Free Market Economics: A Basic Reader

History of Economic Thought

Hans F. Sennholz

For almost two thousand years economic investigation was handicapped by the common notion that economic exchange is fair only as long as each party gets exactly as much as he gives the other. This notion of equality in exchange even permeated the writings of the classical economists.

Back in the 1870’s the Englishman Jevons, the Swiss Walras, and the Austrian Menger irrefutably exploded this philosophical foundation. The Austrian School, especially, built a new foundation on the cognition that economic exchange results from a difference in individual valuations, not from an equality of costs. According to Menger, “the principle that leads men to exchange is the same principle that guides them in their economic activity as a whole; it is the endeavor to insure the greatest possible satisfaction of their wants.” Exchange comes to an end as soon as one party to the exchange should judge both goods of equal value.

In the terminology of the economists, the value of a good is determined by its marginal utility. This means that the value of a good is determined by the importance of the least important want that can be satisfied by the available supply of goods. A simple example first used by Boehm-Bawerk, the eminent Austrian economist, may illustrate this principle.

A pioneer farmer in the jungle of Brazil has just harvested five sacks of grain. They are his only means of subsistence until the next harvest. One sack is absolutely essential as the food supply which is to keep him alive. A second sack is to assure his full strength and complete health until the next harvest. The third sack is to be used for the raising of poultry which provides nutriment in the form of meat. The fourth sack is devoted to the distilling of brandy. And finally, after his modest personal wants are thus provided for, he can think of no better use for his fifth sack than to feed it to a number of parrots whose antics give him some entertainment.

It is obvious that the various uses to which the grain is put do not rank equally in importance to him. His life and health depend on the first two sacks, while the fifth and last sack “at the margin” has the least importance or “utility.” If he were to lose this last sack, our frontier farmer would suffer a loss of well-being no greater than the pleasure of parrot entertainment. Or, if he should have an opportunity to trade with another frontiersman who happens to pass his solitary log cabin, he will be willing to exchange one sack for any other good that in his judgment exceeds the pleasure of parrot entertainment.

But now let us assume that our frontier farmer has a total supply of only three sacks. His valuation of any one sack will be the utility provided by the third and last sack, which affords him the meat. Loss of any one of three sacks would be much more serious, its value and price therefore much higher. Our farmer could be induced to exchange this sack only if the usefulness of the good he is offered would exceed the utility derived from the consumption of meat.

And finally, let us assume that he possesses only a single sack of grain. It is obvious that any exchange is out of the question as his life depends on it. He would rather fight than risk loss of this sack.

The Law of Supply and Demand

This discussion of the principles of valuation is not merely academic. In a highly developed exchange economy these principles explain the familiar observation that the value and price of goods vary inversely to their quantity. The larger the supply of goods the lower will be the value of the individual good, and vice versa. This elementary principle is the basis of the price doctrine known as the law of supply and demand. Stated in a more detailed manner, the following factors determine market prices: the value of the desired good according to the subjective judgment of the buyer and his subjective value of the medium of exchange; the subjective value of the good for the seller and his subjective value of the medium of exchange.

In a given market there can be only one price. Whenever businessmen discover discrepancies in prices of goods at different locations, they will endeavor to buy in the lower-price markets and sell in the higher-price markets. But these operations tend to equalize all prices. Or, if they discover discrepancies between producers’ goods prices and the anticipated prices of consumers’ goods, they may embark upon production in order to take advantage of the price differences.

Value and price constitute the very foundation of the economics of the market society, for it is through value and price that the people give purpose and aim to the production process. No matter what their ultimate motivation may be, whether material or ideal, noble or base, the people judge goods and services according to their suitability for the attainment of their desired objectives. They ascribe value to consumers’ goods and determine their prices. And according to Boehm-Bawerk’s irrefutable “imputation theory,” they even determine indirectly the prices of all factors of production and the income of every member of the market economy.

The prices of the consumers’ goods condition and determine the prices of the factors of production: land, labor, and capital. Businessmen appraise the production factors in accordance with the anticipated prices of the products. On the market, the price and remuneration of each factor then emerges from the bids of the competing highest bidders. The businessmen, in order to acquire the necessary production factors, outbid each other by bidding higher prices than their competitors. Their bids are limited by their anticipation of the prices of the products.

The pricing process thus reveals itself as a social process in which all members of society participate. Through buying or abstaining from buying through cooperation and competition, the millions of consumers ultimately determine the price structure of the market and the allocation of the income of each individual.

Prices Are Production Signals

Market prices direct economic production. They determine the selection of the factors of production, particularly the land and resources that are employed—or left unused. Market prices are the essential signals that provide meaning and direction to the market economy. The entrepreneurs and capitalists are merely the consumers’ agents, and must cater to their wishes and preferences. Through their judgments of value and expressions of price, the consumers decide what is to be produced and in what quantity and quality; where it is to be produced and by whom; what method of production is to be employed; what material is to be used; and they make numerous other decisions. Indeed, the baton of price makes every member of the market economy a conductor of the production process.

Prices also direct investments. True, it may appear that the businessman determines the investment of savings and the direction of production. But he does not exercise this control arbitrarily, as his own desires dictate. On the contrary, he is guided by the prices of products. Where lively demand assures or promises profitable prices, he expands his production. Where prices decline, he restricts production. Expansion and contraction of production tend to alternate until an equilibrium has been established between supply and demand. In final analysis, then, it is the consumer—not the businessman—who determines the direction of production through his buying or abstention from buying.

If, for instance, every individual member of the market society were to consume all his income, then the demand for consumers’ goods would determine prices in such a way that businessmen would be induced to produce consumers’ goods only. The stock of capital goods will stay the same, provided people do not consume more than their income. If they consume more, the stock of capital goods is necessarily diminished.

If, on the other hand, people save part of their incomes and reduce consumption expenditures, the prices of consumption goods decline. Businessmen thus are forced to adjust their production to the changes demanded. Let us assume that people, on the average, save 25 per cent of their incomes. Then, businessmen, through the agency of prices, would assign only 75 per cent of production to immediate consumption and the rest to increasing capital.

Our knowledge of prices also discloses the most crucial shortcoming of socialism and the immense superiority of the market order. Without the yardstick of prices, economic calculation is impossible. Without prices, how is the economic planner to calculate the results of production? He cannot compare the vast number of different materials, kinds of labor, capital goods, land, and methods of production with the yields of production. Without the price yardstick, he cannot ascertain whether certain procedures actually increase the productivity and output of his system. It is true, he may calculate in kind. But such a calculation permits no value comparison between the costs of production and its yield. Other socialist substitutes for the price denominator, such as the calculation of labor time, are equally spurious.

Government Interference with Prices

Economic theory reveals irrefutably that government intervention causes effects that tend to be undesirable, even from the point of view of those who design that intervention. To interfere with prices, wages, and the rates of interest through government orders and prohibitions is to deprive the people of their central position as sovereigns of the market process. It compels entrepreneurs to obey government orders rather than the value judgments and price signals of consumers. In short, government intervention curtails the economic freedom of the people and enhances the power of politicians and government officials.

The price theory also explains the various other economic problems of socialism and the interventionist state. It explains, for instance, the unemployment suffered in the industrial areas, the agricultural surpluses accumulated in government bins and warehouses; it even explains the gold and dollar shortages suffered by many central banks all over the world.

The market price equates the demand for and the supply of goods and services. It is the very function of price to establish this equilibrium. At the free market price, anyone willing to sell can sell, and anyone willing to buy can buy. Surpluses or shortages are inconceivable where market prices continuously adjust supply and production to the demand exerted by the consumers.

But whenever government by law or decree endeavors to raise a price, a surplus inevitably results. The motivation for such a policy may indeed be laudable: to raise the farmers’ income and improve their living conditions. But the artificially high price causes the supply to increase and the demand to decline. A surplus is thus created, which finds some producers unable to sell their goods at the official price. This very effect explains the $8 billion agricultural surplus now held by the U.S. Government.

It also explains the chronic unemployment of some 5 million people in the United States. For political and social reasons and in attempted defiance of the law of supply and demand, the U.S. Government has enacted minimum wage legislation that is pricing millions of workers right out of the market. The minimum wage is set at $1.25 per hour—to which must be added approximately 30¢ in fringe costs such as social security, vacations and paid holidays, health, and other benefits—so that the minimum employment costs of an American worker exceed $1.55 an hour. But in the world of economic reality, there are millions of unskilled workers, teenagers, and elderly workers whose productivity rates are lower than this minimum. Consequently, no businessman will employ them unless he is able to sustain continuous losses on their employment. In fact, these unfortunate people are unemployable as long as the official minimum wage exceeds their individual productivity in the market. This kind of labor legislation, even when conceived in good intentions, has bred a great variety of problems which give rise and impetus to more radical government intervention.

Money Problems Explained

The price theory also explains most money problems in the world. For several years after World War II, many underdeveloped countries suffered a chronic gold and dollar shortage. And in recent years, the United States itself has had serious balance-of-payments problems, which are reflected in European countries as a dollar flood.

No matter what the official explanations may be, our knowledge of prices provides us with an understanding of these international money problems. Price theory reveals the operation of “Gresham’s Law,” according to which an inflated depreciated currency causes gold to leave the country. Gresham’s Law merely constitutes the monetary case of the general price theory, which teaches that a shortage inevitably results whenever the government fixes an official price that is below the market price. When the official exchange ratio between gold and paper money understates the value of gold, or overstates the paper, a shortage of gold must inevitably emerge.

And finally, our knowledge of the nature of prices and of the consequences of government interference with prices also explains the “shortages” of goods and services suffered in many countries. Whether the interference is in the form of emergency or wartime controls, international commodity agreements, price stops, wage stops, rent stops, or “usury laws” that artificially limit the yield of capital—and whether they are imposed on the people of America, Africa, Asia, or Europe— government controls over prices control and impoverish the people. And yet, omnipotent governments all over the world are bent on substituting threats and coercion for the laws of the market.

John Stuart Mill

Among the mistakes [of the preclassical writers] which were most pernicious in their direct consequences . . . was the immense importance attached to consumption. The great end of legislation in matters of national wealth . . . was to create consumers. . . . This object, under the varying names of an extensive demand, a brisk circulation, a great expenditure of money, and sometimes totidem verbis a large consumption, was conceived to be the great condition of prosperity.

It is not necessary, in the present state of the science, to contest this doctrine in the most flagrantly absurd of its forms or of its applications. The utility of a large government expenditure for the purpose of encouraging industry is no longer maintained. . . .

In opposition to these palpable absurdities, it was triumphantly established by political economists that consumption never needs encouragement. . . . The person who saves his income is no less a consumer than he who spends it: he consumes it in a different way; it supplies food and clothing to be consumed, tools and materials to be used, by productive laborers. Consumption, therefore, already takes place to the greatest extent which the amount of production admits of; but, of the two kinds of consumption, reproductive and unproductive, the former alone adds to the national wealth, the latter impairs it. What is consumed for mere enjoyment is gone; what is consumed for reproduction leaves commodities of equal value, commonly with the addition of a profit. The usual effect of the attempts of government to encourage consumption is merely to prevent saving; that is, to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means which were intended to increase it.

What a country wants to make it richer is never consumption, but production. Where there is the latter, we may be sure that there is no want of the former. To produce, implies that the producer desires to consume; why else should he give himself useless labor? He may not wish to consume what he himself produces, but his motive for producing and selling is the desire to buy. Therefore, if the producers generally produce and sell more and more, they certainly also buy more and more.

From what has been already said, it is obvious that periods of “brisk demand” are also the periods of greatest production: the national capital is never called into full employment but at those periods. This, however, is no reason for desiring such times; it is not desirable that the whole capital of the country should be in full employment. For, the calculations of producers and traders being of necessity imperfect, there are always some commodities which are more or less in excess, as there are always some which are in deficiency. If, therefore, the whole truth were known, there would always be some classes of producers contracting, not extending, their operations. If all are endeavoring to extend them, it is a certain proof that some general delusion is afloat.

The commonest cause of such delusion is some general, or very extensive, rise of prices (whether caused by speculation or by the currency) which persuades all dealers that they are growing rich. And hence, an increase of production really takes place during the progress of depreciation, as long as the existence of depreciation is not suspected. . . . But when the delusion vanishes and the truth is disclosed, those whose commodities are relatively in excess must diminish their production or be ruined: and if during the high prices they have built mills and erected machinery, they will be likely to repent at leisure.

Unreasonable hopes and unreasonable fears alternately rule with tyrannical sway over the minds of a majority of the mercantile public; general eagerness to buy and general reluctance to buy, succeed one another in a manner more or less marked, at brief intervals. Except during short periods of transition, there is almost always either great briskness of business or great stagnation; either the principal producers of almost all the leading articles of industry have as many orders as they can possible execute, or the dealers in almost all commodities have their warehouses full of unsold goods.

General Superabundance

In this last case, it is commonly said that there is a general superabundance; and as those economists who have contested the possibility of general superabundance would none of them deny the possibility or even the frequent occurrence of the phenomenon which we have just noticed, it would seem incumbent on them to show that the expression to which they object is not applicable to a state of things in which all or most commodities remain unsold, in the same sense in which there is said to be a superabundance of any one commodity when it remains in the warehouses of dealers for want of a market.

Whoever offers a commodity for sale desires to obtain a commodity in exchange for it, and is therefore a buyer by the mere fact of his being a seller. The sellers and the buyers, for all commodities taken together, must, by the metaphysical necessity of the case, be an exact equipoise to each other; and if there be more sellers than buyers of one thing, there must be more buyers than sellers for another.

This argument is evidently founded on the supposition of a state of barter; and, on that supposition, it is perfectly incontestable. When two persons perform an act of barter, each of them is at once a seller and a buyer. He cannot sell without buying. Unless he chooses to buy some other person’s commodity, he does not sell his own.

If, however, we suppose that money is used, these propositions cease to be exactly true. . . . Interchange by means of money is therefore, as has been often observed, ultimately nothing but barter. But there is this difference—that in the case of barter, the selling and the buying are simultaneously confounded in one operation; you sell what you have, and buy what you want, by one indivisible act, and you cannot do the one without doing the other.

Now the effect of the employment of money, and even the utility of it, is that it enables this one act of interchange to be divided into two separate acts or operations; one of which may be performed now, and the other a year hence, or whenever it shall be most convenient. Although he who sells, really sells only to buy, he need not buy at the same moment when he sells; and he does not therefore necessarily add to the immediate demand for one commodity when he adds to the supply of another. The buying and selling being now separated, it may very well occur that there may be, at some given time, a very general inclination to sell with as little delay as possible, accompanied with an equally general inclination to defer all purchases as long as possible.

This is always actually the case, in those periods which are described as periods of general excess. And no one, after sufficient explanation, will contest the possibility of general excess, in this sense of the word. The state of things which we have just described, and which is of no uncommon occurrence, amounts to it.

For when there is a general anxiety to sell, and a general disinclination to buy, commodities of all kinds remain for a long time unsold, and those which find an immediate market do so at a very low price. . . . There is stagnation to those who are not obliged to sell, and distress to those who are. . . .

In order to render the argument for the impossibility of an excess of all commodities applicable to the case in which a circulating medium is employed, money must itself be considered as a commodity. It must, undoubtedly, be admitted that there cannot be an excess of all other commodities, and an excess of money at the same time.

But those who have, at periods such as we have described, affirmed that there was an excess of all commodities, never pretended that money was one of these commodities; they held that there was not an excess, but a deficiency of the circulating medium. What they called a general superabundance, was not a superabundance of commodities relatively to commodities, but a superabundance of all commodities relatively to money.

What it amounted to was, that persons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsalable. . . .

It is, however, of the utmost importance to observe that excess of all commodities, in the only sense in which it is possible, means only a temporary fall in their value relatively to money. To suppose that the markets for all commodities could, in any other sense than this, be overstocked, involves the absurdity that commodities may fall in value relatively to themselves.

The argument against the possibility of general overproduction is quite conclusive, so far as it applies to the doctrine that a country may accumulate capital too fast; that produce in general may, by increasing faster than the demand for it, reduce all producers to distress. This proposition, strange to say, was almost a received doctrine as lately as thirty years ago; and the merit of those who have exploded it is much greater than might be inferred from the extreme obviousness of its absurdity when it is stated in its native simplicity.

It is true that if all the wants of all the inhabitants of a country were fully satisfied, no further capital could find useful employment; but, in that case, none would be accumulated. So long as there remain any persons not possessed, we do not say of subsistence, but of the most refined luxuries, and who would work to possess them, there is employment for capital. . . . Nothing can be more chimerical than the fear that the accumulation of capital should produce poverty and not wealth, or that it will ever take place too fast for its own end. Nothing is more true than that it is produce which constitutes the market for produce, and that every increase of production, if distributed without miscalculation among all kinds of produce in the proportion which private interest would dictate, creates, or rather constitutes its own demand.

This is the truth which the deniers of general overproduction have seized and enforced. . . .

The essentials of the doctrine are preserved when it is allowed that there cannot be permanent excess of production, or of accumulation; though it be at the same time admitted, that as there may be a temporary excess of any one article considered separately, so may there of commodities generally, not in consequence of overproduction, but of a want of commercial confidence.

It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices. But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters; that their observation of facts is imperfect, and their explanation still more so; that they treat doubtful points as matter of certainty, often pray for what is directly opposite to their interests, and importunately solicit from authority a protection of the most mischievous tendency.

Jean Baptiste Say

To enable us to form clear and correct practical notions in regard to markets for the products of industry, we must carefully analyse the best established and most certain facts, and apply to them the inferences we have already deduced from a similar way of proceeding; and thus perhaps we may arrive at new and important truths, that may serve to enlighten the views of the agents of industry, and to give confidence to the measures of governments anxious to afford them encouragement.

A man who applies his labour to the investing of objects with value by the creation of utility of some sort, cannot expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it. Now, of what do these means consist? Of other values of other products, likewise the fruits of industry, capital, and land. Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.

Slow Sales Not Due to Scarcity of Money

This observation is applicable to all cases, where there is a supply of commodities or of services in the market. They will universally find the most extensive demand in those places, where the most of values are produced; because in no other places are the sole means of purchase created, that is, values. Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another.

Production Creates Purchasing Power

It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.

For this reason, a good harvest is favourable, not only to the agriculturist, but likewise to the dealers in all commodities generally. The greater the crop, the larger are the purchases of the growers. A bad harvest, on the contrary, hurts the sale of commodities at large. And so it is also with the products of manufacture and commerce. The success of one branch of commerce supplies more ample means of purchase, and consequently opens a market for the products of all the other branches; on the other hand, the stagnation of one channel of manufacture, or of commerce, is felt in all the rest.

But it may be asked, if this be so, how does it happen, that there is at times so great a glut of commodities in the market, and so much difficulty in finding a vent for them? Why cannot one of these superabundant commodities be exchanged for another? I answer that the glut of a particular commodity arises from its having outrun the total demand for it in one or two ways; either because it has been produced in excessive abundance, or because the production of other commodities has fallen short.

From this important truth may be deduced the following important conclusions:

1. That, in every community the more numerous are the producers, and the more various their productions, the more prompt, numerous, and extensive are the markets for those productions; and by a natural consequence, the more profitable are they to the producers; for price rises with the demand. But this advantage is to be derived from real production alone, and not from a forced circulation of products; for a value once created is not augmented in its passage from one hand to another, nor by being seized and expended by the government, instead of by an individual. The man, that lives upon the productions of other people, originates no demand for those productions; he merely puts himself in the place of the producer, to the great injury of production, as we shall presently see.

2. That each individual is interested in the general prosperity of all, and that the success of one branch of industry promotes that of all the others. In fact, whatever profession or line of business a man may devote himself to, he is the better paid and the more readily finds employment, in proportion as he sees others thriving equally around him. A man of talent, that scarcely vegetates in a retrograde state of society, would find a thousand ways of turning his faculties to account in a thriving community that could afford to employ and reward his ability. A merchant established in a rich and populous town, sells to a much larger amount than one who sets up in a poor district, with a population sunk in indolence and apathy. What could an active manufacturer, or an intelligent merchant, do in a small deserted and semi-barbarous town in a remote comer of Poland or Westphalia? Though in no fear of a competitor, he could sell but little, because little was produced; whilst at Paris, Amsterdam, or London, in spite of the competition of a hundred dealers in his own line, he might do business on the largest scale. The reason is obvious: he is surrounded with people who produce largely in an infinity of ways, and who make purchases, each with his respective products, that is to say, with the money arising from the sale of what he may have produced.

4. The same principle leads to the conclusion, that the encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.

The Law of Markets

Having once arrived at the clear conviction, that the general demand for products is brisk in proportion to the activity of production, we need not trouble ourselves much to inquire towards what channel of industry production may be most advantageously directed. The products created give rise to various degrees of demand, according to the wants, the manners, the comparative capital, industry, and natural resources of each country; the article most in request owing to the competition of buyers, yields the best interest of money to the capitalist, the largest profits to the adventurer, and the best wages to the labourer; and the agency of their respective services is naturally attracted by these advantages towards those particular channels.

Such are the concomitants of declining production, which are only to be remedied by frugality, intelligence, activity, and freedom.

Gary North

The division of labor is a subject which has fascinated social scientists for millennia. Before the advent of modem times, philosophers and theologians concerned themselves with the implications of the idea. Plato saw as the ultimate form of society a community in which social functions would be rigidly separated and maintained; society would be divided into definite functional groups: warriors, artisans, unskilled laborers, rulers. St. Paul, in his first letter to the church at Corinth, went so far as to describe the universal Church in terms of a body: there are hands, feet, eyes, and all are under the head, Christ. Anyone who intends to deal seriously with the study of society must grapple with the question of the division of labor. Karl Marx was no exception.

Property vs. Labor

Under this system of alienated labor, Marx argued, man’s very life forces are stolen from him. The source of man’s immediate difficulty is, in this view, the division of labor. The division of labor was, for Marx, the very essence of all that is wrong with the world. It is contrary to man’s real essence. The division of labor pits man against his fellow man; it creates class differences; it destroys the unity of the human race. Marx had an almost theological concern with the unity of mankind, and his hostility to the division of labor was therefore total (even totalitarian).

Class Warfare

A Utopian Ideal

A more utopian ideal cannot be encountered in serious economic literature. While some commentators think that Marx later abandoned this radical view, the evidence supporting such a conclusion is meager. Marx never explicitly repudiated it (although the more outspoken Engels did, for all intents and purposes). Even if Marx had abandoned the view, the basic problems would still remain. How could a communist society abandon the specialization of labor that has made possible the wealth of modem industrialized society and at the same time retain modem mass production methods? How could the communist paradise keep mankind from sliding back into the primitive, highly unproductive, unskilled, low capital intensity production techniques that have kept the majority of men in near starvation conditions throughout most of human history?

Who Shall Plan?

The Problem of Scarcity

Ultimately, the acceptance of the existence of scarcity must be a part of any sane social analysis. In contrast to this Rousseauian-Marxian view of the division of labor stands both the traditional Christian view and the libertarian view of Professor Mises. Men have a natural propensity to consume. If unrestrained, this tendency might result in looting, destruction, and even murder.

The Need to Produce

The desire to consume must be tempered by a willingness to produce, and to exchange the fruits of production on a value for value received basis. Each person then consumes only what he has earned, while extending the same right to others. One of the chief checks on men’s actions is the fact of economic scarcity. In order to extract from a resisting earth the wealth that men desire, they are forced to cooperate. Their cooperation can be voluntary, on a free market, or it can be enforced from above by some political entity.

Scarcity makes necessary an economic division of labor. Those with certain talents can best serve their own interests and society’s interests by concentrating their activities in the areas of production in which they are most efficient. Such specialization is required if productivity is to be increased. If men wish to have more material goods and greater personal services, they must choose occupations in which they can become effective producers. Those who favor a free market arrangement argue that each man is better equipped than some remote board of supervisors to arrange his own affairs and choose his own calling according to his desires, talents, and dreams. But whether the State directs production or the demand of a free market, the specialization of labor is mandatory. This specialization promotes social harmony; the division of labor forces men to restrain their hostile actions against each other if they wish to have effective, productive economic cooperation.

A Faulty Premise

Anyone who wishes to understand why the Marxian system was so totally at odds with the nineteenth century world, and why it is so completely unworkable in practice, can do no better than examine Marx’s attitude toward the division of labor. It becomes obvious why he always shied away from constructing “blueprints for the communist paradise” and concentrated on lashing the capitalist framework: his view of the future was utopian. He expected man to be regenerated by the violence of the Revolution. The world beyond would be fundamentally different: there would be no scarcity, no fighting, and ultimately, no evil. The laws of that commonwealth would not be comformable with the laws that operate under bourgeois capitalism. Thus, for the most part, Marx remained silent about the paradise to come. He had to. There was no possible way to reconcile his hopes for the future with the reality of the world. Marx was an escapist; he wanted to flee from time, scarcity, and earthly limitations. His economic analysis was directed at this world, and therefore totally critical; his hopes for the future were utopian, unrealistic, and in the last analysis, religious. His scheme was a religion—a religion of revolution.

Gary North

If people value something, it has value; if people do not value something, it does not have value; and there is no intrinsic about it.

RT. HON. J. ENOCH POWELL, M.P.

“Ideas die hard,” says an old proverb. Even in an age of rapid change such as our own, the slogans, cliches, and errors of earlier times seem to persist, it often seems that the truths that once brought peace, stability, and steady progress are the first things to be abandoned, while the errors persist undaunted. Henry Hazlitt once wrote of John Maynard Keynes that the true things he said were not new, and the new things he said were not true. Yet it is the new aspect of Keynes’ “New Economics” that has fascinated today’s guild of economists.

The triumph of the slogan is understandable. We are limited creatures. We cannot attain exhaustive knowledge of anything, and certainly not of everything. As a result, we find ourselves at the mercy of the expert; simultaneously, we live our day-to-day lives in terms of ideas that we cannot be continually re-examining. Some things must be accepted on faith or by experience; we have neither the time nor capacity to rethink everything we know. Still, no intelligent person dares to neglect the possibility that his opinion in some area or other may be open to question. At times it is vital that we reconsider a subject, especially if it is a barrier to clear thinking or effective action. If our error is in a realm of life in which we claim to be experts, or at least skilled amateurs, then the necessity of careful reasoning is exceptionally important. The persistence of some erroneous line of reasoning here, simply because this unexamined train of thought is familiar to us, can be disastrous.

Take, for example, the labor theory of value. Classical economics—by which we mean that body of economic thought which was in vogue from the time of Adam Smith (1770’s) until the marginalist-subjective schools arose (1870’s)—was confounded by the problem of value. It proposed a cause-and-effect relationship between human labor and value: abstract human labor (which itself was an abstract concept derived more from mechanics than human experience) was produced by laborers on their jobs; this abstract human labor was in some way embodied in the products of that labor, and this is the source of all value. Certain inescapable problems arose under this presupposition. Why did selling prices fail to correspond to the total payments made to labor? How did the phenomenon of profit appear? What was the origin of interest? On a more concrete level, why did an uncut diamond bring a higher price on the market than an intricate mechanism like a clock? They could explain the disparity of selling prices of jewels and selling prices of clocks in terms of supply and demand, but their labor theory of value never fitted into this explanation. It was an extraneous issue.

Contradictions of Marx

What the new theory did was to reverse the cause-and-effect relationship of the classical school. The value of labor is derivative: it stems from the value of labors product. This, in turn, is the outcome of supply and demand. People desire certain products; these products are not in unlimited supply in relation to the demand. Or, to put it another way, at zero price, some of the demand is left unsatiated. The value of the product is not derived from labor; the reverse is true. Thus, value is not something intrinsic to either the labor or the product; value is imputed by acting men. Value is not a metaphysically existing substance; an object is simply valued (passive) by someone who actively values it. Marx always chided capitalist thinkers for making a “fetishism of commodities,” i.e., ascribing to economic goods a life of their own apart from the human and social relations that make possible the creation of the goods. But this is precisely his labor theory of value. It hypothesized the existence of “congealed labor time” which supposedly gives value to commodities. Had he turned to the individuals who actively participate in all economic action he would have been led to abandon his own brand of “commodity fetishism.” Marx, the self-proclaimed empiricist, was befuddled by his own a priori theory.

Contemporary Errors

Conservatives do not like communism. As a result, they are willing to reject the familiar tenets of Marx’s economics. Those who have read at least excerpts from Capital and who are aware of the labor theory of value are usually willing to abandon the idea. Unfortunately, it would seem that they abandon it in name only, simply because Marx happened to believe it. They have not abandoned the fundamental approach to economics which Marx employed, namely, the fallacy of intrinsic value. The most common application of this erroneous concept, at least in conservative circles, is the idea that gold and silver possess intrinsic value, while paper money does not. This error deserves special attention.

Value: Historic vs. Intrinsic

Today we value silver and gold for many reasons, and on first glance, monetary purposes are not the main ones for most people. That is because so few populations are legally permitted to use gold in trade, and the statist policies of inflation have brought Gresham’s famous law into operation: silver coins have gone into hoards, since the value of their silver content is greater than their face value as coins. But on the international markets, gold has not yet been dethroned; governments and central banks do not always trust each other, but they do trust the historic value of gold.

Why this historic value? I do not want to involve myself in a rarefied philosophical debate concerning metaphysics, but I think it is safe to say that gold does have certain intrinsic qualities. It is highly durable, easily divisible, transportable, and most of all, it is scarce. Money must be all of these, to one degree or another, if it is to function as a means of exchange. It is vital that we get our categories straight in our minds: it is not value that is intrinsic to gold, but only the physical properties that are valued by acting men. Gold’s physical properties are the product of nature; its value is the product of acting men.

It would be a terrible mistake, however, to de-emphasize the historic value of gold and silver merely because they possess no intrinsic value. That mistake is the one which the opponents of gold would have us make. They are equally guilty of mixing up the categories of intrinsic value and historic value, only they argue from the other direction. Conservatives appreciate the fact of gold’s historic value, but they mistakenly argue their case in terms of gold’s intrinsic value. Their opponents do not appreciate the argument from history, but they spend their time refuting the conservatives’ erroneous presentation. They assume that because gold has no intrinsic value (true), gold’s historic value as a means of exchange is somehow invalidated. The two positions are diametrically opposed, yet they focus on a common ground which is irrelevant to both positions; the conservatives do not help their case for gold by an appeal to intrinsic value, and gold’s opponents do not refute the case for gold by demonstrating the error of that appeal.

Gold’s overwhelming acceptance historically by most men in most societies is a lasting testimony to its value as a means of exchange. It should not be referred to as “a storehouse of value,” as it is in so many textbooks. What we should say is that gold is readily marketable and for that reason a valuable thing to store. This position of gold in history is a self-perpetuating phenomenon: people tend to accept gold because they and others have in the past; they assume that others will be willing to accept gold in exchange for goods in the future. This assumption of continuity is basic to all goods that function as money. Continuity is therefore a function of both the physical properties of gold and of men’s estimations concerning other men’s future valuations. In short, it involves nature, man, and time. In estimating the importance of gold for an economic system’s proper functioning, we must take into consideration all three factors, keeping each clear in our minds. This is why we need economic analysis; without it, we wander blindly.

Ignorance in the short run is seldom profitable; in the long run, it is invariably disastrous. Fallacious argumentation can too easily be turned against one by his enemies. Just as Marx used the fallacious labor theory of value against those classical economists who tried to defend the free market in terms of that theory, so the opponents of gold can use the intrinsic value theory against those who try to defend the gold standard with it. This is not to say that logic alone will convince men of the validity of a full gold coin standard; logic is always a tool used by men of varying presuppositions, and these are in turn the product of pre-theoretical valuations. We should not trust in logic to save the world. But ignorance is far worse: it knows neither its presuppositions nor the probable results of its arguments. It lacks consistency, it lacks clarity, and it can be turned against its user by the enemy. Therefore, let the defenders of the gold standard acknowledge the advent of modern, subjectivist economic reasoning. Let us face the fact that if Boehm-Bawerk’s refutation of Marx’s labor theory of value is valid, then all other applications of the fallacy of intrinsic value are equally invalid.

If we cannot learn to think consistently on this point, then we will be grist for the inflationists’ mill. The inflationistic Juggernaut may resemble a charging elephant in our era. It may be too late to stop it with a small caliber rifle, but we know it cannot be stopped with a pop-gun.

Dean Lipton

It is a safe bet that for every million persons who have heard of Karl Marx not more than one or two can recall the name of Eugen von Boehm-Bawerk. In a major sense, this is unfortunate, for Boehm-Bawerk was the man who answered Marx.

Nevertheless, it is quite understandable. Marx was primarily a propagandist, a polemicist, a gifted sloganizer. His life story from the time he was the editor of a radical newspaper in Germany to the years he struggled for control of the First International was the deliberate attempt to sway the minds of men. He was a politician in the guise of journalist, philosopher, and economic thinker. About all this, Boehm-Bawerk could not have cared less. He was the dedicated scientist searching for truth. He refined economic ideas and concepts in a way that few others ever had or could. Where Marx borrowed heavily—and uncritically— from any past economist whose ideas could help him prove a point, Boehm-Bawerk would cut away at their falsity, never concerned with anything except arriving at the core of essential truth.

It was, of course, only natural that he would eventually clash with the ideas promoted by Karl Marx. They were starting their ascendant curve during the time Boehm-Bawerk was growing into manhood and beginning to think about the shape of the world, and the principles upon which human freedom and prosperity were based.

Eugen von Boehm-Bawerk was born in 1851. Three years earlier Marx (and his collaborator, Friedrich Engels) had published The Communist Manifesto containing the ringing declaration:

“WORKERS OF THE WORLD UNITE! YOU HAVE NOTHING TO LOSE BUT YOUR CHAINS.” In 1867, when Boehm-Bawerk was just sixteen, there appeared the first volume of Das Kapital, the book which was to become the bible of so-called scientific or modem socialism.

Many of the young European intellectuals were swayed by Marxist ideas, but there is no record that Boehm-Bawerk ever was. In part, this was probably due to his teacher and mentor, the famous Carl Menger, who among other things formulated the important theory of marginal utility. At first, Boehm-Bawerk was only one of a group of brilliant, young economists gathered loosely around Menger, originating the renowned “Austrian” school of economics. But, in time, he surpassed them all, becoming the master, the man whose work left the greatest impact. Historically, he and the other “Austrian” economists performed two important and vital functions. First, they made corrections in the inaccuracies they saw in the work of the “Classical” economists, even daring to take on such masters of the past as Adam Smith and David Ricardo. Secondly, they were the main economic critics of Marx and his followers in the closing years of the nineteenth century and the opening years of this one.

There was another curious paradox between Karl Marx and Eugen von Boehm-Bawerk which should be mentioned. The politically-minded Marx never held public office. He was unable even to hold all of his followers, all the men who thought in a general way like him, together in the one enclave he knew was necessary for the quick seizure of power. Proudhon quarreled with the Marxists during the volatile days of the Paris Commune. The Marxists expelled Bakunin from the International. Lassalle broke with Marx to form his own Socialist party.

The nonpolitical Boehm-Bawerk was appointed Minister of Finance in three different Austrian cabinets (1895, 1897-98, and 1900-04.) But in each instance it was the office seeking the man. Boehm-Bawerk had no political ambitions, but the political leaders of the Austria of his time knew that he had no peers in the fields of economics and finance. The post he enjoyed most was the one he held for a long time as Honorary Professor of Political Economy at the University of Vienna.

Capital and Interest

Even if Boehm-Bawerk had not exposed the Marxist fallacies, his work would have had lasting significance. He was among the first to explore the complicated labyrinth of price fluctuations. Although many have tried, no one has successfully supplanted his two theories of interest. Here, it is only fair to point out that both were hinted at by Nassau William Senior, an English economist, in 1836. However, Senior had left them in an unfinished state, and it was Boehm-Bawerk’s work which pointed up their importance.

In the abstinence theory, he demonstrated that interest was compensation for the postponement or waiting for the satisfaction of a person’s wants. While this idea may seem commonplace today, it wasn’t in Boehm-Bawerk’s time. His second theory dealt with the importance of interest to the productive process. He insisted that it was the most efficient way to secure capital investments, stating that even a socialist state would have to make use of it, or some equivalent, if it were to survive economically. The experiences of Soviet Russia in the years immediately following the Russian Revolution proved him right.

In 1894, the final two volumes of Marx’s Das Kapital were published posthumously. They had been edited from Marx’s notes by his long-time associate, Friedrich Engels, and we, of course, have no way of knowing how different they might have been if Marx had lived to do his own editing. However, the chances are reasonably good that the two versions would not have differed in any significant respect. Marx and Engels were intellectual twins. A common thread running through all of their ideas was the “exploitation of labor.” According to them, every economic process of a free society was designed to exploit the workingman.

With his usual logical thoroughness, Boehm-Bawerk disposed of this argument in whatever Marxist theory it occurred. Marx argued that interest was derived only by exploiting labor. Boehm-Bawerk answered this contention by pointing out that if interest were the just compensation for saving as he conclusively proved in his abstinence theory, and absolutely essential to the productive processes of a modem industrial nation, it could not be exploitative in the Marxist sense.

Another sample of Marxist reasoning was that all the profits of the entrepreneur and the capitalist were “surplus value” created by labor. If labor had not been exploited, there would be no profit. The corollary to this, of course, was that all so-called “surplus value” should be returned to the worker.

Boehm-Bawerk pointed out that as long as a major part of “surplus value” was re-invested in a nation’s industrial capacity—and not used to satisfy the capitalist’s or entrepreneur’s personal wants—it went back to the people in an ever-rising standard of living. In another one of his uncanny predictions, he foretold that under socialism “surplus value” would not be returned to labor, any more than it was under capitalism. If it were, the socialist nation would lack the means to build or maintain an industrial economy. Again the experiences of both Soviet Russia and Communist China proved him right. In fact, both Russia and China expropriated so much of the worker’s product that millions of people were deliberately starved, so that rapid industrialization could be achieved.

Labor Theory of Value Exposed

But it was on the Marxist Labor Theory of Value that Boehm-Bawerk turned the full force of his powerful mind. The idea that labor “created” value did not originate with Marx. Sir William Petty developed something like it two centuries earlier, and Ricardo devised a similar theory. Marx borrowed the Ricardian concept, and added a few sophisticated touches to it. He himself admitted that his whole theoretical structure rested upon the Labor Theory of Value, and that if it could be disproved, “scientific” socialism would be rendered invalid.

After Boehm-Bawerk finished demolishing it, there was not a single major economist who would accept the Labor Theory of Value as anything other than an interesting historical oddity. Even many branches of World Socialism, such as the Fabian Socialists in England, discarded it as untenable.

The “ambiguities and contradictions” in Marx’s language offended good sense, Boehm-Bawerk pointed out. Marx claimed that the value of a product was determined by the “socially useful” labor involved in its production. Boehm-Bawerk found the phraseology meaningless, and pointed out that it differed little from Adam Smith’s distinction between productive and unproductive labor. Smith had used the artisan as an example of productive labor and the menial servant to illustrate unproductive labor. Boehm-Bawerk stated that if the servant’s efforts released his master to perform productive work, then his labor was also productive.

The universal application of Boehm-Bawerk’s analysis can be seen by taking the case of a widow with young children who re-enters the labor force as a stenographer. Without someone to care for the children, she would be unable to work, and so the girl she hires as a baby sitter certainly performs productive or essential work.

Utility, Scarcity, and Choice

To demonstrate the validity of the Labor Theory of Value, Marx used the diamond, insisting that it was valuable because of the amount of labor expended to mine it. In other words, a diamond at the bottom of a deep mine shaft requiring the work of many men to dig would be worth more than a diamond found accidentally on the surface of the ground. Quite obviously, any diamond merchant who estimated the worth of a stone on this basis instead of the usual reasons such as the number of carats or its crystalline flawlessness would go out of business in short order.

To Marx, value was a concrete condition created in much the same manner that an article might be manufactured. To Boehm-Bawerk, it was a relative system of measurement depending at any time on external factors. He demonstrated that the Marxist concept failed to take two important elements into consideration: utility (or usefulness) and the nearly-equally important subjective quality of want or desire. Despite the appearing solidity of the Labor Theory of Value, it was nebulous, vague, and unpredictable. It lacked every characteristic that a science was supposed to have. Conversely, the Boehm-Bawerkian law worked with mathematical precision.

It could be summarized into the following formula:

1. Utility is the basis of value.

2. Scarcity is the measure of value.

3. Price is the evidence of value.

Nothing is valuable unless it is in some way or degree useful. The decrease or increase of its value is dependent on the rise or decline of its supply . Valuable goods are costly either in terms of other goods or money. To this he added another factor for the determination of price: the subjective quality of want. If no one wanted an article—no matter how scarce it was—its price could hardly be very great.

The importance of want or desire is self-evident. The more the seller values an article, the higher his asking price will be. The more the buyer wants the article, the more he is willing to pay for it. This, of course, works in reverse. The lower the buyer’s personal evaluation of an article, the less he will be willing to pay for it. If a seller places little value on an article, he will be willing to sell it for a low price.

Subjective Value Judgments

Boehm-Bawerk finally concluded: “Thus those very facts which, at first sight, seemed to contradict our theory that the amount of value is dependent on the amount of utility condition, on closer examination afford a striking confirmation of it.”

Footnotes

1 From a lecture given in Guatemala and Costa Rica, November 1964. Reprinted from The Freeman, February 1965

2 Excerpts selected by Henry Hazlitt for quotation in The Failure of the “New Economics” (Princeton: D. Van Nostrand, 1959) from Mill’s Essays on Some Unsettled Questions of Political Economy (1830)

3 In this chapter from Say’s principal work, first published 1803 in French, A Treatise on Political Economy (the 5th American edition, 1832) he presents his “Law of the Markets.” He explains here that supply creates its own demand, that every good or service provides its producer with some purchasing power. Thus widespread economic depression cannot be due to a general scarcity of money nor to general over-production.

4 Even when money is obtained with a view to hoard or bury it, the ultimate object is always to employ it in a purchase of some kind. The heir of the lucky finder uses it in that way, if the miser does not; for money, as money, has no other use than to buy with.

5 By bills at sight, or after date, bank-notes, running-credits, write-offs, &c. as at London and Amsterdam.

6 I speak here of their aggregate consumption, whether unproductive and designed to satisfy the personal wants of themselves and their families, or expended in the sustenance of reproductive industry. The woollen or cotton manufacturer operates a two-fold consumption of wool and cotton: (1) for his personal wear; (2) for the supply of his manufacture; but, be the purpose of his consumption what it may, whether personal gratification or reproduction, he must needs buy what he consumes with what he produces.

7 Individual profits must, in every description of production, from the general merchant to the common artisan, be derived from the participation in the values produced.

8 The reader may easily apply these maxims to any time or country he is acquainted with. We have had a striking instance in France during the years 1811, 1812, and 1813; when the high prices of colonial produce of wheat, and other articles, went hand-in-hand with the low price of many others that could find no advantageous market.

9 These considerations have hitherto been almost wholly overlooked, though forming the basis of correct conclusions in matters of commerce, and of its regulation by the national authority. The right course where it has, by good luck, been pursued, appears to have been selected by accident or, at most, by a confused idea of its propriety, without either self-conviction or the ability to convince other people.

Sismondi [the Swiss historian] seems not to have very well understood the principles laid down in this work. He cites the immense quantity of manufactured products with which England has of late inundated the markets of other nations as a proof that it is possible for industry to be too productive. But the glut thus occasioned proves nothing more than the feebleness of production in those countries that have been thus glutted with English manufactures. If Brazil produced wherewithal to purchase the English goods exported thither, those goods would not glut her market. Were England to admit the import of the products of the United States, she would find a better market for her own in those States. The English government, by the exorbitance of its taxation upon import and consumption, virtually interdicts to its subjects many kinds of importation, thus obligating the merchant to offer to foreign countries a higher price for those articles, whose import is practicable, as sugar, coffee, gold, silver, &c. for the price of the precious metals to them is enhanced by the low price of their commodities, which accounts for the ruinous returns of their commerce.

I would not be understood to maintain in this chapter, that one product can not be raised in too great abundance, in relation to all others; but merely that nothing is more favourable to the demand of one product, than the supply of another; that the import of English manufactures into Brazil would cease to be excessive and be rapidly absorbed, if Brazil produce on her side returns sufficiently ample; to which end it would be necessary that the legislative bodies of either country should consent, the one to free production, the other to free importation. In Brazil every thing is grasped by monopoly, and property is not exempt from the invasion of the government. In England, the heavy duties are a serious obstruction to the foreign commerce of the nation, inasmuch as they circumscribe the choice of returns. I happen myself to know of a most valuable and scientific collection of natural history, which could not be imported from Brazil into England by reason of the exorbitant duties.

[The views of Sismondi, in this particular, have been since adopted by our own Thomas Malthus, and those of our author by David Ricardo. This difference of opinion had given rise to an interesting discussion between our author and Malthus, to whom he has recently addressed a correspondence on this and other parts of the science. . . . Translator]

10 The capitalist, in spending the interest of his capital, spends his portion of the products raised by the employment of that capital. Should he ever spend the principal, still he consumes products only; for capital consists of products, devoted indeed to reproductive, but susceptible of unproductive consumption; to which it is in fact consigned whenever it is wasted or dilapidated.

11 A productive establishment on a large scale is sure to animate the industry of the whole neighbourhood. “In Mexico,” says Alexander Humboldt [German scientist and explorer], “the best cultivated tract, and that which brings to the recollection of the traveller the most beautiful part of French scenery, is the level country extending from Salamanca as far as Silao, Guanaxuato, and Villa de Leon, and encircling the richest mines of the known world. Wherever the veins of precious metal have been discovered and worked, even in the most desert part of the Cordilleras, and in the most barren and insulated spots, the working of the mines, instead of interrupting the business of superficial cultivation, has given it more than usual activity. The opening of a considerable vein is sure to be followed by the immediate erection of a town; farming concerns are established in the vicinity; and the spot so lately insulated in the midst of wild and desert mountains, is soon brought into contact with the tracts before in tillage.”

12 It is only by the recent advances of political economy, that these most important truths have been made manifest, not to vulgar apprehension alone, but even to the most distinguished and enlightened observers. We read in Voltaire that “such is the lot of humanity, that the patriotic desire for one’s country’s grandeur, is but a wish for the humiliation of one’s neighbours;—that it is clearly impossible for one country to gain, except by the loss of another.” Dictionnaire Philosophique. By a continuation of the same false reasoning, he goes on to declare, that a thorough citizen of the world cannot wish his country to be greater or less, richer or poorer. It is true, that he would not desire her to extend the limits of her dominion, because, in so doing, she might endanger her own well-being; but he will desire her to progress in wealth, for her progressive prosperity promotes that of all other nations.

13 This effect has been sensibly experienced in Brazil of late years. The large imports of European commodities, which the freedom of navigation directed to the markets of Brazil, has been so favourable to its native productions and commerce, that Brazilian products never found so good a sale. So there is an instance of a national benefit arising from importation. By the way, it might have perhaps been better for Brazil if the prices of her products and the profits of her producers had risen more slowly and gradually; for exorbitant prices never lead to the establishment of a permanent commercial intercourse; it is better to gain by the multiplication of one’s own products than by their increased price.

14 If the barren consumption of a product be of itself adverse to re-production, and a diminution pro tanto of the existing demand or vent for produce, how shall we designate that degree of insanity, which would induce a government deliberately to burn and destroy the imports of foreign products, and thus to annihilate the sole advantage accruing from unproductive consumption, that is to say, the gratification of the wants of the consumer?

15 Consumption of this kind gives no encouragement to future production, but devours products already in existence. No additional demand can be created, until there be new products raised; there is only an exchange of one product for another. Neither can one branch of industry suffer without affecting the rest.

16 Adapted from Marx’s Religion of Revolution (Nutley, New Jersey: Craig Press, 1968). Reprinted from The Freeman, January 1969

17 The German Ideology (London: Lawrence & Wishart, 1965), p. 32.

18 “Private Property and Communism,” The Economic and Philosophic Manuscripts of 1844, edited by Dirk J. Struik (New York: International Publishers, 1964), p. 136.

19 “Estranged Labor,” ibid., pp. 116-17.

20 J. J. Rousseau, Discourse on the Origin of Inequality, in G. D. H. Cole (ed.), The Social Contract and Discourses (London: Dent, 1966), esp. pp. 195-208. Cf. Robert A. Nisbet, “Rousseau and Totalitarianism,” Journal of Politics, V (1943), pp. 93-114.

21 German Ideology, pp. 44-45.

22 The Communist Manifesto (1848), in Marx-Engels Selected Works (Moscow: Foreign Languages Publishing House, 1962), I, p. 54. For a critique of this view of the State, see my study, Marx’s Religion of Revolution (Nutley, New Jersey: Craig Press, 1968), p. 112.

23 German Ideology, pp. 44-45.

24 Critique of the Gotha Program (1875), in Marx-Engels Selected Works, II, p. 24. This is one of the few places in which Marx presented some picture of the post-Revolutionary world.

25 Ibid.

26 Ludwig von Mises, Socialism (New Haven: Yale, [1922] 1951; London: Jonathan Cape, 1969), p. 164.

27 Maurice Comforth, Marxism and the Linguistic Philosophy (New York: International Publishers, 1965), p. 327.

28 German Ideology, p. 84.

29 Murray N. Rothbard, “Left and Right: The Prospects for Liberty,” Left and Right, I (1965), p. 8.

30 “On the Jewish Question,” (1843-44), in T. B. Bottomore, Karl Marx: Early Writings (New York: McGraw-Hill, 1964), pp. 34-40.

31 G. D. H. Cole, The Meaning of Marxism (Ann Arbor: University of Michigan Press, [1948] 1964), p. 249.

32 Leon Trotsky, The Revolution Betrayed (1936), quoted by F. A. Hayek, The Road to Serfdom (University of Chicago Press, 1944), p. 119.

33 Mises, Socialism, pp. 60-62.

34 From The Freeman, June 1969

35 Cf. Gary North, Marx’s Religion of Revolution (Nutley, New Jersey: Craig Press, 1968), ch. 5, especially pp. 155-70. See also Dean Lip ton, “The Man Who Answered Marx” (Reading no. 66).

36 Cf. Gary North, “Urban Renewal and the Doctrine of Sunk Costs,” The Freeman (May, 1969).

37 I have summarized this neo-Austrian theory of the trade cycle in my essay, “Repressed Depression,” The Freeman (April, 1969).

38 Ludwig von Mises, The Theory of Money and Credit (New Haven, Conn.: Yale University Press, [1912] 1953; FEE, 1971), pp. 109 ff.

39 From The Freeman, October 1967

40 The Positive Theory of Capital is Part II in the 3-part translation of Boehm-Bawerk’s Capital and Interest (South Holland, Illinois: Libertarian Press, 1959).

• 1THE FORMATION AND FUNCTION OF PRICES61.*
• 2THE CONSUMER THEORY OF PROSPERITY62.*
• 3OF THE DEMAND OR MARKET FOR PRODUCTS63.*
• 4Should a tradesman say, “I do not want other products for my woollens, I want money,” there could be little difficulty in convincing him that his customers could not pay him in money, without having first procured it by the sale of some other commodities of their own. “Yonder farmer,” he may be told, “will buy your woollens, if his crops be good, and will buy more or less according to their abundance or scantiness; he can buy none at all, if his crops fail altogether. Neither can you buy his wool nor his corn yourself, unless you contrive to get woollens or some other article to buy withal. You say, you only want money; I say, you want other commodities, and not money. For what, in point of fact, do you want the money? Is it not for the purchase of raw materials or stock for your trade, or victuals for your support?63.1 Wherefore, it is products that you want, and not money. The silver coin you will have received on the sale of your own products, and given in the purchase of those of other people, will the next moment execute the same office between other contracting parties, and so from one to another to infinity; just as a public vehicle successively transports objects one after another. If you can not find a ready sale for your commodity, will you say, it is merely for want of a vehicle to transport it? For, after all, money is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others. So that you will have bought, and every body must buy, the objects of want or desire, each with the value of his respective products transformed into money for the moment only. Otherwise, how could it be possible that there should now be bought and sold in France five or six times as many commodities, as in the miserable reign of Charles VI? Is it not obvious, that five or six times as many commodities must have been produced, and that they must have served to purchase one or the other?”
• 5Thus, to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; an error that proceeds from the circumstance, that almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce: and the commodity, which recurs so repeatedly in use, appears to vulgar apprehensions the most important of commodities, and the end and object of all transactions, whereas it is only the medium. Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist. Should the increase of traffic require more money to facilitate it, the want is easily supplied, and is a strong indication of prosperity—a proof that a great abundance of values has been created, which it is wished to exchange for other values. In such cases, merchants know well enough how to find substitutes for the product serving as the medium of exchange or money:63.2 and money itself soon pours in, for this reason, that all produce naturally gravitates to that place where it is most in demand. It is a good sign when the business is too great for the money; just in the same way as it is a good sign when the goods are too plentiful for the warehouses.
• 6When a superabundant article can find no vent [cannot be sold], the scarcity of money has so little to do with the obstruction of its sale, that the sellers would gladly receive its value in goods for their own consumption at the current price of the day: they would not ask for money, or have any occasion for that product, since the only use they could make of it would be to convert it forthwith into articles of their own consumption.63.3
• 7It is because the production of some commodities has declined, that other commodities are superabundant. To use a more hackneyed phrase, people have bought less, because they have made less profit;63.4 and they have made less profit for one or two causes; either they have found difficulties in the employment of their productive means, or these means have themselves been deficient.
• 8It is observable, moreover, that precisely at the same time that one commodity makes a loss, another commodity is making excessive profit.63.5 And, since such profits must operate as a powerful stimulus to the cultivation of that particular kind of products, there must needs be some violent means, or some extraordinary cause, a political or natural convulsion, or the avarice or ignorance of authority, to perpetuate this scarcity on the one hand, and consequent glut on the other. No sooner is the cause of this political disease removed, than the means of production feel a natural impulse towards the vacant channels, the replenishment of which restores activity to all the others. One kind of production would seldom outstrip every other, and its products be disproportionately cheapened, were production left entirely free.63.6
• 9It is observable, moreover, that precisely at the same time that one commodity makes a loss, another commodity is making excessive profit.63.5 And, since such profits must operate as a powerful stimulus to the cultivation of that particular kind of products, there must needs be some violent means, or some extraordinary cause, a political or natural convulsion, or the avarice or ignorance of authority, to perpetuate this scarcity on the one hand, and consequent glut on the other. No sooner is the cause of this political disease removed, than the means of production feel a natural impulse towards the vacant channels, the replenishment of which restores activity to all the others. One kind of production would seldom outstrip every other, and its products be disproportionately cheapened, were production left entirely free.63.6
• 10Should a producer imagine, that many other classes, yielding no material products, are his customers and consumers equally with the classes that raise themselves a product of their own; as, for example, public functionaries, physicians, lawyers, churchmen, &c., and thence infer, that there is a class of demand other than that of the actual producers, he would but expose the shallowness and superficiality of his ideas. A priest [priests then were supported at least in part by taxes] goes to a shop to buy a gown or a surplice; he takes the value, that is to make the purchase, in the form of money. Whence had he that money? From some tax-gatherer who has taken it from a taxpayer. But whence did this latter derive it? From the value he has himself produced. This value, first produced by the taxpayer, and afterwards turned into money, and given to the priest for his salary, has enabled him to make the purchase. The priest stands in the place of the producer, who might himself have laid the value of his product on his own account, in the purchase, perhaps, not of a gown or surplice, but of some other more serviceable product. The consumption of the particular product, the gown or surplice, has but supplanted that of some other product. It is quite impossible that the purchase of one product can be affected, otherwise than by the value of another.63.7
• 11This is the true source of the gains made by the town’s people out of the country people, and again by the latter out of the former; both of them have wherewith to buy more largely, the more amply they themselves produce. A city, standing in the centre of a rich surrounding country, feels no want of rich and numerous customers; and, on the other hand, the vicinity of an opulent city gives additional value to the produce of the country. The division of nations into agricultural, manufacturing, and commercial, is idle enough. For the success of a people in agriculture is a stimulus to its manufacturing and commercial prosperity; and the flourishing condition of its manufacture and commerce reflects a benefit upon its agriculture also.63.8
• 12The position of a nation, in respect of its neighbours, is analogous to the relation of one of its provinces to the others, or of the country to the town; it has an interest in their prosperity, being sure to profit by their opulence. The government of the United States, therefore, acted most wisely, in their attempt, about the year 1802, to civilize their savage neighbours, the Creek Indians. The design was to introduce habits of industry amongst them, and make them producers capable of carrying on a barter trade with the States of the Union; for there is nothing to be got by dealing with a people that have nothing to pay. It is useful and honourable to mankind, that one nation among so many should conduct itself uniformly upon liberal principles. The brilliant results of this enlightened policy will demonstrate, that the systems and theories really destructive and fallacious, are the exclusive and jealous maxims acted upon by the old European governments, and by them most impudently styled practical truths, for no other reason, as it would seem, than because they have the misfortune to put them in practice. The United States will have the honour of proving experimentally, that true policy goes hand-in-hand with moderation and humanity.63.9
• 13From this fruitful principle, we may draw this further conclusion, that it is no injury to the internal or national industry and production to buy and import commodities from abroad; for nothing can be bought from strangers, except with native products, which find a vent in this external traffic. Should it be objected, that this foreign produce may have been bought with specie, I answer, specie is not always a native product, but must have been bought itself with the products of native industry; so that, whether the foreign articles be paid for in specie or in home products, the vent for national industry is the same in both cases.63.10
• 14For the same reason that the creation of a new product is the opening of a new market for other products, the consumption or destruction of a product is the stoppage of a vent for them. This is no evil where the end of the product has been answered by its destruction, which end is the satisfying of some human want, or the creation of some new product designed for such a satisfaction. Indeed, if the nation be in a thriving condition, the gross national re-production exceeds the gross consumption. The consumed products have fulfilled their office, as it is natural and fitting they should; the consumption, however, has opened no new market, but just the reverse.63.11
• 15In a community, city, province, or nation, that produces abundantly, and adds every moment to the sum of its products, almost all the branches of commerce, manufacture, and generally of industry, yield handsome profits, because the demand is great, and because there is always a large quantity of products in the market, ready to bid for new productive services. And, vice versa, wherever, by reason of the blunders of the nation or its government, production is stationary, or does not keep pace with consumption, the demand gradually declines, the value of the product is less than the charges of its production; no productive exertion is properly rewarded; profits and wages decrease; the employment of capital becomes less advantageous and more hazardous; it is consumed piecemeal, not through extravagance, but through necessity, and because the sources of profit are dried up.63.12 The labouring classes experience a want of work; families before in tolerable circumstances, are more cramped and confined; and those before in difficulties are left altogether destitute. Depopulation, misery, and returning barbarism, occupy the place of abundance and happiness.
• 16MARX’S VIEW OF THE DIVISION OF LABOR64.*
• 17Marx was more than a mere economist. He was a social scientist in the full meaning of the phrase. The heart of his system was based on the idea of human production. Mankind, Marx asserted, is a totally autonomous species-being, and as such man is the sole creator of the world in which he finds himself. A man cannot be defined apart from his labor: “As individuals express their life, so they are. What they are, therefore, coincides with their production, both with what they produce and with how they produce.”64.1 The very fact that man rationally organizes production is what distinguishes him from the animal kingdom, according to Marx. The concept of production was a kind of intellectual “Archimedean point” for Marx. Every sphere of human life must be interpreted in terms of this single idea: “Religion, family, state, law, science, art, etc., are only particular modes of production, and fall under its general law.”64.2 Given this total reliance on the concept of human labor, it is quite understandable why the division of labor played such an important role in the overall Marxian framework.
• 18Marx was more than a mere economist. He was a social scientist in the full meaning of the phrase. The heart of his system was based on the idea of human production. Mankind, Marx asserted, is a totally autonomous species-being, and as such man is the sole creator of the world in which he finds himself. A man cannot be defined apart from his labor: “As individuals express their life, so they are. What they are, therefore, coincides with their production, both with what they produce and with how they produce.”64.1 The very fact that man rationally organizes production is what distinguishes him from the animal kingdom, according to Marx. The concept of production was a kind of intellectual “Archimedean point” for Marx. Every sphere of human life must be interpreted in terms of this single idea: “Religion, family, state, law, science, art, etc., are only particular modes of production, and fall under its general law.”64.2 Given this total reliance on the concept of human labor, it is quite understandable why the division of labor played such an important role in the overall Marxian framework.
• 19Marx had a vision of a perfect human society. In this sense, Martin Buber was absolutely correct in including a chapter on Marx in his Paths in Utopia. Marx believed in the existence of a society which preceded recorded human history. In this world, men experienced no sense of alienation because there was no alienated production. Somehow (and here Marx was never very clear) men fell into patterns of alienated production, and from this, private property arose.64.3 Men began to appropriate the products of other men’s labor for their own purposes. In this way, the very products of a man’s hands came to be used as a means of enslaving him to another. This theme, which Marx announced as early as 1844, is basic to all of Marx’s later economic writings.
• 20Marx’s analysis of the division of labor is remarkably similar to Rousseau’s.64.4 Both argued that the desire for private property led to the division of labor, and this in turn gave rise to the existence of separate social classes based on economic differences. The Marxist analysis of politics relies completely upon the validity of this assumption. Without economic classes, there would be no need for a State, since a State is, by definition, nothing more than an instrument of social control used by the members of one class to suppress the members of another.64.5 Thus, when the proletarian revolution comes, the proletarian class must use the State to destroy the remnants of bourgeois capitalism and the ideology of capitalism. The opposition must be stamped out; here is the meaning of the famous “ten steps” outlined in the Communist Manifesto. Once the opposition is totally eradicated, there will be no more need for a State, since only one class, the proletariat, will be in existence. “In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association in which the free development of each is the condition for the development of all.”64.6 Marx actually believed that in the communist society beyond the Revolution, the division of labor would be utterly destroyed. All specialization would disappear. This implies that for the purposes of economic production and rational economic planning, all men (and all geographical areas) are created equal. It is precisely this that Christians, conservatives, and libertarians have always denied. Marx wrote in The German Ideology (1845-46):
• 21Marx’s analysis of the division of labor is remarkably similar to Rousseau’s.64.4 Both argued that the desire for private property led to the division of labor, and this in turn gave rise to the existence of separate social classes based on economic differences. The Marxist analysis of politics relies completely upon the validity of this assumption. Without economic classes, there would be no need for a State, since a State is, by definition, nothing more than an instrument of social control used by the members of one class to suppress the members of another.64.5 Thus, when the proletarian revolution comes, the proletarian class must use the State to destroy the remnants of bourgeois capitalism and the ideology of capitalism. The opposition must be stamped out; here is the meaning of the famous “ten steps” outlined in the Communist Manifesto. Once the opposition is totally eradicated, there will be no more need for a State, since only one class, the proletariat, will be in existence. “In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association in which the free development of each is the condition for the development of all.”64.6 Marx actually believed that in the communist society beyond the Revolution, the division of labor would be utterly destroyed. All specialization would disappear. This implies that for the purposes of economic production and rational economic planning, all men (and all geographical areas) are created equal. It is precisely this that Christians, conservatives, and libertarians have always denied. Marx wrote in The German Ideology (1845-46):
• 22Marx’s analysis of the division of labor is remarkably similar to Rousseau’s.64.4 Both argued that the desire for private property led to the division of labor, and this in turn gave rise to the existence of separate social classes based on economic differences. The Marxist analysis of politics relies completely upon the validity of this assumption. Without economic classes, there would be no need for a State, since a State is, by definition, nothing more than an instrument of social control used by the members of one class to suppress the members of another.64.5 Thus, when the proletarian revolution comes, the proletarian class must use the State to destroy the remnants of bourgeois capitalism and the ideology of capitalism. The opposition must be stamped out; here is the meaning of the famous “ten steps” outlined in the Communist Manifesto. Once the opposition is totally eradicated, there will be no more need for a State, since only one class, the proletariat, will be in existence. “In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association in which the free development of each is the condition for the development of all.”64.6 Marx actually believed that in the communist society beyond the Revolution, the division of labor would be utterly destroyed. All specialization would disappear. This implies that for the purposes of economic production and rational economic planning, all men (and all geographical areas) are created equal. It is precisely this that Christians, conservatives, and libertarians have always denied. Marx wrote in The German Ideology (1845-46):
• 23... in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd or critic.64.7
• 24The whole question of economic production “beyond the Revolution” was a serious stumbling stone for Marx. He admitted that there would be many problems of production and especially distribution during the period of the so-called “dictatorship of the proletariat.” This period is merely the “first phase of communist society as it is when it has just emerged after prolonged birth pangs from capitalist society.”64.8 Marx never expected great things from this society. However, in the “higher phase of communist society,” the rule of economic justice shall become a reality: “From each according to his ability, to each according to his needs!”64.9 This will be easy to accomplish, since the vast quantities of wealth which are waiting to be released will be freed from the fetters and restraints of capitalist productive techniques. As Mises has pointed out, “Tacitly underlying Marxian theory is the nebulous idea that natural factors of production are such that they need not be economized.”64.10 Maurice Comforth, the Marxist philosopher, confirms Mises’ suspicion that Marxists see all scarcity as a product of institutional defects rather than as a basic fact of the order of the world in which we live:
• 25The whole question of economic production “beyond the Revolution” was a serious stumbling stone for Marx. He admitted that there would be many problems of production and especially distribution during the period of the so-called “dictatorship of the proletariat.” This period is merely the “first phase of communist society as it is when it has just emerged after prolonged birth pangs from capitalist society.”64.8 Marx never expected great things from this society. However, in the “higher phase of communist society,” the rule of economic justice shall become a reality: “From each according to his ability, to each according to his needs!”64.9 This will be easy to accomplish, since the vast quantities of wealth which are waiting to be released will be freed from the fetters and restraints of capitalist productive techniques. As Mises has pointed out, “Tacitly underlying Marxian theory is the nebulous idea that natural factors of production are such that they need not be economized.”64.10 Maurice Comforth, the Marxist philosopher, confirms Mises’ suspicion that Marxists see all scarcity as a product of institutional defects rather than as a basic fact of the order of the world in which we live:
• 26The whole question of economic production “beyond the Revolution” was a serious stumbling stone for Marx. He admitted that there would be many problems of production and especially distribution during the period of the so-called “dictatorship of the proletariat.” This period is merely the “first phase of communist society as it is when it has just emerged after prolonged birth pangs from capitalist society.”64.8 Marx never expected great things from this society. However, in the “higher phase of communist society,” the rule of economic justice shall become a reality: “From each according to his ability, to each according to his needs!”64.9 This will be easy to accomplish, since the vast quantities of wealth which are waiting to be released will be freed from the fetters and restraints of capitalist productive techniques. As Mises has pointed out, “Tacitly underlying Marxian theory is the nebulous idea that natural factors of production are such that they need not be economized.”64.10 Maurice Comforth, the Marxist philosopher, confirms Mises’ suspicion that Marxists see all scarcity as a product of institutional defects rather than as a basic fact of the order of the world in which we live:
• 27The eventual and final abolition of shortages constitutes the economic condition for entering upon a communist society. When there is socialized production the products of which are socially appropriated, when science and scientific planning have resulted in the production of absolute abundance, and when labour has been so enlightened and organized that all can without sacrifice of personal inclinations contribute their working abilities to the common fund, everyone will receive a share according to his needs.64.11
• 28A critical problem for the Marxist is the whole question of communist planning: How is production to be directed? By what standards should the society allocate scarce resources? Whatever Marx’s personal dreams were concerning the abolition of scarcity, resources are not in infinite supply. It is because of this very fact that society must plan production. Marx saw this activity as basic to the definition of man, yet this very activity implies the existence of scarcity, a peculiar paradox for Marxism. The fact remains that automobiles do not grow on trees. Someone must decide how many automobiles should be produced in comparison with the number of refrigerators. Planning is inherent in all economic production, and Marx recognized this: “Modem universal intercourse can be controlled by individuals, therefore, only when controlled by all.”64.12 But how can they “all” register their preferences? If there is no private property (and, therefore, no free market economy), and if there is no State planning—no political planning— then who decides which goods are to be produced and which goods are not? Murray Rothbard has stated this dilemma quite accurately:
• 29Rejecting private property, especially capital, the Left Socialists were then trapped in an inner contradiction: if the State is to disappear after the Revolution (immediately for Bakunin, gradually “withering” for Marx), then how is the “collective” to run its property without becoming an enormous State itself, in fact even if not in name? This was the contradiction which neither the Marxists nor the Bakunists were ever able to resolve.64.13
• 30The need to coordinate production implies the existence of scarcities which the production is designed to alleviate. If everyone had all he desired at the moment of wanting it, production would be unnecessary. Raw materials must be fashioned into goods or indirectly into services, and these goods shipped from place to place. Such actions require time (interest on the investment of capital goods), planning (profit for success and loss for failure), and labor (wages). In short, production demands planning. No society is ever faced with the problem “to plan or not to plan.” The issue which confronts society is the question of whose plan to use. Karl Marx denied the validity of the free market’s planning, since the free market is based upon the private ownership of the means of production, including the use of money. Money, for Marx, is the crystallized essence of alienated production; it is the heart of capitalism’s dynamism. It was his fervent hope to abolish the use of money forever.64.14 At the same time, he denied the validity of centralized planning by the State. How could he keep his “association” from becoming a State? The Fabian writer, G. D. H. Cole, has seen clearly what the demand for a classless society necessitates: “But a classless society means, in the modern world, a society in which the distribution of incomes is collectively controlled, as a political function of society itself. It means further that this controlled distribution of incomes must be made on such a basis as to allow no room for the growth of class differences.”64.15 In other words, given the necessity of a political function in a supposedly stateless world, how can the Marxists escape the warning once offered by Leon Trotsky: “In a country where the sole employer is the State, opposition means death by slow starvation. The old principle: who does not work shall not eat, has been replaced by a new one: who does not obey shall not eat.”64.16
• 31The need to coordinate production implies the existence of scarcities which the production is designed to alleviate. If everyone had all he desired at the moment of wanting it, production would be unnecessary. Raw materials must be fashioned into goods or indirectly into services, and these goods shipped from place to place. Such actions require time (interest on the investment of capital goods), planning (profit for success and loss for failure), and labor (wages). In short, production demands planning. No society is ever faced with the problem “to plan or not to plan.” The issue which confronts society is the question of whose plan to use. Karl Marx denied the validity of the free market’s planning, since the free market is based upon the private ownership of the means of production, including the use of money. Money, for Marx, is the crystallized essence of alienated production; it is the heart of capitalism’s dynamism. It was his fervent hope to abolish the use of money forever.64.14 At the same time, he denied the validity of centralized planning by the State. How could he keep his “association” from becoming a State? The Fabian writer, G. D. H. Cole, has seen clearly what the demand for a classless society necessitates: “But a classless society means, in the modern world, a society in which the distribution of incomes is collectively controlled, as a political function of society itself. It means further that this controlled distribution of incomes must be made on such a basis as to allow no room for the growth of class differences.”64.15 In other words, given the necessity of a political function in a supposedly stateless world, how can the Marxists escape the warning once offered by Leon Trotsky: “In a country where the sole employer is the State, opposition means death by slow starvation. The old principle: who does not work shall not eat, has been replaced by a new one: who does not obey shall not eat.”64.16
• 32The need to coordinate production implies the existence of scarcities which the production is designed to alleviate. If everyone had all he desired at the moment of wanting it, production would be unnecessary. Raw materials must be fashioned into goods or indirectly into services, and these goods shipped from place to place. Such actions require time (interest on the investment of capital goods), planning (profit for success and loss for failure), and labor (wages). In short, production demands planning. No society is ever faced with the problem “to plan or not to plan.” The issue which confronts society is the question of whose plan to use. Karl Marx denied the validity of the free market’s planning, since the free market is based upon the private ownership of the means of production, including the use of money. Money, for Marx, is the crystallized essence of alienated production; it is the heart of capitalism’s dynamism. It was his fervent hope to abolish the use of money forever.64.14 At the same time, he denied the validity of centralized planning by the State. How could he keep his “association” from becoming a State? The Fabian writer, G. D. H. Cole, has seen clearly what the demand for a classless society necessitates: “But a classless society means, in the modern world, a society in which the distribution of incomes is collectively controlled, as a political function of society itself. It means further that this controlled distribution of incomes must be made on such a basis as to allow no room for the growth of class differences.”64.15 In other words, given the necessity of a political function in a supposedly stateless world, how can the Marxists escape the warning once offered by Leon Trotsky: “In a country where the sole employer is the State, opposition means death by slow starvation. The old principle: who does not work shall not eat, has been replaced by a new one: who does not obey shall not eat.”64.16
• 33In this perspective, the division of labor promotes social unity without requiring collective uniformity. It acknowledges the existence of human differences, geographical differences, and scarcity; in doing so, it faces the world in a realistic fashion, trying to work out the best possible solution in the face of a fundamental, inescapable condition of man. In short, the cause of economic scarcity is not the “deformed social institutions” as the socialists and Marxists assert; it is basic to the human condition. While this does not sanction total specialization, since man is not a machine, it does demand that men acknowledge the existence of reality. It does demand that the division of labor be accepted by social theorists as a positive social benefit.64.17
• 34THE FALLACY OF “INTRINSIC VALUE”65.*
• 35Karl Marx was the last major economist to hold to the labor theory. In this sense, he was the last of the great classical economists. He wanted to demonstrate that capitalism, by its own internal contradictions, was doomed to a final destruction. Unfortunately for Marx’s predictions, what he regarded as a basic set of contradictions of capitalism was merely a set of contradictions in the reasoning of the classical economists. He confused a faulty explanation of the capitalist process with the actual operation of the capitalist system. Ironically, Marx fell into a pit which he always reserved for his enemies: he looked not at the empirical data as such, but at an interpretation of the data— not at the “substructure” of the society, but the ideological “superstructure.” Das Kapital was published in 1867; by 1871, the marginalist assault had been launched by Carl Menger of Austria and W. S. Jevons of England. The labor theory of value which had undergirded Marx’s whole analysis of capitalism was destroyed. When Boehm-Bawerk, the Austrian economist who was to gain fame as Menger’s most rigorous disciple, offered his criticisms of Marx in 1884 (and again in 1896), it was clear (to non-Marxists, anyway) that the Marxian framework had gone down with the classical ship.65.1
• 36Yet we should not be too hasty in ridiculing Marx for his insistence on viewing value as something intrinsic in an economic good. People are so used to thinking in these terms that few of us are free from some variety of this basic error. Homes are seen as containing something called “equity”; factories “possess” investments, almost as if these investments were held in some kind of suspension within the factory walls.65.2 The Marxist, of course, has a vested interest in this line of reasoning: the master taught it. Why others continue to indulge in such speculation is a perplexing problem. It is a case where the “common sense” economics of the man in the street is in error.
• 37There are a number of reasons why conservatives make this mistake. They are guided by the best of intentions. They see that paper money and bank credit have led in the past and are leading today to virulent inflations. They fear the economic and social dislocations associated with inflation. They may also see that the modern socialist and interventionist states have used inflationary deficit spending policies to increase their power at the expense of private, voluntary associations. Some of the more sophisticated observers may even have understood the link between inflationary policies and depressions—booms and busts—and they may have concluded, quite correctly, that these trade cycles are not endemic to capitalism as such, but only to economic systems that permit policies of inflation.65.3 They associate inflation with policies of the state or the state-licensed monopolies, fractional reserve banks, rather than the voluntary market economy. Nevertheless, they persist in defending the use of specie metals as the only currency (along with fully redeemable paper IOU’s to specie metals) in terms of the intrinsic value of the metals.
• 38There is a basic confusion here. The confusion rests on a mixing up of two very different propositions: (1) gold and silver are historically valuable; and (2) gold and silver have intrinsic value. The first proposition is indisputably correct; in fact there are few economic or historical statements that could be said to be more absolute. Professor Mises has built his whole theory of money on the fact that gold and silver (especially gold) were first valued because of properties other than their monetary function: brilliance, malleability, social prestige, and so forth. It was precisely because people valued these metals so highly that they were to become instruments of trade, i.e., money.65.4 Since they are so readily marketable, more so than other goods, they can become money.
• 39THE MAN WHO ANSWERED MARX66.*
• 40Boehm-Bawerk covered all possible criticism before it could be leveled. He did it so well that the Marxists ever since have found themselves in the position of having to answer the unanswerable. Take the way he disposed of any future objection to the utilitarian basis for value in his monumental work, The Positive Theory of Capital,66.1 for instance. After noting that such infinitely more useful items as bread and water ordinarily are far less valuable than diamonds or pearls, he points out that they only appear to be because under normal circumstances they are in such abundant supply while pearls and diamonds are relatively rare. But when food becomes scarce, the value of a sandwich to a starving man is far greater than that of a large and flawless diamond. A man dying of thirst in the desert will run first to a canteen of water before he even considers the bag of pearls lying a few feet away.