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NOTE XII. The Sphere of Economic Calculation

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Chapter 12. The Sphere of Economic Calculation. 1. The Character of Monetary Entries.

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Economic calculation can comprehend everything that is exchanged against money.

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The prices of goods and services are either historical data describing past events or anticipations of probable future events.

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Information about a past price conveys the knowledge that one or several acts of interpersonal exchange were affected according to this ratio.

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It does not convey directly any knowledge about future prices.

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We may often assume that the market conditions which determined the formation of prices in the recent past will not change at all,

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or at least not change considerably in the immediate future, so that prices, too, will remain unchanged or change only slightly.

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Such expectations are reasonable if the prices concerned were the result of the interaction of many people ready to buy or to sell,

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provided the exchange ratios seemed propitious to them, and if the market situation was not influenced by conditions

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which are considered as accidental, extraordinary and not likely to return.

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However, the main task of economic calculation is not to deal with the problems of unchanging

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or only slightly changing market situations and prices, but to deal with change.

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The acting individual either anticipates changes which will occur without his own interference

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and wants to adjust his actions to this anticipated state of affairs, or he wants to embark upon

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a project which will change conditions even if no other factors produce a change.

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The prices of the past are for him merely starting points in his endeavors to anticipate

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future prices.

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Historians and statisticians content themselves with prices of the past.

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Man looks at the prices of the future, be it only the immediate future of the next hour,

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day or month.

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For him, the prices of the past are merely a help in anticipating future prices.

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Not only in his preliminary calculation of the expected outcome of planned action, but

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no less in his attempts to establish the result of his past transactions, he is primarily

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be concerned with future prices.

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In balance sheets and in profit and loss statements, the result of past action becomes visible

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as the difference between the money equivalent of funds owned, total assets minus total

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liabilities at the beginning and at the end of the period reported, and as the difference

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between the money equivalent of costs incurred and gross proceeds earned.

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In such statements it is necessary to enter the estimated money equivalent of all assets

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and liabilities other than cash. These items should be appraised according to the prices

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at which they could probably be sold in the future, or as is especially the case with

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equipment for production processes, in reference to the prices to be expected in the sale of

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merchandise manufactured with their aid. However, old business customs and the provisions of

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of commercial law and of the tax laws have brought about a deviation from sound principles

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of accounting which aim merely at the best attainable degree of correctness.

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These customs and laws are not so much concerned with correctness in balance sheets and profit

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and loss statements as with the pursuit of other aims.

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Commercial legislation aims at a method of accounting which could indirectly protect

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Creditors Against Loss. It tends more or less to an appraisal of assets below their estimated

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market value in order to make the net profit and the total funds owned appear smaller than

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they really are. Thus a safety margin is created, which reduces the danger that, to the prejudice

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of creditors, too much might be withdrawn from the firm as alleged profit, and that

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The idea is to raise effective tax rates without making this raise visible in the nominal tax

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rate schedules.

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We must therefore distinguish between economic calculation as it is practiced by businessmen

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planning future transactions, and those computations of business facts which serve other purposes.

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The determination of taxes due and economic calculation are two different things.

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If a law imposing a tax upon the keeping of domestic servants prescribes that one male

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All servants should be counted as two female servants.

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Nobody would interpret such a provision as anything other than a method for determining

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the amount of tax due.

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Likewise, if an inheritance tax law prescribes that securities should be appraised at the

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stock market quotation on the day of the decedent's death, we are merely provided with a way of

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determining the amount of the tax.

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The duly kept accounts in a system of correct bookkeeping are accurate as to dollars and

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cents.

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They display an impressive precision, and the numerical exactitude of their items seems

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to remove all doubts.

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In fact, the most important figures they contain are speculative anticipations of future market

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constellations.

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It is a mistake to compare the items of any commercial account to the items used in purely

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and a technological reckoning, for example, in the design for the construction of a machine.

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The engineer, as far as he attends to the technological side of his job, applies only

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numerical relations established by the methods of the experimental natural sciences.

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The businessman cannot avoid numerical terms which are the outcome of his understanding

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of future human conduct.

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The main thing in balance sheets and in profit and loss statements is the evaluation of assets

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and liabilities not embodied in cash.

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All such balances and statements are virtually interim balances and interim statements.

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They describe as well as possible the state of affairs at an arbitrarily chosen instant,

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while life and action go on and do not stop.

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It is possible to wind up individual business units, but the whole system of social production

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never ceases.

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Nor are the assets and liabilities consisting in cash exempt from the indeterminacy inherent

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in all business accounting items.

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They depend on the future constellation of the market no less than any item of inventory

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or equipment.

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The numerical exactitude of business accounts and calculations must not prevent us from

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realizing the uncertainty and speculative character of their items and of all computations

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based on them.

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Yet these facts do not detract from the efficiency of economic calculation.

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Economic calculation is as efficient as it can be.

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No reform could add to its efficiency.

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that renders to acting man all the services which he can obtain from numerical computation.

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It is, of course, not a means of knowing future conditions with certainty, and it does not

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deprive action of its speculative character.

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But this can be considered a deficiency only by those who do not come to recognize the

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facts that life is not rigid, that all things are perpetually fluctuating, and that men

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Man has no certain knowledge about the future.

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It is not the task of economic calculation to expand man's information about future conditions.

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Its task is to adjust his actions as well as possible to his present opinion concerning

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want satisfaction in the future.

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For this purpose, acting man needs a method of computation, and computation requires a

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2. THE LIMITS OF ECONOMIC CALCULATION

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Economic calculation cannot comprehend things which are not sold and bought against money.

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There are things which are not for sale, and for whose acquisition sacrifices other than

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money and money's worth must be expended.

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He who wants to train himself for great achievements must employ many means, some of which may

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require expenditure of money.

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But the essential things to be devoted to such an endeavor are not purchasable.

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Honor, virtue, glory, and likewise, vigor, health, and life itself, play a role in action both as means and as ends, but they do not enter into economic calculation.

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There are things which cannot at all be evaluated in money, and there are other things which can be appraised in money only with regard to a fraction of the value assigned to them.

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The appraisal of an old building must disregard its artistic and historical eminence as far as these qualities are not a source of proceeds in money or goods vendable.

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What touches a man's heart only and does not induce other people to make sacrifices for its attainment remains outside the pale of economic calculation.

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However, all this does not in the least impair the usefulness of economic calculation.

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Those things which do not enter into the items of accountancy and calculation are either

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ends or goods of the first order.

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No calculation is required to acknowledge them fully and to make due allowance for them.

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All that acting man needs in order to make his choice is to contrast them with the total

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Let us assume that a town council has to decide between two water supply projects.

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One of them implies the demolition of a historical landmark, while the other, at the cost of

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an increase in money expenditure, spares this landmark.

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The fact that the feelings which recommend the conservation of the monument cannot be

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that be estimated in a sum of money does not in any way impede the councilman's decision.

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The values that are not reflected in any monetary exchange ratio are, on the contrary, by this

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very fact lifted into a particular position which makes the decision rather easier.

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No complaint is less justified than the lamentation that the computation methods of the market

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do not comprehend things not vendable.

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Moral and aesthetic values do not suffer any damage on account of this fact.

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Money, money prices, market transactions, and economic calculation based upon them are

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the main targets of criticism.

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Loquacious sermonizers disparage Western civilization as a mean system of mongering and peddling.

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complacency, self-righteousness, and hypocrisy exult in scorning the dollar philosophy of our age.

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Neurotic reformers, mentally unbalanced literati, and ambitious demagogues

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take pleasure in indicting rationality and in preaching the gospel of the irrational.

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In the eyes of these babblers, money and calculation are the source of the most serious evils.

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However, the fact that men have developed a method of ascertaining as far as possible

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the expediency of their actions and of removing uneasiness in the most practical and economic

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way does not prevent anybody from arranging his conduct according to the principle he

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considers to be right.

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The materialism of the stock exchange and of business accountancy does not hinder anybody

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from living up to the standards of Thomas Achampus, or from dying for a noble cause.

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The fact that the masses prefer detective stories to poetry, and that it therefore pays

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better to write the former than the latter, is not caused by the use of money and monetary

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accounting.

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It is not the fault of money that there are gangsters, thieves, murderers, prostitutes,

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corruptible officials and judges.

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It is not true that honesty does not pay.

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It pays for those who prefer fidelity to what they consider to be right, to the advantages

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which they could derive from a different attitude.

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Other critics of economic calculation fail to realize that it is a method available only

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to people acting in the economic system of the division of labor in a social order based

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upon private ownership of the means of production.

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It can only serve the considerations of individuals or groups of individuals operating in the

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institutional setting of this social order.

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It is, consequently, a calculation of private profits and not of social welfare.

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This means that the prices of the market are the ultimate fact for economic calculation.

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It cannot be applied for considerations whose standard is not the demand of the consumers

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as manifested on the market, but the hypothetical valuations of a dictatorial body managing

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all national or earthly affairs.

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He who seeks to judge actions from the point of view of a pretended social value, that

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is, from the point of view of the whole society, and to criticize them by comparison with the

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events in an imaginary socialist system in which his own will is supreme, has no use

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for Economic Calculation.

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Economic calculation in terms of money prices is the calculation of entrepreneurs producing

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for the consumers of a market society.

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It is of no avail for other tasks.

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He who wants to employ economic calculation must not look at affairs in the manner of

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a despotic mind.

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These can be used for calculation by the entrepreneurs, capitalists, landowners, and wage earners

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of a capitalist society.

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For matters beyond the pursuits of these categories, it is inadequate.

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It is nonsensical to evaluate in money objects which are not negotiated on the market, and

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to employ in calculations arbitrary items which do not refer to reality.

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The law determines the amount which ought to be paid as indemnification for having caused

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a man's death.

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But the prescription enacted for the determination of the amends due does not mean that there

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is a price for human life.

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Where there is slavery, there are market prices of slaves.

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Where there is no slavery, man, human life and health are race extra commerciam.

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In a society of free men, the preservation of life and health are ends, not means.

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They do not enter into any process of accounting means.

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It is possible to determine in terms of money prices the sum of the income or the wealth

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of a number of people.

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But it is nonsensical to reckon national income or national wealth.

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As soon as we embark upon considerations foreign to the reasoning of a man operating within

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the pale of a market society, we are no longer helped by monetary calculation methods.

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The attempts to determine in money the wealth of a nation or of the whole of mankind are

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as childish as the mystic efforts to solve the riddles of the universe by worrying about

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the dimensions of the pyramid of keyops.

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If a business calculation values a supply of potatoes at $100, the idea is that it will

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be possible to sell it or to replace it against this sum.

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If a whole entrepreneurial unit is estimated $1 million, it means that one expects to sell

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it for this amount.

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But what is the meaning of the items in a statement of a nation's total wealth?

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What is the meaning of the computation's final result?

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What must be entered into it and what is to be left outside?

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Is it correct or not to enclose the value of the country's climate and the people's

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innate abilities and acquired skill?

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The businessman can convert his property into money, but a nation cannot.

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The money equivalents as used in acting and in economic calculation are money prices,

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that is, exchange ratios between money and other goods and services.

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The prices are not measured in money, they consist in money.

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Prices are either prices of the past or expected prices of the future.

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A price is necessarily a historical fact, either of the past or of the future.

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There is nothing in prices which permits one to liken them to the measurement of physical

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and chemical phenomena.

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3.

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The Changeability of Prices

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Exchange ratios are subject to perpetual change, because the conditions which produce them

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are perpetually changing.

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The value that an individual attaches both to money and to various goods and services

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is the outcome of a moment's choice.

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Every later instant may generate something new, and bring about other considerations

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and valuations.

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Not that prices are fluctuating, but that they do not alter more quickly could fairly

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be deemed a problem requiring explanation.

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Every experience teaches people that the exchange ratios of the market are mutable.

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One would assume that their ideas about prices would take full account of this fact.

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Nevertheless, all popular notions of production and consumption, marketing and prices are

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more or less contaminated by a vague and contradictory notion of price rigidity.

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The layman is prone to consider the preservation of yesterday's price structure both as normal

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and as fair, and to condemn changes in the exchange ratios as a violation of the rules

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of nature and of justice.

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It would be a mistake to explain these popular beliefs as a precipitate of old opinions conceived

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in earlier ages of more stable conditions of production and marketing.

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It is questionable whether or not prices were less changeable in those older days.

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On the contrary, it could rather be asserted that the merger of local markets into larger

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national markets, the final emergence of a world-embracing world market, and the evolution

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of commerce aiming at continuously supplying the consumers, have made price changes less

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frequent and less sharp.

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In pre-capitalistic times there was more stability in technological methods of production, but

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there was much more irregularity in supplying the various local markets and in adjusting

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supply to their changing demands.

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But even if it were true that prices were somewhat more stable in a remote past, it

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would be of little avail for our age.

227
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The popular notions about money and money prices are not derived from ideas formed in

228
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of the Past. It would be wrong to interpret them as atavistic remnants. Under modern conditions,

229
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every individual is daily faced with so many problems of buying and selling that we are

230
00:21:42.320 --> 00:21:47.480
right in assuming that his thinking about these matters is not simply a thoughtless

231
00:21:47.480 --> 00:21:51.240
reception of traditional ideas.

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It is easy to understand why those whose short-run interests are hurt by a change in prices resent

233
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such changes, emphasize that the previous prices were not only fairer but also more

234
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normal and maintain that price stability is in conformity with the laws of nature and

235
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of morality.

236
00:22:11.240 --> 00:22:17.200
But every change in prices furthers the short-run interests of other people.

237
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Those favored will certainly not be prompted by the urge to stress the fairness and normalcy

238
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of price rigidity.

239
00:22:25.640 --> 00:22:31.360
Neither atavistic reminiscences nor the state of selfish group interests can explain the

240
00:22:31.360 --> 00:22:35.780
popularity of the idea of price stability.

241
00:22:35.780 --> 00:22:40.920
Its roots are to be seen in the fact that notions concerning social relations have been

242
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constructed according to the pattern of the natural sciences.

243
00:22:45.620 --> 00:22:50.920
The economists and sociologists who aimed at shaping the social sciences according to

244
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and the pattern of physics or physiology only indulged in a way of thinking which popular

245
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fallacies had adopted long before.

246
00:23:00.520 --> 00:23:05.720
Even the classical economists were slow to free themselves from this error.

247
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With them, value was something objective, that is, a phenomenon of the external world

248
00:23:12.000 --> 00:23:16.800
and a quality inherent in things, and therefore measurable.

249
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They utterly failed to comprehend the purely human and voluntaristic character of value judgments.

250
00:23:24.360 --> 00:23:30.240
As far as we can see today, it was Samuel Bailey who first disclosed what is going on

251
00:23:30.240 --> 00:23:33.440
in preferring one thing to another.

252
00:23:33.440 --> 00:23:38.520
But his book was overlooked, as were the writings of other precursors of the subjective theory

253
00:23:38.520 --> 00:23:40.120
of value.

254
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It is not only a task of economic science to discard the errors concerning measurability

255
00:23:45.960 --> 00:23:51.640
in the field of action, it is no less a task of economic policy.

256
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For the failures of present-day economic policies are, to some extent, due to the lamentable

257
00:23:57.520 --> 00:24:04.000
confusion brought about by the idea that there is something fixed and therefore measurable

258
00:24:04.000 --> 00:24:07.320
in inter-human relations.

259
00:24:07.320 --> 00:24:10.040
4.

260
00:24:10.040 --> 00:24:14.960
Stabilization An outgrowth of all these errors is the idea

261
00:24:14.960 --> 00:24:22.180
of Stabilization. Shortcomings in the government's handling of monetary matters and the disastrous

262
00:24:22.180 --> 00:24:28.000
consequences of policies aimed at lowering the rate of interest and at encouraging business

263
00:24:28.000 --> 00:24:34.200
activities through credit expansion gave birth to the ideas which finally generated the slogan

264
00:24:34.200 --> 00:24:42.000
Stabilization. One can explain its emergence and its popular appeal. One can understand

265
00:24:42.000 --> 00:24:48.820
Considered as the fruit of the last 150 years' history of currency and banking, one can,

266
00:24:48.820 --> 00:24:53.880
as it were, plead extenuating circumstances for the error involved.

267
00:24:53.880 --> 00:24:59.840
But no such sympathetic appreciation can render its fallacies any more tenable.

268
00:24:59.840 --> 00:25:05.980
Stability, the establishment of which the program of stabilization aims at, is an empty

269
00:25:05.980 --> 00:25:08.840
and contradictory notion.

270
00:25:08.840 --> 00:25:16.260
The urge toward action, that is, improvement of the conditions of life, is inborn in man.

271
00:25:16.260 --> 00:25:22.420
Man himself changes from moment to moment, and his valuations, volitions and acts change

272
00:25:22.420 --> 00:25:24.020
with him.

273
00:25:24.020 --> 00:25:29.220
In the realm of action there is nothing perpetual but change.

274
00:25:29.220 --> 00:25:35.420
There is no fixed point in this ceaseless fluctuation other than the eternal, aprioristic

275
00:25:35.420 --> 00:25:38.040
categories of action.

276
00:25:38.040 --> 00:25:44.100
It is vain to sever valuation and action from man's unsteadiness and the changeability

277
00:25:44.100 --> 00:25:50.460
of his conduct, and to argue as if there were in the universe eternal values independent

278
00:25:50.460 --> 00:25:55.640
of human value judgments, and suitable to serve as a yardstick for the appraisal of

279
00:25:55.640 --> 00:25:57.880
real action.

280
00:25:57.880 --> 00:26:02.720
All methods suggested for a measurement of the changes in the monetary unit's purchasing

281
00:26:02.720 --> 00:26:08.920
Purchasing Power are more or less unwittingly founded on the illusory image of an eternal

282
00:26:08.920 --> 00:26:15.220
and immutable being who determines by the application of an immutable standard the quantity

283
00:26:15.220 --> 00:26:20.120
of satisfaction which a unit of money conveys to him.

284
00:26:20.120 --> 00:26:26.080
It is a poor justification of this ill-thought idea that what is wanted is merely to measure

285
00:26:26.080 --> 00:26:29.820
changes in the purchasing power of money.

286
00:26:29.820 --> 00:26:37.380
The crux of the stability notion lies precisely in this concept of purchasing power.

287
00:26:37.380 --> 00:26:44.740
The layman, laboring under the ideas of physics, once considered money as a yardstick of prices.

288
00:26:44.740 --> 00:26:50.200
He believed that fluctuations of exchange ratios occur only in the relations between

289
00:26:50.200 --> 00:26:56.260
the various commodities and services, and not also in the relation between money and

290
00:26:56.260 --> 00:27:00.340
and the Totality of Goods and Services.

291
00:27:00.340 --> 00:27:02.820
Later people reversed the argument.

292
00:27:02.820 --> 00:27:08.200
It was no longer money to which constancy of value was attributed, but the totality

293
00:27:08.200 --> 00:27:11.980
of things vendable and purchasable.

294
00:27:11.980 --> 00:27:18.120
People began to devise methods for working up complexes of commodity units to be contrasted

295
00:27:18.120 --> 00:27:21.180
to the monetary unit.

296
00:27:21.180 --> 00:27:27.080
Results to find indexes for the measurement of purchasing power silenced all scruples.

297
00:27:27.080 --> 00:27:32.880
Both the doubtfulness and the incomparability of the price records employed and the arbitrary

298
00:27:32.880 --> 00:27:39.520
character of the procedures used for the computation of averages were disregarded.

299
00:27:39.520 --> 00:27:44.840
Irving Fisher, the eminent economist who was the champion of the American stabilization

300
00:27:44.840 --> 00:27:51.240
Movement, contrasts with the dollar, a basket, containing all the goods the housewife buys

301
00:27:51.240 --> 00:27:55.480
on the market for the current provision of her household.

302
00:27:55.480 --> 00:28:00.280
In the proportion in which the amount of money required for the purchase of the content of

303
00:28:00.280 --> 00:28:06.200
this basket changes, the purchasing power of the dollar has changed.

304
00:28:06.200 --> 00:28:12.040
The goal assigned to the policy of stabilization is the preservation of the immutability of

305
00:28:12.040 --> 00:28:14.800
this money expenditure.

306
00:28:14.800 --> 00:28:20.660
This would be all right if the housewife and her imaginary basket were constant elements,

307
00:28:20.660 --> 00:28:26.740
if the basket were always to contain the same goods and the same quantity of each, and if

308
00:28:26.740 --> 00:28:32.920
the role which this assortment of goods plays in the family's life were not to change.

309
00:28:32.920 --> 00:28:38.220
But we are living in a world in which none of these conditions is realized.

310
00:28:38.220 --> 00:28:43.780
First of all, there is the fact that the quality of the commodities produced and consumed changes

311
00:28:43.780 --> 00:28:54.020
It is a mistake to identify wheat with wheat, not to speak of shoes, hats and other manufacturers.

312
00:28:54.020 --> 00:28:59.380
The great price differences in the synchronous sales of commodities which mundane speech

313
00:28:59.380 --> 00:29:05.820
and statistics arrange in the same class clearly evidence this truism.

314
00:29:05.820 --> 00:29:12.540
An idiomatic expression asserts that two peas are alike, but buyers and sellers distinguish

315
00:29:12.540 --> 00:29:33.540
A comparison of prices paid at different places or at different dates for commodities which technology or statistics call by the same name is useless if it is not certain that their qualities, but for the place difference, are perfectly the same.

316
00:29:33.540 --> 00:29:41.540
Quality means, in this connection, all those properties to which the buyers and would-be buyers pay heed.

317
00:29:41.540 --> 00:29:53.540
The mere fact that the quality of all goods and services of the first order is subject to change, explodes one of the fundamental assumptions of all index number methods.

318
00:29:53.540 --> 00:30:08.540
It is irrelevant that a limited amount of goods of the higher orders, especially metals and chemicals which can be uniquely determined by a formula, are liable to a precise description of their characteristic features.

319
00:30:08.540 --> 00:30:15.020
A measurement of purchasing power would have to rely upon the prices of the goods and services

320
00:30:15.020 --> 00:30:20.220
of the first order, and, what is more, of all of them.

321
00:30:20.220 --> 00:30:25.660
To employ the prices of the producer's goods is not helpful because it could not avoid

322
00:30:25.660 --> 00:30:31.780
counting the various stages of the production of one and the same consumer's good several

323
00:30:31.780 --> 00:30:35.260
times, and thus falsifying the result.

324
00:30:35.260 --> 00:30:41.900
A restriction to a group of selected goods would be quite arbitrary, and therefore vicious.

325
00:30:41.900 --> 00:30:48.700
But even apart from all these insurmountable obstacles, the task would remain insoluble.

326
00:30:48.700 --> 00:30:54.500
For not only do the technological features of commodities change, and new kinds of goods

327
00:30:54.500 --> 00:31:02.460
appear while many old ones disappear, valuations change too, and they cause changes in demand

328
00:31:02.460 --> 00:31:04.380
and production.

329
00:31:04.380 --> 00:31:09.580
The assumptions of the measurement doctrine would require men whose wants and valuations

330
00:31:09.580 --> 00:31:11.620
are rigid.

331
00:31:11.620 --> 00:31:17.780
Only if people were to value the same things always in the same way could we consider price

332
00:31:17.780 --> 00:31:23.420
changes as expressive of changes in the power of money to buy things.

333
00:31:23.420 --> 00:31:28.780
As it is impossible to establish the total amount of money spent at a given fraction

334
00:31:28.780 --> 00:31:37.980
Statisticians must rely upon the prices paid for individual commodities.

335
00:31:37.980 --> 00:31:43.600
This raises two further problems, for which there is no apodictic solution.

336
00:31:43.600 --> 00:31:50.140
It becomes necessary to attach to the various commodities coefficients of importance.

337
00:31:50.140 --> 00:31:56.180
It would be manifestly wrong to let the prices of various commodities enter into the computation

338
00:31:56.180 --> 00:32:01.460
without taking into account the different roles they play in the total system of the

339
00:32:01.460 --> 00:32:03.960
individual's households.

340
00:32:03.960 --> 00:32:08.940
But the establishment of such proper weighting is, again, arbitrary.

341
00:32:08.940 --> 00:32:16.100
Secondly, it becomes necessary to compute averages out of the data collected and adjusted.

342
00:32:16.100 --> 00:32:20.620
But there exist different methods for the computation of averages.

343
00:32:20.620 --> 00:32:25.320
There are the arithmetic, the geometric, the harmonic averages.

344
00:32:25.320 --> 00:32:32.180
There is the quasi-average known as the median. Each of them leads to different results. None

345
00:32:32.180 --> 00:32:39.720
of them can be recognized as the unique way to attain a logically unassailable answer.

346
00:32:39.720 --> 00:32:45.780
The decision in favor of one of these methods of computation is arbitrary.

347
00:32:45.780 --> 00:32:51.840
If all human conditions were unchangeable, if all people were always to repeat the same

348
00:32:51.840 --> 00:32:58.440
Some actions, because their uneasiness and their ideas about its removal, were constant.

349
00:32:58.440 --> 00:33:03.600
Or if we were in a position to assume that changes in these factors occurring with some

350
00:33:03.600 --> 00:33:09.880
individuals or groups are always outweighed by opposite changes with other individuals

351
00:33:09.880 --> 00:33:16.520
or groups, and therefore do not affect total demand and total supply, we would live in

352
00:33:16.520 --> 00:33:19.040
a world of stability.

353
00:33:19.040 --> 00:33:26.280
But the idea that in such a world money's purchasing power could change is contradictory.

354
00:33:26.280 --> 00:33:32.420
As will be shown later, changes in the purchasing power of money must necessarily affect the

355
00:33:32.420 --> 00:33:39.380
prices of different commodities and services at different times and to different extents.

356
00:33:39.380 --> 00:33:47.220
They must consequently bring about changes in demand and supply, in production and consumption.

357
00:33:47.220 --> 00:33:53.980
The idea implied in the inappropriate term level of prices, as if, other things being

358
00:33:53.980 --> 00:34:00.080
equal, all prices could rise or drop evenly, is untenable.

359
00:34:00.080 --> 00:34:06.780
Other things cannot remain equal if the purchasing power of money changes.

360
00:34:06.780 --> 00:34:13.900
In the field of praxeology and economics, no sense can be given to the notion of measurement.

361
00:34:13.900 --> 00:34:19.620
In the hypothetical state of rigid conditions there are no changes to be measured.

362
00:34:19.620 --> 00:34:25.880
In the actual world of change there are no fixed points, dimensions or relations which

363
00:34:25.880 --> 00:34:28.620
could serve as a standard.

364
00:34:28.620 --> 00:34:35.060
The monetary unit's purchasing power never changes evenly with regard to all things vendable

365
00:34:35.060 --> 00:34:37.100
and purchasable.

366
00:34:37.100 --> 00:34:42.580
The notions of stability and stabilization are empty if they do not refer to a state

367
00:34:42.580 --> 00:34:45.180
of Rigidity and its Preservation.

368
00:34:45.180 --> 00:34:51.460
However, this state of rigidity cannot even be thought out consistently to its ultimate

369
00:34:51.460 --> 00:34:53.860
logical consequences.

370
00:34:53.860 --> 00:34:56.780
Still less can it be realized.

371
00:34:56.780 --> 00:35:00.900
Where there is action, there is change.

372
00:35:00.900 --> 00:35:04.240
Action is a lever of change.

373
00:35:04.240 --> 00:35:10.420
The pretentious solemnity which statisticians and statistical bureaus display in computing

374
00:35:10.420 --> 00:35:15.860
indexes of purchasing power and cost of living is out of place.

375
00:35:15.860 --> 00:35:21.780
These index numbers are at best rather crude and inaccurate illustrations of changes which

376
00:35:21.780 --> 00:35:23.860
have occurred.

377
00:35:23.860 --> 00:35:30.500
In periods of slow alterations in the relation between the supply of and the demand for money,

378
00:35:30.500 --> 00:35:34.060
they do not convey any information at all.

379
00:35:34.060 --> 00:35:39.860
In periods of inflation, and consequently of sharp price changes, they provide a rough

380
00:35:39.860 --> 00:35:45.660
image of events which every individual experiences in his daily life.

381
00:35:45.660 --> 00:35:51.140
A judicious housewife knows much more about price changes as far as they affect her own

382
00:35:51.140 --> 00:35:55.420
household than the statistical averages can tell.

383
00:35:55.420 --> 00:36:01.600
She has little use for computations disregarding changes both in quality and in the amount

384
00:36:01.600 --> 00:36:08.680
of goods which she is able or permitted to buy at the prices entering into the computation.

385
00:36:08.680 --> 00:36:14.840
If she measures the changes for her personal appreciation by taking the prices of only

386
00:36:14.840 --> 00:36:22.380
two or three commodities as a yardstick, she is no less scientific and no more arbitrary

387
00:36:22.380 --> 00:36:27.580
than the sophisticated mathematicians in choosing their methods for the manipulation of the

388
00:36:27.580 --> 00:36:29.860
data of the market.

389
00:36:29.860 --> 00:36:35.460
In practical life, nobody lets himself be fooled by index numbers.

390
00:36:35.460 --> 00:36:40.340
Nobody agrees with the fiction that they are to be considered as measurements.

391
00:36:40.340 --> 00:36:45.180
Where quantities are measured, all further doubts and disagreements concerning their

392
00:36:45.180 --> 00:36:47.360
dimensions cease.

393
00:36:47.360 --> 00:36:49.700
These questions are settled.

394
00:36:49.700 --> 00:36:55.380
Nobody ventures to argue with the meteorologists about their measurements of temperature, humidity,

395
00:36:55.380 --> 00:36:59.480
atmospheric pressure and other meteorological data.

396
00:36:59.480 --> 00:37:05.540
But on the other hand, nobody acquiesces in an index number if he does not expect a personal

397
00:37:05.540 --> 00:37:09.840
advantage from its acknowledgement by public opinion.

398
00:37:09.840 --> 00:37:14.100
The establishment of index numbers does not settle disputes.

399
00:37:14.100 --> 00:37:19.960
It merely shifts them into a field in which the clash of antagonistic opinions and interests

400
00:37:19.960 --> 00:37:23.160
is irreconcilable.

401
00:37:23.160 --> 00:37:26.260
Human action originates change.

402
00:37:26.260 --> 00:37:33.420
As far as there is human action, there is no stability but ceaseless alteration.

403
00:37:33.420 --> 00:37:37.900
The historical process is a sequence of changes.

404
00:37:37.900 --> 00:37:43.280
It is beyond the power of man to stop it and to bring about an age of stability in which

405
00:37:43.280 --> 00:37:46.520
all history comes to a standstill.

406
00:37:46.520 --> 00:37:53.940
It is man's nature to strive after improvement, to beget new ideas and to rearrange the conditions

407
00:37:53.940 --> 00:38:03.820
The Prices of the Market are historical facts, expressive of a state of affairs that prevailed

408
00:38:03.820 --> 00:38:09.140
at a definite instant of the irreversible historical process.

409
00:38:09.140 --> 00:38:15.140
In the praxeological orbit, the concept of measurement does not make any sense.

410
00:38:15.140 --> 00:38:21.380
In the imaginary and, of course, unrealizable state of rigidity and stability, there are

411
00:38:21.380 --> 00:38:27.180
There are no changes to be measured. In the actual world of permanent change, there are

412
00:38:27.180 --> 00:38:36.180
no fixed points, objects, qualities or relations with regard to which changes could be measured.

413
00:38:36.180 --> 00:38:42.700
5. The Root of the Stabilization Idea

414
00:38:42.700 --> 00:38:48.080
Economic calculation does not require monetary stability in the sense in which this term

415
00:38:48.080 --> 00:38:52.600
is used by the champions of the stabilization movement.

416
00:38:52.600 --> 00:38:59.200
The fact that rigidity in the monetary unit's purchasing power is unthinkable and unrealizable

417
00:38:59.200 --> 00:39:03.640
does not impair the methods of economic calculation.

418
00:39:03.640 --> 00:39:09.680
What economic calculation requires is a monetary system whose functioning is not sabotaged

419
00:39:09.680 --> 00:39:12.440
by government interference.

420
00:39:12.440 --> 00:39:18.040
The endeavors to expand the quantity of money in circulation, either in order to increase

421
00:39:18.040 --> 00:39:23.480
is the government's capacity to spend, or in order to bring about a temporary lowering

422
00:39:23.480 --> 00:39:31.360
of the rate of interest, disintegrate all currency matters and derange economic calculation.

423
00:39:31.360 --> 00:39:37.880
The first aim of monetary policy must be to prevent governments from embarking upon inflation

424
00:39:37.880 --> 00:39:43.980
and from creating conditions which encourage credit expansion on the part of banks.

425
00:39:43.980 --> 00:39:49.780
But this program is very different from the confused and self-contradictory program of

426
00:39:49.780 --> 00:39:53.360
stabilizing purchasing power.

427
00:39:53.360 --> 00:39:58.700
For the sake of economic calculation, all that is needed is to avoid great and abrupt

428
00:39:58.700 --> 00:40:01.620
fluctuations in the supply of money.

429
00:40:01.620 --> 00:40:08.460
Gold, and up to the middle of the 19th century, silver, served very well all the purposes

430
00:40:08.460 --> 00:40:11.540
of economic calculation.

431
00:40:11.540 --> 00:40:16.860
Precisions in the relation between the supply of and the demand for the precious metals,

432
00:40:16.860 --> 00:40:22.540
and the resulting alterations in purchasing power, went on so slowly that the entrepreneur's

433
00:40:22.540 --> 00:40:29.100
economic calculation could disregard them without going too far afield.

434
00:40:29.100 --> 00:40:35.000
Precision is unattainable in economic calculation, quite apart from the shortcomings emanating

435
00:40:35.000 --> 00:40:40.020
from not paying due consideration to monetary changes.

436
00:40:40.020 --> 00:40:46.060
Incidentally, no practical calculation can ever be precise.

437
00:40:46.060 --> 00:40:50.940
The formula underlying the process of calculation may be exact.

438
00:40:50.940 --> 00:40:57.220
The calculation itself depends on the approximate establishment of quantities and is therefore

439
00:40:57.220 --> 00:41:00.980
necessarily inaccurate.

440
00:41:00.980 --> 00:41:04.900
Economics is an exact science of real things.

441
00:41:04.900 --> 00:41:11.100
But as soon as price data are introduced into the chain of thought, exactitude is abandoned

442
00:41:11.100 --> 00:41:16.940
and economic history is substituted for economic theory.

443
00:41:16.940 --> 00:41:22.940
The planning businessman cannot help employing data concerning the unknown future.

444
00:41:22.940 --> 00:41:28.060
He deals with future prices and future costs of production.

445
00:41:28.060 --> 00:41:33.180
Accounting and bookkeeping in their endeavors to establish the result of past action are

446
00:41:33.180 --> 00:41:39.620
are in the same position as far as they rely upon the estimation of fixed equipment, inventories

447
00:41:39.620 --> 00:41:41.780
and receivables.

448
00:41:41.780 --> 00:41:48.340
In spite of all these uncertainties, economic calculation can achieve its tasks.

449
00:41:48.340 --> 00:41:54.000
For these uncertainties do not stem from deficiencies of the system of calculation.

450
00:41:54.000 --> 00:42:01.180
They are inherent in the essence of acting that always deals with the uncertain future.

451
00:42:01.180 --> 00:42:07.340
The idea of rendering purchasing power stable did not originate from endeavors to make economic

452
00:42:07.340 --> 00:42:14.140
calculation more correct. Its source is the wish to create a sphere withdrawn from the

453
00:42:14.140 --> 00:42:22.380
ceaseless flux of human affairs, a realm which the historical process does not affect. Endowments

454
00:42:22.380 --> 00:42:27.920
which were designed to provide in perpetuity for an ecclesiastic body, for a charitable

455
00:42:27.920 --> 00:42:36.920
for a family were long established in land or in disbursement of agricultural products in kind.

456
00:42:36.920 --> 00:42:45.920
Later annuities to be settled in money were added. Endowers and beneficiaries expected that an annuity determined

457
00:42:45.920 --> 00:42:52.920
in terms of a definite amount of precious metals would not be affected by changes in economic conditions.

458
00:42:52.920 --> 00:42:55.920
But these hopes were illusory.

459
00:42:55.920 --> 00:43:00.920
Later generations learned that the plans of their ancestors were not realized.

460
00:43:00.920 --> 00:43:07.920
Stimulated by this experience, they began to investigate how the aims sought could be attained.

461
00:43:07.920 --> 00:43:16.920
Thus they embarked upon attempts to measure changes in purchasing power and to eliminate such changes.

462
00:43:16.920 --> 00:43:26.920
The problem assumed much greater importance when governments initiated their policies of long-term, irredeemable and perpetual loans.

463
00:43:26.920 --> 00:43:37.920
The state, this new deity of the dawning age of statolatry, this eternal and superhuman institution beyond the reach of earthly frailties,

464
00:43:37.920 --> 00:43:44.040
offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable

465
00:43:44.040 --> 00:43:48.120
income secure against all vicissitudes.

466
00:43:48.120 --> 00:43:53.320
It opened a way to free the individual from the necessity of risking and acquiring his

467
00:43:53.320 --> 00:43:59.140
wealth and his income anew each day in the capitalist market.

468
00:43:59.140 --> 00:44:04.440
He who invested his funds in bonds issued by the government and its subdivisions was

469
00:44:04.440 --> 00:44:10.440
He was no longer subject to the inescapable laws of the market and to the sovereignty of the consumers.

470
00:44:10.440 --> 00:44:19.440
He was no longer under the necessity of investing his funds in such a way that they would best serve the wants and needs of the consumers.

471
00:44:19.440 --> 00:44:29.440
He was secure. He was safeguarded against the dangers of the competitive market in which losses are the penalty of inefficiency.

472
00:44:29.440 --> 00:44:37.440
The eternal state had taken him under its wing and guaranteed him the undisturbed enjoyment of his funds.

473
00:44:37.440 --> 00:44:45.940
Henceforth, his income no longer stemmed from the process of supplying the wants of the consumers in the best possible way,

474
00:44:45.940 --> 00:44:52.440
but from the taxes levied by the state's apparatus of compulsion and coercion.

475
00:44:52.440 --> 00:44:57.940
He was no longer a servant of his fellow citizens, subject to their sovereignty.

476
00:44:57.940 --> 00:45:03.940
He was a partner of the government which ruled the people and exacted tribute from them.

477
00:45:03.940 --> 00:45:08.940
What the government paid as interest was less than the market offered,

478
00:45:08.940 --> 00:45:14.940
but this difference was far outweighed by the unquestionable solvency of the debtor,

479
00:45:14.940 --> 00:45:22.940
the state whose revenue did not depend on satisfying the public but on insisting on the payment of taxes.

480
00:45:22.940 --> 00:45:34.440
In spite of the unpleasant experiences with public debts in earlier days, people were ready to trust freely the modernized state of the 19th century.

481
00:45:34.440 --> 00:45:41.940
It was generally assumed that this new state would scrupulously meet its voluntarily contracted obligations.

482
00:45:41.940 --> 00:45:48.440
Capitalists and entrepreneurs were fully aware of the fact that in the market society,

483
00:45:48.440 --> 00:45:55.760
There is no means of preserving acquired wealth other than by acquiring it anew each day in

484
00:45:55.760 --> 00:46:01.960
tough competition with everybody, with the already existing firms as well as with newcomers

485
00:46:01.960 --> 00:46:04.640
operating on a shoestring.

486
00:46:04.640 --> 00:46:10.460
The entrepreneur, grown old and weary and no longer prepared to risk his hard-earned

487
00:46:10.460 --> 00:46:16.040
wealth by new attempts to meet the wants of consumers, and the heir of other people's

488
00:46:16.040 --> 00:46:22.580
Profits, lazy and fully conscious of his own inefficiency, preferred investment in bonds

489
00:46:22.580 --> 00:46:28.640
of the public debt because they wanted to be free from the law of the market.

490
00:46:28.640 --> 00:46:36.620
Now the irredeemable perpetual public debt presupposes the stability of purchasing power.

491
00:46:36.620 --> 00:46:42.040
Although the state and its compulsion may be eternal, the interest paid on the public

492
00:46:42.040 --> 00:46:48.680
Debt could be eternal only if based on a standard of unchanging value.

493
00:46:48.680 --> 00:46:54.840
In this form, the investor who for securities sake shuns the market, entrepreneurship and

494
00:46:54.840 --> 00:47:00.600
investment in free enterprise, and prefers government bonds, is faced again with the

495
00:47:00.600 --> 00:47:05.040
problem of the changeability of all human affairs.

496
00:47:05.040 --> 00:47:10.440
He discovers that in the frame of a market society, there is no room left for wealth

497
00:47:10.440 --> 00:47:13.480
are both not dependent upon the market.

498
00:47:13.480 --> 00:47:19.160
His endeavors to find an inexhaustible source of income fail.

499
00:47:19.160 --> 00:47:25.940
There are in this world no such things as stability and security, and no human endeavors

500
00:47:25.940 --> 00:47:29.300
are powerful enough to bring them about.

501
00:47:29.300 --> 00:47:35.160
There is in the social system of the market society no other means of acquiring wealth

502
00:47:35.160 --> 00:47:40.340
and of preserving it than successful service to the consumers.

503
00:47:40.340 --> 00:47:45.900
The state is, of course, in a position to exact payments from its subjects and to borrow

504
00:47:45.900 --> 00:47:46.900
funds.

505
00:47:46.900 --> 00:47:53.180
However, even the most ruthless government in the long run is not able to defy the laws

506
00:47:53.180 --> 00:47:56.580
determining human life and action.

507
00:47:56.580 --> 00:48:01.820
If the government uses the sums borrowed for investment in those lines in which they best

508
00:48:01.820 --> 00:48:07.660
serve the wants of the consumers, and if it succeeds in these entrepreneurial activities

509
00:48:07.660 --> 00:48:13.860
is in free and equal competition with all private entrepreneurs, it is in the same position

510
00:48:13.860 --> 00:48:20.200
as any other businessman, it can pay interest because it has made surpluses, but if the

511
00:48:20.200 --> 00:48:27.400
government invests funds unsuccessfully and no surplus results, or if it spends the money

512
00:48:27.400 --> 00:48:34.500
for current expenditure, the capital borrowed shrinks or disappears entirely, and no source

513
00:48:34.500 --> 00:48:38.460
is open from which interest and principle could be paid.

514
00:48:38.460 --> 00:48:44.660
Then, taxing the people is the only method available for complying with the articles

515
00:48:44.660 --> 00:48:47.320
of the credit contract.

516
00:48:47.320 --> 00:48:53.640
In asking taxes for such payments, the government makes the citizens answerable for money squandered

517
00:48:53.640 --> 00:48:55.460
in the past.

518
00:48:55.460 --> 00:49:01.300
The taxes paid are not compensated by any present service rendered by the government's

519
00:49:01.300 --> 00:49:02.680
apparatus.

520
00:49:02.680 --> 00:49:09.280
The government pays interest on capital which has been consumed and no longer exists.

521
00:49:09.280 --> 00:49:15.240
The treasury is burdened with the unfortunate results of past policies.

522
00:49:15.240 --> 00:49:21.860
A good case can be made out for short-term government debts under special conditions.

523
00:49:21.860 --> 00:49:27.000
Of course, the popular justification of war loans is nonsensical.

524
00:49:27.000 --> 00:49:32.560
All the materials needed for the conduct of a war must be provided by restriction of

525
00:49:32.560 --> 00:49:40.000
of Civilian Consumption, by using up a part of the capital available and by working harder.

526
00:49:40.000 --> 00:49:44.920
The whole burden of warring falls upon the living generation.

527
00:49:44.920 --> 00:49:50.080
The coming generations are only affected to the extent to which, on account of the war

528
00:49:50.080 --> 00:49:55.940
expenditure, they will inherit less from those now living than they would have if no war

529
00:49:55.940 --> 00:49:58.560
had been fought.

530
00:49:58.560 --> 00:50:05.420
Borrowing a war through loans does not shift the burden to the sons and grandsons. Loans,

531
00:50:05.420 --> 00:50:11.600
in this context, mean funds borrowed from those who have money available for lending.

532
00:50:11.600 --> 00:50:17.900
We do not refer here to credit expansion, of which the main vehicle in present-day America

533
00:50:17.900 --> 00:50:23.920
is borrowing from the commercial banks. It is merely a method of distributing the burden

534
00:50:23.920 --> 00:50:30.880
among the citizens. If the whole expenditure had to be provided by taxes, only those who

535
00:50:30.880 --> 00:50:37.840
have liquid funds could be approached. The rest of the people would not contribute adequately.

536
00:50:37.840 --> 00:50:44.400
Short-term loans can be instrumental in removing such inequalities as they allow for a fair

537
00:50:44.400 --> 00:50:51.640
assessment on the owners of fixed capital. The long-term public and semi-public credit

538
00:50:51.640 --> 00:50:57.100
is a foreign and disturbing element in the structure of a market society.

539
00:50:57.100 --> 00:51:02.280
Its establishment was a futile attempt to go beyond the limits of human action and to

540
00:51:02.280 --> 00:51:08.920
create an orbit of security and eternity removed from the transitoriness and instability of

541
00:51:08.920 --> 00:51:11.040
earthly affairs.

542
00:51:11.040 --> 00:51:17.840
What an arrogant presumption to borrow and to lend money forever and ever, to make contracts

543
00:51:17.840 --> 00:51:23.080
for Eternity, to stipulate for all times to come.

544
00:51:23.080 --> 00:51:28.580
In this respect, it mattered little whether the loans were, in a formal manner, made irredeemable

545
00:51:28.580 --> 00:51:30.840
or not.

546
00:51:30.840 --> 00:51:37.060
Intentionally and practically, they were, as a rule, considered and dealt with as such.

547
00:51:37.060 --> 00:51:42.760
In the heyday of liberalism, some western nations really retired parts of their long-term

548
00:51:42.760 --> 00:51:45.820
debt by honest reimbursement.

549
00:51:45.820 --> 00:51:50.860
But for the most part, new debts were only heaped upon old ones.

550
00:51:50.860 --> 00:51:56.180
The financial history of the last century shows a steady increase in the amount of public

551
00:51:56.180 --> 00:51:58.020
indebtedness.

552
00:51:58.020 --> 00:52:03.940
Nobody believes that the states will eternally drag the burden of these interest payments.

553
00:52:03.940 --> 00:52:10.420
It is obvious that sooner or later all these debts will be liquidated in some way or other,

554
00:52:10.420 --> 00:52:16.820
but certainly not by payment of interest and principle according to the terms of the contract.

555
00:52:16.820 --> 00:52:22.780
A host of sophisticated writers are already busy elaborating the moral palliation for

556
00:52:22.780 --> 00:52:25.940
the day of final settlement.

557
00:52:25.940 --> 00:52:31.900
The most popular of these doctrines is crystallized in the phrase, a public debt is no burden

558
00:52:31.900 --> 00:52:34.940
because we owe it to ourselves.

559
00:52:34.940 --> 00:52:41.820
If this were true, then the wholesale obliteration of the public debt would be an innocuous operation,

560
00:52:41.820 --> 00:52:45.360
a mere act of bookkeeping and accountancy.

561
00:52:45.360 --> 00:52:51.540
The fact is that the public debt embodies claims of people who have in the past entrusted

562
00:52:51.540 --> 00:52:57.880
funds to the government against all those who are daily producing new wealth.

563
00:52:57.880 --> 00:53:03.480
It burdens the producing strata for the benefit of another part of the people.

564
00:53:03.480 --> 00:53:08.580
It is possible to free the producers of new wealth from this burden by collecting the

565
00:53:08.580 --> 00:53:15.480
taxes required for the payments exclusively from the bondholders, but this means undisguised

566
00:53:15.480 --> 00:53:17.400
repudiation.

567
00:53:17.400 --> 00:53:22.920
The fact that economic calculation in terms of money is unequal to the tasks which are

568
00:53:22.920 --> 00:53:29.720
assigned to it in these illusory schemes for establishment of an unrealizable realm of calm

569
00:53:29.720 --> 00:53:36.400
removed from the inescapable limitations of human action and providing eternal security

570
00:53:36.400 --> 00:53:39.240
cannot be called a deficiency.

571
00:53:39.240 --> 00:53:45.240
There are no such things as eternal, absolute and unchanging values.

572
00:53:45.240 --> 00:53:49.600
The search for a standard of such values is vain.

573
00:53:49.600 --> 00:53:55.680
Economic calculation is not imperfect because it does not correspond to the confused ideas

574
00:53:55.680 --> 00:54:02.120
of People Yearning for a Stable Income, Not Dependent on the Productive Processes of Men.