Last Knight Live Blog 17 Kraus

Money and economic calculation in terms of money receipts and money outlays are indispensable elements in our daily economic lives. It is simply inconceivable to go about producing and consuming without using money and economic calculation in terms of money. The motivations of businessmen to invest in a new line or enlarge the existing line of production are determined by the difference between the money the business is projected to be spent and received. In short, their motivation is that of pursuing a money profit. Decisions to begin or suspend production are determined by monetary profit; the degree of business success and profitability are measured by monetary profit.While economic well-being, or the so-called “real income”, can only be measured in terms of goods and services consumers are able to buy, those goods and services are not simply counted one by one but estimated on the basis of the relationship of money incomes to money prices. It should be obvious that this “real income” measure itself is the product, and cannot be thought in absence, of the relation between money incomes and money prices. Virtually every kind of economic behavior and decisions, whether it comes to immediate consumption, production, saving (or economic planning for the future), involves considerations of money receipts, money outlays and money prices. Yet, despite these fundamental and almost immediately observable facts about the nature of the economic organization of a modern economic system and the role of money and monetary calculation in it, in economics as scientific discipline, the issue of money and its importance received only very inadequate attention. Almost all efforts were directed to the nebulous problem of “Value”. Despite the thousand books and articles written on the subject of value, no unambiguous and workable definition of economic value has ever been given, let alone solved. Value of a good has either been defined in terms of physical amounts of labor (classical school, including Marxists) or in terms of subjective (psychic) satisfaction derived from the consumption of the good (early and many modern Austrians and the entire neoclassical school). Key economic phenomena under capitalism – money prices of goods and labor services were conceived by various schools as mere derivatives or specific embodiment in its final forms of a much more fundamental substance working underneath the obvious. The price theories of the Classical School and Marxism regarded the quantity of labor or socially necessary labor time (Marxism) as the fundamental substance giving rise to value which is then somehow transformed into money prices. The numerous Marginalist Schools have in common that they regard subjective utility derived from consumption of a marginal unit of a good as the fundamental determinant of value, and thus of money prices. Given how economists conceived the problem of value and money prices, it is not at all surprising that the quest for the fundamental source of money prices culminated in the opinion that the monetary calculation of capitalism is an inferior form of value calculation to be improved upon, a mere surrogate of a “higher form” to be discovered, scientifically determined and the economic life of society subordinated according to it. Thus, when Mises published his paper on Economic Calculation in the Socialist Commonwealth and forcefully argued that it is only capitalism that possesses the only viable method of economic calculation, which is simply in terms of money prices, it rightly attracted considerable attention of economists and stirred heated debates that continue to the present day. Most importantly, the now-famous proof that socialism is impossible because it lacks rational economic calculation provides the means to understand why the “higher forms” of economic calculation either in terms of “socially necessary” labor time as proposed by Marxists or in terms of Wieser’s subjective utility must be impossible. There is only one kind of rational economic calculation in accordance with the existence and continuous development of division of labor economic system – calculation in terms of money. But, of course, not just the analysis of prices was subject to enormous confusions that various theories of values created, and continue to create. Fundamental mistakes infecting theories of prices bred further mistakes and more confusion in theories of business cycles, inflation and unemployment, to name just these more important problems in economics. The claims of Marxism and Keynesianism about inherent economic instability, and even eventual demise, of capitalism can be traced back directly to the view that some higher form of economic calculation in terms of (socially necessary) labor time or subjective value (modern welfare analysis) subject to government control and manipulation is at least conceivable, and with enough ingenuity and determinateness could be successfully implemented to cure the perceived deficiencies of capitalism either by supplanting it entirely or by intervening into its mechanism by means of partial prohibitions, privileges, taxes, subsidies etc. This series of short blog-posts on Chapter 10, A Copernican Shift, were devoted to the centrality of the analysis of money and money prices in Mises’s calculation argument and why they should be given greater weight in economic analysis than it is the case today. One of the great values of Prof. Hülsmann’s biography in general, and the present chapter in particular, is the explicit emphasis of precisely this theme in Mises’s work which, unfortunately, still very much remains largely unexplored even in the present-day Austrian economics. If economists want to improve their understanding of modern economies then they have to go back and rediscover Mises’s calculation argument and take it very seriously in all of their scientific efforts, and not just when it comes to the analysis of socialism. That there is no such thing as calculation of value, however defined, but only calculation in terms of money is that what constitutes a truly Copernican Shift and which is Mises’s single most important contribution to economics.