Chapter 7. Conclusion. Economics and Public Policy.
1. Economics. Its nature and its uses.
Economics provides us with true laws of the type if A, then B, then C, etc.
etc. Some of these laws are true all the time, that is, A always holds, the law of diminishing
marginal utility, time preference, etc. Others require A to be established as true before
the consequence can be affirmed in practice. The person who identifies economic laws in
in Practice and uses them to explain complex economic fact is then acting as an economic
historian rather than as an economic theorist.
He is an historian when he seeks the causal explanation of past facts.
He is a forecaster when he attempts to predict future facts.
In either case, he uses absolutely true laws, but must determine when any particular law
applies to a given situation.
Furthermore, the laws are necessarily qualitative, rather than quantitative, and hence, when
the forecaster attempts to make quantitative predictions, he is going beyond the knowledge
provided by economic science.
It has not often been realized that the functions of the economist on the free market differ
sharply from those of the economist on the hampered market.
What can the economist do on the purely free market?
He can explain the workings of the market economy, a vital task, especially since the
The untutored person tends to regard the market economy as sheer chaos.
But he can do little else.
Contrary to the pretensions of many economists, he is of little aid to the businessman.
He cannot forecast future consumer demands and future costs as well as the businessman.
If he could, then he would be the businessman.
The entrepreneur is where he is precisely because of his superior forecasting ability
on the market.
The pretensions of econometricians and other model builders that they can precisely forecast
the economy will always founder on the simple but devastating query, if you can forecast
so well, why are you not doing so on the stock market, where accurate forecasting reaps such
rich rewards?
It is beside the point to dismiss such a query, as many have done, by calling it anti-intellectual,
for this is precisely the acid test of the would-be economic oracle.
Professor Mises has shown the fallacy of the very popular term model building, which has,
with so many other scientific fallacies been taken over misleadingly by analogy from the
physical sciences, in this case, engineering.
The engineering model furnishes the exact quantitative dimensions in proportionate miniature
of the real world.
No economic model can do anything of the kind.
In recent years, new mathematical statistical disciplines have developed, such as operations
research and linear programming, which have professed to help the businessman make his
concrete decisions.
If these claims are valid, then such disciplines are not economics at all, but a sort of management
technology.
Fortunately, operations research has developed into a frankly separate discipline with its
own professional society and journal.
We hope that all other such movements will do the same.
The economist is not a business technologist.
The economist's role in a free society, then, is purely educational.
But when government or any other agency using violence intervenes in the market, the usefulness
of the economist expands.
The reason is that no one knows, for example, what future consumer demands in some line
will be.
Here, in the realm of the free market, the economist must give way to the entrepreneurial
forecaster.
But government actions are very different, because the problem now is precisely what
the consequences of governmental acts will be.
In short, the economist may be able to tell what the effects of an increased demand for
butter will be, but this is of little practical use, since the businessman is primarily interested
not in this chain of consequences, which he knows well enough for his purposes, but in
whether or not such an increase will take place.
For a governmental decision, on the other hand, the whether is precisely what the citizenry
must decide.
So here the economist, with his knowledge of the various alternative consequences, comes
into his own.
Furthermore, the consequences of a governmental act being indirect are much more difficult
to analyze than the consequences of an increase in consumer demand for a product.
Longer chains of praxeological reasoning are required, particularly for the needs of the
decision-makers.
The consumer's decision to purchase butter and the entrepreneur's decision about entering
Proceduring into the butter business do not require praxeological reasoning, but rather
insight into the concrete data.
The judging and evaluation of a governmental act, for example, an income tax, however,
require long chains of praxeological reasoning.
Hence, for two reasons, because the initial data are here supplied to him, and because
As the consequences must be analytically explored, the economist is far more useful as a political
economist than as a business advisor or technologist.
In a hampered market economy, indeed, the economist often becomes useful to the businessman,
where chains of economic reasoning become important, for example, in analyzing the effects
of Credit Expansion or an Income Tax and, in many cases, in spreading this knowledge
to the outside world.
The political economist, in fact, is indispensable to any citizen who frames ethical judgments
in politics.
Economics can never by itself supply ethical dicta, but it does furnish existential laws
that cannot be ignored by anyone framing ethical conclusions, just as no one can rationally
decide whether product X is a good or a bad food until its consequences on the human body
are ascertained and taken into account.
2. Implicit Moralizing, The Failures of Welfare Economics
As we have reiterated, economics cannot by itself establish ethical judgments, and it
can and should be developed in a vert-frei manner.
This is true whether we adopt the modern disjunction between fact and value, or whether we adhere
to the classical philosophical tradition that there can be a science of ethics.
Or even if there can be, economics may not by itself establish it.
Yet economics, especially of the modern welfare variety, is filled with implicit moralizing,
with unanalyzed ad hoc ethical statements that are either silently or under elaborate
camouflage slipped into the deductive system.
Elsewhere we have analyzed many of these attempts, for example, the old and the new welfare economics.
Interpersonal utility comparisons, the compensation principle, the social welfare function, are
typical examples.
We have also seen the absurdity of the search for criteria of just taxation, before the
The Justice of Taxation itself has been proven.
Other instances of illegitimate moralizing are the doctrine that product differentiation
harms consumers by raising prices and restricting production, a doctrine based on the false
assumptions that consumers do not want these differences and that costs remain the same,
The spurious proof that, given the total tax bill, the income tax is better for consumers
than excise taxes, and the mythical distinction between social cost and private cost.
Neither can economists legitimately adopt the popular method of maintaining ethical
Ethical Neutrality, while pronouncing on policy, that is, taking not their own, but the community's
values or those they attribute to the community, and simply advising others how to attain these
ends.
An ethical judgment is an ethical judgment, no matter who or how many people make it.
does not relieve the economist of the responsibility for having made ethical judgments to plead
that he has borrowed them from others.
The economist who calls for egalitarian measures because the people want more equality is no
longer strictly an economist.
He has abandoned ethical neutrality, and he abandons it not a whit more if he calls for
for Equality simply because he wants it so. Value judgments remain only value judgments.
They receive no special sanctification by virtue of the number of their adherents, and
uncritically adhering to all the prevailing ethical judgments is simply to engage in apologetics
for the Status Quo.
I do not at all mean to deprecate value judgments.
Men do and must always make them.
But I do say that the injection of value judgments takes us beyond the bounds of economics per
se and into another realm, the realm of rational ethics or personal whim, depending on one's
philosophic convictions.
The economist, of course, is a technician who explains the consequences of various actions.
But he cannot advise a man on the best route to achieve certain ends without committing
himself to those ends.
An economist hired by a businessman implicitly commits himself to the ethical valuation that
The Theory of Money and Credit
The Utilitarian Economist tries to escape this policy dilemma by assuming that everyone's
ends are really the same, at least ultimately.
If everyone's ends are the same, then an economist, by showing that policy A cannot lead to goal
Rule G is justified in saying that A is a bad policy, since everyone values A in order
to achieve G. Thus, if two groups argue over price controls, the utilitarian tends to assume
that the proven consequences of maximum price controls, shortages, disruptions, etc., will
will make the policy bad from the point of view of the advocates of the legislation.
Yet the advocates may favor price controls anyway for other reasons, love of power, the
building of a political machine and its consequent patronage, desire to injure the masses, etc.
It is certainly overly sanguine to assume that everyone's ends are the same and therefore
Or the utilitarian shortcut to policy conclusions is also inadequate.
It is probably true, of course, that general knowledge of these consequences of price control
would considerably reduce social support for this measure.
But this is a politico-psychological, not a praxeological, statement.
3. Economics and Social Ethics If the economist-quoi-economist must be
Wertfrei, does this leave him any room for significant pronouncements on questions of
public policy? Superficially, it would seem not, but this entire work has been testimony
to the contrary. Briefly, the Wertfrei economist can do two things. 1. He can engage
in a Praxeological Critique of Inconsistent and Meaningless Ethical Programs, as we have
tried to show in the preceding chapter, and two, he can explicate analytically all the myriad
consequences of different political systems and different methods of government intervention.
In the former task, we have seen that many prominent ethical critiques of the market
are inconsistent or meaningless, whereas attempts to prove the same errors in regard to the
ethical underpinnings of a free society are shown to be fallacious.
In the latter role, the economist has an enormous part to play.
He can analyze the consequences of the free market and of various systems of coerced and
hampered exchange.
One of the conclusions of this analysis is that the purely free market maximizes social
utility because every participant in the market benefits from his voluntary participation.
On the free market, every man gains.
One man's gain, in fact, is precisely the consequence of his bringing about the gain
of others.
When an exchange is coerced, on the other hand, when criminals or governments intervene,
one group gains at the expense of others.
On the free market, everyone earns according to his productive value in satisfying consumer
desires.
Under status distribution, everyone earns in proportion to the amount he can plunder
from the producers.
The market is an interpersonal relation of peace and harmony.
Statism is a relation of war and caste conflict.
Not only do earnings on the free market correspond to productivity, but freedom also permits
a continually enlarged market with a wider division of labor, investment to satisfy future
wants and increased living standards.
Moreover, the market permits the ingenious device of capitalist calculation, a calculation
necessary to the efficient and productive allocation of the factors of production.
Socialism cannot calculate, and hence must either shift to a market economy or revert
to a barbaric standard of living after its plunder of the pre-existing capital structure
has been exhausted.
And every intermixture of government ownership or interference in the market distorts the
allocation of resources and introduces islands of calculational chaos into the economy.
Government taxation and grants of monopolistic privilege, which take many subtle forms, all
hamper market adjustments and lower general living standards.
Government inflation not only must injure half the population for the benefit of the other half,
but may also lead to a business cycle depression or collapse of the currency.
We cannot outline here the entire analysis of this volume.
Suffice it to say that in addition to the praxeological truth that 1.
Under a regime of freedom everyone gains whereas 2.
Under statism some gain x at the expense of others y.
We can say something else, for in all these cases x is not a pure gainer.
The indirect, long-run consequences of his statist privilege will redound to what he
would generally consider his disadvantage, the lowering of living standards, capital
consumption, etc.
Ex's exploitation gain, in short, is clear and obvious to everyone.
His future loss, however, can be comprehended only by praxeological reasoning.
A prime function of the economist is to make this clear to all the potential Xs of the
world.
I would not join with some utilitarian economists in saying that this settles the matter, and
that since we are all agreed on ultimate ends, X will be bound to change his position and
and Support a Free Society.
It is certainly conceivable that X's high time preferences or his love of power or plunder
will lead him to the path of statist exploitation even when he knows all the consequences.
In short, the man who is about to plunder is already familiar with the direct, immediate
consequences.
When praxeology informs him of the longer-run consequences, this information may often count
in the scales against the action, but it may also not be enough to tip the scales.
Furthermore, some may prefer these long-run consequences.
Thus, the OPA director who finds that maximum price controls lead to shortages may, one,
say that shortages are bad and resign, say that shortages are bad but give more weight
to other considerations, for example, love of power or plunder or his high time preference,
or believe that shortages are good, either out of hatred for others or from an ascetic
ethic.
And from the standpoint of praxeology, any of these positions may well be adopted without
saying him nay.
4.
The Market Principle and the Hegemonic Principle Praxeological analysis of comparative politico-economic
systems can be starkly summed up in the following way.
Some consequences of the market principle, individual freedom, general mutual benefit,
maximized social utility, mutual harmony, peace, power of man over nature, most efficient
satisfaction of consumer wants, economic calculation, incentives for production, and advance in
living standards.
and Consequences of the Hegemonic Principle, Coercion, Exploitation, Benefit of One Group
at Expense of Another, Caste Conflict, War of All Against All, War, Power of Man over
Man, Disruption of Want Satisfaction, Calculational Chaos, Destruction of Incentives, Capital Consumption
and Regression of Living Standards.
The listener will undoubtedly ask, how can all the various systems be reduced to such
a simple two-valued schema?
Does not this grossly distort the rich complexity of political systems?
On the contrary, this dichotomy is a crucial one.
No one disputes the fact that historically political systems have differed in degree
that they have never been pure examples of the market or of the hegemonic principle.
But these mixtures can be analyzed only by breaking them down into their components,
their varying blends of the two polar principles.
On Crusoe's and Friday's island, there are basically two types of interpersonal relations
or exchanges, the free or voluntary and the coerced or hegemonic.
There is no other type of social relation.
Every time a free, peaceful unit act of exchange occurs, the market principle has been put
into operation.
Every time a man coerces an exchange by the threat of violence, the hegemonic principle
has been put to work.
All the shadings of society are mixtures of these two primary elements.
The more the market principle prevails in a society, therefore, the greater will be
that society's freedom and its prosperity.
The more the hegemonic principle abounds, the greater will be the extent of slavery
and poverty.
There is a further reason for the aptness of this polar analysis, for it is a peculiarity
of hegemony that every coercive intervention in human affairs brings about further problems
that call for the choice, repeal the initial intervention, or add another one.
It is this feature that makes any mixed economy inherently unstable, tending always toward
one or the other polar opposite, pure freedom or total statism.
It does not suffice to reply that the world has always been in the middle anyway, so why
worry?
The point is that no zone in the middle is stable because of its own self-created problems,
and its own inner contradictions, as a Marxist would say, and the result of these problems is to push the society inexorably in one direction or the other.
The problems, in fact, are recognized by everyone, regardless of his value system or the means he proposes for meeting the situation.
What happens if socialism is established?
Stability is not reached there either, because of the poverty, calculational chaos, etc. which socialism brings about.
Socialism may continue a long time if, as under a primitive caste system, the people believe that the system is divinely ordained,
or if partial and incomplete socialism in one or a few countries can rely on the foreign market for calculation.
Does all this mean that the purely free economy is the only stable system?
Praxeologically, yes. Psychologically, the issue is in doubt.
The unhampered market is free of self-created economic problems.
It furnishes the greatest abundance consistent with man's command over nature at any given time, but those who yearn for power over their fellows, or who wish to plunder others, as well as those who fail to comprehend the praxeological stability of the free market, may well push the society back on the hegemonic road.
To return to the cumulative nature of intervention, we may cite as a classic example the modern American farm program.
In 1929, the government began to support artificially the prices of some farm commodities above their market price.
This, of course, brought about unsold surpluses of these commodities,
Surpluses aggravated by the fact that farmers shifted production out of other lines to enter the now guaranteed high-price fields.
Thus, the consumer paid four ways, once in taxes to subsidize the farmers, a second time in the higher prices of farm products,
A third time in the wasted surpluses, and a fourth time in the deprivation of foregone products in the unsupported lines of production.
But the farm surplus was a problem, recognized as such by people with all manner of value systems. What to do about it?
The farm program could have been repealed, but such a course would hardly have been compatible with the status doctrines that had brought about the support program in the first place.
So, the next step was to clamp maximum production controls on the farmers who produced the supported products.
The Controls had to be set up as quotas for each farm, grounded on production in some
past base period, which, of course, cast farm production in a rapidly obsolescing mold.
The quota system bolstered the inefficient farmers and shackled the efficient ones, paid
made, in effect, not to produce certain products, and, ironically, these have invariably been
what the government considers the essential products.
The farmers naturally shifted to producing other products.
The lower prices of the non-supported products set up the same clamor for support there.
The next plan, again a consequence of statist logic at work, was to avoid these embarrassing
shifts of production by creating a soil bank, whereby the government paid the farmer to
make sure that the land remained completely idle.
This policy deprived the consumers of even the substitute farm products.
The result of the soil bank was readily predictable.
Farmers put into the soil bank their poorest lands and tilled the remaining ones more intensively,
thus greatly increasing their output on the better lands and continuing the surplus problem
as much as ever.
The main difference was that the farmers then received government checks for not producing
anything.
The cumulative logic of intervention is demonstrated in many other areas.
For instance, government subsidization of poverty increases poverty and unemployment
and encourages the beneficiaries to multiply their offspring, thus further intensifying
the problem that the government set out to cure.
Government outlawing of narcotics addiction greatly raises the price of narcotics, driving
addicts to crime to obtain the money.
There is no need to multiply examples.
They can be found in all phases of government intervention.
The point is that the free market economy forms a kind of natural order, so that any
Any interventionary disruption creates not only disorder, but the necessity for repeal
or for cumulative disorder in attempting to combat it.
In short, Proudhon wrote wisely when he called liberty the mother, not the daughter, of order.
Hegemonic intervention substitutes chaos for that order.
Such are the laws that praxeology presents to the human race.
They are a binary set of consequences, the workings of the market principle and of the
hegemonic principle.
The former breeds harmony, freedom, prosperity and order.
The latter produces conflict, coercion, poverty and chaos.
Such are the consequences between which mankind must choose.
In effect, it must choose between the society of contract and the society of status.
At this point, the praxeologist as such retires from the scene.
The citizen, the ethicist, must now choose according to the set of values or ethical
All Principles He Holds Dear.