What Is Economics?
[Understanding the Dollar Crisis (1973)]
As he has said, I am a student of Ludwig von Mises. I consider him the greatest man of our century. If our civilization, the whole of Western Civilization, is to be saved, it will only be because his ideas come to be more generally accepted than they are today.
In this first lecture I have been asked to talk about the science of economics.
Economics: A Science of Means
Economics is sometimes thought of as a very dry and dismal subject dealing with dusty tomes of statistics about material goods and services. Economics is not a dry subject. It is not a dismal subject. It is not about statistics. It is about human life. It is about the ideas that motivate human beings. It is about how men act from birth until death. It is about the most important and interesting drama of all — human action.
Since we must all be economists in one way or another, we all face the problem of how to become better economists in our daily work, in our family life, and as good citizens of our nation and of the world. The top educational problem of today is how to provide people with a better understanding of economics. All of our fundamental political problems, about which we have so many disagreements, are basically economic problems. Our prime problem is how to solve these economic problems. The best answers can be found only by resorting to the study of sound economic principles.
Many people think that economics is a matter of opinions. Economics is not a study of opinions. Economics is a science, and as a science it deals with eternal laws — laws that men are not able to change — laws that remain constant. If we want to improve our own satisfactions in life, we must improve our ability to know and use these laws of economics so as to attain more of the things we want. So, if the civilized world is to survive, people must learn more about this science of human action.
My great teacher, Ludwig Mises, called his great book Human Action. He reduces economic science to two words: men act. From these two words he builds the whole science of economics. He points out that purposes direct all conscious human actions. We are not dealing here with the functions of the body that are performed without conscious guidance. We are dealing with the attempts of men to achieve the things they seek in life. This is what we are assembled here to learn a little bit more about.
In every act throughout our whole lifetime, we are always exchanging something we have for something we prefer. We may be exchanging our time, our energy, our money, or some other scarce good for what we want, but every one of our actions is an exchange — an exchange of something we have for something we prefer. We must learn to improve our actions if we are to get more of the things that we want in life.
The things we really want in life, both material and immaterial, our ultimate goals, are not chosen with the help of economics. Our ultimate aims and goals in life we choose ourselves. They are our decisions. We get our ideas of what we want in life from our parents, from our teachers, from our priests, from our philosophers, from our own thoughts and those of others who are in a position to help us make our own decisions on what we want. But we, each of us, know what is really important to us. No other man is capable of telling us what it is that we want or prefer. No dictator, no bureaucrat is able to tell us what we want. This is something we all decide for ourselves and which we alone know.
If we disagree among ourselves about what we want, we may come to blows. If the disagreement is important enough to us, we may attempt to settle the issue by combat. But most people agree on what is wanted. Our great differences are disagreements about how to go about getting what we all want. These are differences about means rather than ends. For such disagreements, economics provides the intelligent solutions.
Most of the people in the world want peace and prosperity. We want them, of course, for ourselves, our family, our country, and our world. Most of us realize that if we are to have peace for ourselves, our family, and our country, there must be peace for other people, for other families, for other countries. But when it comes to prosperity, there are great disagreements. Many people want it at the expense of others. There is, unfortunately, very little realization that if we are to have prosperity for ourselves, there must also be prosperity for others. Prosperity, like peace, is something that must be general — something that must be shared by all peoples.
So, we now get to the reason for studying economics.
Good Intentions Are Not Enough
The main objective of economics is to substitute consistently correct ideas and actions for the contradictory ideas and actions inherent in popular fallacies. Most people accept many of the popular fallacies that have come down over the years. In my next lecture I shall be dealing with one of the most important fallacies, if not the key fallacy — one that goes back to the days of Aristotle, and to which we owe many of our great difficulties. I shall then elaborate on the idea that many people have had, that the only fair exchange is an equal exchange.
Now the common man, the average man, any man, will change his ideas and actions whenever he is convinced that the change will better serve his interests. No man aims at failure. He always wants to use his available means in a manner that will bring him success in attaining whatever he wants most in life. This is true of all of us. There is no way we can avoid it.
Our job, and my job in particular, is to show that the science of economics, that is, the free market, rather than political intervention or socialism, will help all of us achieve more of the things that we want in life. So the better we understand the laws of the free market, and the better our fellow men understand them, the more successful we shall all be in attaining more of those things that each of us wants most in life.
However good our intentions may be, they can never make unsuitable means any more suitable for attaining desired ends. The world is full of people with good intentions. It is not only the people with bad intentions that we have to worry about. There are a few of them, to be sure, seeking power, seeking things which do not belong to them. Our great problem is the many people who have the best of intentions but who have been taken in by some popular fallacies.
Sometimes I tell a story to illustrate this point. It is about two American sailors in uniform who were spending a weekend in Stockholm. They had been brought up like most good American boys to go to church on Sunday. So they found a large Swedish church and went in. They found, of course, that the service was in Swedish, which neither of them understood. They took seats up front, behind a certain gentleman. They agreed between themselves that when this gentleman rose they would rise and when he knelt they would kneel. They would then worship God in their own way. This was all with the best of intentions.
Midway through the service, the gentleman in front of them stood up. So the two sailor boys in their American uniforms also stood up. The congregation then slowly broke into laughter. The boys were embarrassed and sat down. After the service was over, they spoke with the minister at the door. They found that he knew English. One of the sailors then asked him why the people had laughed when they stood up. The minister smiled, scratched his head a bit, and said, "I was announcing a baptism and I asked the father to stand." The boys had stood up with the best of intentions.
Many of us, like the sailors, do things when we do not know what we are doing. We do not know the results our actions will produce. We do not know how ridiculous they may make us look to somebody else.
So, good intentions are not enough, whether we are going to church, helping a neighbor, engaging in business, or even helping at home. The little child, trying to help her mother in the kitchen, puts her hand on a hot stove, and is burned. She is hurt just as badly no matter how good her intentions were. And so it is in life. It is not good intentions that count. It is reality. It is the fact that only correctly selected actions produce the results that you seek. What matters is not whether a doctrine is new, but whether it is sound.
The Future Can Be Changed
Men will neither seek nor support a free society until they are convinced that the voluntary cooperation of a free market can provide them with more of whatever they want than any other possible system of the division of labor.
This is the situation we face today. Many people throughout the world do not understand the operation of the free market society. They therefore ask for governmental intervention; they resort to force, rather than to the free and voluntary cooperation of the market place. They think they can get more from governmental intervention than from the free market.
Economics, as I have said, is about human action, and all life is human action. So what we are discussing is all life. Let me speak further here about these two words: human action.
To live implies action. Action implies choosing, that is, selection and rejection. Every time you select one action, you are rejecting all the other possible actions that you could take. When you decided to come to this lecture, you rejected the possibility of being in other places at this time. All of our actions imply a choice. We always take that action which we think is going to give us the greatest satisfaction. All action also implies change. It implies that the future can be changed. What we are constantly trying to do is to exchange something we have for something we prefer. We seek to change the future to the way we would prefer it to be. All human life is an attempt to change the future.
Some people sometimes say that they would like to know the future. For example, they would like to know what the prices are going to be in the stock market next week. Actually, we do not want to know the future. If you, or I, or anyone could know the future, this would mean it was set and we could no longer act to change it. All human activity is an attempt to change the future. We have a wide choice of actions that permit us to change the future. If we select the right actions for our purpose, we will produce the future conditions we desire.
All human action also implies imperfection. If we had perfection, there would be no reason to act — no reason to change the future. This means that if we had everything we wanted, there would be no reason to live. When the day comes that you have everything you want, let me know. I shall make arrangements to come to your funeral, because you will then be dead. So do not ever think that we can have perfection, or that we can have everything we want. Life is a series of choices of actions trying to improve the future, and the future always needs improvement from our point of view. Life is never perfect, but it is subject to change, and it is our hope that our actions will produce changes for the better rather than for the worse.
Human Actions Are Usually Unique
Every human action also implies a self-selected purpose. Every time you act, you have a goal, an end, in mind. This is implied whenever you act. You have chosen a goal and you are acting in an attempt to attain that goal. Every human action is an attempt to exchange something we have for something we prefer. I have said this before and I shall say it a number of times during the course of these lectures to try to drive home the point that that is what we are doing every time we act.
Now to go on with my definition of economics. Having stated that all life is human action, I state further that economics is a science of purposeful human actions. It is a science of means for attaining desired ends. It reveals the human actions that moral and intelligent men may take to attain their self-selected goals with the least use of their available time, energy, and scarce goods. My great teacher would say that, when I say "with the least use of their available time, energy, and scarce goods," I am being redundant, repeating myself, in that this is already implied in what has already been said.
As there is in this world no discernible regularity in the emergence and concatenation of ideas and judgments of value, and therefore also none in the succession and concatenation of human actions, the role that experience plays in the study of human action is radically different from the role it plays in the natural sciences. Experience in human action is history and only history. It is not like the natural sciences. It is never a situation that we can repeat with any assurance that we can always produce the same results. With new information, new facts, new associates, new knowledge, we react differently to the same situation; and, of course, it is impossible for us to duplicate exactly the same social situation.
Reason and experience show us that there are two separate realms: the external world of physical, chemical, and physiological phenomena, and the internal world, in our minds, of our thoughts, feelings, valuations, and purposes in life. There is no bridge connecting these two spheres. They are not connected automatically. We always have the right to choose our actions. Identical external events often produce different human reactions, and different external events sometimes produce identical human actions. We do not know why.
So, the science of human action is different from the physical sciences. We cannot experiment with human beings except in a physiological, medical, or biological sense. In the realm of ideas, we cannot experiment as we can in the physical sciences. We cannot duplicate situations in which all things are maintained the same as before. We cannot change one condition and always get the same consequences. We cannot experiment with human actions, because the world, its population, its knowledge, its resources are all constantly changing and cannot be held still.
In economics we must use our minds to deduce our conclusions. We have to say, Other things being equal, other things being the same, this change will produce such and such an effect. We have to trace in our minds the inevitable results of contemplated changes. We are dealing with changeable human beings. We cannot perform actual experiments, because the human conditions cannot be duplicated, controlled, or completely manipulated in real life like chemical experiments in a laboratory. Therefore, there are great differences between economics and the physical sciences. We cannot experiment and we cannot measure. There are no constants with which to measure the actions and the forces which determine the actions and the choices of men. In order to measure you must have a constant standard, and there is no constant standard for measuring the minds, the values, or the ideas of men.
Since we have great differences from the physical sciences, we have to use a different methodology. Economics cannot be empirical, because there are no constants and no measurements. For many years, people used to think that money or a monetary unit was a unit of measurement. I do not think that today, here in Argentina, you have to be told that the value of a monetary unit is not constant. So we do not have to deal with that problem. But there are people who do think it is constant. There are also people who think they can change the situation so that they can construct a constant, or some index number, which they think will measure the changes in the value of a monetary unit.
Science: A Search for Truth
Having spoken of some of the differences between economics and the other sciences, I now want to speak about the characteristics that the science of economics, the science of human actions, purposeful human actions, has in common with all other sciences. Science always is and must be rational. It is the endeavor to attain a mental grasp of the phenomena of the universe by a systematic arrangement of the whole body of available knowledge. Science does not value. Economic science does not value. Science is always neutral with regard to values. Economic science is neutral with regard to values, but it provides acting man with all the information he may need with regard to forming his valuations.
Science is intent only upon discovering truth. It seeks to know reality. It is not dealing with opinions or value judgments. All science aims at tracing back every phenomenon to its cause. There will always be some irreducible and unanalyzable phenomena, some ultimate given, some a priori postulate beyond which you cannot go back any further. In all science, if it is "D" that you want and "C" produces "D," then you strive for "C." If you learn that "B" produces "C," you seek "B,"and if "A" produces "B," you seek "A." You go back to "A." So that "A" gives you "B," which gives you "C," which gives you "D," which is what you want.
In science we go back regressus in infinitum. We go back to a point beyond which we cannot go back any further. This is true in economics as it is in every other science. In economics, human action is an ultimate given, and is one of the agencies capable of bringing about change. There are only two ways to bring about change. One is the automatic way of the physical sciences. We get in a car. We turn the key and it starts certain things moving automatically that can bring changes that we hope will make the car go. And if the car is in good working order, it will go. In human actions you have another agency for change, the purpose in the mind of the acting person. This purpose brings actions that produce changes, which the actor hopes will improve the future situation from his point of view.
Economics is the science which studies human behavior as a relationship between ends and scarce means that have alternative uses. Economics is a striving for efficiency in the use of means to attain selected ends and is essentially the theory of free enterprise.
A Priori Postulates
As I said, we go back as far as we can. Mises goes back to the two words "men act." Everything in economics is contained in those two words. Because it is difficult for us to understand this, I have expanded these two words to what I call the three a priori postulates of economics, the science of human actions for attaining desired ends.
The first postulate is that all men seek to improve their situation from their viewpoint. This is what all of us are trying to do at all times. We constantly strive to attain something that improves our situation from our viewpoint. This postulate has been attacked by some who think it too materialistic. It includes, of course, the actions of men with materialistic purposes, but it does not apply solely to them. It also includes the actions of pure egoists, pure altruists, pure ascetics, pure sensualists, or — what is more likely — the actions of men whose purposes are a mixture of all of these motives. We all have some goals that may be ultra-selfish or ultra-altruist. What I am speaking of here is not actions seeking a maximization of monetary gains only, but actions seeking a maximization of those satisfactions we have selected from all the alternatives that were open to us.
Many of the things we want in life are not utterly selfish. Only a few months ago a brave young boy in Czechoslovakia laid down his life for a cause in which he believed. He thought he was giving it for freedom. His action was certainly not selfish or materialistic.
Many of us do many things for other than purely selfish purposes, but we always seek to improve the future situation from our viewpoint. Who gets the most satisfaction on Christmas morning, the children or the parents? These things you cannot measure. Is a man selfish when he buys life insurance to take care of his loved ones after he is gone? No! We do many things by which we seek to improve the future situation in many ways that are not purely or overly selfish.
Let us remember that the human satisfaction that we seek is the most immaterial thing there is in the world. Nonetheless, we always have ultimate goals in all our acting. We are always seeking something that we want.
Even the criminal, when he commits a crime, is choosing an action which he thinks is best for him from his point of view. Let us remember that so-called materialism includes the wages of priests and musicians, the prices of art, concerts, and books on philosophy. The human satisfaction that all men seek is the most intangible thing in the world. It is not necessarily materialistic, although, of course, the material is included in the scope of this first postulate. I am not saying how I want it to be, nor how I think it should be. I am discussing a science, a search for the truth, reality. This is the way men are. This is what men do. This is why men act — to improve the future situation from their point of view.
Now the second of these postulates, which I hold are a priori and therefore evident to all men, is that the factors available for improving men's situations are scarce. This is a fact in the world. Long before Adam Smith wrote his great book, The Wealth of Nations, in 1776, it was known by all that nature, unassisted by man, is niggardly. There are not enough desirable things in this world to provide all of us with all we want. This poses the economic problem. Men have unsatisfied wants, and there are not enough of the things they want available for satisfying all their wants. So some of us have to go without many of the things we want, and all of us have to go without some of the things we want.
When I say things are scarce, I mean they are scarce in relation to men's wants. There is no quality in things that makes them economic goods except their relationship to the satisfaction of some human want. We say good eggs are scarce. There are not enough to satisfy the human demand for eggs. Eggs are economic goods and we have to pay for them. Some must go without all the eggs they want. There may be even fewer bad eggs, but we do not say that bad eggs are scarce. One bad egg is usually more than we want. Economic scarcity is always in relation to human wants. This is the important thing.
Before I go on with the third and last a priori postulate, let me give you this economic fact: TANSTAAFL. This is a series of letters that was popular in the United States during the New Deal days when everything was represented by alphabet letters. In English these letters stand for the words "There ain't no such thing as a free lunch." This is a fact of life. If someone gets a free lunch, somebody else pays for it.
Going on to the third postulate: men make mistakes. What we are all trying to do is to reduce our mistakes. Our aim here in studying economics is to replace the fallacies that we hold, many of which are popular, with economic truths — that is, we seek to reduce our very human errors.
All economics gets down to these three postulates. We seek to improve our situation with our limited means for doing so, and in our actions we make mistakes. I shall be dwelling on applications of these three postulates all through these lectures.
Men Seek Satisfaction
The burden of our time is that we do not know or realize what we are doing. Just like those two sailor boys in the Swedish church, we do things which produce consequences that we do not intend to produce. This is true of all of us. Our problem is how best to improve our situation. Perhaps the most general inconsistency of our time is the conflict in our market actions. As consumers, "we" buy the things we want at the lowest price we can find. By so acting we reward those who are most efficient in producing the things that we want. As producers, as sellers, and particularly as members of labor unions, "we" choose security and high prices and strive to protect inefficiency. These contradictory policies frustrate each other. They lead to split situations and split personalities. Economics brings the answers, the knowledge of means which are consistent with the desired ends. Actually, today, if we continue pursuing the policies we are now pursuing throughout the Western world, we shall bring an end to peace, and, if we do not change our present policies for better ones, we shall bring an end to the lives of millions of people now on earth.
Now, the vital question is: are these assumed postulates right, or are they wrong? I hold that they are right. I hold that every man has to agree that in choosing his purposeful actions he seeks to improve the future situation in a way he expects will provide him a better future than if he chose any other actions open to him at that time. He has scarce goods. He has scarce time. He has scarce energy. He uses these scarce factors to produce more of those things high on his scale of values, and he makes mistakes.
Now, for this study of economics you do not need an expensive apparatus. All you need is to use that small space which is subject to the greatest unemployment in the world today: the short space between your two ears. Economics, like logic and mathematics, is a display of abstract reasoning. What we need is to use our minds intelligently and to think clearly in facing our problems. We need to look at them without bias. We need to know whether the actions and policies we choose are fit to accomplish what we seek. The first thing necessary to correct an error is to discover it, the next is to admit it, and the last is to avoid it.
Economics is concerned with the simple law of human nature that man strives to attain the maximum of satisfaction with the minimum of sacrifice. Human action is purposive. It always intends to increase human satisfaction. A free and unhampered market economy tends to produce or provide us with the highest possible human satisfactions. This is what I hope to show during the lectures which follow.
The purposefulness of human action is a category to which nothing in the physical sciences corresponds. The actions of nature have no purpose, except when men direct them. If there is a purpose in the actions of a tree growing, it is a purpose of the Deity. It is God who determines the purpose, if any, of the actions of nature. We learn the innate actions of nature by studying the physical sciences. Then, we can use them intelligently for our own purposes.
The Deduced Postulates
Going on from the three a priori postulates, we come to the deduced postulates. These flow from or are deduced from the a priori postulates. The first one, as stated here, is that all men are rational beings. That is, we use our God-given minds to attain our objectives. We always aim at success.
It is very popular to call someone else "irrational." Scientifically, the only people who are irrational are people who are out of their minds, people who are crazy. People make mistakes. Yes, but they always choose the means which they think are most likely to attain the ends they seek. They never aim at failure. Their reasoning may be wrong, but it is their best reasoning. If we want to call somebody else's reasoning irrational because it is mistaken, we had better be careful, because that means that anyone who makes a mistake is irrational. We all make mistakes, and therefore, by this line of reasoning, we are all irrational.
Our first great President of the United States, George Washington, when he was on his death bed, was surrounded by some of the best medical doctors obtainable. These doctors decided that to prolong his life the best thing they could do was to let out some of his blood. They did so, and he died promptly. Today, if a doctor did that, we would call him a murderer. But would you have called those doctors irrational then? No. They were using their best reasoning. The best reasoning of the most intelligent men is often faulty. We are all always acting to attain success in whatever we are trying to do. In this sense, all men are rational. We are all attempting to improve our situation from our point of view, and we are using our minds to our best ability with what we know at the time.
The second deduced postulate here is that all human actions take time. This seems perfectly obvious, that everything we do takes a certain amount of time, and our time is capable of alternative uses. I shall not dwell on this at great length now. I'll speak more about it in the next lecture. I do, however, want to mention that the socialists forget to take this fact into consideration. They do not take time into their consideration of costs. The payment for time is interest, and they ignore interest. In fact, many tax officials in the United States consider interest to be "unearned income." There are people, including the socialists, who want to abolish what they call "unearned incomes." They do not realize that they are suggesting an end to the payment for time, which is a necessary factor in every human effort.
Next, all human actions have consequences. We, of course, would not act unless we thought we were going to produce a consequence that we preferred over the consequences that we could produce by any other action or non-action that we could choose. This involves means and ends. It involves cause and effect. Men's minds hold this idea of cause and effect. If we did not expect our actions to have consequences, there would be no reason to act.
There is a prime cause that we cannot ever know, because no man can conceive of something being created out of nothing. We know that everything we create has to come from some preceding good or action. We are always acting with this in mind. As mentioned earlier, there are only two ways to produce change: the purposeful actions of men and the mechanical actions of the physical sciences — physics, biology, chemistry, and other sciences that we call the natural or physical sciences. All human actions have consequences. It is not good intentions that decide the consequences. It is whether the doctrine is sound, whether it works. It is not whether I like it, nor whether I say it should be so, nor whether Mises says it should be so. It is solely a question of whether or not the chosen action will produce the desired consequences.
Choices Have Prices
Economics attempts to deal with reality and provide the means to help us attain the consequences that we desire. If we are going to attain them, we have to learn the actions that will produce the desired results. This always involves the sacrifice of something. There is a cost for everything we do. This means that every human action has its economic aspect. When we choose one thing, we have to do without certain other things that we cannot have simultaneously. This is the economic aspect of choice: using our scarce means in the best way we know to produce the results we want most. This is the economic problem.
A technical problem exists when you have only one end and you want to know the best means to attain it. An economic problem exists when you have more than one end and must choose one or another from those that are open to you, recognizing that if you choose one you must go without certain others. It is not intelligent to want something without realizing and being willing to pay the cost. One of the great problems in the world today is that so many people want something for nothing, or something at the expense of others. We do not really want anything until we are willing to pay the full cost, or accept the consequences.
Going on to the next deduced postulate: men choose those actions they believe will best improve their situation. Like the other postulates, this is, of course, a truism. It is not how I want it to be, nor how I say it should be. It is how men act. They choose actions which they believe will best improve their situation from their viewpoint. Now, their actions may try to improve somebody else's situation. They may get a satisfaction out of helping others or advancing a cause, as our friend Señor Benegas Lynch gets satisfaction from bringing speakers to you who strive to advance the cause of la libertad (liberty).
Importance of Theory
We all want things that are not necessarily essential, but we always choose those actions which we think will best improve the situation from our viewpoint. This means that the ideas that men hold determine their choice of actions. This means that the most important thing in the world is ideas. John Locke, the philosopher, once said, "I have always thought that the actions of men were the best interpreters of their thoughts." Böhm Bawerk, the teacher of Mises, said, "I cannot profitably discuss the 'practical' side of the subject until there is a complete clarity with respect to the theoretical side."
We hear a lot of disparaging remarks about theory or about something being theoretical. This is unfortunately so, because so many of the economic theories that have guided people in recent years have been bad theories — theories that do not work. Consequently, we seem to look down on theory and seek what is "practical." Actually, it is not a question of theory versus practice. It is good theory versus bad theory. The disparagement of theory is unfortunate, because it is theory that motivates us all. It is ideas that guide all our actions. Let us remember that you cannot shoot ideas. The only way you can stop bad ideas is by satisfying their holders that other ideas are better — that is, more effective for attaining their objectives. What we need in the field of economics more than anything else is better ideas, ideas that stand up, ideas that work, ideas that cannot be successfully challenged.
The conclusion to be drawn from these additional postulates is that the ideas men hold determine their actions. The great problem, then, is to hold the right ideas. Sound theory is most important. We never act without a theory. We never act without an idea that the selected action will improve our situation from our point of view. This is what economics is all about, the freedom to choose our actions. The essence of freedom is that people be free, not only to select their actions, but also to deviate from traditional ways of thinking and acting, so that they may plan for themselves rather than have an established authority plan for them and prevent them from planning in their own way.
We all gain from the planning and the freedom of others. Many of us are using things that we ourselves could not invent or produce. I flew down here in a jet airplane. I have no way of knowing how to make a jet, and yet I benefit from the freedom of the people who made it. We all benefit from the freedom of the people who made the earphones that most of you have on today.1 We all benefit from the freedom others have enjoyed. Many inventors in days past had their difficulties. We benefit from Mr. Gutenberg's freedom, which produced the invaluable printing press, so misused by national treasuries today.
So freedom is important to us not only for our own use, but also for our use of the products of the freedom of others who can improve our situation. Those of us who live in today's age have the highest standard of living that men have ever had in life on this earth. I was last down here in Argentina in 1925 as a young man. I have seen a great many changes in the forty-four years that have passed. Many of these changes have been brought about by people in your country and many by people outside your country. We have all advanced our standard of living because those people had the freedom to invent and to produce in new ways and did not have to stay with the ways of yesteryear.
The problem in economics is one of feeding into the human mind the right ideas, the applicable assumptions, and then thinking straight, thinking soundly with the data we have. The job of the economist is to recognize the decisive causal chains within the tangles of given data. As there are changes in the data, changes in the means available, changes in the things we want, we have to have new ideas, new thoughts, new solutions.
Applied economics consists of propositions such as, "If you want this, then you must do that — if such and such is the ultimate good, then this is clearly incompatible with it and you must drop it out."
Keynes on Ideas
Now I shall quote from a gentleman with whom I do not always agree. In fact, I disagree with him rather basically in many ways. However, I am in agreement with this statement that the late Lord Keynes wrote on the last page of his General Theory:
The ideas of the economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.2
Going out of the quote, early this year, the London Economist reported that Lord Keynes is now a "defunct economist."
Continuing the quotation:
Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
Many of the ideas that people practice today are the ideas of Karl Marx, although very few of the people who practice them realize it. They do not understand that the problem is one of getting the right ideas, ideas that work, and that good intentions are not enough.
Logical thinking and real life are not two separate orbits. Logic is for man the only means he has to master the problems of reality. What is contradictory in theory is also contradictory in reality. Man must fight error by exposing spurious doctrines, by expounding the truth. The problems involved are purely intellectual. We have to repeat the truth again and again and again, because those who expound fallacies are repeating them again and again and again.
We always aim at success. The logic with which we think is the logic with which we act. Reason and action are two aspects of the same thing. Action is an offshoot of reason. We start with an end in mind and eliminate all possible actions not consistent with it. What remains, if anything, is the action we take, and we hope that this will produce the situation that we prefer.
In closing, I repeat what I said earlier, that however good our intentions may be, they can never make unsuitable means more suitable for obtaining our desired ends. What matters is not whether a doctrine is new, but whether it is sound. Bad ideas can be killed only by showing men that new and better ideas will advance them further toward whatever it is they want. Those who are interested in having a free society and a free world have to realize that men will not seek and support a free society until they are convinced that the voluntary cooperation of a free market can provide them with more of whatever they want than any other possible system of the division of labor.
The main reason for studying economics is to substitute consistent, correct ideas for the inconsistent, fallacious ideas so popular among the uninformed. As Henry Hazlitt says in his great little book, Economics In One Lesson, before acting we should consider all of the inevitable results of the proposed action. What we need more than anything else in this world is sound economic thinking. If we start with a correct assumption, and proceed with sound logic, we will attain the results at which we aim with a minimum sacrifice of our limited and therefore valuable time, energy, money, and other scarce goods.
Questions and Answers
We have some time for questions. We ask that you stay within the subject of the lecture. The question and answer period following the last lecture will be open to any question that I may be able to answer.
What I have tried to say in this lecture, of course, is that we all aim at success. Our problem is learning how to attain that success. In the next lecture I will be speaking on "value," the great errors that exist in that field, as well as the best ideas known to man.
Henry Hazlitt, who has spoken here, has written a great book, Economics in One Lesson, which I believe is available in Spanish. That one great lesson is that we should look at all of the inevitable effects that must flow from any proposed action. Too many of our people look only at the short-run effects, or the effects on one group, and not at the effects on other groups or the effects on the long run. I hope I have made myself clear and that you understand me. I have tried to state the situation, as far as I have gone, in a way with which I do not think honest men can disagree.
Why A Free Market?
Q. Why must we be convinced that a free market is the best way to obtain more of what we want?
A. If we believe in freedom and we want to persuade others to believe in freedom, we have to show them that freedom will get them more of the things they want. How long could any of us live on what we ourselves produce? We have a high standard of living because of the division of labor, because we cooperate in helping each other. We are not like animals in a forest, fighting each other. We cooperate. It is because other men want the same things we do that we can have mass production at low cost, and mass production means mass consumption.
What would it cost us if each of us had to produce his own automobile? It is social cooperation that increases the production of the things that consumers want. Most people do not understand that it is only under freedom that they can have more of these things. It is the job of those of us who understand this, those of us who want freedom, those of us who want more things, to convince others that this is the best way. The benefits of freedom cannot be enjoyed without general agreement. Now in the physical sciences, one person can make something by himself that is better than what was previously available and gradually convince a few people that it is better. But in the field of human action, we have to have majority agreement before we can change our system or improve our laws. We must have agreement. So, if we are going to get agreement, if we are going to move toward freedom, if we are going to move toward peace, if we are going to move toward prosperity, we must convince the majority of people of the best way to attain these things they want. They do not disagree on the ends. They disagree on the means. They think that they can get more of the things they want by taking them from someone else. We shall discuss this further in the next lecture.
Is Keynesianism Defunct?
Q. What is the present status of Keynesianism and why did you say it was defunct?
A. First, let me make a correction. I did not say it was defunct. It is not defunct. I said that the London Economist said Keynes is now a "defunct economist," that is, he is dead. But his ideas are still alive. The quotation was, "Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist." My aside remark was more to the effect that many of us today, and many unfortunately in positions of political power, are the slaves of Mr. Keynes. Some of us are also slaves of the thinking of Marx, who is certainly defunct physically. What this says is that their ideas live on when the men have passed away. The ideas of Marx live today and the ideas of Keynes live today. We will be dealing with Keynes in future lectures, particularly when we get into the monetary phase.
Is Freedom the Same?
Q. Is the freedom of the inventor who invents the plane the same as the freedom of the man who produces the plane, and the same as the freedom of the person who uses the plane?
A. First, let me say that freedom is indivisible. You cannot lose a part of your freedom, the freedom of speech, the freedom to buy, the freedom to print, without eventually losing all of your freedom. Of course, all freedom is based on economic freedom. Freedom is indivisible. No one man invented the airplane. It took many, many men to invent today's jet. It took a lot of history, a lot of just minor improvements.
My great teacher, Mises, asks, "What is the automobile of 1969?" He answers his own question: "It is just the automobile of 1909 with thousands upon thousands of minor improvements." Everyone who suggested an improvement did it with the hope that he would make a profit. Many made suggestions that fell by the wayside. But it was the freedom of those men to work on improving the automobile that has given us the automobile that we have today. No one man invented it, neither did one man produce it.
It takes a roomful of plans or specifications to make a jet airplane. It takes men of many different talents. As one of the speakers brought here before you many years ago, Leonard Read, has said, no one man can make even such a simple thing as a pencil. There is not a man alive who can take it all the way from the original raw materials to the finished pencil with its eraser. There isn't a man alive who could make a jet plane. It takes the cooperation of hundreds, possibly thousands. We who want to use the jet need freedom for them, so that we may use our freedom to use the production of their minds, while they are striving to help themselves by helping us. Some of this we will get into in our next lecture.
On Defining Economics
Q. Isn't it better to define economics as a means of voluntary peaceful cooperation? Isn't that better than defining it as maximizing benefits and minimizing costs?
A. I do not see any conflict. What I have tried to do is to explain the same thing in different words. The free market is a peaceful voluntary cooperation. We shall be discussing that in the next two lectures. The free market economy is the actual application of the Golden Rule; we help others as we help ourselves. As we help others more, we help ourselves more. As we help ourselves more, we help others more. This will come out rather clearly, I think, in the third lecture.
How Is Freedom Spread?
Q. What is the best way to extend the ideas of freedom?
A. You have had Leonard Read here. One of his great contributions is on this matter of methodology. As I have tried to stress tonight, the most important thing is ideas. As I have said, you cannot shoot ideas and you cannot jam them into another person's mind. Men have to be ready for ideas. They have to want them. They have to know where they can get them. We have a great responsibility for ourselves, our loved ones and our own families. Our problem is to learn more about freedom ourselves, to the extent that others will come and ask us. In that way we can spread the word.
We cannot go around using force to impose our ideas on others. It has to be done by education. Education is possible only when the people to be educated are willing, when their minds are open. Then, they have to see, hear, or read the right things. We have to make these materials available for the people who want them. This, I believe, is one of the great services that our friends here at the Centro de Estudios sobre la Libertad are providing to you by sponsoring these lectures. I am sure they have publications that will help you to obtain a better understanding, and help other people when they want to know more about la libertad.
Do Ideas Always Precede Action?
Q. Do ideas always precede action?
A. I said that ideas precede action. We do not always have time to study a problem before action is required. Of course, ideas are formed in advance. We must get our education beforehand. We shouldn't wait until there is a fire in our house to know how to get out of it in a hurry. We have to be prepared in advance. Our problem is getting the ideas before we need to act on them. You cannot spend two days studying when you've got to act tomorrow. You have to know these things a certain time in advance. You have to have certain basic ideas. Of course, you cannot afford to spend too much time in making minor decisions, such as whether to cross the street at one point or another. You have to judge each problem as to how important the decision is and how much time you can take before making the decision. Frequently you don't have any time. Something comes at you quickly. You have to make a quick decision and you have to make it on the basis of the intelligence you have at that moment.
Is Too Much Freedom Harmful?
Q. Cannot excessive freedom in certain aspects of economic activity — such as advertising — lead to a waste of resources, human effort, money lavishly spent, etc.?
A. It's hard for me to see what excessive freedom is. I speak of freedom that is equal for all men, but not freedom for one man to harm another. I would admit that freedom means that men are going to make mistakes; but men will make mistakes with or without freedom. However, in a free society you have competition. If one person makes a mistake, perhaps in a suggestion he thinks will improve the automobile, and the suggestion is not accepted by others, he will not make a profit. It is only that one man who loses. Others are still free to advance society. Without freedom, only the dictator can try out his ideas. As I have said, men make mistakes, and they make mistakes in advertising as they do in other occupations, but once you permit the censoring of advertising for reasons other than fraud or misrepresentation, you are going to censor the freedom of speech. Who is to decide what is truth? As John Stuart Mill said, freedom for one man's ideas is often important. Who is to decide whose ideas are to be printed and whose are not? There is no one who can decide this, except the consumer. When men advertise, they advertise with the hope that they are going to sell a product. If there is fraud, if their advertising misrepresents, they may make a few sales, but they will soon go out of business. In my great country, and I suppose it is true down here too, many of the large companies making products which are sold over and over again, give away free samples just to get people to try their products. What makes a business successful is having a good product and getting repeat orders for it from satisfied consumers. Consequently, a company that misrepresents its product is not going to stay in business long. We don't have to worry about it much. Of course, I do not approve of fraud, nor do free market principles sanction misrepresentation.