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Advancing Austrian Economics, Liberty, and Peace

Advancing the scholarship of liberty in the tradition of the Austrian School

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1. Economics: Its Nature and Its Uses

Economics provides us with true laws, of the type if A, then B, then C, etc. Some of these laws are true all the time, i.e., A always holds (the law of diminishing marginal utility, time preference, etc.). Others require A to be established as true before the consequents can be affirmed in practice. The person who identifies economic laws in practice and uses them to explain complex economic fact is, then, acting as an economic historian rather than as an economic theorist. He is an historian when he seeks the casual explanation of past facts; he is a forecaster when he attempts to predict future facts. In either case, he uses absolutely true laws, but must determine when any particular law applies to a given situation.[1]Furthermore, the laws are necessarily qualitative rather than quantitative, and hence, when the forecaster attempts to make quantitative predictions, he is going beyond the knowledge provided by economic science.[2]

     It has not often been realized that the functions of the economist on the free market differ sharply from those of the economist on the hampered market. What can the economist do on the purely free market? He can explain the workings of the market economy (a vital task, especially since the untutored person tends to regard the market economy as sheer chaos), but he can do little else. Contrary to the pretensions of many economists, he is of little aid to the businessman. He cannot forecast future consumer demands and future costs as well as the businessman; if he could, then he would be the businessman. The entrepreneur is where he is precisely because of his superior forecasting ability on the market. The pretensions of econometricians and other “model-builders” that they can precisely forecast the economy will always founder on the simple but devastating query: “If you can forecast so well, why are you not doing so on the stock market, where accurate forecasting reaps such rich rewards?”[3] It is beside the point to dismiss such a query—as many have done—by calling it “anti-intellectual”; for this is precisely the acid test of the would-be economic oracle.

     In recent years, new mathematico-statistical disciplines have developed—such as “operations research” and “linear programming”—which have professed to help the businessman make his concrete decisions. If these claims are valid, then such disciplines are not economics at all, but a sort of management technology. Fortunately, operations research has developed into a frankly separate discipline with its own professional society and journal; we hope that all other such movements will do the same. The economist is not a business technologist.[4]

     The economist’s role in a free society, then, is purely educational. But when government—or any other agency using violence—intervenes in the market, the “usefulness” of the economist expands. The reason is that no one knows, for example, what future consumer demands in some line will be. Here, in the realm of the free market, the economist must give way to the entrepreneurial forecaster. But government actions are very different, because the problem now is precisely what the consequences of governmental acts will be. In short, the economist may be able to tell what the effects of an increased demand for butter will be; but this is of little practical use, since the businessman is primarily interested, not in this chain of consequences—which he knows well enough for his purposes—but in whether or not such an increase will take place. For a governmental decision, on the other hand, the “whether” is precisely what the citizenry must decide. So here the economist, with his knowledge of the various alternative consequences, comes into his own. Furthermore, the consequences of a governmental act, being indirect, are much more difficult to analyze than the consequences of an increase in consumer demand for a product. Longer chains of praxeological reasoning are required, particularly for the needs of the decision-makers. The consumer’s decision to purchase butter and the entrepreneur’s decision about entering into the butter business do not require praxeological reasoning, but rather insight into the concrete data. The judging and evaluation of a governmental act (e.g., an income tax), however, require long chains of praxeological reasoning. Hence, for two reasons—because the initial data are here supplied to him and because the consequences must be analytically explored—the economist is far more “useful” as a political economist than as a business adviser or technologist. In a hampered market economy, indeed, the economist often becomes useful to the businessman—where chains of economic reasoning become important, e.g., in analyzing the effects of credit expansion or an income tax and, in many cases, in spreading this knowledge to the outside world.

     The political economist, in fact, is indispensable to any citizen who frames ethical judgments in politics. Economics can never by itself supply ethical dicta, but it does furnish existential laws that cannot be ignored by anyone framing ethical conclusions—just as no one can rationally decide whether product X is a good or a bad food until its consequences on the human body are ascertained and taken into account.

2. Implicit Moralizing: The Failures of Welfare Economics

     As we have reiterated, economics cannot by itself establish ethical judgments, and it can and should be developed in a Wertfrei manner. This is true whether we adopt the modern disjunction between fact and value, or whether we adhere to the classical philosophical tradition that there can be a “science of ethics.” For even if there can be, economics may not by itself establish it. Yet economics, especially of the modern “welfare” variety, is filled with implicit moralizing—with unanalyzed ad hoc ethical statements that are either silently or under elaborate camouflage slipped into the deductive system. Elsewhere we have analyzed many of these attempts, e.g., the “old” and the “new” welfare economics.[5] Interpersonal utility comparisons, the “compensation principle,” the “social welfare function,” are typical examples. We have also seen the absurdity of the search for criteria of “just” taxation before the justice of taxation itself has been proven. Other instances of illegitimate moralizing are the doctrine that product differentiation harms consumers by raising prices and restricting production (a doctrine based on the false assumptions that consumers do not want these differences, and that cost curves remain the same); the spurious “proof” that, given the total tax bill, the income tax is “better” for consumers than excise taxes;[6] and the mythical distinction between “social cost” and “private cost.”

     Neither can economists legitimately adopt the popular method of maintaining ethical neutrality while pronouncing on policy, that is, taking not their own but the “community’s” values, or those they attribute to the community, and simply advising others how to attain these ends. An ethical judgment is an ethical judgment, no matter who or how many people make it. It does not relieve the economist of the responsibility for having made ethical judgments to plead that he has borrowed them from others. The economist who calls for egalitarian measures because “The people want more equality,” is no longer strictly an economist. He has abandoned ethical neutrality, and he abandons it not a whit more if he calls for equality simply because he wants it so. Value judgments remain only value judgments; they receive no special sanctification by virtue of the number of their adherents. And uncritically adhering to all the prevailing ethical judgments is simply to engage in apologetics for the status quo.[7]

     I do not at all mean to deprecate value judgments; men do and must always make them. But I do say that the injection of value judgments takes us beyond the bounds of economics per se and into another realm—the realm of rational ethics or personal whim, depending on one’s philosophic convictions.

     The economist, of course, is a technician who explains the consequences of various actions. But he cannot advise a man on the best route to achieve certain ends without committing himself to those ends. An economist hired by a businessman implicitly commits himself to the ethical valuation that increasing that businessman’s profits is good (although, as we have seen, the economist’s role in business would be negligible on the free market). An economist advising the government on the most efficient way of rapidly influencing the money market is thereby committing himself to the desirability of government manipulation of that market. The economist cannot function as an adviser without committing himself to the desirability of the ends of his clients.

     The utilitarian economist tries to escape this policy dilemma by assuming that everyone’s ends are really the same—at least ultimately. If everyone’s ends are the same, then an economist, by showing that Policy A cannot lead to Goal G, is justified in saying that A is a “bad” policy, since everyone values A in order to achieve G. Thus, if two groups argue over price controls, the utilitarian tends to assume that the proven consequences of maximum price controls—shortages, disruptions, etc.—will make the policy bad from the point of view of the advocates of the legislation. Yet the advocates may favor price controls anyway, for other reasons—love of power, the building of a political machine and its consequent patronage, desire to injure the masses, etc. It is certainly overly sanguine to assume that everyone’s ends are the same, and therefore the utilitarian shortcut to policy conclusions is also inadequate.[8]

3. Economics and Social Ethics

     If the economist qua economist must be Wertfrei, does this leave him any room for significant pronouncements on questions of public policy? Superficially, it would seem not, but this entire work has been testimony to the contrary. Briefly, the Wertfrei economist can do two things: (1) he can engage in a praxeological critique of inconsistent and meaningless ethical programs (as we have tried to show in the preceding chapter); and (2) he can explicate analytically all the myriad consequences of different political systems and different methods of government intervention. In the former task, we have seen that many prominent ethical critiques of the market are inconsistent or meaningless, whereas attempts to prove the same errors in regard to the ethical underpinnings of a free society are shown to be fallacious.

     In the latter role, the economist has an enormous part to play. He can analyze the consequences of the free market and of various systems of coerced and hampered exchange. One of the conclusions of this analysis is that the purely free market maximizes social utility, because every participant in the market benefits from his voluntary participation. On the free market, every man gains; one man’s gain, in fact, is precisely the consequence of his bringing about the gain of others. When an exchange is coerced, on the other hand—when criminals or governments intervene—one group gains at the expense of others. On the free market, everyone earns according to his productive value in satisfying consumer desires. Under statist distribution, everyone earns in proportion to the amount he can plunder from the producers. The market is an interpersonal relation of peace and harmony; statism is a relation of war and caste conflict. Not only do earnings on the free market correspond to productivity, but freedom also permits a continually enlarged market, with a wider division of labor, investment to satisfy future wants, and increased living standards. Moreover, the market permits the ingenious device of capitalist calculation, a calculation necessary to the efficient and productive allocation of the factors of production. Socialism cannot calculate and hence must either shift to a market economy or revert to a barbaric standard of living after its plunder of the preexisting capital structure has been exhausted. And every intermixture of government ownership or interference in the market distorts the allocation of resources and introduces islands of calculational chaos into the economy. Government taxation and grants of monopolistic privilege (which take many subtle forms) all hamper market adjustments and lower general living standards. Government inflation not only must injure half the population for the benefit of the other half, but may also lead to a business-cycle depression or collapse of the currency.

     We cannot outline here the entire analysis of this volume. Suffice it to say that in addition to the praxeological truth that (1) under a regime of freedom, everyone gains, whereas (2) under statism, some gain (X) at the expense of others (Y), we can say something else. For, in all these cases, X is not a pure gainer. The indirect long-run consequences of his statist privilege will redound to what he would generally consider his disadvantage—the lowering of living standards, capital consumption, etc. X’s exploitation gain, in short, is clear and obvious to everyone. His future loss, however, can be comprehended only by praxeological reasoning. A prime function of the economist is to make this clear to all the potential X’s of the world. I would not join with some utilitarian economists in saying that this settles the matter and that, since we are all agreed on ultimate ends, X will be bound to change his position and support a free society. It is certainly conceivable that X’s high time preferences, or his love of power or plunder, will lead him to the path of statist exploitation even when he knows all the consequences. In short, the man who is about to plunder is already familiar with the direct, immediate consequences. When praxeology informs him of the longer-run consequences, this information may often count in the scales against the action. But it may also not be enough to tip the scales. Furthermore, some may prefer these long-run consequences. Thus, the OPA director who finds that maximum price controls lead to shortages may (1) say that shortages are bad, and resign; (2) say that shortages are bad, but give more weight to other considerations, e.g., love of power or plunder, or his high time preference; or (3) believe that shortages are good, either out of hatred for others or from an ascetic ethic. And from the standpoint of praxeology, any of these positions may well be adopted without saying him nay.

4. The Market Principle and the Hegemonic Principle

     Praxeological analysis of comparative politico-economic systems can be starkly summed up in the following table:


     The reader will undoubtedly ask: How can all the various systems be reduced to such a simple two-valued schema? Does not this grossly distort the rich complexity of political systems? On the contrary, this dichotomy is a crucial one. No one disputes the fact that, historically, political systems have differed in degree—that they have never been pure examples of the market or of the hegemonic principle. But these mixtures can be analyzed only by breaking them down into their components, their varying blends of the two polar principles. On Crusoe’s and Friday’s island, there are basically two types of interpersonal relations or exchanges: the free or voluntary, and the coerced or hegemonic. There is no other type of social relation. Every time a free, peaceful unit-act of exchange occurs, the market principle has been put into operation; every time a man coerces an exchange by the threat of violence, the hegemonic principle has been put to work. All the shadings of society are mixtures of these two primary elements. The more the market principle prevails in a society, therefore, the greater will be that society’s freedom and its prosperity. The more the hegemonic principle abounds, the greater will be the extent of slavery and poverty.

     There is a further reason for the aptness of this polar analysis. For it is a peculiarity of hegemony that every coercive intervention in human affairs brings about further problems that call for the choice; repeal the initial intervention or add another one. It is this feature that makes any “mixed economy” inherently unstable, tending always toward one or the other polar opposite—pure freedom or total statism. It does not suffice to reply that the world has always been in the middle anyway, so why worry? The point is that no zone in the middle is stable, because of its own self-created problems (its own “inner contradictions,” as a Marxist would say). And the result of these problems is to push the society inexorably in one direction or the other. The problems, in fact, are recognized by everyone, regardless of his value system or the means he proposes for meeting the situation.

     What happens if socialism is established? Stability is not reached there, either, because of the poverty, calculational chaos, etc., which socialism brings about. Socialism may continue a long time if, as under a primitive caste system, the people believe that the system is divinely ordained, or if partial and incomplete socialism in one or a few countries can rely on the foreign market for calculation. Does all this mean that the purely free economy is the only stable system? Praxeologically, yes; psychologically, the issue is in doubt. The unhampered market is free of self-created economic problems; it furnishes the greatest abundance consistent with man’s command over nature at any given time. But those who yearn for power over their fellows, or who wish to plunder others, as well as those who fail to comprehend the praxeological stability of the free market, may well push the society back on the hegemonic road.

     To return to the cumulative nature of intervention, we may cite as a classic example the modern American farm program. In 1929, the government began to support artificially the prices of some farm commodities above their market price. This, of course, brought about unsold surpluses of these commodities, surpluses aggravated by the fact that farmers shifted production out of other lines to enter the now guaranteed high-price fields. Thus, the consumer paid four ways: once in taxes to subsidize the farmers, a second time in the higher prices of farm products, a third time in the wasted surpluses, and a fourth time in the deprivation of forgone products in the unsupported lines of production. But the farm surplus was a problem, recognized as such by people with all manner of value systems. What to do about it? The farm program could have been repealed, but such a course would hardly have been compatible with the statist doctrines that had brought about the support program in the first place. So, the next step was to clamp maximum production controls on the farmers who produced the supported products. The controls had to be set up as quotas for each farm, grounded on production in some past base-period, which of course cast farm production in a rapidly obsolescing mold. The quota system bolstered the inefficient farmers and shackled the efficient ones. Paid, in effect, not to produce certain products (and, ironically, these have invariably been what the government considers the “essential” products), the farmers naturally shifted to producing other products. The lower prices of the nonsupported products set up the same clamor for support there. The next plan, again a consequence of statist logic at work, was to avoid these embarrassing shifts of production by creating a “soil bank,” whereby the government paid the farmer to make sure that the land remained completely idle. This policy deprived the consumers of even the substitute farm products. The result of the soil bank was readily predictable. Farmers put into the soil bank their poorest lands and tilled the remaining ones more intensively, thus greatly increasing their output on the better lands and continuing the surplus problem as much as ever. The main difference was that the farmers then received government checks for not producing anything.

     The cumulative logic of intervention is demonstrated in many other areas. For instance, government subsidization of poverty increases poverty and unemployment and encourages the beneficiaries to multiply their offspring, thus further intensifying the problem that the government set out to cure. Government outlawing of narcotics addiction greatly raises the price of narcotics, driving addicts to crime to obtain the money.

     There is no need to multiply examples; they can be found in all phases of government intervention. The point is that the free-market economy forms a kind of natural order, so that any interventionary disruption creates not only disorder but the necessity for repeal or for cumulative disorder in attempting to combat it. In short, Proudhon wrote wisely when he called “Liberty the Mother, not the Daughter, of Order.” Hegemonic intervention substitutes chaos for that order.

     Such are the laws that praxeology presents to the human race. They are a binary set of consequences: the workings of the market principle and of the hegemonic principle. The former breeds harmony, freedom, prosperity, and order; the latter produces conflict, coercion, poverty, and chaos. Such are the consequences between which mankind must choose. In effect, it must choose between the “society of contract” and the “society of status.” At this point, the praxeologist as such retires from the scene; the citizen—the ethicist—must now choose according to the set of values or ethical principles he holds dear.

[1]Murray N. Rothbard, “Praxeology: Reply to Mr. Schuller,” American Economic Review, December, 1951, pp. 943–46.

[2]On the pitfalls of economic forecasting see John Jewkes, “The Economist and Economic Change” in Economics and Public Policy (Washington, D.C.: The Brookings Institution, 1955), pp. 81–99; P.T. Bauer, Economic Analysis and Policy in Underdeveloped Countries (Durham, N.C.: Duke University Press, 1957), pp. 28–32; and A.G. Abramson, “Permanent Optimistic Bias—A New Problem for Forecasters,” Commercial and Financial Chronicle, February 20, 1958, p. 12.

[3]Professor Mises has shown the fallacy of the very popular term “model-building,” which has (with so many other scientific fallacies) been taken over misleadingly by analogy from the physical sciences—in this case, engineering. The engineering model furnishes the exact quantitative dimensions—in proportionate miniature—of the real world. No economic “model” can do anything of the kind. For a bleak picture of the record of economic forecasting, see Victor Zarnowitz, An Appraisal of Short-Term Economic Forecasts (New York: Columbia University Press, 1967).

[4]Since writing the above, the author has come across a similar point in Rutledge Vining, Economics in the United States of America (Paris: UNESCO, 1956), pp. 31ff.

[5]Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 243ff.

[6]See Richard Goode, “Direct versus Indirect Taxes: Welfare Implications,” Public Finance/Finance Publique (XI, 1, 1956), pp. 95–98; David Walker, “The Direct-Indirect Tax Problem: Fifteen Years of Controversy,” Public Finance/Finance Publique (X, 2, 1955), pp. 153–76.

[7]For a critique of “realism” as a ground for status quo apologetics by social scientists, see Clarence E. Philbrook, “‘Realism’ in Policy Espousal,” American Economic Review, December, 1953, pp. 846–59.

[8]It is probably true, of course, that general knowledge of these consequences of price control would considerably reduce social support for this measure. But this is a politico-psychological, not a praxeological, statement.

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