September

the Freeman VOL. 31, NO.9. SEPTEMBER 1981 A MEMORIAL With this issue of The Freeman we celebrate the centenary of the birth of economist Ludwig von Mises who was born on September 29, 1881, in Lemberg, Austria. In his honor, this issue is devoted primarily to excerpts from his great work Human Action, selected and arranged topically by one of his former students, George Koether. SUBJECTS Accounting Advertising Banking Boom and Bust Bureaucracy Capital Capitalism Charity Competition Debt Devaluation Economics Education Entrepreneurship Equality Exchange Rates Gold Standard Government History Human Action Ideology Individualism Inflation Interest Intervention Investment-Domestic Investment-Foreign Labor Unions Laissez Faire Land Reform Machines Market Mathematics Money Money "Supply" Monopoly Morality Praxeology Prices Profit and Loss Public Opinion Reason Religion Science Selfishness Sex Socialism Society Speculation Statistics Tariffs Taxes Theory Time Underdeveloped Nations Unemployment Value Wages War FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-Hudson, N.Y. 10533 Tel: (914) 591-7230 Leonard E. Read, President Managing Editor: Paul L. Poirot Production Editor: Beth A. Hoffman Contributing Editors: Robert G. Anderson Bettina Bien Greaves Edmund A. Opitz (Book Reviews) Roger Ream Brian Summers THE FREEMAN is published monthly by the Foundation for Economic Education, Inc., a non political, nonprofit, educational champion of pri vate property, the free market, the profit and loss system, and limited government.

The costs of Foundation projects and services are met through donations. Total expenses aver age $18.00 a year per person on the mailing list. Donations are invited in any amount. THE FREEMAN is available to any interested person 'in the United States for the asking. For foreign delivery, a donation is required sufficient to cover direct mailing cost of $5.00 a year. Copyright, 1981. The Foundation for Economic Education, Inc. Printed in U.S.A. Additional copies, postpaid: 3 for $1.00; 10 or more, 25 cents each. THE FREEMAN is available on microfilm from University Microfilms International, 300 North Zeeb Road, Ann Arbor, Mich. 48106. The excerpts from Human Action appear here by speciai permission of the publisher, Contemporary Books, Inc., 180 North Michigan Avenue, Chicago, Illinois 60601. All rights reserved.

The Practiceof Human Action From the Introduction to Human Action by Ludwig von Mises, 1949. THERE are people who assert that something must be wrong with the social sciences because social conditions are unsatis factory. The natural sciences have achieved amazing results in the last two or three hundred years, and the practical utiliza tion 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 un employment,war and tyranny. They are sterile and have con tributed 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 in crease in wealth and welfare were feasible only through the pursuit of those liberal policies which were the practical appli cation 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 improve ment 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 515 516 THE FREEMAN of conquerors and expropriators and demonstrated the social benefits derived from business activity. None of the great mod ern inventions would have been put to use if the mentality of the pre-capitalistic era had not been thoroughly demolished by the economists. What is commonly called the ~~industrial revo lution" was an offspring of the ideological revolution brought about by the doctrines of the economists. The economists ex ploded 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 produc tion; that machines are an evil because they bring about un employment; 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 pacemak ers of modern capitalism. It is they that made possible the progress of the natural sciences that has heaped benefits upon the masses.

What is wrong with our age is precisely the widespread ig norance of the role which these policies of economic freedom played in the technical evolution of the last two hundred years. 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 ifhe wants to attain definite ends. ® The Wisdom of Ludwigvon Mises Human Action, generally considered to be the greatest work of the greatest economist of our times, is a towering monument to the mind of a genius. Its 885 pages of text contain insights that have revolutionized economic thought and are moving the world toward a true and complete understanding of human freedom.

Because of the "warp and woof' nature of all human action-with one strand of action by one individual affecting and being affected by the action of all other individuals, and because of the necessity for recognizing and explaining this connexity of all economic phenomena-Human Action is not a book one reads; it is a book one studies. As every human action bears on every other human action, so every principle of economic analysis relates to every other principle. Thus, in dealing topically with one subject, Professor Mises never overlooked its relation to all others. Hence his convictions on anyone topic were spread throughout his book. In these extracts I have sought to capture the essence of his thought on a number of topics, but for purposes of brevity and ease of comprehension, sentences have been shortened and. juxtaposed, words eliminated, para graphing changed and punctuation sometimes altered. Yet, with the excep tion of a very few words in brackets, every word in these extracts is pure Mises, every word is taken from Human Action.

May those who have never savored the fine flavor of this wine of wisdom be tempted, by this small sip, to enjoy deep draughts from the full bottle. -GEORGE KOETHER 517 ACCOUNTING The numerical exactitude of busi ness accounts and calculations must not prevent us from realizing the uncertainty and speculative charac ter of their items and of all compu tations based on them. The essential elements of eco nomic calculation are speculative anticipations of future conditions. 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 proof is that the Stock Exchange appraises them without any regard to these figures. ADVERTISING The consumer is, according to leg end, defenseless against ((high-pres sure" advertising. If this were true, success or failure in business would depend on the mode of advertising only. However, nobody believes that any kind of advertising would have succeeded in making the candle makers hold the field against the 518 electric bulb, the horsedrivers against the motorcars, the goose quill against the steel pen and later against the fountain pen. Advertis ing pays the advertiser only if ex amination of the first sample bought does not result in the consumer's re fusal to buy more of it.

BANKING The demand of the public for credit is a magnitude dependent on the banks' readiness to lend, and banks which do not bother about their own solvency are in a position to expand circulation credit by lowering the rate of interest below the market. Lowering the rate of interest is tan tamount to increasing the quantity of what is mistakenly considered as the fair and normal requirements of business. Banknotes became fiduciary me dia within the operation of the un hampered market economy. Depos its subject to check are money substitutes and, as far as their amount exceeds the reserve kept, [are] fiduciary media, and conse quently no less a vehicle of credit expansion than are banknotes. The begetter of credit expansion was the BANKING 519 banker, not the authority. But today credit expansion is exclusively a government practice. While the size of the credit expan sion that private banks and bankers are able to engineer on an unham pered market is strictly limited, governments aim at the greatest possible amount of credit expansion.

Credit expansion .is the govern ments' foremost tool in their strug gle against the market economy. What is needed to prevent further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full com pliance with the terms of the con tract. Free banking is -the.only method for prevention of the dangers inher ent in credit expansion. Only free banking would have rendered the market economy secure against crises and depressions. No government is willing today to give any thought to the program of free banking because no govern ment wants to renounce what it con siders a handy source of revenue. Those Americans who twice suc ceeded in doing away with a central bank were aware of the dangers of such institutions; it was too bad that they failed to see that the evils they fought were present in every kind of government interference with bank ing.

BOOM AND BUST An increase in the quantity ofmoney or fiduciary media is an indispens able condition of the emergence of a boom. The recurrence of boom peri ods, followed by periods of depres sion, is the unavoidable outcome of repeated 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 ex pansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit ex pansion, or later as a final and total . catastrophe of the currency system involved. The breakdown appears as soon as the banks become frightened by the accelerated pace of the boom and be gin to abstain from further credit expansion. The change in the banks' conduct does not create the crisis. It merely makes visible the havoc spread by the faults which business has committed in the boom period.

The dearth of credit which marks the crisis is caused not by contrac tion but by the abstention from fur ther credit expansion. It hurts all 520 THE FREEMAN September enterprises-not only those which are doomed at any· rate, but no less those whose business is sound and could flourish if appropriate credit were available. As the outstanding debts are not paid back, the banks lack the means to grant credits even to the most solid firms. The crisis becomes general and forces all branches of business and all firms to restrict their activities. But there is no means of avoiding these conse quences of the preceding boom. Prices of the factors of produc tion-both material and human have reached an excessive height in the boom period. They must come down before business can become profitable again. The recovery and return to ((normalcy" can only begin when prices and wage rates are so low that a sufficient number of peo ple assume that they will not drop still more. Therefore the only means to shorten the period of bad business is to avoid any attempts to delay the fall in prices knd wages. Any at tempt of the government or labor unions to prevent or delay this ad justment merely prolongs the stag nation.

Out of the collapse of the boom there is only one way back. Wage rates must drop; people must re strict their consumption temporar ily until the capital wasted by mal investment is restored. The belief of the advocates of credit expansion and inflation that abstention from further credit expansion and inflation would perpetuate the depression is utterly false. The rem edies these authors suggest would not make the boom last forever. They would merely upset the process of recovery. The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as addi tional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expan sion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up and the breakdown of the whole monetary system.

BUREAUCRACY Bureaucratic management, as dis tinguished from profit management, . is the method applied in the conduct of administrative affairs the result of which has no cash value on· the market. Success or failure of a police de1981 BUREAUCRACY 521 partment's activities cannot be as certained according to the arithmet ical procedures of profit-seeking business. No accountant can estab lish whether or not a police depart ment or one of its subdivisions has succeeded. Bureaucratic conduct of affairs is conduct bound to comply with de tailed rules and regulations fixed by the authority of a superior body. It is the only alternative to profit man agement. Whenever the operation of a system is not directed by the profit motive. it must be directed by bu reaucratic rules. No business, whatever its size or specific ta.sk, can ever become bu reaucratic so long as it is entirely and solely operated on a profit basis.

But as soon as it abandons profit seeking and substitutes for it what is called the service principle-it must substitute bureaucratic meth ods for those of entrepreneurial management. CAPITAL From the notion of capital goods one must clearly distinguish the concept of capital. The concept of capital is the fundamental concept of eco nomic calculation, the foremost mental tool of the conduct of affairs in the market economy. Its correla tive is the concept of income. The idea of capital has no counter part in the physical universe of tan gible things. It is nowhere but in the minds of planning men. It is an ele ment in economic calculation. Capital goods are intermediary products which, in the further course of production, are transformed into consumers' goods. All capital goods, including those not called perish able, perish either in wearing out their serviceableness in production or in losing their serviceableness, even before this happens, through a change in the market data. There is no question of keeping a stock of capital goods intact. They are tran sient. The notion of wealth con stancy is an outgrowth of deliberate planning and acting. It refers to the concept of capital as applied in cap ital accounting, not to the capital goods as such.

The accumulation of new capital through saving initiates the chain of actions that results in an im provement of economic conditions. Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way. These additional funds make pos sible the execution of projects which, for the lack of capital goods, could 522 THE FREEMAN September not have been executed previously. Embarking. upon the realization of the new projects, entrepreneurs compete on the market for the fac tors of production. They push up the prices· of materials and wage rates. Thus wage earners, at the start of the process, already reap a share of the benefits that the abstention from consumption on the part of savers has begotten. In the capitalist society there pre vails a tendency toward a steady in crease in the per capita quota of cap ital invested. The accumulation of capital soars above the increase in population figures. Consequently the marginal productivity of labor, real wage rates, and the wage earners' standard of living tend to rise con tinually. But this improvement in well-being is not the manifestation of the operation of an inevitable law of human evolution; it is a tendency resulting from the interplay of forces which can freely produce their ef fects only under capitalism.

That in capitalist countries the average wage earner consumes more goods and can afford more leisure than his ancestors is not an achieve ment of governments and labor unions. It is the outcome of the fact that profit-seeking business has ac cumulated and invested more capi tal and thus increased the marginal productivity of labor. Capital as such does not bear in terest; it must be well employed and invested not only in order to yield interest, but also lest it disappear entirely. CAPITALISM The system of free enterprise has been dubbed capitalism in order to deprecate and to smear it. However, this term can be considered very pertinent. It refers to the most char acteristic feature of the system, its main eminence, viz., the role the no tion of capital plays in its conduct. Modern capitalism is essentially mass production for the needs of the masses. The buyers of the products are by and large the same people who as wage earners cooperate in their manufacturing.

Capitalism, says Marx, repeating the fables of the eulogists of the Middle Ages, has an inevitable ten dency to impoverish the workers more and more. The truth is that capitalism has poured a horn of plenty upon the masses of the wage earners who frequently did all they 1981 CAPITALISM 523 The fear of penury and of the de grading consequences of being sup ported by charity are important fac tors in the preservation of man's physiological equilibrium. They im pel a man to keep fit, to avoid sick ness and accidents, and to recover as soon as possible from injuries suf fered. The experience of the social secu rity system, especially that of the oldest and most complete scheme, the German, has clearly shown the undesirable effects resulting from the elimination of these incentives. No civilized community has cal lously allowed the incapacitated to perish. But the substitution of a le gally enforceable claim to support or sustenance for charitable relief does not seem to agree with human na ture as it is. Not metaphysical pre possessions, but considerations of practical expediency make it inad visable to promulgate an actionable right to sustenance.

could to sabotage the adoption of thus utilize the intellectual methods those innovations which render life of the capitalist system that they fa more agreeable. It is not labor leg-natically condemn. islation and labor-union pressure that have shortened hours of work and withdrawn married women and children from the factories; it is capitalism. The history of capitalism as it has ------------- operated in the last two hundred years in the realm of Western civi-CHARITY lization is the record of a steady rise _, _ in the wage earners' standard of liv ing. The inherent mark of capital ism is that it is mass production for mass consumption directed by the most energetic and far-sighted indi viduals' unflaggingly aiming at im provement. Its driving force is the profit motive, the instrumentality of which forces the businessman con stantly to provide the consumers with more, better and cheaper amenities.

An excess of profits over losses can appear only in a progressing econ omy and only to the extent to which the masses' standard of living im proves. Thus capitalism is the sys tem under which the keenest and most agile minds are driven to pro mote the welfare' of the laggard many. Government-operated enterprises and the Russian Soviet economy are, by the mere fact that they buy and sell on markets, connected with the capitalist system. They themselves bear witness to this connection by calculating in terms of money. They 524 THE FREEMAN September COMPETITION In nature there prevail irreconcil able conflicts of interests. Only the fittest plants and animals survive. The antagonism between an animal starving to death and another that snatches the food away from it is im placable. We may call this biological competition. [It] must not be con fused with social competition, i.e., the striving of individuals to attain the most favorable position in the system of social cooperation. Social competition is present in every con ceivable mode of social organization.

In a totalitarian system, social competition manifests itself in the endeavors of people to court the fa vor of those in power. In the market economy competition manifests it self in the fact that the sellers must outdo one another by offering better or cheaper goods and services, and that buyers must outdo one another by offering higher prices. Market economy competition does not involve antagonism in the sense in which this term is applied to the hostile clash of incompatible inter ests. Psychologists are prone to con fuse combat and competition. But praxeology must beware of such misleading equivocations. Military terms are inappropriate for the de scription 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. The owners of already operating plants have no particular class in terest in the maintenance of free competition. They are opposed to confiscation and expropriation of their fortunes, but their vested in terests are rather in favor of mea sures preventing newcomers from challenging their position. Those fighting for free enterprise and free competition do not defend the inter ests of those rich today. They want a free hand left to unknown men who will be the entrepreneurs of to morrow and whose ingenuity will make the .life of coming generations more agreeable. They want the way left open to further economic im provements. They are the spokes men of material progress.

What makes friendly relations be tween human beings possible is the higher productivity of the division of labor. It removes the natural con flict of interests. A pre-eminent common interest, the preservation and further intensification of social cooperation, becomes paramount and obliterates all essential collisions. Catallactic competition is substi tuted for biological competition. It makes for harmony of the interests of all members of society.

1981 DEBT 525 DEBT The long-term public and semipub lic credit is a foreign and disturbing element in the structure of a market society. The financial history of the last century shows a steady increase in the amount of public indebted ness. Nobody believes that the states will eternally drag the burden of these interest payments. It is ob vious that sooner or later all these debts will be liquidated in some way or other, but certainly not by pay ment of interest and principal ac cording to the terms of the contract. Today there prevails a tendency to push banks and insurance com panies more and more toward in vestment in government bonds. The funds of the social security institu tions completely consist in titles to the public debt. As far as public in debtedness was incurred by spend ing for current expenditure, the sav ing of the individual does not result in capital accumulation. While in the unhampered market economy saving, caPital accumulation, and investment coincide, in the inter ventionist economy the individual citizens' savings can be dissipated by the government. The individual citizen restricts his current con sumption in order to provide for his own future; in doing this he contributes his share to the further eco nomic advancement of society and to an improvement of his fellow men's standard of living. But the govern ment steps in and removes the so cially beneficial effects of the indi viduals' conduct.

In the days of Solon the Athenian, of Ancient Rome's agrarian laws, and of the Middle Ages, the credi tors were by and large the rich and the debtors the poor. But in this age of bonds and debentures, mortgage banks, savings banks, life insurance policies and social security benefits, the masses of people with more mod erate income are themselves credi tors. On the other hand, the rich, in their capacity as owners of common stock, of plants, farms, and real es tate, are more often debtors than creditors. In asking for the expropri ation of creditors, the masses are unwittingly attacking their own particular interests. DEVALUATION If one looks at devaluation not with the eyes of an apologist of govern ment and union policies, but with the eyes of an economist, one must 526 THE FREEMAN September stress the point that all its alleged blessings are temporary only. More over, they depend on the condition that only one country devalues while the other countries abstain from de valuing their own currencies. If the other countries devalue in the same proportion, no changes in foreign trade appear. If they devalue to a greater extent, all these transitory blessings, whatever they may be, fa vor them exclusively. A general ac ceptance of the principles of the flex ible standard [floating exchange rates] must therefore result in a race between the nations to outbid one another [Le., competitive devalua tion]. At the end of this competition is the complete destruction of all na tions' monetary systems.

The much talked about advan tages which devaluation secures in foreign trade and tourism are en tirely due to the fact that the adjust ment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is dis ~ouraged.However, this merely means that in this interval the citi zens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomi tantly they must restrict their con sumption. Devaluation, say its champions, reduces the burden of debts. This is certainly true. The actual effect is that the indebted owners of real es tate and farm land and the share holders of indebted corporations reap gains at the expense of the majority of people whose savings are invested in bonds, debentures, savings-bank deposits and insurance policies.

ECONOMICS Economics opened to human science a domain previously inaccessible and never thought of. The discovery of a regularity in the sequence and in terdependence of market phenom ena went beyond the limits of the traditional system of learning. It conveyed knowledge which could be regarded neither as logic, mathe matics, psychology, physics nor bi ology. The science of human action was at the beginning merely a discipline dealing with those actions which can be tested by monetary calculation. Starting from this basis, the econo mists were bound to widen step by 1981 ECONOMICS 527 step the field of their studies until they· finally developed a system dealing with all human choices, a general theory of action. Economics. does not allow of any breaking up into special branches. It invariably deals with the inter connectedness of all the phenomena of action. There are no such things as ((economics of labor" or ((econom ics of agriculture." There is only one coherent body of economics. There is economics and there is economic history. The two must never be con fused. Economics, like logic and mathematics, is a display of abstract reasoning. Economics can never be experimental and empirical.

Economic knowledge is an essen tial element in the structure of hu man civilization; it deals with soci ety's fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen. It rests with men whether they will make the proper use of this knowledge. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul eco nomics; they will stamp out society and the human race. The early economists devoted themselves to the study of the prob lems of economics. In lecturing and writing books they were eager to communicate to their fellow citizens the results of their thinking. They tried to influence public opinion in order to make sound policies prevail in the conduct of civic affairs. They never conceived of economics as a profession. The development of a profession of economists is an offshoot of inter ventionism. The professional econo mist is the specialist who is instru mental in designing various measures of· government interfer ence with business. He is an expert in the field of economic legislation, which today invariably .aims at hindering the operation of the mar ket economy.

EDUCATION Public education can work if it is limited to reading, writing and arithmetic. With bright children it is even possible to add elementary notions of geometry, the natural sci ences and the valid laws of the coun try. But as soon as one wants to go farther, serious· difficulties appear. Teaching at the elementary level necessarily turns into indoctrina528 THE FREEMAN September tion. The party that operates the schools is in a position to propagan dize its tenets and to disparage those of other parties. Equality of opportunity, it is said, could be provided only by malt.ing education at every level accessible to all. There prevails today the ten dency to reduce all differences among various peoples to their education and to deny the. existence of inborn inequalities in intellect, will power, and character. It is not generally re alized that education can never be more than indoctrination with the ories and ideas already developed.

Education, whatever benefits it may confer, is transmission of traditional doctrines and valuations; it is by ne cessity conservative. It produces im itation and routine, not improve ment and progress. Innovators and creative geniuses cannot be reared in schools. They are precisely the men who defy what the school has taught them. In order to succeed in business a man does not need a degree from a school of business administration. These schools train the subalterns for routine jobs. They certainly do not train entrepreneurs. An entre preneur cannot be trained. General education plays only a minor role in the formation of the political, social and economic ideas of the rising generation. The impact of the press, the radio, and environ mental conditions is much more powerful than that of teachers and textbooks. The propaganda of the churches, the political parties, and the pressure groups outstrips the in fluence of the schools.

ENTREPRENEURSHIP What induces an entrepreneur to embark upon definite projects is nei ther high prices nor low prices as such, but a discrepancy between the costs of production, inclusive of in terest on the capital required and the anticipated prices of the products. The real entrepreneur is a specu lator, a man eager to utilize his opinion about the future structure of the market for business opera tions promising profits. This specific anticipative understanding of the conditions of the uncertain future defies any rules and systematiza tion. It can be neither taught nor learned. Those who confuse entrepreneur ship and management close their eyes to the economic problem. In la bor disputes the parties are not management and labor, but entre preneurship (or capital) and the sal aried or wage-receiving employees. The capitalist system is not a man1981 ENTREPRENEURSHIP 529 agerial system; it is an entrepreneu rial system.

It is impossible to eliminate the entrepreneur from the picture of a market economy. The various com plementary factors of production cannot come together sponta neously. They need to be combined by the purposive efforts of men aim ing at certain ends and motivated by the urge to improve their state of satisfaction. In eliminating the en trepreneur one eliminates the driv ing force of the whole market sys tem. EQUALITY Men are born unequal and it is pre cisely their inequality that gener ates social cooperation and civiliza tion. Equality under the law was not designed to correct the inexorable facts of the universe and to make natural inequality disappear. It was, on the contrary, the device to secure for the whole of mankind the maxi mum benefits it can derive from it. The inequality of incomes and wealth is an inherent feature of the market economy. Its elimination would entirely destroy the market economy.

What those people who ask for equality have in mind is always an increase in their own power to con sume. In endorsing the principle of equality as a political postulate no body wants to share his own income with those who have less. When the American wage earner refers to equality, he means that the divi dends of the stockholders should be given to him. He does not suggest a curtailment of his own income for the benefit of those 95 per cent of the earth's population whose income is lower than his. EXCHANGE RATES If more than one kind of money is used as a medium of exchange, the mutual exchange ratio between them is detennined by their purchasing power. As soon as domestic inflation be gins to affect the prices of some com modities, long before it has ex hausted all its effects upon the greater part of the prices of com modities and services, the price of foreign exchange tends to rise. The rise in foreign exchange rates merely 530 THE FREEMAN September anticipates the movement of domes tic commodity prices.

Exchange ratios are permanently fluctuating. There is nothing con stant and invariable in them. They defy any attempt to measure them. GOLD STANDARD A metallic currency is not subject to government manipulation. The gold standard was an efficacious check upon credit expansion, as it ~orced the banks not to exceed certain lim its in their expansionist ventures. The gold standard's own inflation arypotentialities were kept within limits by the vicissitudes of gold mining. The significance of the fact that the gold standard makes the in crease in the supply of gold depen dent upon the profitability of pro ducing gold is, of course, that it limits the government's power to resort to inflation. The. gold standard makes the determination of money's pur chasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold stan dard; it is its main excellence.

Nationalists are fighting the gold standard because they want to sever their countries from the world mar ket and to establish national au tarky as far as possible. Interven tionist governments and pressure groups are fighting the gold stan dard because they consider it the most serious obstacle to their en deavors to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd. In a living and changing world there cannot be any such thing as stabil ity of purchasing power. It is an es sential feature of money that its purchasing power is changing. The international gold standard works without any action on the part of governments. It is effective real cooperation of all members of the world-embracing market economy.

There is no need for any government to interfere in order to make the gold standard work as an interna tional standard. What governments call interna tional monetary cooperation is con certed action for the sake of credit expansion.

1981 GOVERNMENT 531 GOVERNMENT Government has no more ability than individuals to create something out of nothing. What the government spends more, the public spends less. Public works are not accomplished by the miraculous power of a magic wand. 'They are paid for by funds taken away from the citizens. The more public works expand and the more the government under takes in order to fill the gap left by the alleged ~~private enterprise's in ability to provide jobs for all," the more the realm of private enterprise shrinks. Thus we are again faced with the alternative of capitalism or socialism. There is no reason to idolize the police power and ascribe to it omnip·, otence and omniscience. It cannot conjure away the scarcity of the fac·, tors of production, it cannot make people more prosperous, it cannot raise the productivity of labor. All this talk about contracyclical government activities aims at one goal only, namely to divert the pub·, lic's attention from cognizance of the real cause of the cyclical fluctua-· tions of business. All governments are firmly committed to the policy of low interest rates, credit expansion l• and· inflation. When the unavoid able aftermath of these short-term policies appears, they know only of one remedy-to go on in inflation ary ventures.

Currency and credit manipulation is today the main instrument by means of which the anticapitalist governments are intent upon estab lishing government omnipotence. As soon as the economic freedom which the market economy grants to its members is removed, all political liberties and bills of rights become humbug. We may define freedom as that state of affairs in which the in dividual's discretion to choose is not constrained by government violence beyond the margin within which the praxeological law restricts it any way. HISTORY No laboratory experiments can be performed with regard to human ac tion. 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 com plex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to 532 THE FREEMAN September signify isolated events tested in experiments. The information con veyed by historical experience can not be used as building material for the construction of theories and the prediction of future events. Every historical experience is open to var ious interpretations, and is in fact interpreted in differ,ent ways. His tory speaks only to those people who know how to interpret it on the ground of correct theories.

HUMAN ACTION Man'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 individ ual's innate constitutionalcharac teristics and dispositions and the op eration of environmental factors. There is finally the regularity of phenomena with regard to the inter connectedness of means and ends, viz., the praxeological law as dis tinct from the physical and the physiological law . Man has not the power to change the categories of human action. He must adjust his conduct to them. IDEOLOGY In acting, man is directed by ideolo gies. He chooses ends and means un der the influence of ideologies. The might of an ideology is either direct or indirect. It is direct when the ac tor 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 c'ontent of the ideology as false but is under the ne cessity of adjusting his actions to the fact that this ideology is endorsed by other people.

Any existing' state of social affairs is the product of ideologies previ ously thought out. Society is always the creation of ideologies temporally and logically anterior. Action is al ways directed by ideas; it realizes what previous thinking has de signed. The power of an ideology consists precisely in the fact that people submit to it without any wa vering and or scruples. A man does not himself create his ideas and standards of value; he bor rows 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 doc trines.

1981 IDEOLOGY 533 Common man does not speculate about the gr~at problems .. Yet the common man does choose. He chooses to adopt traditional patterns or pat terns adopted by other people be cause he is convinced that this pro cedure is best fitted to achieve his own welfare. And he is ready to change his ideology and conse quently his mode of action whenever he becomes convinced that this would better serve his interests. In the days of laissez faire people looked upon government as an insti tution whose operation required an expenditure of money which must be defrayed by taxes paid by the cit izens. In the individual citizens" budgets the state was an item of ex penditure. Today the majority of the citizens look upon government as an. agency dispensing benefits. The wage earners and the farmers expect to receive from the treasury more than. they contribute to its revenues. The state is in their eyes a spender, not a taker.

What determines the course of a nation's economic policies is always the economic ideas held by public opinion. No government, whether democratic or dictatorial, can free itself from the sway of the generally accepted ideology. Never before has the world known such a cleverly contrived system of propaganda and oppression as that instituted by contemporary govern·· ments, parties, and pressure groups. However, all these· edifices will crumble like houses of cards as soon as a great ideology attacks them. INDIVIDUALISM Society is nothing but the combina tion 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. All actions are performed by indi viduals. It is always the individual who thinks. Society does not think any more than it eats or drinks. Thinking is always an achievement of individuals. There is joint action but no joint thinking.

A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the sec ondary source. For a social collective has no existence and reality outside of the individual members' actions. The reason the market economy can operate without government 01'534 THE FREEMAN September ders telling everybody precisely what he should do and how he should do it is that it does not ask anybody to deviate from those lines of conduct . which best serve his own interests. What integrates the individual's ac tions into the whole of the social sys tem of production is the pursuit of his own purposes. In indulging his ttacquisitiveness" each actor contributes his share to the best possible arrangement of production activities. Thus, within the sphere of private property and the laws protecting it against en croachments on the part of violent and fraudulent action, there is no antagonism between the interests of the individual and those of society.

Those who want to study human action from the collective units en counter an'insurmountable obstacle in the fact that an individual at the same time can belong and really be longs to various collective entities. The problems raised by the multi plicity of coexisting social units and their mutual antagonisms can be solved only by methodological indi vidualism. ' The collaboration of collectivist creeds in their attempts to destroy freedom has brought about the mis taken belief that the issue in present day political antagonisms is individ ualism versus collectivism. In fact it is a struggle between individualism on the one hand and a multitude of collectivist sects on the other. It is not a uniform Marxian sect that at tacks capitalism, but a host of Marx ian groups. These groups fight one another with the utmost brutality and inhumanity. A substitution of collecti vism for liberalism would re sult in endless bloody fighting.

Individualism is a philosophy of social cooperation and the progres sive intensification of the social nexus. On the other hand, the appli cation of the basic ideas of collectiv ism cannot result in anything but social disintegration and the perpet uation of armed conflict. INFLATION A general rise in prices can only oc cur if there is either a drop in the supply of all commodities or an in crease in the supply of money. If one. wants to know whether or not there is credit expansion, one must look at the supply of fiduciary media, not at the arithmetical state of interest rates. The notions of inflation and defla1981 INFLATION 535 tion are not praxeological concepts. They were not created by econo mists, 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. 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.

What many people today call in flation 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 fall in commodity prices and wage rates. This innova tion is by no means harmless. Those engaged in futile and hope less attempts to fight the inevitable consequences of inflation-the rise in prices-are disguising their en deavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not com prehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they make things worse. The course of a progressing infla. tion is this: At the beginning the in flow of additional money makes the prices of some commodities and ser vices rise; other prices rise later. The price rise affects the various commodities and services at differ ent dates and to a different extent.

The first stage of the inflationary process may last for many years. While it lasts~ the prices of many goods and services are not yet ad justed to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the var ious commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy. But then finally the masses wake up. They become suddenly aware that inflation is a deliberate policy and will go on endlessly. A break down occurs. Everybody is anxious to swap his money against ~~real"

goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the 536 THE FREEMAN September Continental currency in America in 1781, with the French mandats ter ritoriaux in 1796 and with the Ger man Mark in 1923. It will happen again whenever the same conditions appear. Inflation is a policy that cannot last. The monetary system breaks down; all transactions in money cease. People return either to barter or to use of another kind of money. INTEREST Originary interest is the ratio of value assigned to want-satisfaction in' the immediate future and the value assigned to want-satisfaction in remote periods of the future. Ori-· ginary interest is not ((the price paid for the services of capital."

If future goods were not bought and sold at a discount as against present goods, the buyer of land would have to pay a price which equals the sum of all future net rev enues and which would leave noth ing for a current reiterated income. In every act of lending, even apart from the problem of changes in the monetary unit's purchasing power, there is an element of entrepreneu rial venture. The granting of credit is necessarily always an entrepre neurial speculation which can pos sibly result in failure and the loss of a part or of the total amount lent. Every interest stipulated and paid in loans includes not only originary interest but also entrepreneurial profit. The role which the rate of interest plays in the deliberations of the planning businessman is obvious. It prevents him from embarking upon projects the execution of which would not agree with the limited amount of capital goods provided by the sav ing of the public.

In the rate of originary interest there is no more permanence than in prices or wage rates. It was a blunder to explain inter est as an income derived from the productivity of capital. There were schools of thought for whom interest was merely a price paid for obtain ing the disposition of a quantity of money or money substitutes. From this belief they quite logically drew the inference that abolishing the scarcity of money and money substi tutes would abolish interest alto gether and result in the gratuitous ness of credit. The banks and the monetary au thorities are guided by the idea that the height of interest rates as the 1981 INTEREST 537 free loan market determines it is an evil, that it is the objective of a good. economic policy to lower it, and that credit expansion is an appropriate~ means of achieving this end without harm to anybody but parasitic mon·· eylenders. It is this infatuation that causes them to embark upon ven·· tures which must finally bring about a slump.

The cyclical fluctuations of busi·· ness are not an occurrence originat ing in the sphere of the unhampered market, but a product of govern·· ment interference with business conditions designed to lower the rate of interest below the height at which the free market would have fixed it. Therefore there cannot be any question of abolishing interest by any institutions, laws or devices of bank manipulation. He who wants to ((abolish" interest will have to in· duce people to value an apple avail able in a hundred years no less than a present apple. What can be abol ished by laws and decrees is merely the right of the capitalists to receive interest. But such decrees would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty. INTERVENTION In society's economic organization there are the liberals advocating pri..ate ownership of the means of production, the socialists advocating public ownership of the means of production, and the interventionists advocating a third system which, they contend, is as far from social ism as it is from capitalism.

The issue is: How does a system of interventionism work? Can it real ize those ends which people, in re sorting to it, want to attain? The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. With the present height of income and inheritance tax rates, this re serve fund out of which the inter ventionists seek to cover all public expenditure is rapidly shrinking. It has practically disappeared in most European countries. In the United States the recent advances in tax rates produced only negligible reve nue results beyond what would be produced by a progression which stopped at much lower rates. From day to day it becomes more obvious that large-scale additions to the 538 THE FREEMAN September amount of public expenditure can not be financed by ((soaking the rich,"

but that the burden must be carried by the masses. Those anxious to get subsidies will themselves have to foot the bill. All these champions of interven tionism fail to realize that their flro gram thus implies the establish ment of full government supremacy in all economic matters and ulti mately brings about socialism. If it is in the jurisdiction of the govern ment to decide whether or not defi nite conditions of the economy jus tify its intervention, no sphere of operation is left to the market. Then it is no longer the consumers who ultimately determine what should be produced, in what quantity, of what quality, by whom, where and how-but it is the government. It is difficult to find out how many of the supporters of interventionism are conscious of the fact that the pol icies they recommend directly lead to socialism, and how many hold fast to the illusion that what they are aiming at is a middle-of-the-road system that can last as a permanent systema ((third solution."

An essential element of the doc trines advanced both by socialists and interventionists is that the re currence of depressions is a phenom enon inherent in the very operation of the market economy.Y et the evils in the great depression that started in 1929 were not created by capitalism, but, on the contrary, by the en deavors to ((reform" and ((improve" the operation of the market econ omy by interventionism. The crash was ,the necessary outcome of the at tempts to lower the rate of interest by credit expansion. Institutional unemployment was the inevitable result of the policy of fixing wage rates above the potential .market height. The interventionist interlude must come to an end because all varieties of interference with the market phe nomena not only fail to achieve the ends aimed at by their authors, but bring about a state of affairs which is less desirable than the previous state they were designed to alter. If one wants to correct [this] by sup plementing the first acts of inter vention with more and more of such acts, one must go farther and far ther until the market economy has been entirely destroyed and social ism has been substituted for it.

Men must choose between the market economy and socialism. They cannot evade deciding between these alternatives by adopting a ((middle of-the-road" position, whatever name they may give to it. In abolishing economic calculation the general adoption of socialism would result in complete chaos and the disintegra tion of social cooperation under the division of labor.

1981 INVESTMENT 539 INVESTMENT-DOMESTIC When governments initiated their policies of long-term irredeemable and perpetual loans, the state of fered to the citizen an opportunity to put his wealth in safety and to enjoy a stable income secure against all vicissitudes. It opened a way to free the individual from the necessity of risking and acquiring his wealth and his income anew each day in the capitalist market. He who invested his funds in bonds issued by the gov ernment and its subdivisions was no longer subject to the inescapable laws of the market and the sovereignty of the consumers. Henceforth his in come no longer stemmed from the process of supplying the wants of consumers in the best possible way, but from taxes levied by the state's apparatus of compulsion and coer cion. He was no longer a servant of his fellow citizens, subject to their sovereignty; he was a partner of the government which ruled the people and exacted tribute from them.

However, even the most ruthless government in the long run is not able to defy the laws determining human life and action. If the gov ernment invests funds and no sur plus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principal could be paid. The irredeemable perpetual pub lic debt presupposes the stability of purchasing power. Although the state and its compulsion may be eternal, the interest paid on the public debt could be eternal only if based on a standard of unchanging value. The investor who for security's sake shuns the market, entrepre neurship and investment in free en terprise and prefers government bonds is faced again with the prob lem of the changeability of all hu man affairs. He discovers that in the frame of a market society there is no room left for wealth not dependent upon the market. His endeavors to find an inexhaustible source of in come fail. There are in this world no such things as stability and security and no human endeavors are pow erful enough to bring them about.

INVESTMENT-FOREIGN Under the conditions of the latter nineteenth centu!'y it did not matter whether or not a nation was pre pared and equipped with the re540 THE FREEMAN September quired capital in order to utilize ad equately the natural resources in 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 pro moters were not stopped by national borderlines. As far as investment was concerned the greater part of the earth's surface could be consid ered as integrated into a uniform world-embracing market system. 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 con quest. The inflow of foreign capital did not harm the receiving nations. It was European capital that acceler ated considerably the marvelous economic evolution of the United States and the British Dominions.

Thanks to foreign capital the coun tries of Latin America and Asia are today equipped with facilities for production and transportation which they would have had to forego for a very long time if they had not re ceived 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 askin~ today for ((for eign aid" explodes the fables of the Marxians and the nationalists. However, the mere lust for im ported capital goods does not resus citate the international capital mar ket. Investment and lending abroad are only possible if the receiving na tions are unconditionally and sin cerely committed to the principle of private property and do not plan to expropriate the foreign capitalists at a later date. It was such expropri ations that destroyed the interna tional capital market. Intergovern mental loans are no substitute for the functioning of an international capital market.

LABOR UNIONS The improvement in the workers' material conditions is due to the in crease in the per capita quota of cap ital invested and the technological achievements which the employ ment of this additional capital brought about. As far as labor legislation and union pressure did not exceed the limits of what the workers would have got without them as a neces sary consequence of the acceleration of capital accumulation as compared with population, they were super1981 LABOR UNIONS 541 £luous. As far as they exceeded these limi ts, they were harmful to the in terests of the masses. They delayed the accumulation of capital thus slowing down the tendency toward a rise in the marginal productivity of labor and in wage rates. They con ferred privileges on some groups of wage earners at the expense ofother groups. They created mass unem ployment and decreased the amount of products available for the workers in their capacity as consumers.

If unions were really bargaining agencies, their collective bargaining could not raise the height of wages above the point of the unhampered market. As long as there are still unemployed workers available, there is no reason for an employer to raise his offer. Real collective bargaining would not differ from individual bargaining. What is euphemistically called collective bargaining by union lead ers and ((pro-labor" legislation is bargaining at the point of a gun. It is bargaining between an armed party, ready to use its weapons, and an unarmed party under duress. It is not a market transaction. It is a dictate forced upon the em ployer and it produces institutional unemployment. If a government de cree or labor union pressure and compulsion fix wage rates above the height of the potential market rates, institutional unemployment results. The problem is not the right to strike, but the right-by intimida tion or violence-to force other peo ple to strike, and the further right to prevent anybody from working in a shop in which a union has called a strike. When the unions invoke the right to strike in justification of such intimidation and deeds of violence, they are on no better ground thana religious group would be in invok ing the right of freedom of con science as a justification for perse cuting dissenters.

LAISSEZ FAIRE In eighteenth-century France the saying laissez faire [let people do or make what they choose] and laissez passer [let pass or go] was the for mula into which some of the cham pions of the cause of liberty com pressed their program. Laissez faire does not mean: Let soulless mechanical forces operate. It means: Let each individual choose how he wants to cooperate in the so cial division of labor; let the con sumers determine what the entre preneurs should produce. Planning means: Let the govern542 THE FREEMAN September ment alone choose and enforce its rulings by the apparatus of coercion and compulsion. The alternative is not between a dead mechanism or a rigid automa tism on one hand and conscious planning on the other hand. The question is whose planning? LAND REFORM Plans aiming at a more or less equal distribution of the soil among the farming population are, under the conditions of the market economy, merely plans for granting privileges to a group of less efficient producers at the expense of the immense ma jority of consumers. The operation of the market tends to eliminate all those farmers whose cost of produc tion is higher than the marginal costs needed for the production of· that amount of farm products the con sumers are ready to buy. It deter mines the size of farms as well as the methods of production applied.

If the government interferes in or der to make a different arrangement of the conditions of farming prevail, it raises the average price of farm products. MACHINES Labor is more scarce than the ma terial factors of production. There are material factors of production which remain unused because the labor required is needed for the sat isfaction of more urgent needs. In our world there is no abundance, but a shortage of manpower, and there are unused material factors of pro duction, i.e., land, mineral deposits, and even plants and equipment. The substitution of more efficient methods of production for less effi cient ones does not render labor abundant, provided there are still material factors available whose utilization can increase human well being. On the contrary, it increases output and thereby the quantity of consumers' goods. ((Labor-saving" devices increase supply. They do not bring about ((technological unem ployment."

THE MARKET It is customary to speak metaphori cally of the automatic and anony mous forces actuating the ((mecha nism" of the market. Such metaphors 1981 THE MARKET 543 disregard the fact that the only fac tors directing the market and the determination of prices are purpo sive acts of men. There is no auto matism; there are only men con sciously and deliberately aiming at ends chosen. The market is a social body; it is the foremost social body. Everybody in acting serves his fellow citizens. Everybody, on the other hand, is served by his fellow citizens. Every body is both a means and an end in himself, an ultimate end for himself and a means to other people in their endeavors to attain ,their own ends. Each man is free; nobody, is sub ject to a despot. Of his own accord the individual integrates himself into the cooperative system. The market directs him and reveals to him in what way he can best promote his own welfare as well as that of other people. The market is supreme. The market alone puts the whole social system in order and provides it with sense and meaning.

The market is not a place, a thing or a collective entity. The market is a process, actuated by the interplay of the 'actions of the various individ uals cooperating under the division of labor. 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. Such ex changes can be effected only if each party values what he receives more highly than what he gives away. The divisibility of money, unlim ited for all practical purposes, makes it possible to determine the ex change ratios with nicety. The market process is coherent and indivisible. It is an indissoluble intertwinement of actions' and reac tions, of moves and countermoves. But the insufficiency of our mental abilities enjoins upon us the neces sity of dividing it into parts and analyzing each of these parts sepa rately. In resorting to such artificial cleavages we must never forget that the seemingly autonomous exis tence 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 market economy as such does not respect political frontiers. Its field is the world. The market makes peo ple rich or poor, determines who shall run the big plants and who shall scrub the floors, fixes how many peo ple shall work in the copper mines and how many in the symphony or chestras. None of these decisions is made once and for all; they are re vocable every day. The selective process never stops. To assign to everybody his proper place in society is the task of the consumers. Their buying and ab stention from buying is instrumen tal in determining each individual's 544 THE FREEMAN September social position. The consumers de termine ultimately not only the prices of the consumers' goods, but no less the prices of all factors of production. They determine the in come of every member of the market economy. The consumers, not the entrepreneurs, pay ultimately the wages earned by every worker, the glamorous movie star as well as the charwoman. It is true, in the market the various consumers have not the same voting right. The rich cast more votes than the poorer citizens. But this inequality is itself the outcome of a previous voting process.

If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt. Other men who did better in satisfying the demand of the consumers replace him. The consumers make poor people rich and rich people poor. They de termine precisely what should be produced, in what quality, and in . what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable. They do not care one whit for past merit and vested interests. Market prices tell producers what to produce, how to produce, and in what quantity. The market is the fo cal point to which activities of the individuals converge. It is the center from which the activities of individ uals radiate. The market economy, or capital ism, as it is usually called, and the socialist economy prec1ude one an other. There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed econ 0my' a system that would be in part capitalistic and in part socialist. The market economy is the product of a long evolutionary process. It is the strategy, as it were, by the applica tion of which man has triumphantly progressed from savagery to civili zation.

MATHEMATICSAND ECONOMICS 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 forma tion of exchange ratios between var ious commodities. In the realm of physical and chemical events there exist (or, at least, it is generally assumed that there exist) constant relations be1981 MATHEMATICS AND ECONOMICS 545 tween magnitudes, and man is ca pable of discovering these constants with a reasonable degree of preci sion by means of laboratory experiments. No such constant re lations exist in the field of human action outside of physical and chem ical technology and therapeutics. Those economists who want to substitute ~~quantitative economics" for what they call ~~qualitative eco nomics" are utterly mistaken. There are, in the field of economics, no con stant relations, and consequently no measurement is possible. The math ematical economist, blinded by the prepossession that economics must be construed according to the pat tern of Newtonian mechanics and is open to treatment by mathematical methods, misconstrues entirely the subject matter of his investigations.

He no longer deals with human ac tion but with a soulless mechanism mysteriously actuated by forces not open to further analysis. The mathematical economist eliminates the entrepreneur from his thought. He has no need for this mover and shaker whose never ceasing intervention prevents the system reaching the state of perfect equilibrium and static conditions. As the mathematical economist sees it, the prices of the factors of produc tion are determined by the intersec tion of two curves, not by human ac tion. Mathematical economists substitute algebraic symbols for the deter minate terms of money as used in economic calculation and believe that this procedure renders their reason ing more scientific. They deal with equilibrium in various mathemati cal symbols as ifit were a real entity and not a limiting notion, a mere mental tool. What they are doing is vain playing with mathematical symbols, a pastime not suited to convey any knowledge. They strongly impress the gullible layman. In fact they only confuse and muddle things which are satisfactorily dealt with in textbooks of commercial arith metic and accountancy.

The equations formulated by mathematical economics remain a useless piece of mental gymnastics and would remain so even if they were to express much more than they do. MONEY Money is a medium of exchange. A medium of exchange is a good which people acquire neither for their own consumption nor for employ ment in their own production activ ities, but with the intention of ex changing it at a later date against those goods which they want to use 546 THE FREEMAN September either for consumption or for pro duction. Nothing can enter into the func tion of a medium of exchange which was not already previously an eco nomic good to which people assigned exchange value before it was de manded as such a medium. Money is the thing which serves as the generally accepted and com monly used medium of exchange. This is its only function. All other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.

What is employed as money is a commodity which is used also for nonmonetary purposes. Under the gold standard, gold is money and money is gold. It is immaterial whether or not the laws assign legal tender quality only to gold coins minted by the government. What counts is that these coins really con tain a fixed weight of gold and that every quantity of bullion· can be transformed into coins. Under the gold standard the dollar and the pound sterling were merely names for a definite weight of gold. We call such a money commodity money. A second sort of money .is credit money. Credit money evolved out of the use of money-substitutes. It was customary to use claims, payable on demand and absolutely secure, as substitutes for the sum of money to which they gave claim. As long as these claims had been daily maturing claims against a debtor of undisputed solvency and could be collected without notice and free of expense, their exchange value was equal to their face value; it was this perfect equivalence which as signed to them the character of money substitutes.

Fiat money is money consisting of mere tokens which can neither be employed for any industrial pur poses nor convey a claim against anybody. The important thing to be remembered is that with every sort of money, demonetization-i.e., the abandonment of its use as a medium of exchange-must result in a seri ous fall of its exchange value. In the course of history various commodities have been employed as media of exchange. A long evolution eliminated the greater part of these commodities from the monetary function. Only two, the precious metals gold and silver, remained. In the second part of the nineteenth century more and more govern ments deliberately turned toward the demonetization of silver. The choice of the good to be em ployed as a medium of exchange and as money is never indifferent. It de termines the course of the cash-in duced 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 1981 MONEY 547 MONEY "SUPPLY"AND "STABILITY"

which in a selective process, going on for ages, finally assigned to the precious metals gold and silver the character of money. For two hun dred years the governments have interfered with the market's choice of the money medium. Even the most bigoted etatists [statists] do not ven ture to assert that this interference has proved beneficial. The fateful errors of popular mone·· tary doctrines which have led astray the monetary policies of almost all governments would hardly have come into existence if many econo·· mists had not themselves committ~d blunders in dealing with monetary issues and did not stubbornly cling to them. There is first of all the spurious idea of the supposed neutrality of money. An outgrowth of this doc·· trine was the notion of the ((level" of prices that rises or falls proportion·· .ately with the increase or decrease in the quantity of money in circula·· tion. It was not realized that changes in the quantity of money can never affect the prices of all goods and ser vices at the same time and to the same extent. Nor was it realized that changes in the purchasing power of the monetary unit are necessarily linked with changes in the mutual relations between those buying and selling.

The assumption that the medium of exchange is a neutral factor was a serious blunder. People tacitly as sumed that changes in purchasing power occur with regard to all goods and services at the same time and to the same extent. This is, of course, the fable of money's neutrality. The notion of a neutral money is no less contradictory than that of a money of stable· purchasing power. ______________ ,. Money without a driving force of its own would not, as people assume, be a perfect money; it would not be money at all. The purchasing power of money is determined by demand and supply, as is the case with the prices of all vendible goods and services. The de mand for a medium of exchange is the composite of two partial de mands: the demand displayed by the intention to use it in consumption and production and that displayed by the· intention to use it as a me dium of exchange. The value in ex change (purchasing power) of a me dium of exchange is the resultant of the cumulative effect of both partial demands.

548 THE FREEMAN September Money is not a standard for the measurement of prices; it is a me dium 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 com modities and services vary. With action and unceasing change, with· the economic system which cannot be rigid, neither neutrality of money nor stabili ty of its pur chasing power are compatible. All plans to render money neutral and stable are contradictory. Money is an element of action and conse quently of change. Changes in the money relation, Le., in the relation of the demand for and the supply of money, affect the exchange ratio be tween money on the one hand the vendible commodities on the other hand. These changes do not affect at the same time and to the same ex tent the prices of the various com modities and services. They conse quently affect the wealth. of various members of society in a different way.

Changes in the supply of money must bring about changes in other data too. The market system before and after the inflow or outflow of a quantity of money is not merely changed in that cash holdings of the individuals and prices have in creased or decreased. There have been effected also changes in the re ciprocal exchange ratios between the various commodities and services. It is generally believed by those unfamiliar with economic theory that credit expansion and an increase in the quantity of money in circulation are efficacious means for lowering the rate of interest permanently be low the height it would attain on a nonmanipulated capital and loan market. This theory is utterly illu sory. But it guides the monetary and credit policy of almost every con temporary government. The endeavors .to expand the quantity of money in circulation ei ther in order to increase the govern ment's·capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation.

It is not on account of an alleged scarcity of money that prices of ag ricultural products are too low to se cure to submarginal farmers the amount they would like to earn. The cause of these farmers' distress is that other farmers are producing at lower costs. An increase in the quantity of goods produced, other things being unchanged, must bring about an im provement in peoples' conditions. Its consequence is a fall in the money prices of the goods the production of which has been increased. But such a fall in money prices does not in the least impair the benefits derived from the additional wealth produced. One 1981 MONEY "SUPPLY" AND "STABILITY" 549 MONOPOLY Each factory turns out product.s dif·· ferent from those of other plants .. Each hotel has a monopoly on the sale of its services on the site of its premises. The professional services rendered by a physician or a lawyer are never. perfectly equal to those rendered by any other physician or lawyer. Except for certain raw mamust not say that a fall in prices caused by an increase in production of goods is proof of some disequili brium which cannot be eliminated otherwise than by increasing the quantity of money.

The services which money renders can be nei ther improved nor re paired by changing the supply of money. There may appear an excess or a deficiency of money in an indi vidual's cash holding. But· such a condition can be remedied by in creasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confu sion 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 every·· body all that money does and can do. terials, foodstuffs, and other staple goods, monopoly is everywhere on the market. However, the mere phenomenon of monopoly is without any signifi cance and relevance for the opera tion of the market and the determi nation of prices. It does not give the monopolist any advantage in selling his products. Under copyright law every rhymester enjoys a monopoly in the sale of his poetry. But this does not influence the market. It may happen that no price whatever can be realized for his stuff and that his books can only be sold at their waste paper value.

One must· not confuse the notions of monopoly and of monopoly prices. Mere monopoly as such is of no im portance if it does not result in mo nopoly prices. The publisher of a copyright book is a monopolist. But he may not be able to sell a single copy no matter --------------- how low the price he asks. Not every price at which a monopolist sells a monopolized commodity is a monop _______________ oly price. Monopoly prices are only prices at which it is more advanta geous 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. Monopoly prices are the out growth of government interference with business. They were not cre ated by the interplay. of the factors operating on a free market. They 550 THE FREEMAN September are not products of capitalism, but precisely of the endeavors to coun teract the forces determining the height of market prices. It is a dis tortion of fact to speak of monopoly capitalism. It would be more appro priate to speak of monopoly inter ventionism or monopoly statism.

The important place that cartels occupy in our time is an outcome of the interventionist policies adopted by the governments of all countries. The monopoly problem mankind has to face today is not an outgrowth of the operation of the market econ omy. It is a product of purposive ac tion on the part of governments. It is not one of the evils inherent in capitalism as the demagogues trum pet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroy ing its operation. It is a grotesque distortion of the true state of affairs to speak of mo nopoly capitalism instead of monop oly interventionism and of private cartels instead of government-made cartels. MORALITY Compliance with the moral rules which the establishment, preserva tion, and intensification of social cooperation require is not seen [by the economist] as a sacrifice to a mythi cal entity, but as the recourse to the most efficient methods of action, as a price expended for the attainment of more highly valued returns.

The social division of labor and co operation rests upon conciliatory settlements of disputes. Not war, as Heraclitus said, but peace is the source of all social relations. He who wants to preserve life and health as well and as long as possible, must realize that respect for other peo ple's lives and health better serves his aim than the opposite, mode of conduct. PRAXEOLOGY It is no longer possible to define neatly the boundaries between the kind of action which is the proper field of economic science in the nar rower sense, and other action. Acting man is always concerned with both CCmaterial" and cCideal" things. He chooses between alter natives. No matter whether they are to be classified as material or ideal. The general theory of choice is much more than merely a theory of 1981 PRAXEOLOGY 551 the ((economic side" of human en deavors and of man's striving for commodities and an improvement in his material well-being. It is the sci ence of every kind of human action.

Choosing determines all human de cisions. Out of the political economy of the classical school emerges the general theory of human action, praxeol ogy.l The economic or catallactic 2 problems are imbedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elabo rated part, of a more universal sci ence, praxeology. Praxeology-and consequently economics too-is a deductive sys tem. 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 pro claimed without such a connection is arbitrary and floats in midair. It IThe term praxeology was first used in 1890 by Espinas in "Les Origines de la technologie,"

Revue Philosophique, XVth year, XXX, 114-15. ZThe term Catallactics or the Science of Ex changes was first used by Whately. cr. his book Introductory Lectures on Political Econ omy (London, 1831), p. 6. is impossible to deal with a special segment of economics if one does not 'encase it in a complete system of ac tion. 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 special ist. In dealing with any problem he must always fix his glance upon the whole system. In speaking of the laws of nature we have in mind the fact that there prevails an inexorable interconnect edness of physical and biological phenomena and that acting man must submit to this regularity if he wants to succeed. In speaking of the laws of human action we refer to the fact that such an inexorable inter connectedness of phenomena is present also in the field of human action as such and that acting man must recognize this regularity too if he wants to succeed.

In physics we are faced with changes occurring in various sense phenomena. We discover a regular ity in the sequence of these changes and these observations lead us to the construction of a science of phys ics. In praxeology the first fact we know is that men are purposively intent upon bringing about some 552 THE FREEMAN September changes. It is this knowledge that integrates the subject matter of praxeology and differentiates it from the subject matter of the natural sci ences. We know the forces behind the changes, and this aprioristic knowledge leads us to a cognition of the praxeological process. The phys icist does not know what electricity ~~is." He knows only phenomena at tributed to something called elec tricity. 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 phe nomena and to describe the market process.

Praxeology is a theoretical and systematic, not a historical, science. Its statements and propositions are not derived from experience. They are, like those of logic and mathe matics, a priori. They are not subject to verification or falsification on the ground of experience and facts. The teachings of praxeology and economics are valid for every· hu man action without regard to its un derlying 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. The only standard which it applies is whether or not the means chosen are fit for the attainment of the ends aimed at. Only the insane venture to disre gard physical and biological laws. But it is quite common to disdain praxeological laws. Rulers do not like to admit that their power is re stricted by any laws other than those of physics and biology. They never ascribe their failures and frustra tions to the violation of economic law.

PRICES The ultimate source of the determi nation of prices is the value judg ments of the consumers. Each indi vidual, in buying or not buying and in selling or not selling, contributes his share to the formation of market prices. But the larger the market is, the smaller is the weight of each in dividual's contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct. What is called a price is always a relationship within an integrated system which is the composite effect of human relations.

1981 PRICES 553 Money prices are exchange ratios. The divisibility of money, unlimited for all practical purposes, makes it possible to determine the exchange ratios with nicety. Prices are determined between extremely narrow margins; the val uations on the one hand of the mar ginal buyer and those of the mar ginal 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 valuations which result in de termination of definite prices are different. Each party attaches a higher value to the good he receives than to that he gives away. The ex change ratio, the price, is not the product of an equality of valuation, ,but, on the contrary, the product of a discrepancy in valuation. The characteristic feature of the market price is that it tends to equalize supply and· demand. Any deviation of a market price from the height at which supply and demand are equal is-in the unhampered market-self-liquidating.

At times governments have re sorted to maximum prices, at other times to minimum prices for various commodities. At times they have de creed maximum wage rates, at other times minimum wage rates. It is only with regard to interest that they have never had recourse to mini mum rates; when they have interfered, they have always decreed maximum interest rates. They have always looked askance upon saving, investing, and moneylending. But if the government fixes prices at a height different from what the market would have fixed if left alone, this equilibrium of demand and sup ply is disturbed. Then there are with maximum prices-potential buyers who cannot buy although they are ready to pay the price fixed by the authority, or even a higher price [i.e., demand exceeds supply]. Then there are-with minimum prices potential sellers who cannot sell al though they are ready to sell at the price fixed by the authority, or even at a lower price [i.e., supply exceeds demand]. The price can no longer segregate those potential buyers and sellers who can buy and sell from those who cannot. If the authority does not want chance or violence to determine the allocation of the sup ply available, and conditions to be come chaotic, it must itself regulate the amount which each individual is permitted to buy. It must resort to rationing.

Before the government interfered, the goods concerned were, in the eyes of the government, too dear. As a result of the maximum price their supply dwindles or disappears alto gether. The government interfered because it considered these com modities especially vital, necessary, indispensable. But its action cur554 THE FREEMAN September tailed the supply available. It is therefore, from the point of view of the government, absurd and non sensical. A government can no more determine prices than a goose can lay hen's eggs. If the government is unwilling to acquiesce in this undesired and un desirable outcome and goes further and further, if it fixes the prices of all goods and services and obliges all people to continue producing and working at these prices and wage rates, it eliminates the market alto gether. Then the planned economy, socialism of the German Zwangs wirtschaft pattern, is substituted for the market economy.

Prices are by definition deter mined by peoples' buying and sell ing or abstention from buying and selling. They must not be confused with·fiats issued by governments or other agencies enforcing their or ders by an apparatus of coercion and compulsion. Prices are a market phenomenon. They are generated by the market process and are the pith of the mar ket economy. There is no such thing as prices outside the market. Prices cannot be constructed synthetically, as it were. The very idea of cost prices is un realizable. The reason why the price of Burgundy is higher than that of Chianti is not the higher price of the vineyards of Burgundy as against those of Tuscany. The causation is the other way around. Because peo ple are ready to pay higher prices for Burgundy than for Chianti, winegrowers are ready to pay higher prices for the vineyards of Burgundy than for those of Tuscany. Prices of the market are the ulti mate fact for economic. calculation.

Attempts to eliminate monetary terms from economic calculation are delusive. No method of economic calculation is possible other than one based on money prices as deter mined by the market. The pricing process is a social pro cess. It is consummated by an inter action 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 co operation and cooperating· in com petition all people are instrumental in bringing about the result, viz., the price structure of the market, the allocation of the factors of pro duction to the various lines of want satisfaction, and the determination of the share of each individual.

1981 PROFIT AND LOSS 555 PROFIT AND LOSS Profits are the driving force of the market economy. The greater the profits, the better the needs of the consumers are supplied. For profits can only be reaped by removing dis crepancies between the demands of the consumers and the previous state of production activities. He who serves the public best, makes the highest profits. In fighting profits governments deliberately sabotage the operation of the market econ omy. The profits of those who have produced goods and services for which the buyers scramble are not the source of the losses of those who have brought to the market com modities in the purchase of which the public is not prepared to pay the full amount of production costs ex panded. These losses are caused by the lack of insight displayed in an ticipating the future state of the market and the demand of the consumers. There are in the market economy no conflicts between the interests of the buyers and sellers. There are disadvantages caused by inadequate foresight. It would be a universal boon if every man and all members of the market society would always foresee future conditions correctly and in time and act accordingly.

However, man is not omniscient. It is wrong to look at these problems from the point of view of resentment and envy. If profits were to be curtailed for the benefit of those whom a change in the data has injured, the adjust ment of supply to demand would not be improved but impaired. If one were to prevent doctors from occa sionally earning high fees, one would not increase but rather decrease the number of those choosing the medi cal profession. Profit and loss are favorable to some members of society and unfa vorable to others. Hence, people con cluded, the gain of o~e man is the damage of another; no man profits but by the loss of others. This dogma is at the bottom· of all modern doc trines teaching that there prevails, within the frame of the market economy, an irreconcilable conflict among the interests of any nation and those of all other nations. It is entirely wrong with regard to any kind of entrepreneurial profj.t or loss.

What produces a man's profit in the course of affairs within an un hampered market society is not his fellow citizen's plight and distress, but the fact that he alleviates or en tirely removes what causes his fel low citizen's uneasiness. What hurts the sick is the plague, not the phy sician who treats the disease. The 556 THE FREEMAN September doctor's gain is not an outcome of the epidemics, but the aid he gives to those afflicted. An excess of the total amount of profits over that of losses is a proof of the fact that there is economic progress and improvement in the standard of living of all strata of the population. The greater this excess is, the. greater is the increment in general prosperity. Entrepreneurial profits and losses are essential phe nomena of the market economy. There cannot be a market economy without them. It is absurd to speak of a Urate of profit" or a ~~normal rate of profit."

Profit is not related to or dependent on the amount of capital employed by the entrepreneur. Capital does not ~~beget" profit. Profit and loss are entirely determined by the success or failure of the entrepreneur to ad just production to the demand of the consumers. Entrepreneurial profits are. not a lasting phenomenon but only temporary. There prevails an inherent tendency for profits and losses to disappear. The entrepreneurial function, the striving of entrepreneurs after prof its, is the driving power in the mar ket economy. Profit and loss are the devices by means of which the con sumers exercise their supremacy on the market. The behavior of the con sumers makes profits and losses ap pear and thereby shifts ownership of the means of production from the hands of the less efficient into those of the more efficient. Production for profit is necessarily production for use, as profits can only be earned by providing· the con sumers with those things they most urgently want to use.

PUBLIC OPINION The supremacy of public opinion de termines not only the singular role that economics occupies in the com plex of thought and knowledge. It determines the whole process of hu man history. New ideas and innovations are al ways an achievement of uncommon men. But these great men cannot succeed in adjusting social condi tions to their plans if they do not convince public opiIiion. Capitalism gave the world what it needed, a higher standard of living for a steadily increasing number of people. But the liberals, the pi oneers and supporters of capitalism, overlooked one essential point. A so cial system, however beneficial, can not work if it is not supported by public opinion. They did not antici pate the success of the anticapital istic propaganda.

1981 REASON REASON RELIG'ION 557 Man has only one tool to fight error: reason. Man uses reason in order to choose between the incompatible satisfactions of conflicting desires. 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 predi cated with regard to reason is that it is the mark that distinguishes man from animals and has brought about everything that is specifically hu man. To those pretending that man would be happier if he were to re nounce 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 pro vides all the information required: for an ultimate decision between reason and unreason. If man consid ers freeing himself from the su premacy of reason, he must know what he will have to forsake.

Reasoning and scientific inquiry can never bring full ease of mind. He who seeks this must apply to faith and try to quiet his conscience by embracing a creed or a metaphy sical doctrine. Praxeology and economics are not qualified to deal with the transcen dent and metaphysical aspects of any doctrine. But, on the other hand, no appeal to any religious.ormetaphy sical dogmas or creeds can invali date the theorems and theories con cerning social cooperation as developed by logically correct prax eological reasoning. It would, however, be a serious mistake to conclude that the sci ences of human action, and the pol icy derived from their teachings, are antitheistic and hostile to religion. They are radically opposed to all systems of theocracy. But they are entirely neutral withregard to reli gious beliefs which do not pretend to interfere with the conduct of social, political and economic affairs.

Liberalism puts no obstacles in the way of a man eager to adjust his personal conduct and his private af fairs according to the mode in which he individually or his church or de nomination interprets the teachings of the Gospels. But it is radically op posed to all endeavors to silence the rational discussion of problems of social welfare by an appeal to reli gious intuition and revelation. In the liberal opinion the aim of the moral law is to impel individu als to adjust their conduct to the 558 THE FREEMAN September preservation of peaceful, social co operation and to the improvement of interhuman relations. Liberals wel come 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 froPl whatever source they may stem. SCIENCE The end of science is to know reality.

Science always is and must he ra tional. It is the endeavor to attain a mental grasp of the phenomena of the universe by a systematic ar rangement of the whole body of available knowledge. 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 hu man actions with uncertainty. The sciences of human action dif fer radically from the natural sci ences. Authors eager to construct an epistemological system of the sci ences of human action according to the pattern of the natural sciences err lamentably. The real thing which is the sub ject matter of praxeology, human action, stems from the same source as human reasoning. Action and reason are congeneric and homoge neous; 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 con sequence of the fact that action is an offshoot of reason. The theorems at tained by correct praxeological rea soning are perfectly certain and in contestable, like the correct mathematical theorems. Experience concerning human ac tion differs from that concerning natural phenomena in that it re quires and presupposes praxeologi cal knowledge. This is why the methods of the natural sciences are inappropriate for the study of prax eology, 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. It is quite obvious that our eco nomic theory is not perfect. There is no such thing as· perfection in hu man knowledge, nor for that matter in any other human achievement. Omniscience is denied to man. The most elaborate theory that seems to 1981 SCIENCE 559 satisfy completely our thirst for knowledge may one day be amended or supplanted by a new theory. Sci·· ence does not give us absolute and final certainty. It only gives us as·· surance within limits of our mental abilities and the prevailing state of scientific thought. A scientific sys·· tern is but one station in an end·· lessly progressing search for knowl·· edge.

But to acknowledge these facts does not mean that present-day eco-, nomics is backward. It merely means that economics is a living thing-and to live implies both imperfec tion and change. Science's contribution to life and action does not consist in establish ing value judgments, but in clarifi cation of the conditions under which man must act and in elucidation of the effects of various modes of ac tion. SELFISHNESS What a man does is always aimed at an improvement of his -own state of satisfaction. In this sense-and in no other-we are free to use the term selfishness and to emphasize that action is necessarily always selfish. Even an action directly aim ing at the improvement of other peo ple's conditions is selfish. The actor considers it as more satisfactory to himself to make other people eat than to eat himself. His uneasiness is caused by the awareness that other people are in want.

Whereas in a capitalist society selfishness inci tes everyone to the utmost diligence, in a socialist soci ety it makes for inertia and laxity. The socialists may still babble about the miraculous change in human nature that the advent of socialism will effect, and about the substitu tion of lofty altruism for mean ego tism. But they must no longer in dulge in fables about the marvelous effects the selfishness of each indi vidual will bring. Under such a so cialist mode of production all per sonal incentives which selfishness provides under capitalism are re moved, and a premium is put upon laziness and negligence. The notions of selfishness and un selfishness as employed in such rea soning are self-contradictory and vain. The politician is always selfish no matter whether he supports a popu lar program in order to get an office or whether he firmly clings to his own-unpopular-convictions and thus deprives himself of the benefits he could reap by betraying them.

560 THE FREEMAN September SEX We interpret animal behavior on the assumption that the animal yields to the impulse which prevails at the moment. But it is different with man. Man 'is a being capable of subduing his instincts. A man does not ravish ev ery female that stirs his senses; he does not devo\.lr every piece of food that entices him; he does not knock down every fellow he would like to kill. He arranges his wishes and de sires into a scale, he chooses; in short, he acts. Acting man rationalizes the sat isfaction of his sexual appetites. Their satisfaction is the outcome of a weighing of pros and cons. Man does not blindly submit to a sexual stimulation like a bull; he refrains from copulation if he deems the costs-the anticipated disadvan tages-too high. In this sense we may apply the term moral restraint. Rationalization of sexual inter course involves the rationalization of proliferation. Methods of ratio nalizing the increase of progeny were adopted which were independent of abstention from copulation. People resorted to the egregious and repul sive practices of exposing or killing infants and of abortion. Finally they learned to perform the sexual act in such a way that no pregnancy re sults.

Social cooperation is impossible if people give rein to the natural im pulse of proliferation. In restricting procreation man adjusts himself to the natural conditions of his exis tence. The rationalization of the sexual passions is an indispensable condition of civilization and societal bonds. Its abandonment would in the long run not increase but de crease the numbers of those surviv ing, and would render life for every one as poor and miserable as it was many thousands of years ago for our ancestors. It is not the practice of birth con trol that is new, but merely the fact that it is more frequently resorted to. Especially new is the fact that the practice is no longer limited to the upper strata of the population, but is common to the whole popula tion. For it is one of the most impor tant social effects of capitalism that it deproletarianizes all strata of so ciety. It raises the standard of living of the masses of manual workers to such a height that they too turn into ~~bourgeois" and think and act like well-to-do burghers. Eager to pre serve their standard of living for themselves and their children, they embark upon birth control. With the spread and progress of capitalism, birth control becomes a universal practice. The transition to capital ism is thus accompanied by two phe1981 SEX 561 SOCIALISM nomena: a decline both in fertility rates and in mortality rates. The av erage duration of life is prolonged.

Private ownership of the means of production (market economy or cap italism) and public ownership of the means of production (socialism or communism or ((planning") can never be confounded with one another; they cannot be mixed or combined; no gradual transition leads from one of them to the other; they are mutually incompatible. With regard to the same factors of production there can only exist private control or public control. In the first case there is a market, there are market prices for all fac tors of production, and economic cal culation is possible. In the second case all these things are absent. It is vain to comfort oneself with the hope that the organs of the collective economy will be ttomnipresent" and (tomniscient." We do not deal in praxeology with the acts of the om nipresent and omniscient Deity, but with the actions of men endowed with a human mind only. Such a mind cannot plan without economic calculation.

A socialist system with a market and market prices is as self-contra dictory as is the notion of a triangu lar square. The essential mark of socialism is that one will alone acts. It is immaterial whose will it is. The ---------------. director may be an anointed king or a dictator, ruling by virtue of his charisma, he may be a Fuhrer or a board of Fuhrers appointed by. the vote of the people. The main thing is that the employment of all factors of production is directed by one agency only. One will alone chooses, de cides, directs, acts, gives orders. All the rest simply obey orders and in structions. Organization and a planned order are substituted for the ((anarchy" of production. When the socialists declare that ((order" and ((organization" are to be substituted for the ((anarchy" of pro duction, conscious action for the al leged planlessness of capitalism, true cooperation for competition, produc tion for use for production for profit, what they have in mind is the sub stitution of the exclusive and mo nopolistic power of only one agency for the infinite multitude of the plans of individual consumers and those attending to the wishes of the con sumers, the entrepreneurs and cap italists. The essence of socialism is the entire elimination of the market and of catallactic competition. The socialist system is a system without a market or market prices for the factors of production, and without 562 "THE FREEMAN September competition; it means the unre stricted centralization and unifica tionof the conduct of all affairs in the hands of one authority.

In the market society there are money prices. Economic calculation is calculation in terms of money prices. The various quantities of goods and services enter into this calculation with the amount of money for which they are bought and sold on the market or for which they could prospectively be bought and sold. It is a fictitious assumption that an isolated self-sufficient indi vidual or the general manager of a socialist system could calculate. There is no way which could lead one from the money computation of a market economy to any kind of computation in a nonmarket sys tem. Eliminate economic calcula tion and you have no means ofmak ing a rational choice between various alternatives. Private ownership of the means of production is the fundamental insti tution of the market economy. It is the institution which characterizes the market economy as such. Where it is absent, there is no question of a market economy.

In an economic system in which there is no private ownership of the means of production, no market, and no prices for goods, the concepts of capital and income are mere aca demic postulates devoid of any prac tical application. Ina socialist economy there are capital goods but no capital. The notion of capital makes sense only in the market economy. It serves the deliberations and calculations of individuals or groups of individuals operating on their own a~count in suchan economy. It is a device of capitalists, entrepreneurs, and farmers eager to make profits and to avoid losses. Profit tells the entre preneur that the consumers approve of his ventures; loss, that they dis approve. The problem of socialist economic calculation is precisely this: that. in the absence of market prices for the factors of production, a computation of profit or loss is not feasible. The paradox of ((planning" is that it can not plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping in the dark.

Socialism cannot be realized be cause it is beyond human power to establish it as a social system. The choice is between capitalism .and chaos. A man who chooses between drinking a glass of milk and a glass of potassium cyanide does not choose between two beverages; he chooses between life and death. A society that chooses between capitalism and socialism does not choose between two social systems; it chooses be tween social cooperation and the disintegration of society.

1981 SOCIETY 563 SOCIETY SPECULATION Society is joint action and coopera tion in which each participant sees the other partner's success as a means for the attainment of his own. Social cooperation has nothing to do with personal love or a general coml mandment to love one another. Peo ple do not cooperate because they love or should love one another. They cooperate because this best serves their own interest. The advantages derived from peaceful cooperation and the divi sion of labor are universal. They im, mediately 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 orie later. --------------,- action refers to an unknown future. It is in this sense always a risky speculation.

Manis 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 specu lator for whom success or failure de pend on his greater or lesser ability to understand the future. Every ac tion is a speculation. There is in the course of human events no stability and consequently no safety. Capitalists, landowners and la borers are by necessity speculators. So is the consumer in providing for anticipated future needs. There's many a slip 'twixt cup and lip. A capitalist is always also vir tually an entrepreneur and specu lator. He always runs the chance of losing his funds. There is no such thing as a perfectly safe investment. If it were possible to calculate the future state of the market, the fu ture would not be uncertain. There would be neither entrepreneurial-loss nor profit.

The fact that the term ~~specula --------------- tor" is today used only with an op probrious connotation clearly shows that our contemporaries do not even _______________ suspect in what the fundamental problem of action consists. There are in this world no such things as stability and security and no human endeavors are powerful enough to bring them about. Every 564 THE FREEMAN September STATISTICS Statistics is a method for the presen tation of historical facts. It is not economics and cannot produce eco nomic theorems and theories. There is no such thing as quanti tative economics. All economic quantities we know about are data of economic history. Reasonable businessmen are fully aware of the uncertainty of the fu ture. They realize that economists do not dispense any reliable infor mation about things to come and that all they provide is interpreta tion of statistical data referring to the past. For capitalists and entre preneurs the economists' opinions about the future count only as ques tionable conjectures.

The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of pur chasing power and cost of living is out of place. A judicious housewife knows much more about the price changes as far as they affect her own household than the statistical aver ages can tell. She has little use for computations disregarding changes both in quality and in the amount of goods which she is permitted to buy at the prices entering into the com putation. In practical life nobody lets himself be fooled by index numbers. Nobody agrees with the fiction that they are to be considered as mea surements. TARIFFS The interests of every firm can be favored by all kinds of privileges granted to it by government. But if privileges are granted to the same extent also to other firms, every businessman loses-not only in his capacity as a consumer, but also in his capacity as a buyer of raw ma terials, half-finished products, ma chines 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 firm. They can never moti vate him to ask for universal protec tion for all firms if he is not sure to be protected to a greater extent than the other industries·or enterprises.

If everybody is protected to the same extent, everybody not only loses as consumer as much as he gains as producer. Everybody, moreover, is harmed by the general drop in the productivity of labor which the shifting of industries from more fa vorable to less favorable locations brings about. The only effect of protection is to 1981 TARIFFS 565 divert production from those places in which it could produce more per unit of capital and labor expended to places in which it produces less. It makes people poorer, not more pros perous. TAXES The idea of social justice implied in the abilityto-pay principle is that of perfect financial equality of all citi zens. The only logical stopping place of the abilityto-pay doctrine is at the complete equalization of in comes and wealth by confiscation of all incomes and fortunes above the lowest amount in the hands of any. one. Continuous change and the ine· quality of wealth and income are es·· sential and necessary features of the market economy. In the frame of such a system no tax can be neutral.

The very idea of a neutral tax is as unrealizable as that of neutral money. Discriminating taxes levied upon corporations would, if raised above a certain limit, result in .the total disappearance of corporations and big business. Capital levies, inheri tance and estate taxes, and income taxes are similarly self-defeating if carried to extremes. If taxes grow beyond a moderate limit, they cease to be taxes and turn into devices for the destruction of the market economy. The more taxes increase, the more they under mine the market economy and con comitantly the system of taxation it self. Every specific tax, as well as the nation's whole tax system, be comes self-defeating above a certain height of rates. Taxes are necessary. But the sys tem of discriminatory taxation uni versally accepted under the mis leading name of progressive taxation of income and inheritance is not a mode of taxation. It is rather a mode of disguised expropriation of the successful capitalists and entrepre neurs. It can best be considered a means of bringing about socialism.

Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have .been intent upon shifting the main burden to other groups. Those anxious to get subsi dies will themselves have to foot the bill.

566 THE FREEMAN September THEORY The ultimate yardstick of an eco nomic theorem's correctness or in correctness is solely reason unaided by experience. 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 con nection between them can only be answered by a theory, i.e., in the case of human action by praxeology. Economic history is possible only because there is an economic theory capable of throwing light upon eco nomic actions. If there were no eco nomic theory, reports concerning economic facts would be nothing more than a collection of uncon nected data open to any arbitrary interpretation. Logical thinking and real life are not two separate orbits. Logic is for man the only means to master the problems of reality. What is contra dictory in theory is no less contra dictory in reality.

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 the ory is either correct or incorrect. It may happen that the present state of our knowledge does not allow a decision with regard to its correct ness or incorrectness. But a theory can never be valid for a bourgeois or an American ifit is invalid for a pro letarian or a Chinese. The very fact that there are intol erant 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 cor rectness 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.

TIME Men value fractions of time of the same length in a different way ac cording as they are nearer or remo ter from the instant of the actor's decision. Acting man does not ap praise time periods merely with re gard to their dimension. His choices 1981 TIME 567 regarding the removal of future uneasiness are directed by the cate-, gories sooner and later. The economization of time is in-, dependent of the economization of economic goods and services. The value of time, Le., time preference or the higher valuation of want-sat isfaction in nearer periods of the fu ture as against that in remoterpe riods, is an essential element in human action. It determines every choice and every action. The time element is· instrumental in the for mation of all prices of all commodi ties and services. The social process of production never stops. At each instant num berless processes are in progress some of which are nearer to, some remoter from, the achievement of their special tasks.

Every single performance in this ceaseless pursuit of wealth produc tion is based upon the saving and the preparatory work of earlier gen erations. We are the lucky heirs of our fathers and forefathers whose saving has accumulated the capital goods with the aid of which we are working today. Capital goods-the factors of fur ther production produced in the past-are not an independent fac tor. They are the joint products of the cooperation of the two original factors-nature and labor-ex pended in the past. They have no productive power of their own. Nor is it correct to call capital.goods la bor and nature stored up. They are rather labor, nature, and time stored up. The difference between produc tion without the aid of capital goods and that assisted. by the employ ment of capital goodsconsists in time. For success in entrepreneurial ac tivities, mere anticipation of the di rection in which the market will react to a certain event is of little significance if it is not supplemented by an adequate anticipation of the length of the various adjustment pe riods involved. Most of the mistakes committed by entrepreneurs in the conduct of .affairs and most of the blunders vitiating the prognoses of future business trends on the part of ~~expert" forecasters are caused by errors concerning the length of ad justment periods. There is in the course of a man's life a rightmo ment for everything as well· as a too early and a too late.

UNDERDEVELOPED NATIONS The fact·that the standard of living of the average American worker is incomparably more satisfactory than that of the average Hindu worker, 568 THE FREEMAN September that in the United States hours of work are shorter and children sent to school and not to the factories, is not an achievement of the govern ment and the laws of the country. It is the outcome of the fact that the capital invested per head of the em ployees is much greater than in In dia and that consequently the mar ginal productivity of labor is much higher. This is not the merit of ((so cial policies"; it is the result of the laissez faire methods of the past which abstained from sabotaging the evolution of capitalism. It is this laissez faire that the Asiatics must adopt if they want to improve the lot of their peoples. It is false to blame the European powers for the poverty of the masses in their former colonial empires. In investing capital the foreign rulers did all they could do for an improve ment in material well-being.

Economic backwardness in a for eign country, endowed by rich nat ural resources, hurts the interests of all those whose standard of living could be raised if a more appropriate mode of utilizing this natural wealth were adopted. The conflict between the have-nots and the haves is a real conflict. But it is present only in a world in which any sovereign government is free to hurt the interests of all peoples-its own included-by depriving the consumers of the advantages a bet ter exploitation of this country's resources would give them. It is not sovereignty as such that makes for war, but sovereignty of govern ments not entirely committed to the principles of the market economy. The principle of each nation's un restricted sovereignty is in a world of government interference with business, a challenge to all other na tions. UNEMPLOYMENT The worker looks upon unemploy ment as an evil. He would like to avoid it provided the sacrifice is not too grievous. He chooses between employment and unemployment in the same way in which he proceeds in all other actions and choices: he weighs the pros and cons. If he chooses unemployment this unem ployment is a market phenomenon whose nature is not different from other market phenomena as they appear in a changing market econ omy. We may call this kind of un employment market-generated or catallactic unemployment.

Catallactic unemployment must not be confused with institutional unemployment. Institutional unem1981 UNEPLOYMENT 569 ployment is not the outcome of the decisions of individual job-seekers. It is the effect of interference with the market phenomena intent upon enforcing by coercion and compul sion wage rates higher than those the unhampered market would have determined. Real wage rates can rise only to the extent that, other things being equal, capital becomes more plenti ful. If the government or the unions succeed in enforcing wage rates which are higher than those the un hampered market would have deter mined, the supply of labor exceeds the demand for labor. Institutional unemployment emerges. Firmly committed to the princi ples of interventionism, govern ments try to check this undesired result of their interference by re sorting to those measures which are nowadays called full-employment policy: unemployment doles, arbit ration of labor disputes, public works by means of lavish public spending, inflation and credit expansion. All these remedies are worse than the evil they are designed to remove.

Assistance granted to the unem ployed does not dispose of unem ployment. It makes it easier for the unemployed to remain idle. The nearer the allowance comes to the height at which the unhampered market would have fixed the wage rate, the less incentive it offers to the beneficiary to look for a new job. It is a means of making unemploy ment last rather than of making it disappear. The disastrous financial implications of unemployment ben efits are manifest. On the unhampered market there is always for each type of labor a rate at which all those eager to work can get a job. The final wage rate is that rate at which all job-seekers get jobs and all employers [get] as many workers as they want to hire. Its height is determined by the mar ginal productivity of each type of work. Unemployment in the unham pered market is always vountary. VALUE Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the condi tions of his environment. Different people and the same people at differ ent times value the same objective facts in a different way.

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. An inveterate fallacy asserted that things and services exchanged are 570 THE FREEMAN September of equal value. Value was consid ered as objective, as an intrinsic quality inherent in things and not merely as the expression of various people's eagerness to acquire them. The basis of modern economics is the cognition that it is precisely the disparity in the value attached to the objects exchanged that results in their being exchanged. People buy and sell only because they appraise the things given up less than those received. Thus the notion of a mea surement of value is vain. Economic calculation always deals with prices, never with values. To prefer and to set aside and the choices and decisions in which they result are not acts of measurement. Action does not measure utility or value; it chooses between alternatives.

WAGES Wages are the price paid for the wage earner's achievement, i.e., for the contribution of his efforts to the processing of the good concerned or, as people say, for the value which his services add to the value of the materials. No matter whether there are time wages or piecework wages, the employer always buys the worker's performance· and services, not his time. Every employer must aim at buy ing the factors ofproduction needed, inclusive of labor, at the cheapest price. An employer who paid more than agrees with the market price of the services his employees render him, would soon be removed. from his entrepreneurial position. On the other hand an employer who tried to reduce wage rates below the height consonant with the marginal pro ductivity of labor would not recruit the type of men that the most effi cient utilization of his equipment requires. The entrepreneurs are not merely faced with a shortage of ttlabor in general," but with a shortage of those specific types of labor they need for their plants. The competition among the entrepreneurs in bidding for the most suitable hands is no less keen than their competition in bidding for the required raw materials, tools, and machines and in their bidding for capital on the capital and loan market.

In the market economy the worker sells his services as other people sell their commodities. The employer is not the employee's lord. He is simply the buyer of services which he must purchase at their market price.

1981 WAGES 571 The only real and effective protec tion of the wage earner in the mar ket economy is provided by the play of the factors determining the for mation of prices. The market makes the worker independent of arbitrary discretion on the part of the em ployer and his aides. The workers are subject only to the supremacy of the consumers as their employers are too. In determining, by buying or abstention from buying, the prices of products and· the employment of factors of production, consumers as sign to each kind of labor its price in the market. An employer cannot grant favors at the expense of his customers. He cannot pay wage rates higher than those determined by the market if the buyers are not ready to pay pro portionately higher prices for com modities produced in plants in which wage rates are higher than in other plants. On the unhampered labor market, wage rates always tend toward the height at which they equal the mar ginal productivity of each kind of la bor, that is the height that equals the value added to or substracted from the value of the product by the employment or discharge of a man.

Wage rates are ultimately deter mined by the value which the wage earner's fellow citizens attach to his services and achievements. Labor is appraised like a commodity, not be cause the entrepreneurs and capitalists are hardhearted and cal lous, but because they are unconditionally subject to the su premacy of the .consumers. WAR Our age is full of conflicts which generate war. However, these con flicts do not spring from the opera tion of the unhampered market so ciety. It is not capitalism that produces them, but precisely the an ticapitalist policies designed to check the functioning of capitalism. They are an outgrowth of the various gov ernments' interference with busi ness, of trade and migration barri ers and discrimination against foreign labor, foreign products, and foreign capital. In the long run war and the pre servation of the market economy are incompatible. Capitalism is essen tially a scheme for peaceful nations.

But this does not mean that a nation which is forced to repel foreign ag gressors must substitute govern ment control for private enterprise. If it were to do this it would deprive itself of the most efficient means of defense.

572 THE FREEMAN It may be admitted that it is not ufair" that war enhances the profits of those entrepreneurs who contrib ute best to the equipment of the fighting forces. But it would be fool ish to deny that the profit system produces the best weapons. It was not socialist Russia that aided capi talist America with lend-lease; the Russians were lamentably defeated before American-made bombs fell on Germany and before they got arms manufactured by American big business. Aggressive nationalism is the necessary derivative of the policies of interventionism and national planning. While laissez faire elimi nates the causes of international conflict, government interference with business creates conflicts for which no peaceful solution can be found. There are within the unhampered market society no conflicts of the rightly understood interests. The in terests of the citizens are not op posed to those of the nation, the in terests of each nation are not opposed to those of other nations.

It is futile to place confidence in treaties, conferences, and such bu reaucratic outfits as the League of ' Nations and the United Nations. Plenipotentiaries, office clerks and experts make a poor show in fight ing ideologies. The spirit of conquest cannot be smothered by red tape. What is needed is· a radical change in ideologies and economic policies.

Human Action Reappraised For the past 31 years, The Freeman has featured A Reviewer's Notebook by John Chamberlain. So, it is altogether fitting and proper that he be asked to review now what he said in review of Human Action when it was first published. IT takes a long time for chickens to come home to roost. Thirty-one years ago I was asked to review Ludwig von Mises' gigantic Human Action, then just published by the Yale Uni versity Press. I took on the job with some misgivings-it represented a month's work compressed into a week's time to give the book even a cursory reading. But I remember the immense satisfaction that it gave me. For the first time I saw the na ture of our epoch with what I felt I was absolute clarity. True, a couple of women writers, Isabel Paterson and Rose Wilder Lane, had indi cated the fallibility of the New Deal approach (I remember being im pressed with Mrs. Paterson's dic tum that if you were going to give J.