Chapter 12. The Sphere of Economic Calculation. 1. The Character of Monetary Entries.
Economic calculation can comprehend everything that is exchanged against money.
The prices of goods and services are either historical data describing past events or anticipations of probable future events.
Information about a past price conveys the knowledge that one or several acts of interpersonal exchange were affected according to this ratio.
It does not convey directly any knowledge about future prices.
We may often assume that the market conditions which determined the formation of prices in the recent past will not change at all,
or at least not change considerably in the immediate future, so that prices, too, will remain unchanged or change only slightly.
Such expectations are reasonable if the prices concerned were the result of the interaction of many people ready to buy or to sell,
provided the exchange ratios seemed propitious to them, and if the market situation was not influenced by conditions
which are considered as accidental, extraordinary and not likely to return.
However, the main task of economic calculation is not to deal with the problems of unchanging
or only slightly changing market situations and prices, but to deal with change.
The acting individual either anticipates changes which will occur without his own interference
and wants to adjust his actions to this anticipated state of affairs, or he wants to embark upon
a project which will change conditions even if no other factors produce a change.
The prices of the past are for him merely starting points in his endeavors to anticipate
future prices.
Historians and statisticians content themselves with prices of the past.
Man looks at the prices of the future, be it only the immediate future of the next hour,
day or month.
For him, the prices of the past are merely a help in anticipating future prices.
Not only in his preliminary calculation of the expected outcome of planned action, but
no less in his attempts to establish the result of his past transactions, he is primarily
be concerned with future prices.
In balance sheets and in profit and loss statements, the result of past action becomes visible
as the difference between the money equivalent of funds owned, total assets minus total
liabilities at the beginning and at the end of the period reported, and as the difference
between the money equivalent of costs incurred and gross proceeds earned.
In such statements it is necessary to enter the estimated money equivalent of all assets
and liabilities other than cash. These items should be appraised according to the prices
at which they could probably be sold in the future, or as is especially the case with
equipment for production processes, in reference to the prices to be expected in the sale of
merchandise manufactured with their aid. However, old business customs and the provisions of
of commercial law and of the tax laws have brought about a deviation from sound principles
of accounting which aim merely at the best attainable degree of correctness.
These customs and laws are not so much concerned with correctness in balance sheets and profit
and loss statements as with the pursuit of other aims.
Commercial legislation aims at a method of accounting which could indirectly protect
Creditors Against Loss. It tends more or less to an appraisal of assets below their estimated
market value in order to make the net profit and the total funds owned appear smaller than
they really are. Thus a safety margin is created, which reduces the danger that, to the prejudice
of creditors, too much might be withdrawn from the firm as alleged profit, and that
The idea is to raise effective tax rates without making this raise visible in the nominal tax
rate schedules.
We must therefore distinguish between economic calculation as it is practiced by businessmen
planning future transactions, and those computations of business facts which serve other purposes.
The determination of taxes due and economic calculation are two different things.
If a law imposing a tax upon the keeping of domestic servants prescribes that one male
All servants should be counted as two female servants.
Nobody would interpret such a provision as anything other than a method for determining
the amount of tax due.
Likewise, if an inheritance tax law prescribes that securities should be appraised at the
stock market quotation on the day of the decedent's death, we are merely provided with a way of
determining the amount of the tax.
The duly kept accounts in a system of correct bookkeeping are accurate as to dollars and
cents.
They display an impressive precision, and the numerical exactitude of their items seems
to remove all doubts.
In fact, the most important figures they contain are speculative anticipations of future market
constellations.
It is a mistake to compare the items of any commercial account to the items used in purely
and a technological reckoning, for example, in the design for the construction of a machine.
The engineer, as far as he attends to the technological side of his job, applies only
numerical relations established by the methods of the experimental natural sciences.
The businessman cannot avoid numerical terms which are the outcome of his understanding
of future human conduct.
The main thing in balance sheets and in profit and loss statements is the evaluation of assets
and liabilities not embodied in cash.
All such balances and statements are virtually interim balances and interim statements.
They describe as well as possible the state of affairs at an arbitrarily chosen instant,
while life and action go on and do not stop.
It is possible to wind up individual business units, but the whole system of social production
never ceases.
Nor are the assets and liabilities consisting in cash exempt from the indeterminacy inherent
in all business accounting items.
They depend on the future constellation of the market no less than any item of inventory
or equipment.
The numerical exactitude of business accounts and calculations must not prevent us from
realizing the uncertainty and speculative character of their items and of all computations
based on them.
Yet these facts do not detract from the efficiency of economic calculation.
Economic calculation is as efficient as it can be.
No reform could add to its efficiency.
that renders to acting man all the services which he can obtain from numerical computation.
It is, of course, not a means of knowing future conditions with certainty, and it does not
deprive action of its speculative character.
But this can be considered a deficiency only by those who do not come to recognize the
facts that life is not rigid, that all things are perpetually fluctuating, and that men
Man has no certain knowledge about the future.
It is not the task of economic calculation to expand man's information about future conditions.
Its task is to adjust his actions as well as possible to his present opinion concerning
want satisfaction in the future.
For this purpose, acting man needs a method of computation, and computation requires a
2. THE LIMITS OF ECONOMIC CALCULATION
Economic calculation cannot comprehend things which are not sold and bought against money.
There are things which are not for sale, and for whose acquisition sacrifices other than
money and money's worth must be expended.
He who wants to train himself for great achievements must employ many means, some of which may
require expenditure of money.
But the essential things to be devoted to such an endeavor are not purchasable.
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.
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.
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.
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.
However, all this does not in the least impair the usefulness of economic calculation.
Those things which do not enter into the items of accountancy and calculation are either
ends or goods of the first order.
No calculation is required to acknowledge them fully and to make due allowance for them.
All that acting man needs in order to make his choice is to contrast them with the total
Let us assume that a town council has to decide between two water supply projects.
One of them implies the demolition of a historical landmark, while the other, at the cost of
an increase in money expenditure, spares this landmark.
The fact that the feelings which recommend the conservation of the monument cannot be
that be estimated in a sum of money does not in any way impede the councilman's decision.
The values that are not reflected in any monetary exchange ratio are, on the contrary, by this
very fact lifted into a particular position which makes the decision rather easier.
No complaint is less justified than the lamentation that the computation methods of the market
do not comprehend things not vendable.
Moral and aesthetic values do not suffer any damage on account of this fact.
Money, money prices, market transactions, and economic calculation based upon them are
the main targets of criticism.
Loquacious sermonizers disparage Western civilization as a mean system of mongering and peddling.
complacency, self-righteousness, and hypocrisy exult in scorning the dollar philosophy of our age.
Neurotic reformers, mentally unbalanced literati, and ambitious demagogues
take pleasure in indicting rationality and in preaching the gospel of the irrational.
In the eyes of these babblers, money and calculation are the source of the most serious evils.
However, the fact that men have developed a method of ascertaining as far as possible
the expediency of their actions and of removing uneasiness in the most practical and economic
way does not prevent anybody from arranging his conduct according to the principle he
considers to be right.
The materialism of the stock exchange and of business accountancy does not hinder anybody
from living up to the standards of Thomas Achampus, or from dying for a noble cause.
The fact that the masses prefer detective stories to poetry, and that it therefore pays
better to write the former than the latter, is not caused by the use of money and monetary
accounting.
It is not the fault of money that there are gangsters, thieves, murderers, prostitutes,
corruptible officials and judges.
It is not true that honesty does not pay.
It pays for those who prefer fidelity to what they consider to be right, to the advantages
which they could derive from a different attitude.
Other critics of economic calculation fail to realize that it is a method available only
to people acting in the economic system of the division of labor in a social order based
upon private ownership of the means of production.
It can only serve the considerations of individuals or groups of individuals operating in the
institutional setting of this social order.
It is, consequently, a calculation of private profits and not of social welfare.
This means that the prices of the market are the ultimate fact for economic calculation.
It cannot be applied for considerations whose standard is not the demand of the consumers
as manifested on the market, but the hypothetical valuations of a dictatorial body managing
all national or earthly affairs.
He who seeks to judge actions from the point of view of a pretended social value, that
is, from the point of view of the whole society, and to criticize them by comparison with the
events in an imaginary socialist system in which his own will is supreme, has no use
for Economic Calculation.
Economic calculation in terms of money prices is the calculation of entrepreneurs producing
for the consumers of a market society.
It is of no avail for other tasks.
He who wants to employ economic calculation must not look at affairs in the manner of
a despotic mind.
These can be used for calculation by the entrepreneurs, capitalists, landowners, and wage earners
of a capitalist society.
For matters beyond the pursuits of these categories, it is inadequate.
It is nonsensical to evaluate in money objects which are not negotiated on the market, and
to employ in calculations arbitrary items which do not refer to reality.
The law determines the amount which ought to be paid as indemnification for having caused
a man's death.
But the prescription enacted for the determination of the amends due does not mean that there
is a price for human life.
Where there is slavery, there are market prices of slaves.
Where there is no slavery, man, human life and health are race extra commerciam.
In a society of free men, the preservation of life and health are ends, not means.
They do not enter into any process of accounting means.
It is possible to determine in terms of money prices the sum of the income or the wealth
of a number of people.
But it is nonsensical to reckon national income or national wealth.
As soon as we embark upon considerations foreign to the reasoning of a man operating within
the pale of a market society, we are no longer helped by monetary calculation methods.
The attempts to determine in money the wealth of a nation or of the whole of mankind are
as childish as the mystic efforts to solve the riddles of the universe by worrying about
the dimensions of the pyramid of keyops.
If a business calculation values a supply of potatoes at $100, the idea is that it will
be possible to sell it or to replace it against this sum.
If a whole entrepreneurial unit is estimated $1 million, it means that one expects to sell
it for this amount.
But what is the meaning of the items in a statement of a nation's total wealth?
What is the meaning of the computation's final result?
What must be entered into it and what is to be left outside?
Is it correct or not to enclose the value of the country's climate and the people's
innate abilities and acquired skill?
The businessman can convert his property into money, but a nation cannot.
The money equivalents as used in acting and in economic calculation are money prices,
that is, exchange ratios between money and other goods and services.
The prices are not measured in money, they consist in money.
Prices are either prices of the past or expected prices of the future.
A price is necessarily a historical fact, either of the past or of the future.
There is nothing in prices which permits one to liken them to the measurement of physical
and chemical phenomena.
3.
The Changeability of Prices
Exchange ratios are subject to perpetual change, because the conditions which produce them
are perpetually changing.
The value that an individual attaches both to money and to various goods and services
is the outcome of a moment's choice.
Every later instant may generate something new, and bring about other considerations
and valuations.
Not that prices are fluctuating, but that they do not alter more quickly could fairly
be deemed a problem requiring explanation.
Every experience teaches people that the exchange ratios of the market are mutable.
One would assume that their ideas about prices would take full account of this fact.
Nevertheless, all popular notions of production and consumption, marketing and prices are
more or less contaminated by a vague and contradictory notion of price rigidity.
The layman is prone to consider the preservation of yesterday's price structure both as normal
and as fair, and to condemn changes in the exchange ratios as a violation of the rules
of nature and of justice.
It would be a mistake to explain these popular beliefs as a precipitate of old opinions conceived
in earlier ages of more stable conditions of production and marketing.
It is questionable whether or not prices were less changeable in those older days.
On the contrary, it could rather be asserted that the merger of local markets into larger
national markets, the final emergence of a world-embracing world market, and the evolution
of commerce aiming at continuously supplying the consumers, have made price changes less
frequent and less sharp.
In pre-capitalistic times there was more stability in technological methods of production, but
there was much more irregularity in supplying the various local markets and in adjusting
supply to their changing demands.
But even if it were true that prices were somewhat more stable in a remote past, it
would be of little avail for our age.
The popular notions about money and money prices are not derived from ideas formed in
of the Past. It would be wrong to interpret them as atavistic remnants. Under modern conditions,
every individual is daily faced with so many problems of buying and selling that we are
right in assuming that his thinking about these matters is not simply a thoughtless
reception of traditional ideas.
It is easy to understand why those whose short-run interests are hurt by a change in prices resent
such changes, emphasize that the previous prices were not only fairer but also more
normal and maintain that price stability is in conformity with the laws of nature and
of morality.
But every change in prices furthers the short-run interests of other people.
Those favored will certainly not be prompted by the urge to stress the fairness and normalcy
of price rigidity.
Neither atavistic reminiscences nor the state of selfish group interests can explain the
popularity of the idea of price stability.
Its roots are to be seen in the fact that notions concerning social relations have been
constructed according to the pattern of the natural sciences.
The economists and sociologists who aimed at shaping the social sciences according to
and the pattern of physics or physiology only indulged in a way of thinking which popular
fallacies had adopted long before.
Even the classical economists were slow to free themselves from this error.
With them, value was something objective, that is, a phenomenon of the external world
and a quality inherent in things, and therefore measurable.
They utterly failed to comprehend the purely human and voluntaristic character of value judgments.
As far as we can see today, it was Samuel Bailey who first disclosed what is going on
in preferring one thing to another.
But his book was overlooked, as were the writings of other precursors of the subjective theory
of value.
It is not only a task of economic science to discard the errors concerning measurability
in the field of action, it is no less a task of economic policy.
For the failures of present-day economic policies are, to some extent, due to the lamentable
confusion brought about by the idea that there is something fixed and therefore measurable
in inter-human relations.
4.
Stabilization An outgrowth of all these errors is the idea
of Stabilization. Shortcomings in the government's handling of monetary matters and the disastrous
consequences of policies aimed at lowering the rate of interest and at encouraging business
activities through credit expansion gave birth to the ideas which finally generated the slogan
Stabilization. One can explain its emergence and its popular appeal. One can understand
Considered as the fruit of the last 150 years' history of currency and banking, one can,
as it were, plead extenuating circumstances for the error involved.
But no such sympathetic appreciation can render its fallacies any more tenable.
Stability, the establishment of which the program of stabilization aims at, is an empty
and contradictory notion.
The urge toward action, that is, improvement of the conditions of life, is inborn in man.
Man himself changes from moment to moment, and his valuations, volitions and acts change
with him.
In the realm of action there is nothing perpetual but change.
There is no fixed point in this ceaseless fluctuation other than the eternal, aprioristic
categories of action.
It is vain to sever valuation and action from man's unsteadiness and the changeability
of his conduct, and to argue as if there were in the universe eternal values independent
of human value judgments, and suitable to serve as a yardstick for the appraisal of
real action.
All methods suggested for a measurement of the changes in the monetary unit's purchasing
Purchasing Power are more or less unwittingly founded on the illusory image of an eternal
and immutable being who determines by the application of an immutable standard the quantity
of satisfaction which a unit of money conveys to him.
It is a poor justification of this ill-thought idea that what is wanted is merely to measure
changes in the purchasing power of money.
The crux of the stability notion lies precisely in this concept of purchasing power.
The layman, laboring under the ideas of physics, once considered money as a yardstick of prices.
He believed that fluctuations of exchange ratios occur only in the relations between
the various commodities and services, and not also in the relation between money and
and the Totality of Goods and Services.
Later people reversed the argument.
It was no longer money to which constancy of value was attributed, but the totality
of things vendable and purchasable.
People began to devise methods for working up complexes of commodity units to be contrasted
to the monetary unit.
Results to find indexes for the measurement of purchasing power silenced all scruples.
Both the doubtfulness and the incomparability of the price records employed and the arbitrary
character of the procedures used for the computation of averages were disregarded.
Irving Fisher, the eminent economist who was the champion of the American stabilization
Movement, contrasts with the dollar, a basket, containing all the goods the housewife buys
on the market for the current provision of her household.
In the proportion in which the amount of money required for the purchase of the content of
this basket changes, the purchasing power of the dollar has changed.
The goal assigned to the policy of stabilization is the preservation of the immutability of
this money expenditure.
This would be all right if the housewife and her imaginary basket were constant elements,
if the basket were always to contain the same goods and the same quantity of each, and if
the role which this assortment of goods plays in the family's life were not to change.
But we are living in a world in which none of these conditions is realized.
First of all, there is the fact that the quality of the commodities produced and consumed changes
It is a mistake to identify wheat with wheat, not to speak of shoes, hats and other manufacturers.
The great price differences in the synchronous sales of commodities which mundane speech
and statistics arrange in the same class clearly evidence this truism.
An idiomatic expression asserts that two peas are alike, but buyers and sellers distinguish
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.
Quality means, in this connection, all those properties to which the buyers and would-be buyers pay heed.
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.
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.
A measurement of purchasing power would have to rely upon the prices of the goods and services
of the first order, and, what is more, of all of them.
To employ the prices of the producer's goods is not helpful because it could not avoid
counting the various stages of the production of one and the same consumer's good several
times, and thus falsifying the result.
A restriction to a group of selected goods would be quite arbitrary, and therefore vicious.
But even apart from all these insurmountable obstacles, the task would remain insoluble.
For not only do the technological features of commodities change, and new kinds of goods
appear while many old ones disappear, valuations change too, and they cause changes in demand
and production.
The assumptions of the measurement doctrine would require men whose wants and valuations
are rigid.
Only if people were to value the same things always in the same way could we consider price
changes as expressive of changes in the power of money to buy things.
As it is impossible to establish the total amount of money spent at a given fraction
Statisticians must rely upon the prices paid for individual commodities.
This raises two further problems, for which there is no apodictic solution.
It becomes necessary to attach to the various commodities coefficients of importance.
It would be manifestly wrong to let the prices of various commodities enter into the computation
without taking into account the different roles they play in the total system of the
individual's households.
But the establishment of such proper weighting is, again, arbitrary.
Secondly, it becomes necessary to compute averages out of the data collected and adjusted.
But there exist different methods for the computation of averages.
There are the arithmetic, the geometric, the harmonic averages.
There is the quasi-average known as the median. Each of them leads to different results. None
of them can be recognized as the unique way to attain a logically unassailable answer.
The decision in favor of one of these methods of computation is arbitrary.
If all human conditions were unchangeable, if all people were always to repeat the same
Some actions, because their uneasiness and their ideas about its removal, were constant.
Or if we were in a position to assume that changes in these factors occurring with some
individuals or groups are always outweighed by opposite changes with other individuals
or groups, and therefore do not affect total demand and total supply, we would live in
a world of stability.
But the idea that in such a world money's purchasing power could change is contradictory.
As will be shown later, changes in the purchasing power of money must necessarily affect the
prices of different commodities and services at different times and to different extents.
They must consequently bring about changes in demand and supply, in production and consumption.
The idea implied in the inappropriate term level of prices, as if, other things being
equal, all prices could rise or drop evenly, is untenable.
Other things cannot remain equal if the purchasing power of money changes.
In the field of praxeology and economics, no sense can be given to the notion of measurement.
In the hypothetical state of rigid conditions there are no changes to be measured.
In the actual world of change there are no fixed points, dimensions or relations which
could serve as a standard.
The monetary unit's purchasing power never changes evenly with regard to all things vendable
and purchasable.
The notions of stability and stabilization are empty if they do not refer to a state
of Rigidity and its Preservation.
However, this state of rigidity cannot even be thought out consistently to its ultimate
logical consequences.
Still less can it be realized.
Where there is action, there is change.
Action is a lever of change.
The pretentious solemnity which statisticians and statistical bureaus display in computing
indexes of purchasing power and cost of living is out of place.
These index numbers are at best rather crude and inaccurate illustrations of changes which
have occurred.
In periods of slow alterations in the relation between the supply of and the demand for money,
they do not convey any information at all.
In periods of inflation, and consequently of sharp price changes, they provide a rough
image of events which every individual experiences in his daily life.
A judicious housewife knows much more about price changes as far as they affect her own
household than the statistical averages can tell.
She has little use for computations disregarding changes both in quality and in the amount
of goods which she is able or permitted to buy at the prices entering into the computation.
If she measures the changes for her personal appreciation by taking the prices of only
two or three commodities as a yardstick, she is no less scientific and no more arbitrary
than the sophisticated mathematicians in choosing their methods for the manipulation of the
data of the market.
In practical life, nobody lets himself be fooled by index numbers.
Nobody agrees with the fiction that they are to be considered as measurements.
Where quantities are measured, all further doubts and disagreements concerning their
dimensions cease.
These questions are settled.
Nobody ventures to argue with the meteorologists about their measurements of temperature, humidity,
atmospheric pressure and other meteorological data.
But on the other hand, nobody acquiesces in an index number if he does not expect a personal
advantage from its acknowledgement by public opinion.
The establishment of index numbers does not settle disputes.
It merely shifts them into a field in which the clash of antagonistic opinions and interests
is irreconcilable.
Human action originates change.
As far as there is human action, there is no stability but ceaseless alteration.
The historical process is a sequence of changes.
It is beyond the power of man to stop it and to bring about an age of stability in which
all history comes to a standstill.
It is man's nature to strive after improvement, to beget new ideas and to rearrange the conditions
The Prices of the Market are historical facts, expressive of a state of affairs that prevailed
at a definite instant of the irreversible historical process.
In the praxeological orbit, the concept of measurement does not make any sense.
In the imaginary and, of course, unrealizable state of rigidity and stability, there are
There are no changes to be measured. In the actual world of permanent change, there are
no fixed points, objects, qualities or relations with regard to which changes could be measured.
5. The Root of the Stabilization Idea
Economic calculation does not require monetary stability in the sense in which this term
is used by the champions of the stabilization movement.
The fact that rigidity in the monetary unit's purchasing power is unthinkable and unrealizable
does not impair the methods of economic calculation.
What economic calculation requires is a monetary system whose functioning is not sabotaged
by government interference.
The endeavors to expand the quantity of money in circulation, either in order to increase
is the government's capacity to spend, or in order to bring about a temporary lowering
of the rate of interest, disintegrate all currency matters and derange economic calculation.
The first aim of monetary policy must be to prevent governments from embarking upon inflation
and from creating conditions which encourage credit expansion on the part of banks.
But this program is very different from the confused and self-contradictory program of
stabilizing purchasing power.
For the sake of economic calculation, all that is needed is to avoid great and abrupt
fluctuations in the supply of money.
Gold, and up to the middle of the 19th century, silver, served very well all the purposes
of economic calculation.
Precisions in the relation between the supply of and the demand for the precious metals,
and the resulting alterations in purchasing power, went on so slowly that the entrepreneur's
economic calculation could disregard them without going too far afield.
Precision is unattainable in economic calculation, quite apart from the shortcomings emanating
from not paying due consideration to monetary changes.
Incidentally, no practical calculation can ever be precise.
The formula underlying the process of calculation may be exact.
The calculation itself depends on the approximate establishment of quantities and is therefore
necessarily inaccurate.
Economics is an exact science of real things.
But as soon as price data are introduced into the chain of thought, exactitude is abandoned
and economic history is substituted for economic theory.
The planning businessman cannot help employing data concerning the unknown future.
He deals with future prices and future costs of production.
Accounting and bookkeeping in their endeavors to establish the result of past action are
are in the same position as far as they rely upon the estimation of fixed equipment, inventories
and receivables.
In spite of all these uncertainties, economic calculation can achieve its tasks.
For these uncertainties do not stem from deficiencies of the system of calculation.
They are inherent in the essence of acting that always deals with the uncertain future.
The idea of rendering purchasing power stable did not originate from endeavors to make economic
calculation more correct. Its source is the wish to create a sphere withdrawn from the
ceaseless flux of human affairs, a realm which the historical process does not affect. Endowments
which were designed to provide in perpetuity for an ecclesiastic body, for a charitable
for a family were long established in land or in disbursement of agricultural products in kind.
Later annuities to be settled in money were added. Endowers and beneficiaries expected that an annuity determined
in terms of a definite amount of precious metals would not be affected by changes in economic conditions.
But these hopes were illusory.
Later generations learned that the plans of their ancestors were not realized.
Stimulated by this experience, they began to investigate how the aims sought could be attained.
Thus they embarked upon attempts to measure changes in purchasing power and to eliminate such changes.
The problem assumed much greater importance when governments initiated their policies of long-term, irredeemable and perpetual loans.
The state, this new deity of the dawning age of statolatry, this eternal and superhuman institution beyond the reach of earthly frailties,
offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable
income secure against all vicissitudes.
It opened a way to free the individual from the necessity of risking and acquiring his
wealth and his income anew each day in the capitalist market.
He who invested his funds in bonds issued by the government and its subdivisions was
He was no longer subject to the inescapable laws of the market and to the sovereignty of the consumers.
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.
He was secure. He was safeguarded against the dangers of the competitive market in which losses are the penalty of inefficiency.
The eternal state had taken him under its wing and guaranteed him the undisturbed enjoyment of his funds.
Henceforth, his income no longer stemmed from the process of supplying the wants of the consumers in the best possible way,
but from the taxes levied by the state's apparatus of compulsion and coercion.
He was no longer a servant of his fellow citizens, subject to their sovereignty.
He was a partner of the government which ruled the people and exacted tribute from them.
What the government paid as interest was less than the market offered,
but this difference was far outweighed by the unquestionable solvency of the debtor,
the state whose revenue did not depend on satisfying the public but on insisting on the payment of taxes.
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.
It was generally assumed that this new state would scrupulously meet its voluntarily contracted obligations.
Capitalists and entrepreneurs were fully aware of the fact that in the market society,
There is no means of preserving acquired wealth other than by acquiring it anew each day in
tough competition with everybody, with the already existing firms as well as with newcomers
operating on a shoestring.
The entrepreneur, grown old and weary and no longer prepared to risk his hard-earned
wealth by new attempts to meet the wants of consumers, and the heir of other people's
Profits, lazy and fully conscious of his own inefficiency, preferred investment in bonds
of the public debt because they wanted to be free from the law of the market.
Now the irredeemable perpetual public debt presupposes the stability of purchasing power.
Although the state and its compulsion may be eternal, the interest paid on the public
Debt could be eternal only if based on a standard of unchanging value.
In this form, the investor who for securities sake shuns the market, entrepreneurship and
investment in free enterprise, and prefers government bonds, is faced again with the
problem of the changeability of all human affairs.
He discovers that in the frame of a market society, there is no room left for wealth
are both not dependent upon the market.
His endeavors to find an inexhaustible source of income fail.
There are in this world no such things as stability and security, and no human endeavors
are powerful enough to bring them about.
There is in the social system of the market society no other means of acquiring wealth
and of preserving it than successful service to the consumers.
The state is, of course, in a position to exact payments from its subjects and to borrow
funds.
However, even the most ruthless government in the long run is not able to defy the laws
determining human life and action.
If the government uses the sums borrowed for investment in those lines in which they best
serve the wants of the consumers, and if it succeeds in these entrepreneurial activities
is in free and equal competition with all private entrepreneurs, it is in the same position
as any other businessman, it can pay interest because it has made surpluses, but if the
government invests funds unsuccessfully and no surplus results, or if it spends the money
for current expenditure, the capital borrowed shrinks or disappears entirely, and no source
is open from which interest and principle could be paid.
Then, taxing the people is the only method available for complying with the articles
of the credit contract.
In asking taxes for such payments, the government makes the citizens answerable for money squandered
in the past.
The taxes paid are not compensated by any present service rendered by the government's
apparatus.
The government pays interest on capital which has been consumed and no longer exists.
The treasury is burdened with the unfortunate results of past policies.
A good case can be made out for short-term government debts under special conditions.
Of course, the popular justification of war loans is nonsensical.
All the materials needed for the conduct of a war must be provided by restriction of
of Civilian Consumption, by using up a part of the capital available and by working harder.
The whole burden of warring falls upon the living generation.
The coming generations are only affected to the extent to which, on account of the war
expenditure, they will inherit less from those now living than they would have if no war
had been fought.
Borrowing a war through loans does not shift the burden to the sons and grandsons. Loans,
in this context, mean funds borrowed from those who have money available for lending.
We do not refer here to credit expansion, of which the main vehicle in present-day America
is borrowing from the commercial banks. It is merely a method of distributing the burden
among the citizens. If the whole expenditure had to be provided by taxes, only those who
have liquid funds could be approached. The rest of the people would not contribute adequately.
Short-term loans can be instrumental in removing such inequalities as they allow for a fair
assessment on the owners of fixed capital. The long-term public and semi-public credit
is a foreign and disturbing element in the structure of a market society.
Its establishment was a futile attempt to go beyond the limits of human action and to
create an orbit of security and eternity removed from the transitoriness and instability of
earthly affairs.
What an arrogant presumption to borrow and to lend money forever and ever, to make contracts
for Eternity, to stipulate for all times to come.
In this respect, it mattered little whether the loans were, in a formal manner, made irredeemable
or not.
Intentionally and practically, they were, as a rule, considered and dealt with as such.
In the heyday of liberalism, some western nations really retired parts of their long-term
debt by honest reimbursement.
But for the most part, new debts were only heaped upon old ones.
The financial history of the last century shows a steady increase in the amount of public
indebtedness.
Nobody believes that the states will eternally drag the burden of these interest payments.
It is obvious that sooner or later all these debts will be liquidated in some way or other,
but certainly not by payment of interest and principle according to the terms of the contract.
A host of sophisticated writers are already busy elaborating the moral palliation for
the day of final settlement.
The most popular of these doctrines is crystallized in the phrase, a public debt is no burden
because we owe it to ourselves.
If this were true, then the wholesale obliteration of the public debt would be an innocuous operation,
a mere act of bookkeeping and accountancy.
The fact is that the public debt embodies claims of people who have in the past entrusted
funds to the government against all those who are daily producing new wealth.
It burdens the producing strata for the benefit of another part of the people.
It is possible to free the producers of new wealth from this burden by collecting the
taxes required for the payments exclusively from the bondholders, but this means undisguised
repudiation.
The fact that economic calculation in terms of money is unequal to the tasks which are
assigned to it in these illusory schemes for establishment of an unrealizable realm of calm
removed from the inescapable limitations of human action and providing eternal security
cannot be called a deficiency.
There are no such things as eternal, absolute and unchanging values.
The search for a standard of such values is vain.
Economic calculation is not imperfect because it does not correspond to the confused ideas
of People Yearning for a Stable Income, Not Dependent on the Productive Processes of Men.