Mises as Social Rationalist Pt III: Economic Calculation, Market, and Society
Editors note: One of the most important analysis of Ludwig von Mises's social theory and his views on the origins of human society has been Dr. Joseph Salerno's Ludwig von Mises as a Social Rationalist. This essay sparked an important debate among scholars within the Austrian school of the ideological differences between Ludwig von Mises and F.A. Hayek, enriching our understanding of the work of both great scholars.
For the benefit of readers, we will publish during this week in six separate parts. Part I. Part II. The complete essay can be found here.
Mises characterizes the market as "the foremost social body" (1966, p. 315). As such the market economy is "the product of a long evolutionary process" (Mises 1966, p. 265). This does not imply, however, that market relations are a nonteleological or undesigned outcome of tropistic and nonrational cultural selection processes. To the contrary, Mises argues that the market economy is the product of conscious reason and teleological striving, it is "the outcome of man's endeavors to adjust his action in the best possible way to the given conditions of his environment that he cannot alter" (1966, p. 265). In this spirit, Mises refers to the market economy both as "a man-made mode of acting under the division of labor" and as a "strategy" for achieving social and economic progress (1966, p. 265).
Moreover, the market originates and evolves through individual exchanges, which involve "intentional mutuality" and "conscious and purposeful cooperation" (Mises 1966, p. 194). As Mises writes, "The recurrence of individual acts of exchange generates the market step by step with the evolution of the division of labor within a society based on private property" (1966, p. 327). It follows then that "The exchange relation is the fundamental social relation. Interpersonal exchange of goods and services weaves the bond which unites men into society. The societal formula is: do ut des" (Mises 1966, p. 194).
By virtue of the fact that it subsists in the network of exchanges continually recurring among purposeful human actors, the market and its configuration at any moment in time is to be explained by the human values and choices which give rise to these exchanges. In this sense, certainly, market society is a purposeful creation, an intended consequence of consciously chosen behavior. According to Mises:
The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor. The forces determining the-continually changing-state of the market are the value judgments of these individuals and their actions as directed by these value judgments. ... The market is entirely a resultant of human actions. Every market phenomenon can be traced back to definite choices of the members of the market society. ...
... [T]he only factors directing the market and the determination of prices are the purposive acts of men. There is no automatism; there are only men consciously and deliberately aiming at ends chosen. There are no mysterious mechanical forces; there is only the human will to remove uneasiness [1966, pp. 257–58, 315].
But while market phenomena are to be explained completely in terms of conscious human choices, the successive price structures which emerge in the course of the market process are genuinely "social" phenomena. They are social in the sense that, although every individual transactor contributes to their formation, they represent more than any particular individual's contribution. The result is that each individual when planning his market activities takes prices into account as if they were uninfluenced by his own actions. As Mises writes:
The market phenomena are social phenomena. They are the resultant of each individual's active contribution. But they are different from each such contribution. They appear to the individual as something given which he himself cannot alter. ...
... [Prices] are social phenomena as they are brought about by the interplay of the valuations of all individuals participating in the operation of the market. Each individual, in buying or not buying and in selling or not selling, contributes his share to the formation of the market prices. But the larger the market is, the smaller is the weight of each individual's contribution. Thus the structure of market prices appears to the individual as a datum to which he must adjust his own conduct [1966, pp. 315, 331].
Mises emphasizes that it is not any particular price but the momentarily prevailing complex of interrelationships among prices that constitutes the social aspect of the market:
It would be absurd to look upon a definite price as if it were an isolated object in itself. A price is expressive of the position which acting men attach to a thing under the present state of their efforts to remove uneasiness. It does not indicate a relationship to something unchanging, but merely the instantaneous position in a kaleidoscopically changing assemblage. In this collection of things considered valuable by the value judgments of acting men each particle's place is interrelated with those of all other particles. What is called a price is always a relationship within an integrated system which is the composite effect of human relations [1966, p. 392].
In determining the price structure, the market also determines, as part of the same social process, the allocation of labor and other resources among various lines of production and the "distribution" of income among the various individuals contributing to production. Writes Mises:
The pricing process is a social process. It is consummated by an interaction of all members of society. All collaborate and cooperate, each in the particular role he has chosen for himself in the framework of the division of labor. Competing in cooperation and cooperating in competition all people are instrumental in bringing about the result, viz., the price structure of the market, the allocation of the factors of production to the various lines of want-satisfaction, and the determination of the share of each individual. These three events are not different matters. They are only different aspects of one indivisible phenomenon. ... In the market process they are accomplished uno acto [1966, p. 338].
It is thus that the market process gives rise to "not only the price structure but no less the social structure, the assignment of definite tasks to the various individuals" (Mises 1966, p. 311). It is the market and the market alone which permits the development and persistence of a meaningful and purposeful social order. Under the guidance of the market, each individual chooses purposefully to integrate himself with greatest advantage to himself and to his fellows into the social division of labor. In this way, the social system "is steered by the market. ... The market alone puts the whole social system in order and provides it with sense and meaning'' (Mises 1966, p. 257).
In Misesian social theory, therefore, the hallmark and sine qua non of market society and of social being itself is not its "spontaneity" (whatever that may mean) but its purposefulness. When the social steering mechanism of the market is destroyed, as it is under socialist central planning, systematic and meaningful social cooperation becomes impossible and is replaced by "a system of groping about in the dark. What is called conscious planning is precisely the elimination of conscious purposive action [emphasis is mine]" (Mises 1966, pp. 700–01).
While human cooperation in the division of labor is made possible by the social resultant of market exchange relationships, i.e., the price structure, the market itself is predicated upon an intellectual operation consciously originated and performed by the individual human mind. This operation is what Mises calls "economic calculation in monetary terms" or simply "monetary calculation." According to Mises monetary calculation is "the intellectual basis of the market economy" and "the guiding star of action under the social system of division of labor" (1966, pp. 229, 259). It is a "method of thinking'' purposefully created by "acting man," which "made it possible to calculate his actions" (Mises 1966, p. 231).
Calculation is absolutely necessary for an actor to determine the most advantageous allocation of scarce resources in a world in which resources are neither purely nonspecific nor absolutely specific to a wide variety of possible production processes (Mises 1966, pp. 207–08). Under these conditions, therefore, monetary calculation:
is the compass of the man embarking upon production. He calculates in order to distinguish the remunerative lines of production from the unprofitable in order to distinguish the remunerative lines of production from the unprofitable ones. ... Every single step of entrepreneurial activities is subject to scrutiny by monetary calculation. The premeditation of planned action becomes commercial precalculation of expected costs and expected proceeds. The retrospective establishment of the outcome of past action becomes accounting of profit and loss [Mises 1966, p. 229].
Capital, "the fundamental concept of economic calculation," and the correlative concept of income enable the actor to mentally grasp the distinction between means and ends "with regard to the perpetually changing conditions of highly developed processing industries and the complicated structure of the social cooperation of hundreds of thousands of specialized jobs and performances" (Mises 1966, pp. 260–61). Capital accounting is thus the indispensable precondition of the expression of individual rationality and purpose within the context of the social division of labor, because, without recourse to this intellectual operation, men and women would be unable to evaluate the outcomes, whether consummated or expected, of their actions. According to Mises: "Monetary calculation reaches its full perfection in capital accounting. It establishes the money prices of the available means and confronts this total with the changes brought about by action and by the operation of other factors. This confrontation shows what changes occurred in the state of the acting man's affairs and the magnitude of those changes; it makes success and failure, profit and loss ascertainable" (1966, p. 230).
Without the possibility of economic calculation, even a human actor in perfect isolation would find his range of purposeful activities or "autistic exchanges" restricted to less than the full range of production possibilities determined by the purely external elements of his environment (including his labor capacities). In characterizing the economies of the isolated individual and of the isolated socialist society as unrealizable "imaginary constructions," Mises declares: "Robinson Crusoe, who ... may have existed, and the general manager of a perfectly isolated socialist commonwealth that never existed would not have been in a position to plan and to act as people can only when taking recourse to economic calculation" (1966, p. 243).
Market and therefore society are impossible without calculable action. Mises is emphatic on this point: "The tasks set to acting within any system of the division of labor cannot be achieved without economic calculation. ... That [the market] is capable of such calculation was instrumental in its evolution and conditions its present-day operation. The market economy is real because it can calculate [emphasis mine]." Thus logic dictates that a treatment of the problem of economic calculation precede the systematic elaboration of a theory of the market economy. Catallactics, in turn, must precede the analysis of alternative economic systems, such as socialism, that provide no scope for calculable action. These latter systems of economic organization cannot even be conceptualized without recourse to the calculational modes of thought developed within the market economy. To quote Mises:
The analysis of the problems of the market society, the only pattern of human action in which calculation can be applied in planning action, opens access to the analysis of all thinkable modes of action and of all economic problems with which historians and ethnographers are confronted. All noncapitalistic methods of economic management can be studied only under the hypothetical assumption that in them too cardinal numbers can be used in recording past action and planning future action. This is why economists place the study of the pure market economy in the center of their investigation [1966, pp. 266–67].
But, as Mises points out, economic calculation involves arithmetic computation and "computation requires a common denominator to which all items entered are to be referable" (1966, p. 214). It is for this reason that economic calculation can only be calculation in terms of money prices and that the development of economic calculation as well as of the application of cardinal numbers in all areas of human life is logically and historically inseparable from the evolution of money and the market economy. As Mises writes:
Thus money becomes the vehicle of economic calculation ... only because money is the common medium of exchange, because most goods and services can be sold and bought on the market against money, and only as far as this is the case, can men use money prices in reckoning. The exchange ratios between money and the various goods and services as established on the market of the past and as expected to be established on the market of the future are the mental tools of economic planning. Where there are no money prices there are no such things as economic quantities. ... There is no means for man to find out what kind of action would best serve his endeavors to remove his uneasiness as far as possible ... [1966, pp. 208–09]
... [Monetary calculation] developed in the frame and was gradually perfected with the improvement of the market mechanism and with the expansion of the scope of things which are negotiated on markets against money. It was economic calculation that assigned to measurement, number, and reckoning the role they play in our quantitative and computing civilization. The measurements of physics and chemistry make sense for practical action only because there is economic calculation. It is monetary calculation that made arithmetic a tool for a better life. It provides the mode of using achievements of laboratory experiments for the most efficacious removal of uneasiness. ... Our civilization is inseparably linked with our methods of economic calculation. It would perish if we were to abandon this most precious intellectual tool of acting [1966, p 230].