-reserve banking system to grind to a halt for a lengthy period of time as the monetary authorities would have to freeze all bank accounts until sufficient currency was printed and delivered to banks throughout the country. This would take months and would completely disrupt the monetary and financial system in the meanwhile, forcing the government to resort to the archaic and costly technique of literally printing up and shipping new currency to pay for its war expenditures.As an indication of the enormous expense involved in printing Federal Reserve dollar notes, a 2002 study by the Government Accounting Office estimated that even replacing $1 notes only by $1 coins would save $500 million annually (Barbara Hagenbaugh, "Dollar Coin Series Will Feature Presidents," USA Today. Selling government bonds en masse causing their prices to plunge would wreak havoc with the balance sheets of banks and other financial institutions and make it extremely difficult for the government to issue war debt.
These mass-action tactics would have a number of additional and very important benefits. First, they would cause a deep rift in the ruling class, which, in a plutocratic democracy such as the United States, is by no means monolithic because it includes significant elements of the big business and finance establishment that are competing with one another for subsidies and special legal privileges from the state.
This uneasy coalition of political interests can be readily destabilized by the radical change in the pattern of benefits and costs brought about by mass-action tactics that unevenly affect the revenues and subsidies of politically connected business firms. Thus, those industrial firms and financial institutions suffering significant hardships from these tactics would turn against the war, thereby shrinking and weakening the ruling class. With the prospect of civil war with its former allies looming, those in control of the state apparatus would have a strong incentive to halt its war-making activities.
Second, other business firms completely outside the ambit of the tax-consuming, government-industrial complex — e.g., McDonald's, Wal-Mart, Microsoft, etc. — would also suffer economic losses as a result of the general strike and financial collapse, giving them an incentive to ally themselves with the renegade firms that were formerly members of the political establishment. This newly emergent anti-state coalition of business organizations could also peacefully strike at the enfeebled and demoralized imperial state by refusing to do business with it and threatening to blacklist individual bureaucrats and politicians as candidates for the anticipated lucrative jobs in the private sector.
Finally, the anti-imperialist alliance of large and powerful business interests brought into existence by the general strike and other peaceful mass-action economic tactics would naturally, if unintentionally, interpose itself as a protective shield between the economically debilitated but still dangerous and vindictive state and the individual dissidents of the taxpaying class.
ConclusionThe praxeological method, which has been used successfully to elaborate the laws of economics, is also capable of yielding a systematic body of truths when applied to the analysis of war. Although the logic of war making has yet to be fully elaborated, it is clear that this praxeological sub-discipline is useful in dispelling the long entrenched myths and fallacies about war. The logic of war making also provides knowledge of the means to those whose goal, for ideological or economic reasons, is to bring about the cessation of a war.
"If ever it could be said that one man stood against the ideological tide of an era, that was von Mises. But whether his efforts have turned that tide is a question to be resolved in the future by those who understand his theories and share his love of liberty." — Howard S. Katz, Rip-Off ResistanceBettina Bien Greaves and Robert W. McGee, Mises: An Annotated Bibliography (Irvington-on-Hudson, New York, N.Y., The Foundation for Economic Education, 1993) p. 317. The original cites Katz, Howard S. "Ludwig von Mises Dies at Age 92." Rip-Off Resistance. 1:4 (December 1973) 3.
Today is the one hundred twenty fifth anniversary of Ludwig Heinrich Edler von Mises's birth, September 29, 1881, in Lemberg, Austria-Hungrary (today, Lviv, Ukraine).
On his ninetieth birthday, the CBS television show Spectrum featured a birthday special on Ludwig von Mises. The speaker, Jeffrey Saint John, called Mises "the de Tocqueville of modern economics" and observed that he had explained long ago that Nixon-style price controls are economic dictatorship and have in the past produced Communism, Nazism, and fascism.Grove City Archive: "D" files. For the same occasion, F.A. "Baldy" Harper's Institute for Humane Studies had sponsored a two-volume Festschrift, six copies of which were sent to Mises at the end of October.
Mises was touched and commented to his wife Margit: "The only good thing about being a nonagenarian is that you are able to read your obituaries while you are still alive."Quoted from Margit von Mises, My Years with Ludwig von Mises, p. 181.
However, there were a few magnificent obituaries that Mises would not be able to read.The following obituaries were compiled by Bettina Bien Greaves and Robert W. McGee in Mises: An Annotated Bibliography (Irvington-on-Hudson, New York, N.Y., The Foundation for Economic Education, 1993) pp. 315ff.
The American Economic Review. In Memoriam: Ludwig von Mises, 1881-1973." 64:3 (June 1974) 518. Drafted (but unsigned) by Fritz Machlup: "Mises was certainly not a popular economist; by his blunt criticism of popular views and policies, by his unrelenting attacks on inflationism, interventionism, and socialism, and by his uncompromising steadfastness in arguing the case for private enterprise and free markets, he acquired as many intellectual enemies and detractors as any of the renowned economists of the twentieth century. At the same time, Mises was a beloved teacher and friend of a host of students who came to appreciate the integrity and profundity of his teachings in courses and seminars but particularly in his private seminars."
Bidinotto, Robert James. "Von Mises — A Final Salute." Unbound! Boston: Individuals for a Rational Society. 2:1 (September-October 1973) 1-2. "Our age may well be labeled by future historians as 'the Age of Mediocrity.' Nothing is so characteristic of this century as the ever-shrinking stature of men. Yet if these times are to be vindicated, it will be solely by the grace of a few lonely giants who stood tall and strode far, guided down unexplored paths by unflinching courage and unwavering vision.¶ On October 10, 1973, one of those giants fell….¶ Dr. Ludwig von Mises is dead at the age of 92. And it is difficult to conceive of any person in our time who has given the world so much, yet been rewarded so little in return."
Chamberlain, John. "Unsung Economist Who Was Prophet." Chicago Tribune. Section 1 (October 13, 1973) 14. "Genuine innovators such as von Mises have to wait for death to gain their rightful recognition. It is all very unfair, but the truth does eventually catch up with the showmen, relegating them to the historical footnote positions where they belong….¶ Von Mises' great work, Human Action, a study of the conditions needed to release an optimum amount of productive energy in a society … will live long as a monument to von Mises."
Daily Telegraph. U.K. "Ludwig von Mises." (October 11, 1973). "With the death of Prof Ludwig von Mises yesterday, aged 92, the world's liberal economists lose their most prolific pen, and Austria loses the last lingering reminder of the intellectual pre-eminence of Vienna at the turn of the century….¶ As an authoritative exponent of liberal economics he has enjoyed a popularity, never foreseen, in the Asian liberal economies of Japan, Hongkong and Formosa, and a respect, never foreseen, in the Communist countries, for his exposition of the impossibility of calculation in a full socialist society….¶ The gentle, witty but tenaciously logical teaching of von Mises in Europe and America earned him a loyal army of auxiliary writers and pamphleteers."
Hazlitt, Henry. Remarks at Mises's Memorial service, October 16, 1973. 6-8. Multilithed by the Foundation for Economic Education (Irvington, N.Y.) 6-8. "His outstanding moral quality was moral courage, the ability to stand alone, and an almost fanatical intellectual honesty and candor that refused to deviate or compromise an inch. This often cost him personally dear, but it set an ideal to strengthen and inspire his students and all the rest of us who were privileged to know him."
International Herald Tribute. "Economist Ludwig von Mises; Advanced Libertarian Theory." (October 12, 1973) 5. "Mr. von Mises was recognized as a brilliant contributor to economic thought not only by his disciples but also by many who disagreed radically with his political and social philosophy."
Kirzner, Israel M. Tribute in National Review. 25:45 (November 9, 1973) 1246, 1260: "To those who knew him, Ludwig Mises was, in the face of shocking neglect by so many of his contemporaries, a living exemplar of incorruptible intellectual integrity, a model of passionate, relentless scholarship and dedication. It will not be easy to forget these stern lessons which he so courageously personified."
McFalls, John, investment advisor. "The Passing of Ludwig von Mises." Broadcast memorial to Ludwig von Mises, October 14-16, 1973, during Value-Action radio programs: "Mises was a master of synthesis. He brought wholeness out of the fractured field of economics. He was a scholar of great patience and integrity who believed that the movement toward collectivism and state intervention posed a grave threat to Western civilization."
Monatsblätter für Freiheitliche Wirtschaftspolitik. "Der letzte Liberale" [The last liberal]. 11 (November 1973) 645. "With the passing of 'the last liberal,' a liberal of the old school who occasionally said, 'Liberalism, that is what I am,' the last survivor of the epoch-making Viennese School of Economics is gone at 92 years of age. Now honored by a diminishing band of followers, he has almost become a legend, on the one hand in the field of money and business cycle theory, and on the other hand and above all in the world of economic and political theory." (Translated from the German)
Peterson, William H. "Ludwig von Mises: In Memoriam." The Wall Street Journal. (October 12, 1973). "Mr. von Mises believed in choice. He believed that choosing among options determines all human decisions and hence the entire sphere of human action….¶ While man could destroy himself and civilization, he could also ascend — in a free society, i.e., a free economy — to undreamed-of cultural, intellectual and technological heights. In any event, thought would be decisive. Mr. von Mises believed in the free market of not only goods and services but of ideas as well — in the potential of human intellect….¶ He held that a free society and a free market are inseparable. He gloried in the potential of reason and man. In sum, he stood for principle in the finest tradition of Western Civilization."
La Prensa. Buenos Aires. "Ludwig von Mises: Murió en Nueva York" [Ludwig von Mises: Died in New York]. (October 18, 1973). "Mises' life, his works and his conferences were all dedicated to rounding out the thesis that men are not automatons; they act rationally and the ideas that motivate them are the original cause of the course of history. His concepts make clear that government intervention leads inevitably not only to conflicts within a country, but also to international conflicts." (Translated from the Spanish)
Read, Leonard. Remarks at memorial service, October 16, 1973. 8-9. Multilithed by the Foundation for Economic Education (Irvington, N.Y.) 8-9: "Ludwig Mises is truly — and I use this term in the present tense — a Teacher. More than two generations have studied under him and countless thousands of others have learned from his books. Books and students are the enduring monuments of a Teacher and these monuments are his. This generation of students will pass away but the ideas set in motion by his writings will be a fountain source for new students for countless generations to come."
Rothbard, Murray N. "Ludwig von Mises: 1881-1973." Human Events. Washington, D.C. (October 10, 1973) 847. "Readers of Mises' majestic, formidable and uncompromising works must have often been surprised to meet him in person. Perhaps they had formed the image of Ludwig Mises as cold, severe, austere, the logical scholar repelled by lesser mortals, bitter at the follies around him and at the long trail of wrongs and insults that he had suffered.¶ They couldn't have been more wrong; for what they met was a mind of genius blended harmoniously with a personality of great sweetness and benevolence. Not once has any of us heard a harsh or bitter word escape from Mises' lips. Unfailingly gentle and courteous, Ludwig Mises was always there to encourage even the slightest signs of productivity or intelligence in his friends and students….¶ And always there as an inspiration and as a constant star." Inserted by Philip M. Crane in Congressional Record. 119:159 (October 23, 1973) E6696-6697.
Murray Rothbard later added:
When Mises died, and I was preparing an obituary, Professor Raico kindly sent me a deeply moving passage from Adonais, Shelley's great eulogy to Keats, that, as usual for Raico, struck just the right note in a final assessment of Mises:
For such as he can lend — they borrow notGlory from those who made the world their prey:And he is gathered to the kings of thoughtWho waged contention with their time's decay,And of the past are all that cannot pass away.Murray N. Rothbard, Ludwig von Mises — Scholar, Creator, Hero (Auburn, Ala.: Mises Institute, 1988) p. 74. The original cites Ralph Raico, "The Legacy of Ludwig von Mises," The Libertarian Review (September 1981), p. 22.
Today, September 29, 2006 is the one-hundred-and-twenty-fifth anniversary of the birth of Ludwig von Mises, economist and social philosopher, who passed away in 1973. Mises was my teacher and mentor and the source or inspiration for most of what I know and consider to be important and worthwhile in these fields — of what enables me to understand the events shaping the world in which we live. I want to take this opportunity to pay tribute to him, because I believe that he deserves to occupy a major place in the intellectual history of modern times. Mises is important because his teachings are necessary to the preservation of material civilization. As he showed, the base of material civilization is the division of labor. Without the higher productivity of labor made possible by the division of labor, the great majority of mankind would simply die of starvation. The existence and successful functioning of the division of labor, however, vitally depends on the institutions of a capitalist society -that is, on limited government and economic freedom, private ownership of land and all other property, exchange and money, saving and investment, economic inequality and economic competition, and the profit motive - institutions everywhere under attack for several generations.
When Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly. Major flaws and inconsistencies in the writings of Smith and Ricardo and their followers enabled the socialists to claim classical economics as their actual ally. The writings of Jevons and the earlier "Austrian" economists — Menger and Böhm-Bawerk — were insufficiently comprehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theoretical depth in any case.
Thus, when Mises appeared, there was virtually no systematic intellectual opposition to socialism or defense of capitalism. Quite literally, the intellectual ramparts of civilization were undefended. What Mises undertook, and which summarizes the essence of his greatness, was to build an intellectual defense of capitalism and thus of civilization.
The leading argument of the socialists was that the institutions of capitalism served the interests merely of a handful of rugged "exploiters" and "monopolists" and operated against the interests of the great majority of mankind, which socialism would serve. While the only answer others could give was to devise plans to take away somewhat less of the capitalists' wealth than the socialists were demanding, or to urge that property rights nevertheless be respected despite their incompatibility with most people's well-being, Mises challenged everyone's basic assumption. He showed that capitalism operates in the material self-interests of all, including the non-capitalists — the so-called proletarians. In a capitalist society, Mises showed, privately owned means of production serve the market. The physical beneficiaries of the factories and mills are all who buy their products. And, together with the incentive of profit and loss and the freedom of competition that it implies, the existence of private ownership ensures an ever-growing supply of products for all.
Thus, Mises showed to be absolute nonsense such clichés as "poverty causes communism." Not poverty, he explained, but poverty plus the mistaken belief that communism is the cure for poverty, causes communism. He showed that if the misguided revolutionaries of the backward countries and of impoverished slums understood economics, any desire they might have to fight poverty would make them advocates of capitalism.
Socialism, Mises demonstrated, in his greatest original contribution to economic thought, not only abolishes the incentive of profit and loss and the freedom of competition along with private ownership of the means of production, but makes economic calculation, economic coordination, and economic planning impossible, and therefore results in chaos. For socialism means the abolition of the price system and the intellectual division of labor; it means the concentration and centralization of all decision-making in the hands of one agency: the Central Planning Board, or the Supreme Dictator.
Yet the planning of an economic system is beyond the power of any one consciousness: the number, variety and locations of the different factors of production, the various technological possibilities that are open to them, and the different possible permutations and combinations of what might be produced from them, are far beyond the power even of the greatest genius to keep in mind. Economic planning, Mises showed, requires the cooperation of all who participate in the economic system. It can exist only under capitalism, where, every day, businessmen plan on the basis of calculations of profit and loss; workers, on the basis of wages; and consumers, on the basis of the prices of consumers' goods.
Mises's contributions to the debate between capitalism and socialism — the leading issue of modern times — are overwhelming. Before he wrote, people did not realize that capitalism has economic planning. They uncritically accepted the Marxian dogma that capitalism is an anarchy of production and that socialism represents rational economic planning. People were (and most still are) in the position of Moliere's M. Jourdan, who never realized that what he was speaking all his life was prose. For, living in a capitalist society, people are literally surrounded by economic planning, and yet do not realize that it exists.
Every day, there are countless businessmen who are planning to expand or contract their firms, who are planning to introduce new products or discontinue old ones, planning to open new branches or close down existing ones, planning to change their methods of production or continue with their present methods, planning to hire additional workers or let some of their present ones go. And every day, there are countless workers planning to improve their skills, change their occupations or places of work, or to continue with things as they are; and consumers, planning to buy homes, cars, stereos, steak or hamburger, and how to use the goods they already have — for example, to drive to work or to take the train, instead.
Yet people deny the name planning to all this activity and reserve it for the feeble efforts of a handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens and hundreds of millions. Mises identified the existence of planning under capitalism, the fact that it is based on prices ("economic calculations"), and the fact that the prices serve to coordinate and harmonize the activities of all the millions of separate, independent planners.
He showed that each individual, in being concerned with earning a revenue or income and with limiting his expenses, is led to adjust his particular plans to the plans of all others.
For example, the college student who decides to become an accountant rather than an artist, because he values the higher income to be made as an accountant, changes his career plan in response to the plans of others to purchase accounting services rather than paintings. The individual who decides that a house in a particular neighborhood is too expensive and who therefore gives up his plan to live in that neighborhood, is similarly engaged in a process of adjusting his plans to the plans of others; because what makes the house too expensive is the plans of others to buy it who are able and willing to pay more. And, above all, Mises showed, every business, in seeking to make profits and avoid losses, is led to plan its activities in a way that not only serves the plans of its own customers, but takes into account the plans of all other users of the same factors of production throughout the economic system.
Thus, Mises demonstrated that capitalism is an economic system rationally planned by the combined, self-interested efforts of all who participate in it. The failure of socialism, he showed, results from the fact that it represents not economic planning, but the destruction of economic planning, which exists only under capitalism and the price system.
Mises was not primarily anti-socialist. He was pro-capitalist. His opposition to socialism, and to all forms of government intervention, stemmed from his support for capitalism and from his underlying love of individual freedom and conviction that the self-interests of free men are harmonious — indeed, that one man's gain under capitalism is not only not another's loss, but is actually others' gain. Mises was a consistent champion of the self-made man, of the intellectual and business pioneer, whose activities are the source of progress for all mankind and who, he showed, can flourish only under capitalism.
Mises demonstrated that competition under capitalism is of an entirely different character than competition in the animal kingdom. It is not a competition for scarce, nature-given means of subsistence, but a competition in the positive creation of new and additional wealth, from which all gain. For example, the effect of the competition between farmers using horses and those using tractors was not that the former group died of starvation, but that everyone had more food and the income available to purchase additional quantities of other goods as well. This was true even of the farmers who "lost" the competition, as soon as they relocated in other areas of the economic system, which were enabled to expand precisely by virtue of the improvements in agriculture. Similarly, the effect of the automobile's supplanting the horse and buggy was to benefit even the former horse breeders and blacksmiths, once they made the necessary relocations.
In a major elaboration of Ricardo's Law of Comparative Advantage, Mises showed that there is room for all in the competition of capitalism, even those of the most modest abilities. Such people need only concentrate on the areas in which their relative productive inferiority is least. For example, an individual capable of being no more than a janitor does not have to fear the competition of the rest of society, almost all of whose members could be better janitors than he, if that is what they chose to be. Because however much better janitors other people might make, their advantage in other lines is even greater. And so long as the person of limited ability is willing to work for less as a janitor than other people can earn in other lines, he has nothing to worry about from their competition. He, in fact, outcompetes them for the job of janitor by being willing to accept a lower income than they. Mises showed that a harmony of interests prevails in this case, too. For the existence of the janitor enables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain.
On the basis of such facts, Mises argued against the possibility of inherent conflicts of interest among races and nations, as well as among individuals. For even if some races or nations were superior (or inferior) to others in every aspect of productive ability, mutual cooperation in the division of labor would still be advantageous to all. Thus, he showed that all doctrines alleging inherent conflicts rest on an ignorance of economics.
He argued with unanswerable logic that the economic causes of war are the result of government interference, in the form of trade and migration barriers, and that such interference restricting foreign economic relations is the product of other government interference, restricting domestic economic activity. For example, tariffs become necessary as a means of preventing unemployment only because of the existence of minimum wage laws and pro-union legislation, which prevent the domestic labor force from meeting foreign competition by means of the acceptance of lower wages when necessary. He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally.
In answer to the vicious and widely believed accusation of the Marxists that Nazism was an expression of capitalism, he showed, in addition to all the above, that Nazism was actually a form of socialism. Any system characterized by price and wage controls, and thus by shortages and government controls over production and distribution, as was Nazism, is a system in which the government is the de facto owner of the means of production. Because, in such circumstances, the government decides not only the prices and wages charged and paid, but also what is to be produced, in what quantities, by what methods, and where it is to be sent. These are all the fundamental prerogatives of ownership. This identification of "socialism on the German pattern," as he called it, is of immense value in understanding the nature of all demands for price controls.
Mises showed that all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention, which destroys the workings of capitalism. He was among the first to point out that the poverty of the early years of the Industrial Revolution was the heritage of all previous history — that it existed because the productivity of labor was still pitifully low; because scientists, inventors, businessmen, and savers and investors could only step by step create the advances and accumulate the capital necessary to raise it. He showed that all the policies of so-called labor and social legislation were actually contrary to the interests of the masses of workers they were designed to help — that their effect was to cause unemployment, retard capital accumulation, and thus hold down the productivity of labor and the standard of living of all.
In a major original contribution to economic thought, he showed that depressions were the result of government-sponsored policies of credit expansion designed to lower the market rate of interest. Such policies, he showed, created large-scale malinvestments, which deprived the economic system of liquid capital and brought on credit contractions and thus depressions. Mises was a leading supporter of the gold standard and of laissez-faire in banking, which, he believed, would virtually achieve a 100% reserve gold standard and thus make impossible both inflation and deflation.
What I have written of Mises provides only the barest indication of the intellectual content that is to be found in his writings. He wrote approximately twenty books. And I venture to say that I cannot recall reading a single paragraph in any of them that did not contain one or more profound thoughts or observations. Even on the occasions when I found it necessary to disagree with him (for example, on his view that monopoly can exist under capitalism, his advocacy of the military draft, and certain aspects of his views on epistemology, the nature of value judgments, and the proper starting point for economics), I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works.
Mises's two most important books are Human Action and Socialism, which best represents the breadth and depth of his thought. These are not for beginners, however. They should be preceded by some of Mises's popular writings, such as Bureaucracy and Planning For Freedom.
The Theory of Money and Credit, Theory and History, Epistemological Problems of Economics, and The Ultimate Foundation of Economic Science are more specialized works that should probably be read only after Human Action. Mises's other popular writings in English include Omnipotent Government, The Anti-Capitalistic Mentality, Liberalism, Critique of Interventionism, Economic Policy, and The Historical Setting of the Austrian School of Economics. For anyone seriously interested in economics, social philosophy, or modern history, the entire list should be considered required reading. [All titles of Mises currently in print can be ordered on this web site.]
Mises must be judged not only as a remarkably brilliant thinker but also as a remarkably courageous human being. He held the truth of his convictions above all else and was prepared to stand alone in their defense. He cared nothing for personal fame, position, or financial gain, if it meant having to purchase them at he sacrifice of principle. In his lifetime, he was shunned and ignored by the intellectual establishment, because the truth of his views and the sincerity and power with which he advanced them shattered the tissues of fallacies and lies on which most intellectuals then built, and even now continue to build, their professional careers.
It was my great privilege to have known Mises personally over a period of twenty years. I met him for the first time when I was sixteen years old. Because he recognized the seriousness of my interest in economics, he invited me to attend his graduate seminar at New York University, which I did almost every week thereafter for the next seven years, stopping only when the start of my own teaching career made it no longer possible for me to continue in regular attendance.
His seminar, like his writings, was characterized by the highest level of scholarship and erudition, and always by the most profound respect for ideas. Mises was never concerned with the personal motivation or character of an author, but only with the question of whether the man's ideas were true or false. In the same way, his personal manner was at all times highly respectful, reserved, and a source of friendly encouragement. He constantly strove to bring out the best in his students. This, combined with his stress on the importance of knowing foreign languages, led in my own case to using some of my time in college to learn German and then to undertaking the translation of his Epistemological Problems of Economics — something that has always been one of my proudest accomplishments.
Today, Mises's ideas at long last appear to be gaining in influence. His teachings about the nature of socialism have been confirmed in the most spectacular way possible, namely, by the collapse of the former Soviet Union, and by the substantial conversion of Mainland China, Russia, and the rest of the Soviet Empire to capitalism.
Some of Mises's ideas have been propounded by the Nobel prizewinners F.A. Hayek (himself a former student of Mises) and Milton Friedman. His ideas inspired the "miracle" of Germany's economic recovery after World War II. They have exerted a major influence on the writings of Henry Hazlitt, Murray Rothbard, and the staff of the Foundation for Economic Education, as well as such prominent former students as Hans Sennholz and Israel Kirzner. They live on with increasing power and influence in the daily work of The Ludwig von Mises Institute, which publishes books and journals and holds conferences, seminars, and classes on his ideas.
Mises's works deserve to be required reading in every college and university curriculum — not just in departments of economics, but also in departments of philosophy, history, government, sociology, law, business, journalism, education, and the humanities. He himself should be awarded an immediate posthumous Nobel Prize — indeed, more than one. He deserves to receive every token of recognition and memorial that our society can bestow. For as much as anyone in history, he labored to preserve it. If he is widely enough read, his labors may actually succeed in saving it.
The primary social evil of our time is lack of respect for self-ownership rights. It is what underlies both private crime and institutionalized crime perpetrated by the state. State laws, regulations, and actions are objectionable just because the state is claiming the right to control how someone's body is to be used.
When the state drafts a man or threatens him with imprisonment if he violates its narcotics laws, for example, it is assuming partial control of his body, contrary to his self-ownership rights.
Moreover, laws such as tax laws or fines for failure to comply with arbitrary state decrees (e.g., economic regulations, anti-discrimination rules) also violate self-ownership rights by assuming ownership of property owned by individuals.
After all, although self-ownership is more fundamental than rights in external resources — one must own oneself in order to own other things — self-ownership is rendered meaningless if the right to own private property is not also respected. This is why Murray Rothbard insisted that all "human rights" are property rights — ownership rights in scarce resources, whether self-ownership rights in one's body or property rights in external objects.
Now as the example above shows, all political theories advocate some form of property rights, since they specify certain owners of various types of resources. State policies that tax, conscript, or imprison or fine individuals for failure to comply with various regulations in effect assign partial ownership in the subjects' bodies or property to the state. The state claims a partial ownership right in these resources.
All political systems assign owners to resources according to some assignment rule. What sets libertarianism apart is its own unique property-assignment rule: the rule that specifies that individuals, not the state, are owners of their own bodies and property.
First Use and Homesteading of Unowned Resources
It is, therefore, crucial that libertarian theory have a sound basis for property rights and for its unique property assignment rules.
Relying on some version of the Lockean notion of homesteading — an individual appropriating something unowned from the state of nature, thereby becoming the owner — libertarianism rightly focuses on the concept of first use of a previously unowned scarce resource as the key test for determining ownership of it.For more on the importance of and reasons for first use being the touchstone of property ownership, see my articles A Theory of Contracts: Binding Promises, Title Transfer, and Inalienability and Defending Argumentation Ethics, esp. the section "Objective Links: First Use, Verbal Claims, and the Prior-Later Distinction," and the links in this piece to various writings by Hans-Hermann Hoppe on this issue; and the blog posts The Essence of Libertarianism? and Thoughts on Intellectual Property, Scarcity, Labor-ownership, Metaphors, and Lockean Homesteading.
One's initial impression might be that first use is the bedrock principle of libertarian property assignment, that is, that it decides questions of ownership of all scarce resources, both human bodies and external things. The owner of a plot of land is its first user (or his descendent in title), just as the first user of a body is its owner. This would mean that self-ownership rests on the first use principle.
Parents as First Owners
And what is wrong with relying on first use as the basis for self-ownership? To be sure, with respect to most claimants to one's body — a robber or state trying to conscript, say — one is indeed the "first user," and thus has a better claim to the body than the outsider. But what about one's parents? Is one really the first user of one's body? Was one's body simply lying around unowned, in state of nature, waiting for some occupant to swoop down and appropriate it?
No, obviously not. It was (one was) in the care of — and produced by — one's parents. So if we maintain that "first use" always determines the answer to the question "who owns this resource?", for any resource at all, then it would seem that parents do own their children. The mother owns the physical matter and bits of food and nourishment that assemble into the zygote, embryo, fetus, and then baby.
So, when does the child become a self-owner? Or does he? The libertarian seems to be faced with a dilemma.
Possible Solutions to the Dilemma
Several possible arguments might be put forward to avoid the uncomfortable specter of children in bondage. First, it could be noted that the main political issue in society concerns third parties who want to dominate and control others. Slaveowning parents do not seem to pose the most pressing danger. For the typical case of conflict, the first-use principle suffices to prove self-ownership of one's body vis-à-vis the third party claimant. Still, this leaves open the possibility of parents owning their kids.
Second, it could be argued that even if the parent does own the child, in most cases a decent parent would manumit the child at a suitable age. This is probably true, but the possibility of a brutal parent selling his son or daughter into slavery is still unsettling. Third, perhaps one could try some kind of "regression theorem" based on this … back to "Adam." But this seems unlikely to be fruitful.
Fourth, it is not difficult to envision a scenario in which most lines of descent, at some point, become permanently "liberated" or "manumitted" by the benevolent actions of a key ancestor. Great-great-great-Grand-dad manumits his child on the condition that he free his issue, and so on. In this way, eventually all or most lines of descent become freed by some distant act in the past of a benevolent ancestor. But still, this leaves open the possibility that some might not; and, in any event, it admits that at some points in time, child-slavery exists and is permissible.
Finally, and to me most decisive: the libertarian could argue that the parent has various positive obligations to his or her children, such as the obligation to feed, shelter, educate, etc. The idea here is that libertarianism does not oppose "positive rights"; it simply insists that they be voluntarily incurred. One way to do this is by contract; another is by trespassing against someone's property. Now, if you pass by a drowning man in a lake you have no enforceable (legal) obligation to try to rescue him; but if you push someone in a lake you have a positive obligation to try to rescue him. If you don't you could be liable for homicide. Likewise, if your voluntary actions bring into being an infant with natural needs for shelter, food, care, it is akin to throwing someone into a lake. In both cases you create a situation where another human is in dire need of help and without which he will die. By creating this situation of need you incur an obligation to provide for those needs. And surely this set of positive obligations would encompass the obligation to manumit the child at a certain point. This last argument is, to my mind, the most attractive, but it is also probably the least likely to be accepted by most libertarians, who generally seem opposed to positive obligations, even if they are incurred as the result of one's actions. Rothbard, for example, puts forward several objections to such an approach.See Murray N. Rothbard, The Ethics of Liberty, chapter 14, "Children and Rights."
Objective Link: The Real Touchstone
All this said, it turns out that these Herculean efforts are unnecessary. The dilemma arises only if it is assumed that "first use" determines ownership not only for homesteaded resources, but also for bodies.
However, the "first use" rule is merely the result of the application of the more general principle of objective link to the case of objects that may be homesteaded from an unowned state. Recall that the purpose of property rights is to permit conflicts over scarce (rivalrous) resources to be avoided. To fulfill this purpose, property titles to particular resources are assigned to particular owners. The assignment must not, however, be random, arbitrary, or biased, if it is to actually be a property norm and possibly help conflict to be avoided. What this means is that title has to be assigned to one of the competing claimants based on "the existence of an objective, intersubjectively ascertainable link between owner and the" resource claimed.Hans-Hermann Hoppe, A Theory of Socialism and Capitalism, p. 12.
Thus, it is the concept of objective link between claimants and a claimed resource that determines property ownership. First use is merely what constitutes the objective link in the case of previously unowned resources. In this case, the only objective link to the thing is that between the first user — the appropriator — and the thing. Any other supposed link is not objective, and is merely based on verbal decree, or on some type of formulation that violates the prior-later distinction. But the prior-later distinction is crucial if property rights are to actually establish rights, and to make conflict avoidable. Moreover, ownership claims cannot be based on mere verbal decree, as this also would not help to reduce conflict, since any number of people could simply decree their ownership of the thing.Hoppe elaborates on these themes in ch. 1, 2, and 7 of A Theory of Socialism and Capitalism.
So for homesteaded things — previously unowned resources — the objective link is first use. It has to be by the nature of the situation.
But for bodies, things are not the same. As noted above, one is not really the "first user" of one's body in the same sense as one is the first user of a previously unowned thing that one appropriates. It's not as if the body was just lying, unoccupied and unused, in the wild, waiting for an occupant to homestead it. And moreover, as noted above, the occupant is not exactly the first user of his body, with respect to his parents.
Additionally, to homestead an unowned resource presupposes one already has a body, which one uses to act in the world and to homestead unowned things. But this is not the case for "homesteading" one's body. One has no body before one gains rights to it.For further discussion of the difference between bodies and things homesteaded for purposes of rights, see Kinsella, "A Theory of Contracts: Binding Promises, Title Transfer, and Inalienability," Journal of Libertarian Studies, vol. 17, no. 2, pp. 11–37 (e.g., the "Property in the Body" section on p. 29).
If "first use" is not the ultimate test for the "objective link" in the case of body ownership, what is? It is the unique relationship between a person and "his" body — his direct and immediate control over the body, and the fact that, at least in some sense, a body is a given person and vice versa. This is what constitutes the objective link sufficient to give that person better title to his body than any third party claimant, even his parents (an exception would be the victim of a crime committed by the body-owner, who might thereby acquire a "superior" link to or claim on the criminal's body).
Moreover, any outsider who claims another's body cannot deny this objective link and its special status, since the outsider also necessarily presupposes this in his own case. This is so because in seeking dominion over the other, in asserting ownership over the other's body, he has to presuppose his own ownership of his body, which demonstrates he does place a certain significance on this link, at the same time that he disregards the significance of the other's link to his own body. (Notice that if a victim seeks dominion over the body of his aggressor for purposes of proportional punishment, his claim of ownership over the aggressor's body is not incompatible with a claim of self-ownership, since the cases are different. It is not inconsistent to claim that the special link between an innocent person and his body gives him the best claim over that body, and to also claim that this no longer holds for an aggressor because he has committed aggression. This distinction is neither arbitary nor particularizable; it is grounded in the nature of things.)For more on this, see my A Libertarian Theory of Punishment and Rights, pp. 617-25; and Hans-Hermann Hoppe, A Theory of Socialism and Capitalism, pp. 131-38.
The basic point about the primacy of the "direct" link over an "indirect" link (ceteris paribus — see the point above about punishment of criminals) was first suggested to me by Hoppe. As might be apparent to those familiar with Hoppe's argumentation ethics, the Hoppean theory implies the logical priority of direct versus indirect control over one's body. In fact, the argument made above (that any outsider who claims another's body cannot deny the objective link between person and body) is merely an application of Hoppe's argumentation ethics approach. In fact, Hoppe made a similar argument in a German publication in 1985:
The answer to the question what makes my body "mine" lies in the obvious fact that this is not merely an assertion but that, for everyone to see, this is indeed the case. Why do we say "this is my body"? For this a twofold requirement exists. On the one hand it must be the case that the body called "mine" must indeed (in an intersubjectively ascertainable way) express or "objectify" my will. Proof of this, as far as my body is concerned, is easy enough to demonstrate: When I announce that I will now lift my arm, turn my head, relax in my chair (or whatever else) and these announcements then become true (are fulfilled), then this shows that the body which does this has been indeed appropriated by my will. If, to the contrary, my announcements showed no systematic relation to my body's actual behavior, then the proposition "this is my body" would have to be considered as an empty, objectively unfounded assertion; and likewise this proposition would be rejected as incorrect if following my announcement not my arm would rise but always that of Müller, Meier, or Schulze (in which case one would more likely be inclined to consider Müller's, Meier's, or Schulze's body "mine"). On the other hand, apart from demonstrating that my will has been "objectified" in the body called "mine," it must be demonstrated that my appropriation has priority as compared to the possible appropriation of the same body by another person.
As far as bodies are concerned, it is also easy to prove this. We demonstrate it by showing that it is under my direct control, while every other person can objectify (express) itself in my body only indirectly, i.e., by means of their own bodies, and direct control must obviously have logical-temporal priority (precedence) as compared to any indirect control. The latter simply follows from the fact that any indirect control of a good by a person presupposes the direct control of this person regarding his own body; thus, in order for a scarce good to become justifiably appropriated, the appropriation of one's directly controlled "own" body must already be presupposed as justified. It thus follows: If the justice of an appropriation by means of direct control must be presupposed by any further-reaching indirect appropriation, and if only I have direct control of my body, then no one except me can ever justifiably own my body (or, put differently, then property in/of my body cannot be transferred onto another person), and every attempt of an indirect control of my body by another person must, unless I have explicitly agreed to it, be regarded as unjust(ified).Informal translation from Hans-Hermann Hoppe, Eigentum, Anarchie und Staat (Manuscriptum Verlag, 2005, pp. 98-100; originally published in 1985).
So, who owns a child's body? Initially, the parents own it as a sort of temporary trustee. The parents, as the producers of the child, have an objective link to the child's body that defeats any claims of outsiders (unless the parents sever this link by abusing their position). That is, parents have a better claim to the child than any outsiders, because of their natural link to the child. However, when the child "homesteads" or "appropriates" his own body by establishing the requisite objective link sufficient to establish self-ownership, the child becomes an adult, so to speak, and now has a better claim to his body than his parents.
Hoppe recognized this basic conclusion in his 1989 treatise, where he wrote:
It is worth mentioning that the ownership right stemming from production finds its natural limitation only when, as in the case of children, the thing produced is itself another actor-producer. According to the natural theory of property, a child, once born, is just as much the owner of his own body as anyone else. Hence, not only can a child expect not to be physically aggressed against but as the owner of his body a child has the right, in particular, to abandon his parents once he is physically able to run away from them and say "no" to their possible attempts to recapture him. Parents only have special rights regarding their child — stemming from their unique status as the child's producers — insofar as they (and no one else) can rightfully claim to be the child's trustee as long as the child is physically unable to run away and say "no."Hoppe, A Theory of Socialism and Capitalism, n.9 to ch. 2, on p. 212; emphasis added.
Here Hoppe adopts the Rothbardian approach, which uses the child's capacity to run away and say "no" as a sort of rule of thumb for indicating when a child fully appropriates his body.Rothbard, The Ethics of Liberty, chapter 14, "Children and Rights." But a more general conception of body-appropriation may be developed by considering the following. First, as Hoppe emphasizes, to appropriate means to bring under control.Hans-Hermann Hoppe, "Four Critical Replies," p. 242.
Hoppe also argues that rights are held by rational agents — those who are "capable of communicating, discussing, arguing, and in particular, [who are] able to engage in an argumentation of normative problems".Hoppe, A Theory of Socialism and Capitalism, n.2 on p. 212. This implies that a person reaches adulthood, or "appropriates" his body and gains full ownership rights to it, when he reaches the point where he is a rational agent in this sense. (The act of gaining full self-ownership rights may be regarded as a type of homesteading or appropriation of one's body — reaching adulthood, so to speak — so long as it is kept in mind that it is a special type of homesteading: not homesteading by a body-owner of an unowned (non-agent) resource, but the establishment of an objective link constituted by direct and immediate control of the body by a rational agent.)
Obviously, there are other issues that could be explored here: when and exactly how does a child homestead himself, or reach adulthood; and exceptions to the prima facie case, such as where a person commits a crime which in some sense severs his objective link or transfers it to his victim (creating a "superior" link on behalf of the victim), so that the victim has the right to retaliate. But it should be clear that what distinguishes libertarianism from all competing political theories is its scrupulous adherence — informed by sound, i.e., Austrian, economics — to the idea that property rights in scarce resources must be assigned to the person with the best, objective link to the resource in question; and that, in the case of bodies, the link is the natural connection to and relationship between the occupant and the body, while for all other resources, the objective link is first use.