The Economics and Ethics of Private Property
Notes
Chapter 1
[Reprinted from the Journal of Libertarian Studies 9, no. 1 (Winter 1989).]
The “Unanimity Principle” which Buchanan and Tullock, following Knut Wicksell (Finanztheoretische Untersuchungen, Jena: Gustav Fischer, 1896), have repeatedly proposed as a guide for economic policy is also not to be confused with an ethical principle proper. According to this principle only such policy changes should be enacted which can find unanimous consent—and that surely sounds attractive; but then, mutatis mutandis, it also determines that the status quo be preserved if there is less than unanimous agreement on any proposal of change—and that sounds far less attractive, because it implies that any given, present state of affairs regarding the allocation of property rights must be legitimate either as a point of departure or as a to-be-continued-state. However, the public choice theorists offer no justification in terms of a normative theory of property rights for this daring claim as would be required. Hence, the unanimity principle is ultimately without ethical foundation. In fact, because it would legitimize any conceivable status quo, the Buchananites’ most favored principle is no less than outrightly absurd as a moral criterion. See on this also Rothbard, The Ethics of Liberty chap. 26; idem, “The Myth of Neutral Taxation,” pp. 549f.
Whatever might still be left for the unanimity principle, Buchanan and Tullock, following the lead of Wicksell again, then give away by reducing it in effect to one of “relative” or “quasi” unanimity.
How can Buchanan and Tullock come up with such absurd ideas? By a semantic trick. What was “inconceivable” and “no agreement” in pre-Orwellian talk is for them “conceptually possible” and a “conceptual agreement.” For a most instructive short exercise in this sort of reasoning in leaps and bounds, see James Buchanan, “A Contractarian Perspective on Anarchy,” in idem, Freedom in Constitutional Contract (College Station: Texas A&M University Press, 1977). Here we learn (p. l7) that even the acceptance of the 55 mph speed limit is possibly voluntary (Buchanan is not quite sure) since it ultimately rests on all of us conceptually agreeing on the constitution, and that Buchanan is not really a statist, but in truth an anarchist (p. 11).
The most important Agenda of the state relates not to those activities which private individuals are already fulfilling but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the state does not make them. The important thing for government is not to do things which individuals are doing already and to do them a little better or a little worse: but to do those things which are not done at all.
This reasoning not only appears phony, it truly is.
Regarding democratically controlled allocations, various deficiencies have become quite evident. As, for example, James Buchanan and Richard E. Wagner write (The Consequences of Mr. Keynes , p. 19):
Market competition is continuous; at each purchase, a buyer is able to select among competing sellers. Political competition is intermittent; a decision is binding generally for a fixed number of years. Market competition allows several competitors to survive simultaneously…. Political competition leads to an all-or-nothing outcome…. In market competition the buyer can be reasonably certain as to just what it is that he will receive from his purchase. In political competition, the buyer is in effect purchasing the services of an agent, whom he cannot bind…. Moreover, because a politician needs to secure the cooperation of a majority of politicians, the meaning of a vote for a politician is less clean than that of a “vote” for a private firm.
See also James M. Buchanan, “Individual Choice in Voting and the Market,” in idem, Fiscal Theory and Political Economy (Chapel Hill: University of North Carolina Press, 1962); for a more general treatment of the problem Buchanan and Tullock, The Calculus of Consent.
What has commonly been overlooked, though—especially by those who try to make a virtue of the fact that a democracy gives equal voting power to everyone, whereas consumer sovereignty allows for unequal “votes”—is the most important deficiency of all: Under a system of consumer sovereignty people might cast unequal votes but, in any case, they exercise control exclusively over things that they acquired through original appropriation or contract and hence are forced to act morally. Under a democracy of production everyone is assumed to have something to say regarding things one did not so acquire; hence, one is permanently invited thereby not only to create legal instability with all its negative effects on the process of capital formation, but, moreover to act immorally. See on this also Ludwig von Mises, Socialism (Indianapolis: Liberty Fund, 1981), chap. 31.
Insurance companies, a very important sector of any totally free economy, would have a special incentive to dissociate themselves from any aggressor and, in addition, to bring all their considerable business influence to bear against him. Aggressive violence causes value loss, and the insurance industry would suffer the major cost in most such value losses. An unrestrained aggressor is a walking liability, and no insurance company, however remotely removed from his original aggression, would wish to sustain the risk that he might aggress against one of its own clients next. Besides, aggressors and those who associate with them are more likely to be involved in situations of violence and are, thus, bad insurance risks. An insurance company would probably refuse coverage to such people out of a foresighted desire to minimize any future losses which their aggression might cause. But even if the company were not motivated by such foresight, it would still be forced to rate their premiums up drastically or cancel their coverage altogether in order to avoid carrying the extra risk invoked in their inclination to violence. In a competitive economy, no insurance company could afford to continue covering aggressors and those who had dealings with aggressors and simply pass the cost on to its honest customers; it would soon lose these customers to more reputable firms which could afford to charge less for their insurance coverage.
Chapter 2
[Reprinted from the Journal des Economistes et des Etudes Humaines 1, no. 2 (1990.)]
[i]n any sort of division-of-labor economy, capital goods are built, not for their own sake by the investor, but in order to use them to produce lower-order and eventually consumers’ goods. In short, a characteristic of an investment expenditure is that the good in question is not being used to fulfill the needs of the investor, but of someone else—the consumer. Yet, when government confiscates resources from the private market economy, it is precisely defying the wishes of the consumers; when government invests in any good, it does so to serve the whims of government officials, not the desires of consumers. (Man, Economy, and State, pp. 816–17)
Thus, government expenditure, by definition, cannot be conceived of as lengthening the production structure and hence as counterbalancing the taxpayers’ raised time preference rate.—On the other hand,
as for the transfer expenditures made by the government (including the salaries of bureaucrats and subsidies to privileged groups), it is true that some of this will be saved and invested. These investments, however, will not represent the voluntary desires of consumers, but rather investments in fields of production not desired by the producing consumers…. Once let the tax be eliminated, and … the new investments called forth by the demands of the specially privileged will turn out to be malinvestments. (Power and Market, p. 98)
Consequently, transfer expenditures also cannot be conceived of as compensating for the fact that taxpayers shorten the length of the production structure. All such expenditures can do is to lengthen the structure of mal-production. “At any rate” concludes Rothbard,
the amount consumed by the government insures that the effect of income taxation will be to raise time-preference ratios and to reduce saving and investment. (Ibid., p. 98)
Both the economic relation and the political relation represent cooperation on the part of two or more individuals. The market and the state are both devices through which co-operation is organized and made possible. Men co-operate through exchange of goods and services in organized markets, and such co-operation implies mutual gain. The individual enters into an exchange relationship in which he furthers his own interest by providing some product or service that is of direct benefit to the individual on the other side of the transaction. At base, political or collective action under the individualistic view of the State is much the same. Two or more individuals find it mutually advantageous to join forces to accomplish certain common purposes. In a very real sense, they “exchange” and devote resources to the construction of the common good. (James M. Buchanan and Gordon Tullock, The Calculus of Consent [Ann Arbor: University of Michigan Press], p. 192)
Surely, the most amazing thing about such a “new theory of politics” is that anyone takes it seriously. Remarks Joseph A. Schumpeter on such views:
The theory which construes taxes on the analogy of club dues or the purchase of the service of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind. (Capitalism, Socialism and Democracy [New York: Harper, 1942], p. 198)
And H.L. Mencken has this to say regarding a thesis such as Buchanan’s and Tullock’s:
The average man, whatever his errors otherwise, at least sees clearly that government is something lying outside him and outside the generality of his fellow men—that it is a separate, independent and often hostile power, only partly under his control, and capable of doing him great harm…. Is it a fact of no significance that robbing the government is everywhere regarded as a crime of less magnitude than robbing an individual, or even a corporation? … When a private citizen is robbed a worthy man is deprived of the fruits of his industry and thrift; when the government is robbed the worst that happens is that certain rogues and loafers have less money to play with than they had before. The notion that they have earned that money is never entertained; to most sensible men it would seem ludicrous. They are simply rascals who, by accidents of law, have a somewhat dubious right to a share in the earnings of their fellow men. When that share is diminished by private enterprise the business is, on the whole, far more laudable than not. (A Mencken Chrestomathy [New York: Vintage Books, 1949] pp. 146–47)
Wherever earthly governments are established or exist, anarchy is officially prohibited for all members of society, usually referred to as subjects or citizens. They can no longer relate to each other on their own terms…. Rather, all members of society must accept an external “third party”—a government—into their relationships, a third party with the coercive powers to enforce its judgments and punish detractors…. However, such a “third party” arrangement for society is non-existent among those who exercise the power of government themselves. In other words, there is no “third party” to make and enforce judgments among the individual members who make up the third party itself. The rulers still remain in a state of anarchy vis-à-vis each other. They settle disputes among themselves, without regard for a Government (an entity outside themselves). Anarchy still exists. Only whereas without government it was market or natural anarchy, it is now a political anarchy, an anarchy inside power. (Cuzán, pp. 152–53)
Nothing appears more surprising to those, who consider human affairs with a philosophical eye, than the easiness with which the many are governed by the few; and the implicit submission, with which men resign their own sentiments and passions to those of their rulers. When we enquire by what means this wonder is effected, we shall find, that as FORCE is always on the side of the governed, the governors have nothing to support them but opinion. It is therefore, on opinion only that government is founded; and this maxim extends to the most despotic and most military governments, as well as to the most free and most popular. The soldan of EGYPT, or the emperor of ROME, might drive his harmless subjects, like brute beasts, against their sentiments and inclination: but he must, at least, have led his mamalukes, or praetorian bands, like men, by their opinion. (Essays, Moral, Political and Literary , p. 19)
All power tends toward the absolute. If it is not absolute, this is because some kind of limitations have come into play … those in the positions of power at the center ceaselessly tried to erode these limitations. They never succeeded, and for the reason that also seems to me to be tied to the international system: a limitation of power to act externally and the constant threat of foreign assault (the two characteristics of a multi-polar system) imply that power is also limited internally and must rely on autonomous centers of decision-making and so may use them only sparingly. (p. 78)
On the origin and development of the natural rights doctrine and its idea of justice and property (including all the statist failings and slips of its aforementioned heroes) see Richard Tuck, Natural Rights Theories (Cambridge: Cambridge University Press, 1979); on the revolutionary character of the idea of natural law see Lord (John) Acton, Essays on Freedom and Power (Glencoe, Ill.: Free Press. 1948); as an eminent contemporary natural rights philosopher see Henry Veatch, Human Rights (Baton Rouge: Louisiana State University Press, 1985).
was poor and primitive … made up of numberless rural microcosms—the manors…. Society was dominated by a spirit of resignation, suspicion, and fear toward the outside world…. The arts, education, trade, production, and the division of labor were reduced to a minimal level. The use of money almost completely disappeared. The population was small, production meager, and poverty extreme…. The prevailing ideas reflected a brutal and superstitious society—fighting and praying were the only respectable activities…. Those who labored were regarded as despicable serfs…. In this depressed and depressing world, the rise of cities between the tenth and thirteenth centuries represented a new element which changed the course of history. (p. 144)
At the root of urban growth was a massive migratory movement. (p. 145)
The town was to the people of Europe from the eleventh to the thirteenth centuries what America was to Europeans in the nineteenth century. The town was the “frontier,” a new and dynamic world where people felt they could break their ties with an unpleasant past, where people hoped they could find opportunities for economic and social success, where sclerotic traditional institutions and discriminations no longer counted, and where there would be ample reward for initiative, daring, and industriousness (p. 146). In the feudal world, a vertical arrangement typically prevailed, where relations between men were dictated by the concepts of fief and service; investiture and homage; lord, vassal, and serf. In the cities, a horizontal arrangement emerged, characterized by cooperation among equals. (p. 148)
See also Henri Pirenne, Medieval Cities (Princeton, N.J.: Princeton University Press, 1952), chap. 5; Michael Tigar and Madeleine Levy, Law and the Rise of Capitalism (New York: Monthly Review Press, 1977).
[E]very man has a property in his own person. This nobody has any right to but himself. The labour of his body and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left in it, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature placed it in, it hath by his labour something annexed to it that excludes the common right of other men. For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to. (p. 305)
See also Ernest K. Bramsted and K.J. Melhuish, eds., Western Liberalism (London: Longman, 1978).
What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, convenience, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages…. But, most important of all, he [man] regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice. (pp. 6–7)
For a similar account see also J.P. Taylor, English History 1914–15 (Oxford: Clarendon Press, 1965), p. 1.
There was a time, long ago, when the average American could go about his daily business hardly aware of the government—especially the federal government. As a farmer, merchant, or manufacturer, he could decide what, how, when, and where to produce and sell his goods, constrained by little more than market forces. Just think: no farm subsidies, price supports, or acreage controls; no Federal Trade Commission; no antitrust laws; no Interstate Commerce Commission. As an employer, employee, consumer, investor, lender, borrower, student, or teacher, he could proceed largely according to his own lights. Just think: no National Labor Relations Board; no federal consumer “protection” laws; no Securities and Exchange Commission; no Equal Employment Opportunity Commission; no Department of Health and Human Services. Lacking a central bank to issue national paper currency, people commonly used gold coins to make purchases. There were no general sales taxes, no Social Security taxes, no income taxes. Though governmental officials were as corrupt then as now—maybe more so—they had vastly less to be corrupt with. Private citizens spent about fifteen times more than all governments combined. (p. IX)
Resolve to serve no more, and you are at once freed. I do not ask that you place bands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great colossus whose pedestals have been pulled away, fall of his own weight and break into pieces. (pp. 52–53)
Chapter 3
[Reprinted from the Review of Austrian Economics 4 (1990).]
However, this discovery—that politicians and bureaucrats are no more altruistic or concerned about the public good than are people in other walks of life—is hardly new even if it has sometimes been overlooked. Yet what is in fact new with public choice is the inference drawn from this correct insight then, that all institutions should hence be regarded as an outgrowth of identical motivational forces and be treated analytically on a par with each other—is false to the point of being ridiculous. Regardless of a person’s subjective beliefs, integrating one’s actions into the institutional framework of either the state or a “normal” economic enterprise and pursuing one’s wealth maximizing interests here or there will in fact produce categorically different outcomes. On a representative statement of the public choice school regarding the idea of the “state as a firm” and of “political exchange” as essentially the same as economic exchange, see James Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 1965), p. 19; for a critique of this view and the fundamental difference between economic and political means, see Franz Oppenheimer, The State (New York: Vanguard Press, 1914), pp. 24–27; Murray N. Rothbard, Power and Market (Kansas City: Sheed Andrews and McMeel, 1977), chap. 2.
The descriptive part of Marxist analyses is generally valuable. In unearthing the close personal and financial links between state and business, they usually paint a much more realistic picture of the present economic order than do the mostly starry-eyed “bourgeois economists.” Analytically, however, they get almost everything wrong and turn the truth upside down.
The traditional, correct pre-Marxist view on exploitation was that of radical laissez-faire liberalism as espoused by, for instance, Charles Comte and Charles Dunoyer. According to them, antagonistic interests do not exist between capitalists as owners of factors of production and laborers, but between, on the one hand, the producers in society, i.e., homesteaders, producers and contractors, including businessmen as well as workers, and on the other hand, those who acquire wealth nonproductively and/or noncontractually, i.e., the state and stateprivileged groups, such as feudal landlords. This distinction was first confused by Saint-Simon, who had at some time been influenced by Comte and Dunoyer, and who classified market businessmen along with feudal lords and other stateprivileged groups as exploiters. Marx took up this confusion from Saint-Simon and compounded it by making only capitalists exploiters and all workers exploited, justifying this view through a Ricardian labor theory of value and his theory of surplus value. Essentially, this view on exploitation has remained typical for Marxism to this day despite Böhm-Bawerk’s smashing refutation of Marx’s exploitation theory and his explanation of the difference between factor prices and output prices through time preference (interest). To this day, whenever Marxist theorists talk about the exploitative character of monopoly capitalism, they see the root cause of this in the continued existence of the private ownership of means of production. Even if they admit a certain degree of independence of the state apparatus from the class of monopoly capitalists (as in the version of “state monopoly capitalism”), for them it is not the state that makes capitalist exploitation possible; rather it is the fact that the state is an agency of capitalism, an organization that transforms the narrow-minded interests of individual capitalists into the interest of an ideal universal capitalist (the ideelle Gesamtkapitalist), which explains the existence of exploitation.
In fact, as explained, the truth is precisely the opposite: It is the state that by its very nature is an exploitative organization, and capitalists can engage in exploitation only insofar as they stop being capitalists and instead join forces with the state. Rather than speaking of state monopoly capitalism, then, it would be more appropriate to call the present system “state financed monopoly socialism,” or “bourgeois socialism.”
For representative Marxist studies, see Rudolf Hilferding, Finance Capital (London: Routledge and Kegan Paul, 1981); V.I. Lenin, Imperialism Last Stage of Capitalism (Moscow: Foreign Languages Publishing House, 1947); Paul M. Sweezy, The Theory of Capitalist Development (New York: Monthly Review Press, 1942); Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Ernest Mandel, Marxist Economic Theory (London: Merlin, 1962); Late Capitalism (London: New Left Books, 1975); Herbert Meissner, ed., Bürgerliche Ökonomie ohne Perspektive (East Berlin: Dietz, 1976); on the perversion of the classical liberal class analysis through Marxism, see Murray N. Rothbard, “Left and Right” in Egalitarianism As a Revolt Against Nature and Other Essays (Washington, D.C.: Libertarian Review Press, 1974); on the refutation of the Marxist theory of exploitation, see Eugen von Böhm-Bawerk, Karl Marx and the Close of His System, ed. Paul M. Sweezy, (New York: Augustus M. Kelley, 1948).
See on this also such—in spite of their characteristic leftist misconceptions—informative studies as C. Wright Mills, The Power Elite (New York: 1965); G. William Domhoff, Who Rules America? (New York: 1967); E.E. Schattschneider, The Semi-Sovereign People (New York: Holt 1960); Peter Bachrach and Morton Baratz, Power and Poverty (New York: 1970); C. Offe, Strukturprobleme des Kapitalistischen Staates (Frankfurt/M. Suhrkamp, 1972).
Chapter 4
[First printed in the Journal of Libertarian Studies 9, no. 2 (Fall, 1990). Also reprinted in Requiem for Marx, edited by Yuri N. Maltsev (Auburn, Ala.: Ludwig von Mises Institute, 1993).]
The basic norm of the state is power. That is, seen from the side of its origin: violence transformed into might. Violence is one of the most powerful forces shaping society, but is not itself a form of social interaction. It must become law in the positive sense of this term, that is, sociologically speaking, it must permit the development of a system of “subjective reciprocity,” and this is only possible through a system of self-imposed restrictions on the use of violence and the assumption of certain obligations in exchange for its arrogated rights; in this way violence is turned into might, and a relationship of domination emerges which is accepted not only by the rulers, but under not too severely oppressive circumstances by their subjects as well, as expressing a “just reciprocity.” Out of this basic norm secondary and tertiary norms now emerge as implied in it: norms of private law, of inheritance, criminal, obligational and constitutional law, which all bear the mark of the basic norm of power and domination, and which are all designed to influence the structure of the state in such a way as to increase economic exploitation to the maximum level which is compatible with the continuation of legally regulated domination.
The insight is fundamental that “law grows out of two essentially different roots.” On the one hand, out of the law of the association of equals, which can be called a “natural right,” even if it is no natural right, and on the other hand, out of the law of violence transformed into regulated might, the law of unequals.
On the relation between private and public law, see also F.A. Hayek, Law, Legislation and Liberty, 3 vols. (Chicago: University of Chicago Press, 1973–79), esp. vol. I, chap. 6 and vol. II, pp. 85–88.
Never, I repeat, and in particular by no modern defender of the bourgeois civilization has anything like this been penned, never has a brief been composed on behalf of the business class from so profound and so wide a comprehension of what its achievement is and what it means to humanity. (“The Communist Manifesto in Sociology and Economics,” in idem, Essays of Joseph A. Schumpeter, ed. Richard Clemence [Port Washington, N.Y.: Kennikat Press, 1951], p. 293)
Given this view of capitalism, Marx went so far as to defend the British conquest of India, for example, as a historically progressive development. See Marx’s contributions to the New York Daily Tribune, of June 25, 1853, July 11, 1853, August 8, 1853 (Marx and Engels, Werke [East Berlin: Dietz, 1960], vol. 9). As a contemporary Marxist taking a similar stand on imperialism see Bill Warren, Imperialism: Pioneer of Capitalism (London: New Left Books, 1981).
Chapter 5
[A slightly different version appears in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, edited by Mark Skousen (New York: Praeger, 1992).]
On the competing, positivist view of economics, according to which economic laws are hypotheses subject to empirical confirmation and falsification (much like the laws of physics), see Milton Friedman, “The Methodology of Positive Economics,” in idem, Essays in Positive Economics (Chicago: University of Chicago Press, 1953).
In a system without change in which there is no uncertainty whatever about the future, nobody needs to hold cash. Every individual knows precisely what amount of money he will need at any future date. He is therefore in a position to lend all the funds he receives in such a way that the loans fall due on the date he will need them. (p. 249)
See also Rothbard, Man, Economy, and State, p. 280.
Goods are useful and scarce, and any increment in goods is a social benefit. But money is useful not directly, but only in exchanges…. When there is less money, the exchange-value of the monetary unit rises; when there is more money, the exchange-value of the monetary unit falls. We conclude that there is no such thing as “too little” or “too much” money, that, whatever the social money stock, the benefits of money are always utilized to the maximum extent. (p. 670)
See also Murray N. Rothbard, The Mystery of Banking (New York: Richardson and Snyder, 1983).
Let us assume that there is only gold money and only one central bank. With the successive progress toward the state of an evenly rotating economy all individuals and firms restrict step by step their holding of cash and the quantities of gold thus released flow into nonmonetary—industrial—employment. When the equilibrium of the evenly rotating economy is finally reached, there are no more cash holdings; no more gold is used for monetary purposes. The individuals and firms own claims against the central bank, the maturity of each part of which precisely corresponds to the amount they will need on the respective dates for the settlement of their obligations. The central bank does not need any reserves as the total sum of the daily payments of its customers exactly equals the total sum of withdrawals. All transactions can in fact be effected through transfer in the bank’s books without any recourse to cash. Thus the “money” of this system is not a medium of exchange; it is not money at all; it is merely a numéraire, an ethereal and undetermined unit of accounting of that vague and indefinable character which the fancy of some economists and the errors of many laymen mistakenly have attributed to money. (Human Action, p. 249)
The notion that the creation of credit by the banking system allows investment to take place to which “no genuine saving” corresponds, i.e., the idea that saving and investment … can differ from one another, is to be explained, I think, by an optical illusion. (p. 81)
[T]he savings which result from this decision are just as genuine as any other savings. No one can be compelled to own the additional money corresponding to the new bank-credit unless he deliberately prefers to hold more money rather than some other form of wealth. (p. 83)
The new money is not “forced” on anyone. (p. 328)
As Henry Hazlitt remarks,
[o]n the same reasoning we can create any amount of new “savings” we wish overnight, simply by printing that amount of new paper money, because somebody will necessarily hold that new paper money! (The Failure of the “New Economics,” p. 227)
The theory of aggregate production that is the goal of the following book can be much more easily applied to the conditions of a totalitarian state than the theory of the production and distribution of a given output turned out under the conditions of free competition and of a considerable degree of laissez-faire. (quoted from Hazlitt, The Failure of the “New Economics,” p. 277)
If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest. (The General Theory, p. 31)
Or:
The greater, moreover, the consumption for which we have provided in advance, the more difficult it is to find something further to provide for in advance, and the greater our dependence on present consumption as a source of demand. Yet the larger our incomes, the greater, unfortunately, is the margin between our incomes and our consumption. So, failing some novel expedient, there is, as we shall see, no answer to the riddle, except that there must be sufficient unemployment to keep us so poor that our consumption falls short of our income by no more than the equivalent of the physical provision for future consumption which it pays to produce to-day. (p. 105)
Chapter 6
[Reprinted from the Review of Austrian Economics 7, no. 2 (1994).]
In order to increase the popularity of money substitutes two complementary measures were actually required: First, the note-issuing depositing institution had to overvalue deposit notes against genuine money by either charging no depositing fee or by even paying interest on deposits. Secondly, because the guarding of money is actually not costless and deposited money cannot possibly generate an interest return, the bank, in order to cover its otherwise unavoidable losses, had to engage in fractional reserve banking, i.e., it had to issue and bring into circulation new, additional deposit tickets that, while physically indistinguishable from any other notes, were actually not covered by genuine money.
On the ethical and economic status of the practice of fractional-reserve banking see the section, “From Deposit and Loan Banking to Fractional-Reserve Banking: The Devolution of Credit,” below.
In fact, such an agreement is illusionary. Joint ownership of the monopoly bank would imply that tradeable stock certificates must be issued and distributed. But who should get how much stock? Bank clients, according to their deposit size? Yet all private holders of notes help save on gold and would want to be included among the bank owners according to the size of their note holdings. What about the owners and sellers of nonmoney goods? In showing themselves willing to accept paper instead of gold, they, too, play their part in the resource cost savings. But how in the world is one to determine how many shares to award them when their contribution consists, as it does, of various quantities of heterogeneous consumer and producer goods? Here, at the very latest it would become impossible to reach agreement.
Moreover, why would any new market participant—any later deposit, note and/or nonmoney good owner not initially endowed with bank stock—want to consent to and support this arrangement? Why should he pay for banking stock, while it was distributed to the initial wealth owners free of charge, even though he is now involved in resource cost savings just as much as they were then? Such an arrangement would involve a systematic redistribution of income and wealth in favor of all initial wealth owners and at the expense of all later ones. Yet if new additional bank stock were issued for each new deposit, note, or nonmoney good owner, such stock would be worthless from the outset and any bank offering it would be a nonstarter.
In addition, as will be explained below, regardless of how the ownership problem is resolved, the very operation of the bank will—indeed must—have effects on the interpersonal income and wealth distribution.
Among the suggestions for an alternative fiat money “anchor” recently considered by Friedman, the “frozen monetary base rule” deserves a brief comment (see Friedman, “Monetary Policy for the 1980s” in To Promote Prosperity, John H. Moore, ed. ). In one respect this rule represents an advance over his earlier 3 to 5 percent monetary growth rule. His advocacy of the latter rule was based essentially on the erroneous proto-Keynesian notion that money constitutes part of social capital, such that an economy cannot grow by 5 percent unless it is accommodated to do so by a proportional increase in the money supply. In contrast, the frozen monetary base rule indicates a recognition of the old Humean insight that any supply of money is equally optimal or, in Friedman’s own words, that money’s “usefulness to the community as a whole does not depend on how much money there is (Friedman, Money Mischief, p. 28). Otherwise, the proposal represents no advance at all, for how in the world can a monopolist be expected to follow a frozen monetary base rule any more than a less stringent 3 to 5 percent growth rule?
Moreover, even if this problem were solved miraculously, this would still not alter the monopoly’s character as an instrument of unilateral expropriation and income and wealth redistribution. The monopolist, apart from offering depositing and clearing services (for which his customers would pay him a fee), would also have to perform the function, for customers and noncustomers alike, of replacing old, worn-out notes—one-to-one and free of charge—with new, identical ones (otherwise, who would want to replace a permanent commodity money by a perishable fiat money?). However, while the costs associated with this task may be low, they are definitely not zero. Accordingly, in order to avoid losses and recoup his expenses, the monopolist cannot but increase the monetary base—and hence one would essentially be back at the older monetary growth rule.
Chapter 7
[This article was written with the assistance of Jörg Guido Hülsmann and Walter Block and is reprinted from the Quarterly Journal of Austrian Economics 1, no. 1 (Spring, 1998).]
Curiously, in the reply to their various critics, Selgin and White selected as their central target an article by Hans-Hermann Hoppe (“How is Fiat Money Possible?—or, The Devolution of Money and Credit,” Review of Austrian Economics 7, no. 2 (1994): 49–74, that deals only cursorily with their position. Other Austrian critics of fractional reserve banking explicitly dealt with in Selgin and White’s article including Walter Block, “Fractional Reserve Banking: An Interdisciplinary Perspective,” in Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, Walter Block and Llewellyn H. Rockwell, Jr., eds. (Auburn, Ala.: Ludwig von Mises Institute, 1988) and Jesús Huerta de Soto, “A Critical Analysis of Central Banks and Fractional-Reserve Free Banking from the Austrian Perspective,” Review of Austrian Economics 8, no. 2 (1995): 25–36. Murray N. Rothbard, the most prominent critic of fractional reserve banking, is targeted only indirectly; and although several of his works are mentioned in their bibliography, Rothbard’s later writings on the subject (“The Myth of Free Banking in Scotland,” Review of Austrian Economics 2 [1988]: 229–57; idem, “Aurophobia: or, Free Banking on What Standard?” Review of Austrian Economics, 6, no. 1 [1992]: 97–108; idem, “The Present State of Austrian Economics,” Journal des Economistes et des Etudes Humaines 6, no. 2 [1995]) are not mentioned. Likewise ignored entirely are the criticisms by Joseph T. Salerno (“Two Traditions in Modern Monetary Theory: John Law and A.R.J. Turgot,” Journal des Economistes et des Etudes Humaines 2, no. 2/3 [1991]; idem, “The Concept of Coordination in Austrian Macroeconomics,” in Austrian Economics: Perspectives on the Past and Prospects for the Future, Richard Ebeling, ed. [Hillsdale, Mich.: Hillsdale College Press, 1991]; and idem, “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6, no. 2 [1993]: 113–46). Selgin and White also do not address, and in this case could not have done so, the most recent and most extensive criticism of their work by Jörg Guido Hülsmann (“Free Banking and the Free Bankers,” Review of Austrian Economics 9, no. 1 [1996]: 3–53).
The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of cheque-book money not fully—i.e., 100 percent—covered by deposits paid in by the public…. No bank must be permitted to expand the total amount of its deposits subject to cheque or the balance of such deposits of any individual customer … otherwise than by receiving cash deposits … or by receiving a cheque payable by another domestic bank subject to the same limitations. This means a rigid 100 per cent reserve for all future deposits; i.e., all deposits not already in existence on the first day of the reform. (The Theory of Money and Credit [Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1978], pp. 438 and 48)
See also notes 11, 25, 37, 47, and 48 below.
There is actually more to the charge of Selgin and White being fiat money advocates in the article under scrutiny. For, in “the mature free-banking system,” according to Selgin and White (but in contrast to the analysis of the operation of such a system given by Mises), a situation is supposed to emerge in which
At the limit, if inter-clearinghouse settlements were made entirely with other assets (perhaps claims on a super-clearinghouse which itself holds negligible commodity money), and if the public were completely weaned from holding commodity money, the active demand for the old-fashioned money commodity would be wholly nonmonetary. (Lawrence White, Competition and Currency [New York: New York University Press, 1989], p. 235)
Thus, notes Salerno (“Ludwig von Mises’s Monetary Theory in Light of Modern Monetary Thought,” Review of Austrian Economics 8, no. 1 [1994]: 71–115, p. 76, n. 7) regarding Selgin and White’s ultimate objective, “the public would presumably finally be freed from its shackles of gold to enjoy the virtues of an invisible-hand-generated private fiat money.” Moreover, as far as semantic innovations and deviations from orthodox Misesian terminology, and hence potential sources of confusion are concerned, we have to consider Selgin and White’s own writings. For in referring to money and money substitutes as “outside and “inside” money respectively, in talking of “base money,” “basic money,” “bank money,” “high-powered” and “low-powered” money, and, yes, the gold dollar “as a substitute for bank deposits,” they display an unusual degree of semantic creativity. Moreover, in suggesting, by their selection of terms, that all of these things are somehow equally “money,” their writings actually have become a source of obfuscation. See on this Hülsmann, “Free Banking and the Free Bankers,” pp. 5ff.
In lumping money and money substitutes together under the joint title of “money,” as if they were somehow the same thing, Selgin and White fail to grasp that the issue of fiduciary media—an increase of property titles—is not the same thing as a larger supply of property and that relative price changes effected through the issue of fiduciary media are an entirely different “externality” matter than price changes effected through an increase in the supply of property. With this the fundamental distinction between property and a property title in mind, de Soto’s analogy between fractional reserve banking and the tragedy of the commons makes perfect sense. As under the scenario of a tragedy of the commons, every issue of fiduciary media—to titles in search of property—sets in motion a rush, always starting with the bank and its client, to fill these empty tickets with existing property; and in the course of this rush, invariably the first-comers will physically enrich themselves (through the appropriation of existing quantities of property) at the expense of a corresponding impoverishment of later-comers, whose quantity of existing property is physically diminished while they have been left with a larger number of property tickets.
Holders of demand liabilities are granters of credit just as are holders of time liabilities. The only difference is that in the former case the duration of individual loans is unspecified; they are “call loans” that may mature at any time;
and “Mises,” who holds the opposite view, “confuses a difference of degree with one of substance” (Selgin, The Theory of Free Banking, p. 62). In fact, it is Selgin who is confused.
To be sure, one might say that it is only a matter of degree whether a loan (of a car or of money) matures in an hour, a day, a week, or a month. Just as surely, however, this does not change the categorical distinction between present—existing—goods and not (yet) existing future goods. At any point in time, a car or a sum of money (gold) either exists or it does not exist. Nor does it alter the praxeological datum that no one, at any time, can act with anything except present goods. Future goods are the goal of actions, but in order to attain them, every actor must first invariably employ present means goods. Nor does Selgin’s observation concerning degrees of time affect in the slightest the fundamental human condition of scarcity. The supply of present goods is at all times limited, and the limited quantity of present goods limits in turn the quantity of possible future goods.
Whereas Mises recognizes the distinction between present goods and future goods as a universal praxeological category, Selgin’s attempt to conflate demand and time deposits (thus distinguish himself fundamentally from Mises) implies a denial that there is no such fundamental difference between present (existing) goods and future (not-existing) goods (or that their existence differs only in degrees). Contrary to Selgin, it is not a matter of degree but rather one of substance whether a car or a sum of money presently exists or not, and whether one person or someone else owns them. Either they exist or they don’t exist, and either A owns them or someone else does. Accordingly if a property title (demand deposit note) then states that one person is the owner of a present car or present money and no car or money exists, or the car or money is presently owned by someone else, this does not represent a degree of truth but a falsehood. Explains Mises:
A depositor of a sum of money who acquires in exchange for it a claim convertible into money at any time which will perform exactly the same service for him as the sum it refers to has exchanged no present good for a future good. The claim that he has acquired by his deposit is also a present good for him. The depositing of money in no way means that he has renounced immediate disposal over the utility that it commands. (The Theory of Money and Credit, p. 268)
See also the two following notes.
do these warehouse receipt transactions relate to the T-account balance sheets of the deposit banks? In simple justice, not at all. When I store a piece of furniture worth $5,000 in warehouse, in law and in justice the furniture does not show up as an asset of the warehouse during the time that I keep it there. The warehouse does not add $5,000 to both its assets and liabilities because it in no sense owns the furniture; neither can we say that I have loaned the warehouse the furniture for some indefinite time period. The furniture is mine and remains mine; I am only keeping it there for safekeeping and therefore I am legally and morally entitled to redeem it any time I please. I am not therefore the bank’s “creditor”; it doesn’t owe me money which I may some day collect. Hence, there is no debt to show up on the Equity + Liability side of the ledger. Legally, the entire transaction is not a loan but a bailment. (The Mystery of Banking [New York: Richardson and Snyder, 1983], pp. 88–89)
Interestingly, while Selgin and White manifest a strong positivistic tendency (fractional reserve banking is recognized by the courts, so it must be all right; on this tendency see “The Issue of Fraud III” below), they do not come to terms with legal reality. For if money deposits are debt, why, then, don’t the courts apply the same reasoning to all other fungible commodities such as wheat? Why are wheat warehouse receipts not considered a debt but a bailment by the courts? Why is this treatment peculiar to money and the banking business? Moreover, why is it that the courts, even if they falsely consider money deposits as debts, still insist that they are more than an ordinary debt, and the depositor’s relation to the bank is not identical with that of an ordinary creditor? See Rothbard, Mystery of Banking, p. 275.
The champions of free competition in counterfeiting retort that this is simply the market at work, that the market registers a “demand” for more expanded credit, and that the private bankers, those Kirznerian entrepreneurs, are simply “alert” to such market demands. Well, of course, there is always a “demand” for fraud, and embezzlement, on the market, and there will always be plenty of “alert” swindlers who are eager and willing to furnish a supply of these items. But if we define the “market” not simply as a supply of desired goods and services, but as a supply of such goods within a framework of inviolate property rights, then we see a very different picture. (“The Present State of Austrian Economics,” Journal des Economistes et des Etudes Humaines 6, no. 2, [1995]: 77)
[t]he truth is that, except for small groups of businessmen who were able to distinguish between good and bad banks, bank notes were always looked upon with distrust. It was the special charters which governments granted to privileged banks that slowly made these suspicions disappear. (p. 438)
In [governments’] eyes the foremost task of the banks was to lend money to the treasury. The money-substitutes were favorably considered as pace-makers for government-issued paper money. The convertible banknote was merely a first step on the way to the nonredeemable banknote. With the progress of statolatry and the policy of interventionism these ideas have become general and are no longer questioned by anybody. (p. 442)
Governments did not foster the use of bank notes in order to avoid inconvenience to ladies shopping. Their idea was to lower the rate of interest and to open a source of cheap credit to their treasuries. In their eyes the increase in the quantity of fiduciary media was a means of promoting welfare. Banknotes are not indispensable. All the economic achievements of capitalism would have been accomplished if they had never existed. (Human Action: A Treatise on Economics, 3rd rev. ed. , p. 447)
Accordingly, Mises’s view regarding sound money is completely different from Selgin and White’s. Whereas the latter believe that gold would—and should—ultimately disappear from circulation altogether (see note 3 above), Mises considered it a requirement of a sound monetary system that
[g]old must be in the cash holdings of everybody. Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his pay check, and to spending gold coins when he buys in a store. (The Theory of Money and Credit, pp. 450–51)
We also reject the notion … that competitive banks issuing redeemable liabilities can create credit “out of thin air.” By the nature of the balance sheet, all bank loans must be funded by liabilities or equity. Neither source of funds can be conjured out of thin air. No one is forced to hold a competitive bank’s redeemable liabilities or to buy its shares; anyone can hold claims on other banks instead, or on no bank. A competitive bank must therefore expend real resources to attract a clientele by the provision of interest and services. The notion that a bank can extend credit … gratuitously is valid only with respect to the inframarginal credits of a monopoly bank, or to [the] issuer of a forced tender; it does not apply to a bank in a competitive system. (p. 94, n. 13)
Thus competition will beat down the returns to capital invested in fractional-reserve banking until the marginal bank is earning only the normal rate of return. (“In Defense of Fiduciary Media,” p. 97)
While we have no difficulty accepting the distinction drawn here between competitive and monopolistic banking, none of this has any bearing on the issue at hand, that is, the validity of the analogy between states and fractional reserve banks as outlaw organizations. For one, states have to compete for clients (residents). Indeed, competition between states (or banks) for clients only comes to a complete halt with the establishment of a single world state (or central bank). And the intra-state competition between fractional reserve banks is, as explained, competition within a state-privileged industry; that is, monopolistic competition (just as inter-state competition is an example of monopolistic competition). Second and more importantly, the difference between competitive and monopolistic banks (or states), interesting as it may otherwise be, does not affect in the slightest their common characteristic as fractional reserve banks (or states). Counterfeiting and taxation do not change their nature because they are undertaken competitively.
The error can be revealed by analogy. Selgin and White are paraphrased here: We also reject the notion that competitive states issuing tax liabilities can create taxes out of thin air. By the nature of state budgets all expenditures must be funded by conquest, robbery, or theft. Neither source of funds can be conjured out of thin air. No one is forced to hold any particular state’s tax liabilities or buy its shares; anyone can move and pay taxes to another state, or to no state. A competitive state must therefore expend real resources to attract a clientele by the provision of protection and services. The notion that a state can increase taxes gratuitously is valid only with respect to the inframarginal taxes of a monopoly state; it does not apply to a state in a competitive system. Thus, competition will beat down the returns to capital invested in states until the marginal state is earning only the normal rate of return.
According to Selgin and White, it would seem to follow that taxation (like money counterfeiting) is not to be considered a problem until the arrival of a single world monopoly bank. Up until then, under competitive conditions, taxes represent nothing but a normal market income.
An increase in the demand for money puts downward pressure on product and factor prices in general. If there were no money-supply response, a general decline in economic activity would follow, since prices and wages could not fully and instantaneously adjust themselves to the new market conditions. Goods in general would go unsold; production would be cut; workers would be laid off…. With a less-than-perfectly flexible price system, general deflationary pressures can push the economy below its potential during the period in which prices are adjusting to the higher monetary demand. And the fact that some prices and some wages are more flexible than others means that the adjustment period will involve changes in relative prices that reflect no changes in relative scarcities. These are precisely the kinds of problems … avoided by free banking’s responsiveness to increases in money demand. (“Central Banking, Free Banking, and Financial Crises,” Review of Austrian Economics 9, no. 2 [1996]: 117)
Buyers and sellers on the market never concern themselves with the elements in the equation of exchange, of which two—velocity of circulation and the price level—do not even exist before market parties act and the other two—the quantity of money (in the whole economy) and the sum of transactions—could not possibly be known to the parties in the market. Only the importance which the various actors in the market attach, on the one hand, to the maintenance of a cash balance of a certain magnitude and, on the other hand, to the ownership of the various goods in question determines the formation of the exchange relationship between money and goods. (“The Position of Money Among Economic Goods,” in Money, Method, and the Market Process, Richard Ebeling, ed. , p. 61)
in order to eliminate all monetary influences on the formation of prices, and the structure of production, it would not be sufficient merely quantitatively to adapt the supply of money to these changes in demand, it would be necessary also to see that it came into the hands of those who actually require it; that is, to that part of the system where that change in business organization or the habits of payment had taken place. (Prices and Production , p. 124)
With the later Hayek, one wonders how banks could possibly have the requisite knowledge of performing this task.
Whenever a bank expands its liabilities in the process of making new loans and investments, it is the holders of the liabilities who are the ultimate lenders of credit, and what they lend are the real resources they could acquire if, instead of holding money, they spent it. When the expansion or contraction of bank liabilities proceeds in such a way as to be at all times in agreement with changing demands for inside money, the quantity of real capital funds supplied to borrowers by the banks is equal to the quantity voluntarily offered to the banks by the public. Under these conditions, banks are simply intermediaries of loanable funds. (The Theory of Free Banking: Money Supply under Competitive Note Issue, p. 55)
As for John Maynard Keynes (The General Theory of Employment, Interest, and Money [New York: Harcourt, Brace, 1936], p. 82), he had written that the notion that the creation of credit by banking systems allows investment to take place to which “no genuine saving” corresponds; that is, “the idea that saving and investment … can differ from one another, is to be explained, I think, by an optical illusion” (p. 81).
[T]he savings which result from this decision are just as genuine as any other savings. No one can be compelled to own the additional money corresponding to the new bank-credit, unless he deliberately prefers to hold more money rather than some other form of wealth. (p. 83)
Indeed, Selgin acknowledges that
many Keynesians might accept the prescription for monetary equilibrium offered [by him]. Those who do not regard the liquidity trap as an important factual possibility would probably accept it as entirely adequate. (The Theory of Free Banking, p. 59)
Henry Hazlitt remarked on this Keynesian idea that
[o]n the same reasoning we can create any amount of new “savings” we wish overnight, simply by printing that amount of new paper money, because somebody will necessarily hold that new paper money! (The Failure of the “New Economics”: An Analysis of the Keynesian Fallacies [Lanham, Maryland: University Press of America, 1983], p. 227)
As for Selgin and White’s claim of being Misesians, it is worthwhile to quote Mises on
the role cash holding plays in the process of saving and capital accumulation…. [i]f an individual employs a sum of money not for consumption but for the purchase of factors of production, saving is directly turned into capital accumulation. If the individual saver employs his additional savings for increasing his cash holding because this is in his eyes the most advantageous mode of using them, he brings about a tendency toward a fall in commodity prices and a rise in the monetary unit’s purchasing power. If we assume that the supply of money in the market system does not change, this conduct on the part of the saver will not directly influence the accumulation of capital and its employment for an expansion of production. The effect of our saver’s saving, i.e., the surplus of goods produced over goods consumed, does not disappear on account of his hoarding. The prices of capital goods do not rise to the height they would have attained in the absence of such hoarding. But the fact that more capital goods are available is not affected by the striving of a number of people to increase their cash holdings. If nobody employs the goods—the nonconsumption of which brought about the additional saving—for an expansion of his consumptive spending, they remain as an increment in the amount of capital goods available, whatever their prices may be. The two processes—increased cash holding of some people and increased capital accumulation—take place side by side. A drop in commodity prices, other things being equal, causes a drop in the money equivalent of the various individuals’ capital. But this is not tantamount to a reduction in the supply of capital goods and does not require an adjustment of production activities to an alleged impoverishment. It merely alters the money items to be applied in monetary calculation. (Mises, Human Action, pp. 521–22)
The advantages and disadvantages derived from cash holding are not objective factors which could directly influence the size of cash holdings. They are put on the scales by each individual and weighed against one another. The result is a subjective judgment of value, colored by the individual’s personality. Different people and the same people at different times value the same objective facts in a different way. Just as knowledge of a man’s wealth and his physical condition does not tell us how much he would be prepared to spend for food of a certain nutritive power, so knowledge about data concerning a man’s material situation does not enable us to make definite assertions with regard to the size of his cash holding. (Mises, Human Action, p. 430)
The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money’s purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can desire from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. Changes in money’s purchasing power generate changes in the disposition of wealth among the various members of society. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive, and the appetite for such gains may result in policies designed to bring about cash-induced alterations in purchasing power. However, the services which money renders can be neither improved nor repaired by changing the supply of money. There may appear an excess or a deficiency of money in an individual’s cash holding. But such a condition can be remedied by increasing or decreasing consumption or investment. (Of course, one must not fall prey to the popular confusion between the demand for money for cash holding and the appetite for more wealth.) The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do. (Mises, Human Action, p. 421)
Chapter 8
[Reprinted from the Review of Austrian Economics 9, no. 1 (1992).]
Chapter 9
[First printed in the Meaning of Ludwig von Mises: Contributions in Economics, Epistemology, Sociology, and Political Philosophy, edited by Jeffrey M. Herbener (Auburn, Ala.: Ludwig von Mises Institute, 1993). Also reprinted in Hans-Hermann Hoppe, Economic Science and the Austrian Method (Auburn, Ala.: Ludwig von Mises Institute, 1995).]
[K]nowledge is a tool of action. Its function is to advise man how to proceed in his endeavors to remove uneasiness. ...The category of action is the fundamental category of human knowledge. It implies all the categories of logic and the category of regularity and causality. It implies the category of time and that of value. ...In acting, the mind of the individual sees itself as different from its environment, the external world, and tries to study this environment in order to influence the course of events happening in it. (The Ultimate Foundation of Economic Science, pp. 35–36)
Or:
Both, a priori thinking and reasoning on the one hand and human action on the other, are manifestations of the mind. Reason and action are congeneric and homogeneous, two aspects of the same phenomenon. (Ibid., p. 42)
Yet he leaves the matter more or less at this and concludes that “it is not the scope of praxeology to investigate the relation of thinking and action” (Human Action, p. 25).
On the propositional character of language and experience, in particular, see Kamlah and Lorenzen, Logische Propädeutik, chap. 1; Lorenzen, Normative Logic and Ethics, chap. 1. Lorenzen writes:
I call a usage a convention if I know of another usage which I could accept instead. However I do not know of another behavior which could replace the use of elementary sentences. If I did not accept proper names and predicators, I would not know how to speak at all. ...Each proper name is a convention... but to use proper names at all is not a convention: it is a unique pattern of linguistic behavior.
Therefore, I am going to call it “logical.” The same is true with predicators. Each predicator is a convention. This is shown by the existence of more than one natural language. But all languages use predicators. (Ibid., p. 16)
See also J. Mittelstrass, “Die Wiederkehr des Gleichen,” Ratio, 1966.
On the law of identity and contradiction, in particular, see Blanshard, Reason and Analysis, pp. 276ff., 423ff.
On a critical evaluation of 3- or more-valued logics as either meaningless symbolic formalisms or as logically presupposing an understanding of the traditional two-valued logic see Wolfgang Stegmüller, Hauptströmungen der Gegenwartsphilosophie (Stuttgart: Kröner, 1975), vol. 2, pp. 182–91; Blanshard, Reason and Analysis, pp. 269–75. Regarding the many-valued or open-textured logic proposed by Friedrich Waismann, Blanshard notes:
We can only agree with Dr. Waismann—and with Hegel—that the black-and-white distinctions of formal logic are quite inadequate to living thought. But why should one say, as Dr. Waismann does, that in adopting a more differentiated logic one is adopting an alternative system which is incompatible with black-and-white logic? What he has actually done is to recognize a number of gradations within the older meaning of the word “not.” We do not doubt that such gradations are there, and indeed as many more as he cares to distinguish. But a refinement of the older logic is not an abandonment of it. It is still true that the colour I saw yesterday was either a determinate shade of yellow or not, even though the “not” may cover a multitude of approximations, and even though I shall never know which was the shade I saw. (Ibid., pp. 273–74)
Following the lead of Hugo Dingler, Paul Lorenzen and other members of the so-called Erlangen School have worked out a system of protophysics, which contains all a prioristic presuppositions of empirical physics, including, apart from geometry, also chronometry and hylometry (i.e., classical mechanics without gravitation, or rational mechanics).
Geometry, chronometry and hylometry are a priori theories which make empirical measurements of space, time and material “possible.” They have to be established before physics in the modern sense of an empirical science, with hypothetical fields of forces, can begin. Therefore, I should like to call these disciplines by a common name: protophysics. (Lorenzen, Normative Logic and Ethics, p. 60)
Chapter 10
[Reprinted from Ratio 25, no. 1 (1983).]
impossible for any scientific forecaster—whether human being or computer—to predict his or her or us own future results, no matter what methods are used. Any attempt to do so can only achieve its goal post festum.
On the methodological significance of this statement see also K.O. Apel, Die Erklären: Verstehen Kontroverse in transzendental-pragmatischer Sicht (Frankfurt/ M.: Suhrkamp, 1979), note 19, pp. 44ff.
Chapter 11
[Reprinted from Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, Walter Block and Llewellyn H. Rockwell, Jr., eds., Auburn, Ala.: Ludwig von Mises Institute, 1988.]
On the faultiness of Gewirth’s attempt to derive universalizable rights from the notion of action see also the perceptive remarks by Alasdair MacIntyre, After Virtue: A Study in Moral Theory (London: Duckworth, 1981), pp. 64–65; Habermas, Moralbewusstsein und kommunikatives Handeln, pp. 110–11; and Veatch, Human Rights, pp. 159–60.
On human rights as property rights see also Rothbard, The Ethics of Liberty, chap. 15.
Chapter 12
[Reprinted from the Austrian Economics Newsletter (Winter, 1988). Also reprinted in volume 3 of Austrian Economics, edited by Stephen Littlechild (London: Edward Elgar, 1990).]
Chapter 13
[Reprinted from Liberty 2, no. 1 (1988).]
Chapter 14
[Reprinted from volume 17 of Austrian Economics: Perspectives on the Past and Prospects for the Future, edited by Richard M. Ebeling (Hillsdale, Mich.: Hillsdale College Press, 1991).]
Geometry, chronometry and hylometry [rational mechanics] are a priori theories which make empirical measurement of space, time and material “possible.” They have to be established before physics in the modern sense of all empirical science, with its hypothetical fields of forces, can begin. Therefore, I should like to call these three disciplines by the common name: protophysics. The true sentences of protophysics are those sentences which are defendable on the basis of logic, arithmetic and analysis, definitions and the ideal norms which make measurements possible. (p. 60)
See also Peter Janich, Die Protophysik der Zeit (Mannheim: Bibliographisches Institut, 1969); Friedrich Kambartel, Erfahrung und Struktur ).
As far as the empiricist principle of logical positivism refers to the experimental methods of the natural sciences, it merely asserts what is not questioned by anybody. As far as it rejects the epistemological principles of the sciences of human action, it is not only entirely wrong. It is also knowingly and intentionally undermining the intellectual foundations of Western civilization. (p. 133)
The advance of formalism, then, explains Kambartel, has far-reaching consequences.
The retreat of mathematics from all practical justification, and from the corresponding epistemological justification of formalism, is itself a practical decision of the utmost importance. It is the abandonment of practical justification and, since formal systems without a meaningful interpretation of their starting point cannot justify anything, ultimately of the justification of propositions altogether. (p. 241)
In consequence,
many formal analyses become a high-bred game of an interested few, although without the public noticing it, because of its inability to attain the level of discussion that is required here to determine the borderline between theory and game. (p. 238)
take a look at any page by the 1983 economics [Nobel] prize winner, Gerald Debreu, Theory of Value: An Axiomatic Analysis of Economic Equilibrium, which was in its eighth printing in 1979—a testimony to the honors of graduate study in economics. The only hint of reality in the entire book appears on p. 29, the words, “No. 2 Red Winter Wheat.” (Gary North, “Why Murray Rothbard Will Never Win the Nobel Prize!,” in Walter Block and Llewellyn H. Rockwell, Jr., eds., Man, Economy, and Liberty, Essays in Honor of Murray N. Rothbard [Auburn, Ala.: Ludwig von Mises Institute, 1988], pp. 89–90)
Chapter 15
[Reprinted from www.LewRockwell.com.]
