Ludwig von Mises once wrote that all of economics can be neatly summed up in one of two studies: either you are studying how prices come into being, or you are studying how markets allocate goods. All economic problems can be distilled into one of these two categories.
Prices and markets are innocuous concepts – they exist in various forms, and to paraphrase Adam Ferguson, “they are the work of human hands, but not of human design.” Both prices and markets are natural phenomena that have come into being as the result of our actions, and they serve no other purpose than facilitating our ends.
Yet from time to time, and the current time being a good case in point, prices and markets are viewed with much more sinister spectacles. Prices come to be seen as “right”, or more usually, “wrong”. They are too high or too low. Much sovereign debt is trading at a high price, too high if you believe some analysts. This is a function of its interest rate being low, too low as the case may be. The healthcare debacle in the United States is the consequence of a widespread belief that medical prices are too high, or more aptly that health insurance is too expensive.
Markets are those various places where prices come alive. Unsurprisingly, when prices seem “wrong” to people it must be that the markets that allow them to arise are themselves not functioning correctly. Main Street is in the midst of a recession, though Wall Street seems to be relishing record high stock prices. Might something be amiss in the financial markets? Millions of people are out of work, and yet the labour market seems woefully inept at getting jobs to them.
The apparent mispricings and market failures lead to many calls for changes to rectify these perceived errors. What is missing is some real thought into why it is that these prices and markets do not coincide with what we perceive to be the “right” price, or “well functioning” markets.
First, it is an outlet for those interested not in the glossy superficial nature of events, but the real underlying phenomena shaping them. The journal is not concerned with overly elaborate constructivist plans to recreate the wheel. We don’t need to invent new prices or markets when the old ones no longer seem sufficient at serving their original purposes. What we need is critical analysis into why current events seem so dysfunctional.
Second, and perhaps more importantly, The Journal of Prices & Markets stresses the lost art of relevance. Economics is a beautiful science that should serve the purpose of enlightening us. Instead it has gotten to the state where it creates confusion. As the jokes go, economists predicted ten of the last five recessions, and if you want a second opinion on something, just call back the economist you originally asked. Economists cannot even seem to reach agreement amongst themselves on simple questions, and in a bid to convince each other of their correctness they seek ever more levels of complexity in their theories. Complexity is not necessarily a bad thing, but we should never lose sight of the original question.
Economics aimed at relevant issues is what the doctor ordered, not economics aimed at irrelevant problems created by economists through their ever-increasingly complex answers to simple questions.
With its world-class editorial board behind it, the Journal seeks to further these aims by serving up a healthy dose of theory and practice.
Each issue will contain five editorials by specialists in their fields. These editorials will bring relevant and current problems to light, and enlighten the reader with analysis that is both elegant and simple. They will solve the age-old problem of economic analysis – how to give an obviously correct answer to a non-trivial question.
For the learned reader looking to delve more deeply into the problems at hand, each issue of The Journal of Prices & Markets offers longer scholarly and peer-reviewed articles. Written by academics, these articles explore the finer details of price formation and market allocations. For the bookworms, the Journal even has reviews of the books you should be reading to understand the world, as well as what you should be looking for as you read them.
Interested? Why not visit the website and put your name on the email list to receive updates when articles are published. If you are an academic, or know someone who is, and are interested in contributing to the Journal, please visit the submissions page for more details.
Many economists and financial commentators believe that in the unregulated market of the internet economy, new forms of money can be created that bypass central-bank and government supervision. The latest development is the emergence of a new electronic means of exchange, the bitcoin (BTC). The BTC is the invention of a programmer who called himself Satoshi Nakamote, who launched the bitcoin on January 3, 2009.
The basic idea behind the BTC is to create, by means of a mathematical algorithm, a substance that is scarce and fungible.
Nakamote devised a software system that enabled people obtain bitcoins as a reward for solving complex mathematical puzzles. The resulting coins are then used for online trading. Nakamote also arranged that the number of BTC can never exceed 21 million.
Some experts maintain that BTC will displace the existent fiat money and will usher in a new era of free banking, which will finally put to rest the menace of inflation.
Unfortunately, this is a pipe dream. Electronic money will not replace fiat paper money. The belief that it can stems from a failure to understand the nature and function of money and how it emerges on the market.
To see where this view goes wrong, let’s first see how money comes about. Money emerges out of barter conditions that permit more complex forms of trade and economic calculation. The distinguishing characteristic of money is that it is the general medium of exchange, evolved from private enterprise from the most marketable commodity. On this Mises wrote,
There would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money. [1]
In short, money is the thing for which all other goods and services are traded. Furthermore, money must emerge as a commodity. An object cannot be used as money unless it already possesses an objective exchange value based on some other use. The object must have a pre-existing price for it to be accepted as money.
Why? Demand for a good arises from its perceived benefit. For instance people demand food because of the nourishment it offers. With regard to money, people demand it not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services.
The benefit money offers is its purchasing power, i.e. its price in terms of goods and services. Consequently for something to be accepted as money, it must have a pre-existing purchasing power: a price. This price could have only emerged if it had an exchange value established in barter.
Once a thing becomes accepted as the medium of exchange, it will continue to be accepted even if its non-monetary usefulness disappears. The reason for this acceptance is that people now possess previous information about its purchasing power. This in turn enables them to form the demand for money.
In short the key to the acceptance is the knowledge of the previous purchasing power. It is this fact that made it possible for governments to abolish the convertibility of paper money into gold, thereby paving the way for the introduction of the paper standard. Again the crux here is that an object must have an established purchasing power for it to be accepted as general medium of exchange, i.e. money.
In today’s monetary system, the core of the money supply is no longer gold, but coins and notes issued by governments and central banks. Consequently coins and notes constitute the standard money we know as cash and employ in transactions. Notwithstanding this, it is the historical link to gold that makes paper money acceptable in exchange.
Observe that a bitcoin (BTC) is not a thing, it is a unit of a non-material virtual currency. A BTC has no material shape, hence from this perspective the notion that it could somehow replace fiat money is not defensible.
BTC can function only as long as individuals know that they can convert it into fiat money, i.e. cash on demand (see, e.g., Lawrence H. White “The Technology Revolution And Monetary Evolution,” Cato Institute’s 14th annual monetary conference, May 23, 1996).
Without a frame of reference or a yardstick, the introduction of new forms of settling transactions is not possible. On this Rothbard wrote,
Just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media – in almost all exchanges – and these are called money. [2]
It was through a prolonged process of selection that people had settled on gold as the most marketable commodity. Gold therefore had become the frame of reference for various forms of payments. Gold formed the basis for the value of today’s fiat money.
Besides, BTC is not a new form of money that replaces previous forms, but rather a new way of employing existent money in transactions.
The fact that the price of BTC has jumped massively lately implies that people assign a high value to the services it offers in employing existent money. This is no different from the case when in a country which imposes restrictions on taking money out people will agree to pay a high price for various means to secure their money.
[1] Ludwig von Mises, The Theory of Money and Credit, pp. 32-33.
For several long months now, the market has been treated to an unadulterated diet of such gross monetary irresponsibility, both concrete and conceptual, from what seems like the four corners of the globe and it has reacted accordingly by putting Other People’s Money where the relevant central banker’s mouth is. Sadly, it seems we are not only past the point where what was formerly viewed as a slightly risqué ‘unorthodoxy’ has become almost trite in its application, but that like the nerdy kid who happens to have done something cool for once in his life, your average central banker has begun to revel in what he supposes to be his new-found daring – a behaviour in whose prosecution he is largely free from any vestige outside control or accountability.
Indeed, this attitude has become so widespread that he and his speck-eyed peers now appear to be engaged in some kind of juvenile, mine’s-bigger-than-yours contest to push the boundaries of what both historical record and theoretical understanding tell us to be advisable. After all, it was sixty years ago now that Mises was telling people, in an article decrying the malign influence of Keynes, that:-
The economists did not contest the fact that a credit expansion in its initial stage makes business boom. But they pointed out how such a contrived boom must inevitably collapse after a while and produce a general depression. This demonstration could appeal to statesmen intent on promoting the enduring well-being of their nation. It could not influence demagogues who care for nothing but success in the impending election campaign and are not in the least troubled about what will happen the day after tomorrow. But it is precisely such people who have become supreme in the political life of this age of wars and revolutions. In defiance of all the teachings of the economists, inflation and credit expansion have been elevated to the dignity of the first principle of economic policy. Nearly all governments are now committed to reckless spending, and finance their deficits by issuing additional quantities of unredeemable paper money and by boundless credit expansion.
In this vein and though we should by now have become numbed to displays of such insistent folly, we cannot but find it a touch ludicrous that the Fed’s Jeremy Stein could give a speech warning about the utterly undeniable dangers of ‘overheating in credit markets’ – presumably with a straight face – only to be pooh-poohed a week or so later by his boss when similar concerns were raised at that latter’s regular meeting with the pampered, corporate welfare insiders at the Treasury Advisor Borrowing Committee.
The wise will take cold comfort from this, being all too cognisant of the fact that our esteemed Fed Chairman – much like his once-revered predecessor in office – has clearly demonstrated, both in the record of his public pronouncements and the belatedly-published transcripts of what he said in camera as the late crisis unfolded, that he is dispositionally unable to recognise the signs of a bubble in a beer glass, much less in a bond price or a balance sheet, since such a phenomenon plays no role in either his dogmatic and mechanistic model of the real world while the possibility that he may be personally in error finds no place in his monumental intellectual conceit.
Adding to the sense that nothing will dissuade these quacks from bleeding and cupping their poor patient until he expires under their assault, in a speech (delivered before a union audience, no less!) that Madame Defarge of the rentier class, Janet Yellen, also vouchsafed the hint that the Fed’s newly-adopted ‘Evans Rule’ – of continued, massive intervention until such time as unemployment subsides below 6 1/2%, assuming that CPI ‘projections’ (Oh, I d-o-o-o love a hard, independently-verifiable, objective target) likewise remain below 2 ½% – was not to be seen so much a ‘threshold’ for restriction as a gentle reminder that a rethink might soon be in order.
Not that the Fed Vice Chair was alone in her infamy. The week’s earlier publication of the Bank of England minutes revealed that there are other central bankers itching to help Wall St. and the City make their bogey for the year. Indeed, it seems that the outgoing Governor had wanted to pre-empt his hubristic successor-elect by easing now and not waiting for said Canadian newcomer to make good his less than modestly declared mission to ‘refound’ the three hundred year-old institution over which he will be suzerain, as part of his personal goal to show the whole of Europe how to ‘get those economies going and fix those financial systems’.
Not content with this, up stepped King’s fellow dove, David Miles, to set out a ‘model’ (roll of the eye-balls) which, by dint of equating the propensity to ‘inflation’ (i.e., to ongoing price rises) not to the supply of money in the system (thereby denying three centuries of theorising) nor with any consideration for the demand for said money (so ignoring the whole 140-odd year history of subjective marginal economics), but solely to the estimated degree of physical and human ‘slack’ in the economy, gave us a QED in favour of more QE.
Having set up the metrics of his toy universe, Mr. Miles told us proudly that he then gave it over to the silicon gods to perform 20,000 iterations with it and arrived – Hey Presto! – at the precise conclusion that the Bank needed to be 16% (sic) more accommodative, in other words, to buy another £60 billion gilts, even though, as our Great Engineer himself admitted:-
The model does not say that asset purchases are the only way this should be achieved. If there are monetary policy tools that are more reliably effective in boosting demand, they should be used. But it is not clear what these are, which is why I have calibrated the model to reflect my own assessment of the evidence of the impact of asset purchases.
As every right thinking person should know (and hence climateers excepted), the principle problem of mathematical computation is encapsulated in the phrase GIGO – Garbage in, Garbage Out. One of the parameters Miles adopts in his latter-day difference engine is that UK GDP ‘should’ run at a steady 3% rate of increase. Since this was roughly the experience of the laughingly-dubbed ‘Great Moderation’ which stretched from the economic travails of the early 90s to the eve of the Crash, this superficially seems to be a reasonable assumption.
What he has overlooked, however, is that while real GDP currently lies some 20% below where an extrapolation of that trend would otherwise suggest, the reckoning of total hours worked in the economy has fully recouped its intervening losses, while, for the past five years of slump and sub-par growth, the RPIX measure of price changes has risen by an average 3.9% p.a. which is the worst performance in 17 years (a ‘remit’-busting failure of policy which, if the yields on gilts maturing in 2055 are any guide, is expected to persist for the entirety of the next four decades!)
Putting these gross aggregates charily together, we can see that, whereas GDP per hour worked rose, with only minor variations, at a trend of 2.5% per annum for the first 37-years of the floating rate era, in the succeeding five years of the crisis, it has declined by 0.8% a year – a fall of a duration and severity unprecedented in the modern record despite the Bank’s fivefold, £325 billion intervention (equivalent to 25% of average GDP over the period and to more than half the state’s cumulative deficit).
So, here’s a question: is it just possible that the long misrule of NeuenArbeiterPartei under the leadership of RobespiBlaire and Culpability Brown (as we always used to refer to them) led to a progressive stultification of the system to the point that the country effectively now lies broken? Sapping entrepreneurial endeavour, burdening the economy with costs and with a mare’s nest of legal and regulatory hindrances, swelling the tax-sucking ranks of patronage amid both the Apparat and the welfare proletariat, this was a reign during which people desperately tried to maintain the illusion of a progressive rise in living standards by incurring crushing levels of debt and relying for nourishment on the bitter fruits of property speculation.
Couple this with the uncomprehending inability of the successor ConDem(n)s to tackle the problems they inherited – as well as with the political elite’s right-on, Davos-man fetish for needlessly driving up energy prices in the service of that jealous pagan deity, Mother Gaia – and you have a nation about whose prospects it is all too easy to despair.
Never mind though, Mr Miles: just run the printing presses a little more – nay! 16% more – prolifically and we have no doubt that all will soon be well again!
How far we are from the pellucid wisdom of Ludwig von Mises can be gathered from what he told a lay audience, just as the groundwork was being laid for the Great Inflation which would ravage the 1970s and early 80s, viz.:-
The nineteenth century the slogan of those excellent British economists who were titans at criticizing socialistic enthusiasts was: ‘There is but one method of relieving the conditions of the future generations of the masses, and that is to accelerate the formation of capital as against the increase of population.’ Since then, there has taken place a tremendous increase in population, for which the silly term ‘population explosion’ was invented. However, we are not having a ‘capital explosion’, only an ‘explosion’ of wishes and an ‘explosion’ of futile attempts to substitute something else—fiat money or credit money—for money.
Meanwhile, Perfidious Albion is left with the sorry combination of activist central bankers, weak growth, a soaring visible trade gap, a record current account deficit, and a scramble to exit positions from those who had previously seen the country as something of a safe haven. With technical indicators already flashing red (if also a touch oversold, at present), is there any floor beneath a currency which its own supposed guardians would dearly love to depreciate further?
Such problems are not confined to the oceanic side of the Channel, of course, as has been highlighted in the deliciously barbed correspondence between the CEO of US tyre company Titan, Morry Taylor, and French industry minister Arnaud Montebourg over that country’s industrial outlook and business climate. Without getting too deeply into the spat, it should be noted that Eurostat data suggest that the French government typically spends (not including ‘investment’) two-thirds more on its almost 63 million citoyens than does the Italian on its 61 million, yet it is the latter who bear the brunt of the criticism.
(In the interests of fair disclosure, the same source shows that we virtuous 62 million Brits enjoy the dubious benefits of 45% more state largesse than do our Italian cousins, if 15% less than our French neighbours and even the ostensibly hard-core Dutch splurge as much on their 17 million as do the afflicted Spanish on their 47 million).
In Spain itself, we have had another failed property lender and the rather cheerless message from embattled Premier Rajoy that ‘there are no green shoots, there is no spring’. On the Western littoral of the peninsula, Portugal has also had to downgrade its forecasts to encompass a deeper shrinkage than was first pencilled in – as a result, by some unforeseeable mischance, of the deeper than anticipated slump which has ravaged the rest of the continent, to which it dispatches 70% of its exports and from which it receives the bulk of its tourists.
In Italy, the chorus of disquiet at the prospect that Il Cavaliere might just attract more votes than anyone else in the weekend elections is swelling to a Verdi-like crescendo (remember that democratic choice is all well and good as long as you vote for the candidate preferred by the global hegemons). More broadly, the signs are not good here either. Retail sales last year were at their lowest level in a decade, while industrial orders fell to their fewest (and at their fastest pace) since the slump, taking them down almost a quarter from their 2007 peak and landing them back where they stood at the very launch of the single currency. Hardly a ringing endorsement of the project!
Thankfully, Germany is potentially providing an offset. We use the qualifier because even if the IfO survey is beginning to show its typical lagged response to a surge in local liquidity, this has yet to translate into business revenues and hence, one has to fear, into earnings. Nonetheless, let’s take cheer where we can: Eurozone biflation is bringing a much-needed cheer to the bosses of the Mittelstand.
Abroad in Asia more attention is suddenly being paid to the fact that Shinzo Abe – after being mugged in the corridors of the recent G20 summit (and possibly warned there that he might need to cultivate some wider good will if he wishes to enlist third-party support in his ongoing dispute with China) – is having to back-pedal a touch in Japan as rumours circulate that he might not even get to appoint the most unredeemed, the wildest-eyed inflationist to the top spot at the BoJ next month.
J is for Japan, but J is also for J-curve – that unfortunate constellation whereby the effects of a lowered currency exert more of an upward influence on the import bill than on contemporaneous export revenues. Hence why the country suffered a record trade deficit last month. The fact that LNG prices in the Pacific basin surged to more than $19/mmbtu this month, even as the yen was shedding 10% of its value vis-à-vis the dollar is but one adverse side-effect of Abe’s quackery.
In the near-term, it may be that the accounts of a number of Japanese corporates are unduly flattered by the translation effect, but we doubt they themselves will be fooled by such transitory gains into a radical alteration of their business plans. What should be made clear here is that in volume terms Japanese exports are 10% lower than they were at the post-Fukushima rebound, one sixth lower than the last, pre-Crash spike, and no greater than they were in early 2006 (on a price-adjusted basis, the trajectory of imports is not wholly dissimilar).
Nor has the return from the Lunar New Year break seen China add any further fuel to the flames, either. To the contrary, yet another ‘decisive’ edict has been issued in the (so far vain) attempt to crack down on the nation’s re-inflating property bubble. Adding to a growing presentiment that the central bank may act to head off what looks like an outpouring of new credit from the banks these past 8 weeks, it has this week withdrawn a record CNY910 billion from the market. The smart money now has it that current PBOC chief Zhou Xiaochuan will be promoted to a level of party seniority sufficient to obviate the need to retire now that he has celebrated his sixty-fifth birthday, implying that there will be no radical loosening of policy on that account, either.
He might need to act soon: the new vogue measure of ‘total social financing’ recorded a 160% yoy jump in January while the pace of boring old bank lending so far this year has been similarly robust and could come in as much as 40%-50% above the combined Jan-Feb total for 2011. At this rate, there will be no notable diminution to the already incredible CNY110 trillion in reported urban fixed-asset investment undertaken these past four years – an amount equal to 145% of the US private economy and a number which has risen more than tenfold in a decade and which accounts for three-fifths of ‘national-scale’ industrial profits.
Whether this will be complicated by the problematical local government debt pile remains to be seen, but one sign that this is becoming a hot button issue is that the China Banking Regulatory Commission has just issued a directive insisting that any new loans extended to LGFVs must be covered by existing cash flows and that the projects for which the funds are intended must generate returns, while what it termed “irregular” lending to these vehicles was henceforth prohibited. That will be fun, given that the recently published provincial budget outlooks suggest the fact that more than half of their loans are due to mature this year.
In response to worries that the regime might act to rein in such developments, the Shanghai Comp underwent its biggest single-day plunge in 15 months, steel futures slipped to complete a 6% drop on the week, copper gapped lower to its weakest close of 2013, and rubber suffered further, making a 10% peak-trough decline from its pre-holiday highs. The FTSE A600 Bank index has, meanwhile, dropped 14%. With Komatsu telling us sales of diggers halved in the last nine-months of 2012 and rivals Caterpillar reporting its worst 3-month regional sales performance (-12%YOY) outside of either the GFC or the Asian Contagion of 1997-8, and with Foxconn announcing a hiring freeze, what little anecdotal evidence we can muster in this period of news blackout is not overwhelmingly positive.
On a broader front, ahead of the all-important National People’s Congress next month, the local press is positively buzzing with assorted calls for ongoing reform – even to the point of positing the formation of a new super-bureaucracy to supersede the NDRC in this task. President Xi and his allies have presumably had something to do with this campaign and the man himself has naturally been very active in trying to secure his power base in the run up to his full inauguration, but much will remain up in the air until the proceedings have been completed and we get a first look at his first full exercise of power.
Never mind, ever alert to the people’s needs, the planners have just announced that they are taking forceful steps to counter the awful quality of the air in China’s choking megalopolises – they have issued a fatwah banning urban barbeques!
As 2012 draws to a close, we should note that it is the 50th anniversary of the 1962 publication of Murray Rothbard’s grand treatise, Man, Economy, and State. This was the book that inspired many of today’s “Austrian” economists to devote their careers to this unorthodox but remarkable school of thought. In this essay I’ll first explain who Rothbard was, and then summarize some of the major elements of his treatise.
Murray Rothbard
Murray Rothbard (1926-1995) became interested in laissez-faire economics at a relatively young age. While working on his economics Ph.D. at Columbia University, Rothbard attended Ludwig von Mises’ famous seminar at nearby New York University. According to this biographical essay, Rothbard
made major contributions to economics, history, political philosophy, and legal theory. He developed and extended the Austrian economics of Ludwig von Mises…He…applied Austrian analysis to historical topics such as the Great Depression of 1929 and the history of American banking.
Rothbard was no ivory-tower scholar, interested only in academic controversies. Quite the contrary, he combined Austrian economics with a fervent commitment to individual liberty. He developed a unique synthesis that combined themes from nineteenth-century American individualists such as Lysander Spooner and Benjamin Tucker with Austrian economics. A new political philosophy was the result, and Rothbard devoted his remarkable intellectual energy, over a period of some forty-five years, to developing and promoting his style of libertarianism. In doing so, he became a major American public intellectual.
Although Rothbard would eventually write several books—any one of which would have secured his legacy to economic theory and the political philosophy of liberty—his magnum opuswas Man, Economy, and State, to which I now turn.
Style and Scope
Rothbard originally intended his work to be a textbook treatment of Ludwig von Mises’ own magnum opus, Human Action, which had come out in 1949. Indeed, Herbert C. Cornuelle, president of the Volker Fund, was the one to pitch this idea to Rothbard that very year. Rothbard prepared an outline and a sample chapter on money, then received the blessing of Mises himself to go forward with it.
However, as Joseph Stromberg chronicles in exquisite detail in his Introduction to the Mises Institute’s (2004) Scholar’s Edition of MES, upon embarking on the project Rothbard eventually realized that a mere textbook would not be adequate. Cornuelle had visited Rothbard and asked if he thought the work should become a treatise in its own right. Rothbard pondered the question and eventually wrote in response (in February 1954):
The original concept of this project was as a step-by-step, spelled out version of Mises’ Human Action. However, as I have been proceeding, the necessary elaborations on the sometimes sparse framework of Mises has led inevitably to new and original presentations. Now that I have been proceeding to the theory of production where the whole cost-curve situation has to be faced, Mises is not much of a guide in this area. It is an area which encompasses a large part of present-day textbooks, and therefore must be met, in one way or another….A further complication has arisen. A textbook, traditionally, is supposed to simply present already-received doctrine in a clear, step-by-step manner. But not only would my textbook fly in the face of the doctrine as received by 99 percent of present-day economists, but there is one particularly vital point on which Mises, and all other economists, will have to be revised: monopoly theory.
Thus we see that Rothbard eventually realized that he was writing a brand new treatise, resting on the Misesian edifice to be sure, but one that was Rothbard’s own. Not only did Rothbard differ from Mises on certain key points (some of which will be discussed below), but even where their treatments were compatible, Rothbard’s was the clearer and more systematic.
The fundamental difference between Human Action and Man, Economy, and State is that the latter, though intimidating because of its size, is completely self-contained. The intelligent layperson with no prior exposure to any economics can read just Rothbard’s treatise, and walk away understanding the core of orthodox Austrian theory. In contrast, Mises’ classic work assumes a great deal of background knowledge on the part of the reader, including Kantian philosophy, the classical theory of value, and Böhm-Bawerkian capital and interest theory (!). None of this is meant to belittle Mises’ work, but merely to underscore that I personally always point the dedicated newcomer to MES first, and only then to Human Action.
A “Misesian” Work Grounded in Praxeology
Rothbard begins the book closely following in Mises’ footsteps, by categorizing economics as a subset of praxeology, which is the science of human action. According to Rothbard, starting from the basic axiom that human beings act—in other words, that they consciously use means to (attempt to) achieve desired goals—one can logically deduce the entire body of economic principles or laws.
It is interesting to read Rothbard’s description (in a March 1951 letter to Cornuelle) of his method of attack:
What I have in mind for a textbook would be a pioneering project….At each step, the reader would be enlightened through simple, hypothetical examples, until, slowly but relentlessly, he would find himself equipped to tackle the economic problems of the day….[T]hrough this method, even the most confirmed socialist, would step-by-step, beginning with simple praxeological axioms, at the end, suddenly find himself realizing the absurdity of his socialist and interventionist beliefs. He would become a libertarian in spite of himself.
Following Mises, Rothbard and his modern disciples argue that sound economic theory is logically antecedent to empirical investigation. If trying to understand the causes of the Great Depression, for example, one can’t simply “let the facts speak for themselves,” because there are an infinity of possible facts one could assemble for the purpose. (What was the mass of the moon on February 16, 1923, at exactly noon GMT, and might it have something to do with the 1929 stock market crash?) Indeed, the very concepts of money, interest rates, and so forth are themselves theory-laden; one needs to have a praxeological foundation in order to even perceive such categories, because they don’t exist “out there” in “the real world” the way a naïve positivist might suggest.
The Structure of Production
Joe Salerno once told Rothbard that he (Rothbard) had incorporated the capital theory of Böhm-Bawerk into his exposition far more than Mises had done in his own works. For those of us who read MES in our youth, we take this for granted, but Salerno’s observation is perfectly correct: Rothbard takes the crucial yet at times mind-numbingly dry treatments of Austrian capital theory from the masters (mainly Menger, Böhm-Bawerk, and Hayek) and distills them into a very readable discussion. He caps it all off with a beautiful diagram (appearing in the beginning of Chapter 6, “Production: The Rate of Interest and Its Determination”) that I have described as the superior Austrian version of the mainstream’s “Circular Flow Diagram.”
Rothbard’s diagram takes the famous Hayekian triangle and rotates it 90 degrees to the right, so that what is considered the earliest or “highest” stage of production, actually is the highest bar on the diagram. At each step moving downward, the goods-in-process have moved through another period of work, where further inputs of land, labor, and capital goods have been applied, transforming the capital goods to become ever closer to the ultimate consumer goods.
Rothbard’s ingenious construction allows for an “economy-wide” accounting, where the capitalists earn the correct rate of return on their investments each period, and where the net incomes earned by the capitalists, land owners, and laborers each period sum to the total spent on the finished consumer goods emerging from the bottom of the production “pipeline” that period.
Monopoly Theory
Throughout the book, Rothbard makes original contributions, but they are often in the form of making a received point a little more crisply, or by filling in a gap in the standard case for a familiar conclusion. When it comes to monopoly theory, however, Rothbard overturns the tables and starts from scratch.
Rothbard begins his treatment by challenging the very notion of “consumers’ sovereignty” as developed by William Hutt. Hutt (and later Mises) used the term to convey the notion that the “customer is always right,” and that through their spending decisions the consumers in a market economy ultimately allocated resources to competing ends.
Rothbard rejected the term on the grounds of both accuracy and strategy. Strictly speaking, it was simply not true to say that consumers were somehow “sovereign” over producers. Yes, consumers were free to withhold their money, but by the same token business owners were free to withhold their products, and workers were free to withhold their labor. Instead of exhibiting consumers’ sovereignty, Rothbard felt the free market demonstrated individual self-sovereignty.
Rothbard also disliked the term for strategic reasons, because the notion of “consumers’ sovereignty” could be used as an ideal benchmark with which to criticize the performance of the real-world market. Indeed, that is precisely what happened (with the related notion of “perfect competition”) in mainstream welfare economics.
During his preliminary discussion of monopoly, Rothbard makes some brilliant observations. For example, he points out that most economists and the general public are horrified by the formation of a cartel, while they look with favor upon the creation of a corporation. Yet the processes are quite similar, involving individuals pooling their resources into a unified enterprise. Rothbard also generalizes Mises’ calculation argument as originally applied to a socialist State, to show that no single firm could ever encompass the entire economy.
In another tour de force, Rothbard shows the dangers of the mainstream fascination with graphical expositions. It is standard in textbooks to this day to show the inefficiencies of “monopolistic competition” using a diagram where the downward sloping demand curve is tangent to the U-shaped average cost curve on its left side, which is not at the lowest point on the curve. Mainstream economists attribute to this purely geometric result economic significance, claiming that “monopolistically competitive” industries will have “excess capacity” and operate at higher unit costs than a perfectly competitive industry. Yet Rothbard points out that this result follows purely from the convenient assumption of a smooth U-shaped average cost curve. If instead we used a jagged average cost curve (with straight lines connecting discrete points), then a downward sloping demand curve could cross the AC “curve” at its lowest point. In other words, Rothbard showed, the standard textbook critique of industries such as sneakers and breakfast cereals, was based on a graphing decision and had little to do with economic analysis.
After these warm-up sections, Rothbard goes for the throat: He denies the very existence of a so-called “competitive price,” with which to contrast the allegedly inefficient “monopoly price.” Instead Rothbard offers the free-market price, which is the only benchmark that can be discussed coherently.
Critique of Keynesianism
In addition to his positive exposition of sound Austrian economics, Rothbard fills MES with critiques of rival doctrines. I am particularly fond of his discussion of Keynesian economics. The critiques have lost some of their force over the decades, because a typical Keynesian textbook no longer motivates its policy conclusions with the arguments that were common when Rothbard was writing. Even so, Rothbard’s demonstrations are a joy to behold.
My personal favorite is his reductio ad absurdum of the multiplier (based on a similar argument by Hazlitt). After reviewing (what was at that time) the standard Keynesian case that new investment spending will have a “multiplier” impact on total income, Rothbard uses the same approach to “prove” that the reader of his book has a much higher multiplier still.
Specifically, Rothbard sets out a few equations, showing that “Social Income” is equal to the “Income of the Reader” plus the “Income of everyone else.” Then he uses some empirical observation to discover that the “Income of everyone else” is 0.99999 times “Social Income.” After some algebra, Rothbard concludes that “Social Income” is 100,000 times the “Income of the Reader.” The consistent Keynesian, Rothbard notes, should then advocate that the government print up dollars and hand them to the reader of Rothbard’s book, because the “reader’s spending will prime the pump of a 100,000-fold increase in the national income.”
Conclusion
Fifty years after its initial publication, Murray Rothbard’s grand treatise still holds up. I have written a Study Guide for it, and still receive emails monthly from people thanking me for helping them work through this classic book, because they recognize its importance and the knowledge it contains. If anyone considers him or herself a fan of Austrian economics and has yet to try Man, Economy, and State, I promise you are in for a treat.
This essay is based on an article originally published by in The Freeman.
On Wednesday December 12, 2012 Fed policy makers announced that they will boost their main stimulus tool by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion of mortgage debt a month.
This decision is likely to boost Fed’s balance sheet from the present $2.86 trillion to $4 trillion by the end of next year. Policy makers also announced that an almost zero interest rate policy will stay intact as long as the unemployment rate is above 6.5% and the rate of inflation doesn’t exceed the 2.5% figure.
Most commentators are of the view that the Fed Chairman Ben Bernanke and his colleagues are absolutely committed to averting the mistakes of the Japanese in 1990’s and the US central bank during the Great Depression. On this Bernanke said that,
A return to broad based prosperity will require sustained improvement in the job market, which in turn requires stronger economic growth.
Furthermore he added that,
The Fed plans to maintain accommodation as long as needed to promote a stronger economic recovery in the context of price of stability.
But why should another expansion of the Fed’s balance sheet i.e. more money pumping, revive the economy? What is the logic behind this way of thinking?
Bernanke is of the view that monetary pumping, whilst price inflation remains subdued, is going to strengthen purchasing power in the hands of individuals.
Consequently, this will give a boost to consumer spending and via the famous Keynesian multiplier the rest of the economy will follow suit.
Bernanke, however, confuses here the means of exchange i.e. money, with the means of payments which are goods and services.
In a market economy every individual exchanges what he has produced for money (the medium of exchange) and then exchanges money for other goods. This means that he funds the purchase of other goods by means of goods he has produced.
Paraphrasing Jean Baptiste Say, Mises argued that,
Commodities, says Say, are ultimately paid for not by money, but by other commodities. Money is merely the commonly used medium of exchange; it plays only an intermediary role. What the seller wants ultimately to receive in exchange for the commodities sold is other commodities.[1]
Printing more money is not going to bring prosperity i.e. more goods and services. Money as such produces nothing.
According to Rothbard,
Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.[2].
Contrary to popular thinking there is no need for more money to keep the economy going. On this Mises argued,
The services which money renders can be neither improved nor repaired by changing the supply of money. … The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.[3]
Printing more money will only result in the diversion of goods from those individuals that produced them to those who have produced nothing i.e. the holders of the newly printed money.
According to Mises,
An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.[4]
What is required to set in motion a broadly based prosperity is to enhance and expand the production structure of the economy. Printing money, however, will undermine the expansion and the enhancement of the wealth generating infrastructure.
Now, if by means of money printing and the lowering of interest rates one can generate prosperity why after all the massive pumping by the Fed are things not improving? – The reply of Bernanke and his colleagues is that the pumping wasn’t aggressive enough.
We suggest that if Bernanke’s way of thinking were to be implemented he runs the risk of severely damaging the process of wealth generation and deepening economic impoverishment.
If money printing can create prosperity then why are all the poor nations still poor – these nations also have central banks and know well how to print money? A good recent example in this regard is Zimbabwe.
Even if we were to accept that the Fed ought to pump money to revive the economy, we are still going to have a problem here if banks were to refuse to channel the pumped money into the economy.
It must be realized that after being badly hurt in 2008 banks are likely to be reluctant to embark on an aggressive lending of the money pumped by the Fed.
For the time being, banks still prefer to sit on the cash rather than lend it out aggressively. (Embark on a large scale lending out of “thin air”). The latest data for the week ending December 12 indicates that the banks’ holding of excess cash increased by $25 billion from the end of November to $1.464 trillion.
We suggest that we should be grateful to the banks for resisting aggressive lending so far – it has prevented an enormous economic disaster. Obviously if the Fed were to force the banks to push all the pumped money into the economy then this could inflict severe damage which will take a long time to fix.
Summary and conclusion
On Wednesday December 12 Fed policy makers announced that they will boost their main stimulus tool by adding $45 billion of monthly Treasury purchases to an existing program to buy $40 billion of mortgage debt per month. This decision is likely to lift the size of the Fed’s balance sheet from the present $2.86 trillion to $4 trillion by the end of next year.
The Fed Chairman Ben Bernanke, the initiator of this plan, is of the view that aggressive money pumping is going to strengthen US economic expansion. We hold that without the cooperation of banks the massive pumping of the Fed is unlikely to enter the economy.
We maintain that if banks were to push the money the Fed is going to pump into the economy this will inflict serious damage on the economy’s ability to generate real wealth.
[1] Ludwig von Mises, Lord Keynes and Say’s Law, The Critics of Keynesian Economics, edited by Henry Hazlitt, University Press of America 1983, p. 316.
[2] Murray N. Rothbard, Man, Economy and State (Los Angeles: Nash Publishing, 1970), p.670.
Episode 73: GoldMoney’s Andy Duncan talks to Godfrey Bloom, who represents Yorkshire and North Lincolnshire in the European Parliament, and who is a member of the parliament’s Committee on Economic and Monetary Affairs. They talk about the possibility of Germany instituting a gold-backed Deutschmark, and broader issues to do with European monetary and fiscal policy.
In a recent Mises.org daily article co-authored with Patrick Barron, Mr Bloom states that Germany now has a “Golden Opportunity” to get back to sound money by pulling out of the euro and introducing a gold-backed Deutschmark. However, given the lack of a comprehensive audit, suspicions about the integrity of the German gold reserves remain. Bloom therefore advocates that Germany should repatriate its physical gold from the storage locations abroad.
They also talk about monetary policies of the European Union, the errors of European politicians and whether or not the eurozone can be sustained. In addition, they also discuss Britain’s relationship with the EU and Britain’s own precarious financial position, particularly in relation to its welfare state and deficit spending.
This podcast was recorded on 21 November 2012 and previously published at GoldMoney.com.
The seminars hosted by Ludwig von Mises, first in Vienna and later in New York, have a key place in the history and development of Austrian economics. Such figures as Hayek, Rothbard, and Hazlitt all attended.
Inspired by this the London Mises Circle is holding a seminar at the Institute of Economic Affairs at 6:30pm on November 1st.
Its a great pleasure to wake up in the morning on holiday and read something very true, as always, from Mises.
Its also a great pleasure to get emails from fellow Cobdenites. One of our supporters sent me this link to a recent Bloomberg article. In short, it has got on the band wagon of GDP targeting for the central banks. This is when the nine central planner magicians, oh, sorry, I mean economists, of the MPC choose another target to set their monetary goals.
Little thought is given to how wealth is actually created. This should not be expected any more from people who profess to know something about the economy. That requirement went out of the window many decades ago. Granted, this is akin to a doctor not being able to take a patient’s pulse, but this is now the norm.
Anyway, here is a small chapter from Socialism by Mises, written in 1922, when economists were required to know the basis of wealth creation as they fought to show how socialism could never create wealth but only destroy it. Our modern day economists would do well to take note and abandon their futile attempts to manipulate wealth creation.
To the socialist, the coming of Socialism means a transition from an irrational to a rational economy. Under Socialism, planned management of economic life takes the place of anarchy of production; society, which is conceived as the incarnation of reason, takes the place of the conflicting aims of unreasonable and self-interested individuals. A just distribution replaces an unjust distribution of goods. Want and misery vanish and there is wealth for all. A picture of paradise is unfolded before us, a paradise which—so the laws of historical evolution tell us—we, or at least our heirs, must at length inherit. For all history leads to that promised land, and all that has happened in the past has only prepared the way for our salvation.
This is how our contemporaries see Socialism, and they believe in its excellence. It is false to imagine that the socialist ideology dominates only those parties which call themselves socialist or—what is generally intended to mean the same thing—“social.” All present-day political parties are saturated with the leading socialistic ideas. Even the stoutest opponents of Socialism fall within its shadow. They, too, are convinced that the socialist economy is more rational than the capitalist, that it guarantees a more just distribution of income, that historical evolution is driving man inexorably in that direction. When they oppose Socialism they do so with the sense that they are defending selfish private interests and that they are combating a development which from the standpoint of public welfare is desirable and is based upon the only ethically acceptable principle. And in their hearts they are convinced that their resistance is hopeless.
Yet the socialist idea is nothing but a grandiose rationalization of petty resentments. Not one of its theories can withstand scientific criticism and all its deductions are ill-founded. Its conception of the capitalist economy has long been seen to be false; its plan of a future social order proves to be inwardly contradictory, and therefore impracticable. Not only would Socialism fail to make economic life more rational, it would abolish social cooperation outright. That it would bring justice is merely an arbitrary assertion, arising, as we can show, from resentment and the false interpretation of what takes place under Capitalism. And that historical evolution leaves us no alternative but Socialism turns out to be a prophecy which differs from the chiliastic dreams of primitive Christian sectarians only in its claim to the title “science.”
In fact Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created. Since a socialist order of society cannot exist, unless it be as a fragment of Socialism within an economic order resting otherwise on private property, each step leading towards Socialism must exhaust itself in the destruction of what already exists.
Such a policy of destructionism means the consumption of capital. There are few who recognize this fact. Capital consumption can be detected statistically and can be conceived intellectually, but it is not obvious to everyone. To see the weakness of a policy which raises the consumption of the masses at the cost of existing capital wealth, and thus sacrifices the future to the present, and to recognize the nature of this policy, requires deeper insight than that vouchsafed to statesmen and politicians or to the masses who have put them into power. As long as the walls of the factory buildings stand, and the trains continue to run, it is supposed that all is well with the world. The increasing difficulties of maintaining the higher standard of living are ascribed to various causes, but never to the fact that a policy of capital consumption is being followed.
In the problem of the capital consumption of a destructionist society we find one of the key problems of the socialist economic policy. The danger of capital consumption would be particularly great in the socialist community; the demagogue would achieve success most easily by increasing consumption per head at the cost of the formation of additional capital and to the detriment of existing capital.
It is in the nature of capitalist society that new capital is continually being formed. The greater the capital fund becomes, the higher does the marginal productivity of labour rise and the higher, therefore, are wages, absolute and relative. The progressive formation of capital is the only way to increase the quantity of goods which society can consume annually without diminishing production in the future—the only way to increase the workers’ consumption without harm to future generations of workers. Therefore, it has been laid down by Liberalism that progressive capital formation is the only means by which the position of the great masses can be permanently improved. Socialism and destructionism seek to attain this end in a different way. They propose to use up capital so as to achieve present wealth at the expense of the future. The policy of Liberalism is the procedure of the prudent father who saves and builds for himself and his successors. The policy of destructionism is the policy of the spendthrift who dissipates his inheritance regardless of the future.
If they had listened to Mises in 1927, the world might have been saved. There would have been no Holocaust, Gulag, bombing of civilians, prolonged Depression and vast human suffering.
That was then. What can we do now? We can revisit his great work Liberalism, drink deeply from its wisdom and apply it in our time. Liberalism is this week’s release in the Laissez Faire Club, with a new introduction by Toby Baxendale. If you are not a member, you can join now.
Using the word “liberalism” to mean genuine freedom takes some getting used to. Today’s self-described liberals push government power as the solution to all our economic and social woes.
But government is not liberal! Government is confiscation, coercion, the Taser, the jail cell!
Another use of the term occurs when self-described conservatives condemn liberalism as the cancer that is killing society. What? Thomas Jefferson was a liberal. So was John Locke. So was Alexis de Tocqueville. Their ideas built the world we love.
Most of all, there was Ludwig von Mises, who proudly called himself a liberal. He was the 20th century’s great defender of capitalism and the free society. He decided to settle the issue about what liberalism is once and for all.
This book is Mises’ classic statement in defense of a free society, one of the last statements of the old liberal school and a text from which we can continue to learn. It has been the conscience of a global movement for liberty for 80 years.
Liberalism first appeared in 1927 as a follow-up to both Mises’ devastating 1922 book showing that socialism would fail and his 1926 book criticizing interventionism. It was written to address the burning question: If not socialism, and if not fascism or interventionism, what form of social arrangement is most conducive to human flourishing? Mises’ answer, summed up in the title, is liberalism.
Even in these times, Mises was aware that the meaning of liberalism had changed from its common use in the 19th century. He had to clarify that his understanding not only included commercial freedom, but was rooted in it. Without economic freedom, no other form of freedom can have material meaning.
But Mises did not accept the idea that the term had been merely stolen from the proponents of free markets. He thought it had never been worked out scientifically, and therefore, the theory of liberalism became vulnerable to political manipulation.
Thus did Mises do more than restate classical liberal doctrine. He gave a thoroughly modern defense of freedom, one that corrected the errors of the old liberal school by rooting the idea of liberty in the institution of private property (the subject on which the classical school was sometimes unclear). That is the grand contribution of this volume:
The program of liberalism, therefore, if condensed into a single word, would have to read: property, that is, private ownership of the means of production… All the other demands of liberalism result from this fundamental demand.
But there are other insights. He demonstrates that the order inherent in a laissez-faire society stems not from a mystical source, but from the capacity of the price system to provide a means of rational coordination between independent actors. This rational pursuit of individual interest leads to the division of labor, the development of the money economy, the extended order of production and the coordinative signals of interest and profit. He argues that it is within man’s rational capacity to understand the reasons for the prosperity and orderliness of freedom.
He further shows that political decentralization and secession are the best means to peace and political liberty. As for religion, he recommends the complete separation of church and state, and a cultural conviction that favors tolerance. On immigration, he favors the freedom of movement. On education, state involvement must end — completely.
In some ways, this is the most political of Mises’ treatises, and also one of the most-inspiring books ever written on the idea of liberty. It remains a book that can set the world on fire for freedom, which is probably why it has been translated into more than a dozen languages.
Yet the concluding message here is something that every freedom lover needs to seriously contemplate and return to again and again. Consider his words:
Liberalism is no religion, no worldview, no party of special interests. It is no religion, because it demands neither faith nor devotion, because there is nothing mystical about it and because it has no dogmas. It is no worldview because it does not try to explain the cosmos, and because it says nothing and does not seek to say anything about the meaning and purpose of human existence. It is no party of special interests, because it does not provide or seek to provide any special advantage whatsoever to any individual or any group. It is something entirely different. It is an ideology, a doctrine of the mutual relationship among the members of society and, at the same time, the application of this doctrine to the conduct of men in actual society. It promises nothing that exceeds what can be accomplished in society and through society. It seeks to give men only one thing: the peaceful, undisturbed development of material well-being for all, in order thereby to shield them from the external causes of pain and suffering as far as it lies within the power of social institutions to do so at all. To diminish suffering, to increase happiness: That is its aim.
No sect and no political party has believed that it could afford to forgo advancing its cause by appealing to men’s senses. Rhetorical bombast, music and song resound, banners wave, flowers and colors serve as symbols and the leaders seek to attach their followers to their own person. Liberalism has nothing to do with all this. It has no party flower and no party color, no party song and no party idols, no symbols and no slogans. It has the substance and the arguments. These must lead it to victory.
This is more than a theory; it is a proposed strategy for achieving a dream. It is one that should attract anyone who is truly serious about making a contribution to the cause of freedom.
It was a great pleasure and a privilege to be asked by Jeff Tucker of Laissez Faire Books to write this foreword to Liberalism, the timeless classic written by Ludwig von Mises in 1927.
It is a book of political thought. In fact, it is Mises’s only book fully dedicated to this subject. As he mentions in his own opening remarks, he has kept it brief so as to appeal to the widest audience he can without dumbing down his message.
For those readers new to Mises — you may have heard, for example, that this genius created the foundations of economics from using the epistemology of Kant with shades of Aristotle to set the logical deductive foundations of economics, and you find this a bit too heavy going for your opening introduction to the thoughts of arguably the greatest economist ever — then I submit, you have your great starter book.
By opening your account of this man here, you will embark on a fascinating discovery of more than just the economic program of liberalism. But as you then progress to other works by Mises, you will encompass the whole philosophical corpus of liberalism.
I read this book as a counterblast against the direction in which John Stuart Mill took liberalism in his post–On Liberty writings, down the route of socialism and in defense of a truly positive conception of liberalism.
This quote is tucked away in the appendix.
John Stuart Mill is an epigone of classical liberalism and, especially in his later years, under the influence of his wife, full of feeble compromises. He slips slowly into socialism and is the originator of the thoughtless confounding of liberal and socialist ideas that led to the decline of English liberalism and to the undermining of the living standards of the English people. Nevertheless — or perhaps precisely because of this — one must become acquainted with Mill’s principal writings:
Principles of Political Economy (1848) On Liberty (1859) Utilitarianism. (1862)
Without a thorough study of Mill it is impossible to understand the events of the last two generations. For Mill is the great advocate of socialism. All the arguments that could be advanced in favor of socialism are elaborated by him with loving care. In comparison with Mill all other socialist writers — even Marx, Engels, and Lassalle — are scarcely of any importance.
One cannot understand liberalism without a knowledge of economics. For liberalism is applied economics; it is social and political policy based on a scientific foundation.
Mises’s greatest student, F.A. von Hayek, some 17 years later wrote his more famous The Road to Serfdom in a similar vein to Mises’s 1927 Liberalismus (the original title and date of issue). [1] As with all Mises’s works, there are no compromises; where Hayek throws compromise to interlocutors, Mises does not.
J.S. Mill in On Liberty was indeed the first to bring to the modern reader the distinction between the negative and positive conceptions of liberty. Negative liberty is total and unconditional freedom from acts of intervention on the part of the state and its enforcers. Positive liberty, in contrast, is the freedom to participate in the various activities of life, which may involve some compromise of negative liberty in order to empower individuals to fulfill their lives, such as the provision (via coercion of you and others) of a nicer house for a poor person so he can participate in the peaceful enjoyment of life. According to Mill’s distinction, the book you are about to read is formally in the negative tradition.
However, I would encourage the view that this book is actually a very empowering and positive outline of the political theory of liberalism — and should be viewed that way. There is nothing negative about justifying the existence of the sovereign to have the sole duty to protect your private property so you can have the quiet and peaceful enjoyment of it. (The lay reader will please observe that private property is not just items like your house and other chattels; it is the entire possession of your own mind, your own body, both spiritual and temporal.) This is truly a magnificent and positive conception of liberty.
Mises confirms this point and illustrates with an example in chapter 3, part 8, “Freedom of Movement”:
Liberalism has sometimes been reproached on the ground that its program is predominantly negative. This follows necessarily, it is asserted, from the very nature of freedom, which can be conceived only as freedom from something, for the demand for freedom consists essentially in the rejection of some sort of claim. On the other hand, it is thought, the program of the authoritarian parties is positive. Since a very definite value judgment is generally connoted by the terms “negative” and “positive,” this way of speaking already involves a surreptitious attempt to discredit the political program of liberalism.
There is no need to repeat here once again that the liberal program — a society based on private ownership of the means of production — is no less positive than any other conceivable political program. What is negative in the liberal program is the denial, the rejection, and the combating of everything that stands in opposition to this positive program. In this defensive posture, the program of liberalism — and, for that matter, that of every movement — is dependent on the position that its opponents assume towards it. Where the opposition is strongest, the assault of liberalism must also be strongest; where it is relatively weak or even completely lacking, a few brief words, under the circumstances, are sufficient. And since the opposition that liberalism has had to confront has changed during the course of history, the defensive aspect of the liberal program has also undergone many changes.
This becomes most clearly evident in the stand that it takes in regard to the question of freedom of movement. The liberal demands that every person have the right to live wherever he wants. This is not a “negative” demand. It belongs to the very essence of a society based on private ownership of the means of production that every man may work and dispose of his earnings where he thinks best. This principle takes on a negative character only if it encounters forces aiming at a restriction of freedom of movement.
Why, according to Mises, is the liberal program only about the protection of private property? Let us read Mises’s own words from chapter 1, part 1, “Property,” as he can encapsulate the answer far better than I can:
Human society is an association of persons for cooperative action. As against the isolated action of individuals, cooperative action on the basis of the principle of the division of labor has the advantage of greater productivity. If a number of men work in cooperation in accordance with the principle of the division of labor, they will produce (other things being equal) not only as much as the sum of what they would have produced by working as self-sufficient individuals, but considerably more. All human civilization is founded on this fact. It is by virtue of the division of labor that man is distinguished from the animals. It is the division of labor that has made feeble man, far inferior to most animals in physical strength, the lord of the earth and the creator of the marvels of technology. In the absence of the division of labor, we would not be in any respect further advanced today than our ancestors of a thousand or ten thousand years ago.
Human labor by itself is not capable of increasing our well-being. In order to be fruitful, it must be applied to the materials and resources of the earth that Nature has placed at our disposal. Land, with all the substances and powers resident within it, and human labor constitute the two factors of production from whose purposeful cooperation proceed all the commodities that serve for the satisfaction of our outer needs. In order to produce, one must deploy labor and the material factors of production, including not only the raw materials and resources placed at our disposal by Nature and mostly found in the earth, but also the intermediate products already fabricated of these primary natural factors of production by previously performed human labor. In the language of economics we distinguish, accordingly, three factors of production: labor, land, and capital. By land is to be understood everything that Nature places at our disposal in the way of substances and powers on, under, and above the surface of the earth, in the water, and in the air; by capital goods, all the intermediate goods produced from land with the help of human labor that are made to serve further production, such as machines, tools, half-manufactured articles of all kinds, etc.
Now we wish to consider two different systems of human cooperation under the division of labor-one based on private ownership of the means of production, and the other based on communal ownership of the means of production. The latter is called socialism or communism; the former, liberalism or also (ever since it created in the nineteenth century a division of labor encompassing the whole world) capitalism. The liberals maintain that the only workable system of human cooperation in a society based on the division of labor is private ownership of the means of production. They contend that socialism as a completely comprehensive system encompassing all the means of production is unworkable and that the application of the socialist principle to a part of the means of production, though not, of course, impossible, leads to a reduction in the productivity of labor, so that, far from creating greater wealth, it must, on the contrary, have the effect of diminishing wealth.
The program of liberalism, therefore, if condensed into a single word, would have to read: property, that is, private ownership of the means of production (for in regard to commodities ready for consumption, private ownership is a matter of course and is not disputed even by the socialists and communists). All the other demands of liberalism result from this fundamental demand.
From chapter 1, part 8, “Democracy”:
For the liberal, the state is an absolute necessity, since the most important tasks are incumbent upon it: the protection not only of private property, but also of peace, for in the absence of the latter the full benefits of private property cannot be reaped.
These considerations alone suffice to determine the conditions that a state must fulfill in order to correspond to the liberal ideal. It must not only be able to protect private property; it must also be so constituted that the smooth and peaceful course of its development is never interrupted by civil wars, revolutions, or insurrections.…
Here is where the social function performed by democracy finds its point of application. Democracy is that form of political constitution which makes possible the adaptation of the government to the wishes of the governed without violent struggles. If in a democratic state the government is no longer being conducted as the majority of the population would have it, no civil war is necessary to put into office those who are willing to work to suit the majority. By means of elections and parliamentary arrangements, the change of government is executed smoothly and without friction, violence, or bloodshed.
Although Hobbes is never mentioned in Liberalism, I see much of Hobbes in Mises. I read Leviathan as the great British philosopher Michael Oakeshott did in his famous introduction to the 1946 edition of that book, as being the founder of the British Enlightenment tradition. Mises sits full square in that tradition. Tearing up the ancient natural-law tradition and setting up the sovereign state as the master protector of the private property of all individuals, thus guaranteeing the fullest possible freedom to live ones life in peace. In addition he was undoubtedly a committed democrat with regard to his favored method of choosing who runs the sovereign.
If you have come to this book to find out a little bit about Mises the economist — and no, not just any economist, but as I mentioned before, arguably the greatest economist ever — you will be pleased to find some great insights that you should savor until you read his full epistemological and economic treatise, Human Action.
One of my favorite university debates as a student at the London School of Economics (LSE) was with socialist students, foaming at the mouth with great indignation regarding all they perceived as injustice in the world, riven with jealousy and envy, concerning why we should not be bothered about the wealth displayed by “the rich.”
When confronted by a rabid debater suggesting that all Rolls Royce cars should be scrapped and all production stopped because with millions starving in the world the money should be spent on feeding these people, I would typically respond with this: “What have you got against the hard-working people of Crewe [a town in Cheshire, UK, where the famous car is a major employer] and the honest money they earn making these things and then spend freely on other goods and services? Why should they not be allowed to earn a living providing things people want instead of being put out of work to satisfy your political objectives?”
As I reread Liberalism to write this foreword, I discovery from Mises, with his laser-like logical precision, I am totally wrong! The buying of the Rolls Royce car by the rich should not be defended on those grounds but by a far sounder chain of economic reasoning. I quote from the section called “The Inequality of Wealth and Income“:
Our defense of luxury consumption is not, of course, the argument that one occasionally hears, that is, that it spreads money among the people. If the rich did not indulge themselves in luxuries, it is said, the poor would have no income. This is simply nonsense. For if there were no luxury consumption, the capital and labor that would otherwise have been applied to the production of luxury goods would produce other goods: articles of mass consumption, necessary articles, instead of “superfluous” ones.
Mises’s rejoinder:
The luxury of today is the necessity of tomorrow. Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone. Luxury consumption provides industry with the stimulus to discover and introduce new things. It is one of the dynamic factors in our economy. To it we owe the progressive innovations by which the standard of living of all strata of the population has been gradually raised.
It is a pleasure to have one’s reasoning corrected by the great master. There is plenty of good economic reasoning packed into this short book.
I will leave you with one final analogy that I hope will stay in your mind between the diligent doctor who advises the right, slow, and brick-by-brick economic way to prosperity and the impatient politician who wants to bring jam today and jam tomorrow with endless sunshine forever, as readers of this book who fall into the former camp along with Mises may find this a useful way of describing the liberal predicament to others:
If a doctor shows a patient, who craves food detrimental to his health the perversity of his desire, no one will be so foolish as to say: “The doctor does not care for the good of the patient; whoever wishes the patient well must not grudge him the enjoyment of relishing such delicious food.” Everyone will understand that the doctor advises the patient to forgo the pleasure that the enjoyment of the harmful food affords solely in order to avoid injuring his health. But as soon as the matter concerns social policy, one is prone to consider it quite differently. When the liberal advises against certain popular measures because he expects harmful consequences from them, he is censured as an enemy of the people, and praise is heaped on the demagogues who, without consideration of the harm that will follow, recommend what seems to be expedient for the moment.[2]
For lovers of the liberal program, our task is thus hard, but one thing is for sure: reason is on our side, and Mises is one of its finest servants.
I hope you enjoy the book. Thank you, LFB, for bringing this book back to life for a new audience.
Toby Baxendale
Ayot St. Peter, Hertfordshire, UK
June 10, 2012
[1] When, in the section titled “The Impracticability of Socialism,” Mises discusses the “calculation problem” — that is, the impossibility of economic calculation under socialism — we can see that what became the more famous Hayekian “knowledge problem” is touched upon here.
The leadership of a socialist society would thus be confronted by a problem that it could not possibly solve. It would not be able to decide which of the innumerable possible modes of procedure is the most rational. The resulting chaos in the economy would culminate quickly and irresistibly in universal impoverishment and a retrogression to the primitive conditions under which our ancestors once lived.
I mention this not to in any way denigrate the masterful work of Hayek — just to underscore the true primacy of his teacher, Mises.
[2] Mises mentioned the traditional factors of production in this quote but does not mention that it is the entrepreneur who combines these factors to make useful things for his fellow man in a constantly dynamic and moving economy. Rest assured, all of Mises’s other works are replete with this valuable insight that makes economics relevant to the real world. I can only assume that this is missed out here as it is covered off so well elsewhere.
