Human Action: A Treatise on Economics

by Ludwig Von Mises

  (b) I guess that out of the total amount of electors 45 millions will exercise their franchise, 25 millions of whom will vote for Roosevelt.

  (c) I estimate Roosevelt's chances as 9 to 1.

  (d) I am certain that Roosevelt will be elected.

  Statement (d) is obviously inexact. If asked under oath on the witness stand whether he is as certain about Roosevelt's future victory as about the fact that a block of ice will melt when exposed to a temperature of 150 degrees, our man would have answered no. He would have rectified his statement and would have declared: I am personally fully convinced that Roosevelt will carry on. That is my opinion. But, of course, this is not certainty, only the way I understand the conditions involved.

  The case of statement (a) is similar. This man believed that he risked very little when laying such a wager. The relation 3:1 docs not assert anything about the chances of the candidates. It is the outcome of the interplay of two factors: the opinion that Roosevelt will be elected and the man's propensity for betting.

  Statement (b) is an evaluation of the outcome of the impending event. Its figures refer not to a greater or smaller degree of probability, but to the expected result of the voting. Such a statement may be based on a systematic investigation like the Gallup poll or simply on estimates.

  It is different with statement (c). This is a proposition about the expected outcome couched in arithmetical terms. It certainly docs not mean that out of ten cases of the same type nine are favorable for Roosevelt and one unfavorable. It cannot have any reference to class probability. But what else can it mean?

  It is a metaphorical expression. Most of the metaphors used in daily speech imaginatively identify an abstract object with another object that can be apprehended directly by the senses. Yet this is not a necessary feature of metaphorical language, but merely a consequence of the fact that the concrete is as a rule more familiar to us than the abstract. As metaphors aim at an explanation of something which is less well known by comparing it with something better known, they consist for the most part in identifying something abstract with a better-known concrete. The specific mark of our case is that it is an attempt to elucidate a complicated state of affairs by resorting to an analogy borrowed from a branch of higher mathematics, the calculus of probability. As it happens, this mathematical discipline is more popular than the analysis of the epistemological nature of understanding-

  There is no use in applying the yardstick of logic to a critique of metaphorical language. Analogies and metaphors are always defective and logically unsatisfactory. It is usual to search for the underlying tertium comparationis. But even this is not permissible with regard to the metaphor we are dealing with. For the comparison is based on a conception which is in itself faulty in the very frame of the calculus of probability, namely the gambler's fallacy. In asserting that Roosevelt's chances are 9:1, the idea is that Roosevelt is in regard to the impending election in the position of a man who owns 90 per cent of all tickets of a lottery in regard to the first prize. It is implied that this ratio 9:1 tells us something substantial about the outcome of the unique case in which we are interested. There is no need to repeat that this is a mistaken idea.

  No less impermissible is the recourse to the calculus of probability in dealing with hypotheses in the field of the natural sciences. Hypotheses are tentative explanations consciously based on logically insufficient arguments. With regard to them all that can be asserted is: The hypothesis does or does not contradict either logical principles or the facts as experimentally established and considered as true. In the first case it is untenable, in the second case it is—under the present state of our experimental knowledge—not untenable. (The intensity of personal conviction is purely subjective.) Neither frequency probability nor historical understanding enters into the matter.

  The term hypothesis, applied to definite modes of understanding historical events, is a misnomer. If a historian asserts that in the fall of the Romanoff dynasty the fact that this house was of German background played a relevant role, he does not advance a hypothesis. The facts on which his understanding is founded are beyond question. There was a widespread animosity against Germans in Russia and the ruling line of the Romanoffs, having for 200 years intermarried exclusively with scions of families of German descent, was viewed by many Russians as a germanized family, even by those who assumed that Tsar Paul was not the son of Peter III. But the question remains what the relevance of these facts was in the chain of events which brought about the dethronement of this dynasty. Such problems are not open to any elucidation other than that provided by understanding.

  6. Betting, Gambling, and Playing Games

  A bet is the engagement to risk money or other things against another man on the result of an event about the outcome of which we know only so much as can be known on the ground of understanding. Thus people may bet on the result of an impending election or a tennis match. Or they may bet on whose opinion concerning the content of a factual assertion is right and whose is wrong.

  Gambling is the engagement to risk money or other things against another man on the result of an event about which we do not know anything more than is known on the ground of knowledge concerning the behavior of the whole class.

  Sometimes betting and gambling are combined. The outcome of horse racing depends both on human action—on the part of the owner of the horse, the trainer, and the jockey—and on nonhuman factors—the qualities of the horse. Most of those risking money on the turf are simply gamblers. But the experts believe they know something by understanding the people involved; as far as this factor influences their decision they are betters. Furthermore they pretend to know the horses; they make a prognosis on the ground of their knowledge about the behavior of the classes of horses to which they assign the various competing horses. So far they are gamblers.

  Later chapters of this book deal with the methods business applies in handling the problem of the uncertainty of the future. On this point of our reasoning only one more observation must be made.

  Embarking upon games can be either an end or a means. It is an end for people who yearn for the stimulation and excitement with which the vicissitudes of a game provide them, or whose vanity is flattered by the display of their skill and superiority in playing a game which requires cunning and expertness. It is a means for professionals who want to make money by winning.

  Playing a game can therefore be called an action. But it is not permissible to reverse this statement and to call every action a game or to deal with all actions as if they were games. The immediate aim in playing a game is to defeat the partner according to the rules of the game. This is a peculiar and special case of acting. Most actions do not aim at anybody's defeat or loss. They aim at an improvement in conditions. It can happen that this improvement is attained at some other men's expense. But this is certainly not always the case. It is, to put it mildly, certainly not the case within the regular operation of a social system based on the division of labor.

  There is not the slightest analogy between playing games and the conduct of business within a market society. The card player wins money by outsmarting his antagonist. The businessman makes money by supplying customers with goods they want to acquire. There may exist an analogy between the strategy of a card player and that of a bluffer. There is no need to investigate this problem. He who interprets the conduct of business as trickery is on the wrong path.

  The characteristic feature of games is the antagonism of two or more players or groups of players.3 The characteristic feature of business within a society, i.e., within an order based on the division of labor, is concord in the endeavors of its members. As soon as they begin to antagonize one another, a tendency toward social disintegration emerges.

  Within the frame of a market economy competition does not involve antagonism in the sense in which this term is applied to the hostile clash of incompatible interests. Competition, it is true, may sometimes or even very often evoke in the competitors those
passions of hatred and malice which usually accompany the intention of inflicting evil on other people. Psychologists are therefore prone to confuse combat and competition. But praxeology must beware of such artificial and misleading equivocations. From its point of view there exists a fundamental difference between catallactic competition and combat. Competitors aim at excellence and preeminence in accomplishments within a system of mutual cooperation. The function of competition is to assign to every member of a social system that position in which he can best serve the whole of society and all its members. It is a method of selecting the most able man for each performance. Where there is social cooperation, there some variety of selection must be applied. Only where the assignment of various individuals to various tasks is effected by the dictator's decisions alone and the individuals concerned do not aid the dictator by endeavors to represent their own virtues and abilities in the most favorable light, is there no competition.

  We will have to deal at a later stage of our investigations with the function of competition.4 At this point we must only emphasize that it is misleading to apply the terminology of mutual extermination to the problems of mutual cooperation as it works within a society. Military terms are inappropriate for the description of business operations. It is, e.g., a bad metaphor to speak of the conquest of a market. There is no conquest in the fact that one firm offers better or cheaper products than its competitors. There is strategy in business only in a metaphorical sense.

  7. Praxeological Prediction

  Praxeological knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But, of course, such prediction can never imply anything regarding quantitative matters. Quantitative problems are in the field of human action open to no other elucidation than that by understanding.

  We can predict, as will be shown later, that—other things being equal—a fall in the demand for a will result in a drop in the price of a. But we cannot predict the extent of this drop. This question can be answered only by understanding.

  The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its method unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.

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  1. John Stuart Mill, A System of Logic Ratiocinative and Inductive (new impression, London, 1936), p. 353.

  2. In life insurance the insured's stake spent in vain consists only in the difference between the amount collected and the amount he could have accumulated by saving.

  3. “Patience” or “Solitaire” is not a one-person game, but a pastime, a means of escaping boredom. It certainly does not represent a pattern for what is going on in a communistic society, as John von Neumann and Oscar Morgensten (Theory of Games and Economic Behavior [Princeton, 1944], p. 86) assert.

  4. See below, pp. 273–277.

  VII. ACTION WITHIN THE WORLD

  1. The Law of Marginal Utility

  ACTION sorts and grades; originally it knows only ordinal numbers, not cardinal numbers. But the external world to which acting man must adjust his conduct is a world of quantitative determinateness. In this world there exist quantitative relations between cause and effect. If it were otherwise, if definite things could render unlimited services, such things would never be scarce and could not be dealt with as means.

  Acting man values things as means for the removal of his uneasiness. From the point of view of the natural sciences the various events which result in satisfying human needs appear as very different. Acting man sees in these events only a more or a less of the same kind. In valuing very different states of satisfaction and the means for their attainment, man arranges all things in one scale and sees in them only their relevance for an increase in his own satisfaction. The satisfaction derived from food and that derived from the enjoyment of a work of art are, in acting man's judgment, a more urgent or a less urgent need; valuation and action place them in one scale of what is more intensively desired and what is less. For acting man there exists primarily nothing but various degrees of relevance and urgency with regard to his own well-being.

  Quantity and quality are categories of the external world. Only indirectly do they acquire importance and meaning for action. Because every thing can only produce a limited effect, some things are considered scarce and treated as means. Because the effects which things are able to produce are different, acting man distinguishes various classes of things. Because means of the same quantity and quality are apt always to produce the same quantity of an effect of the same quality, action does not differentiate between concrete definite quantities of homogeneous means. But this does not imply that it attaches the same value to the various portions of a supply of homogeneous means. Each portion is valued separately. To each portion its own rank in the scale of value is assigned. But these orders of rank can be ad libitum interchanged among the various portions of the same magnitude.

  If acting man has to decide between two or more means of different classes, he grades the individual portions of each of them. He assigns to each portion its special rank. In doing so he need not assign to the various portions of the same means orders of rank which immediately succeed one another.

  The assignment of orders of rank through the valuation is done only in acting and through acting. How great the portions are to which a single order of rank is assigned depends on the individual and unique conditions under which man acts in every case. Action does not deal with physical or metaphysical units which it values in an abstract academic way; it is always faced with alternatives between which it chooses. The choice must always be made between definite quantities of means. It is permissible to call the smallest quantity which can be the object of such a decision a unit. But one must guard oneself against the error of assuming that the valuation of the sum of such units is derived from the valuation of the units, or that it represents the sum of the valuations attached to these units.

  A man owns five units of commodity a and three units of commodity b. He attaches to the units of a the rank-orders 1, 2, 4, 7, and 8, to the units of b the rank-orders 3, 5, and 6. This means: If he must choose between two units of a and two units of b, he will prefer to lose two units of a rather than two units of b. But if he must choose between three units of a and two units of b, he will prefer to lose two units of b rather than three units of a. What counts always and alone in valuing a compound of several units is the utility of this compound as a whole—i.e., the increment in well-being dependent upon it or, what is the same, the impairment of well-being which its loss must bring about. There are no arithmetical processes involved, neither adding nor multiplying; there is a valuation of the utility dependent upon the having of the portion, compound, or supply in question.

  Utility means in this context simply: causal relevance for the removal of felt uneasiness. Acting man believes that the services a thing can render are apt to improve his own well-being, and calls this the utility of the thing concerned. For praxeology the term utility is tantamount to importance attached to a thing on account of the belief that it can remove uneasiness. The praxeological notion of utility (subjective use-value in the terminology of the earlier Austrian economists) must be sharply distinguished from the technological notion of utility (objective use-value in the terminology of the same economists). Use-value in the objective sense is the relation between a thing and the effect it has the capacity to bring about. It is to objec
tive use-value that people refer in employing such terms as the “heating value” or “heating power” of coal. Subjective use-value is not always based on true objective use-value. There are things to which subjective use-value is attached because people erroneously believe that they have the power to bring about a desired effect. On the other hand there are things able to produce a desired effect to which no use-value is attached because people are ignorant of this fact.

  Let us look at the state of economic thought which prevailed on the eve of the elaboration of the modern theory of value by Carl Menger, William Stanley Jevons, and Léon Walras. Whoever wants to construct an elementary theory of value and prices must first think of utility. Nothing indeed is more plausible than to assume that things are valued according to their utility. But then a difficulty appears which presented to the older economists a problem they failed to solve. They observed that things whose “utility” is greater are valued less than other things of smaller utility. Iron is less appreciated than gold. This fact seems to be incompatible with a theory of value and prices based on the concepts of utility and use-value. The economists believed that they had to abandon such a theory and tried to explain the phenomena of value and market exchange by other theories.

  Only late did the economists discover that the apparent paradox was the outcome of a vicious formulation of the problem involved. The valuations and choices that result in the exchange ratios of the market do not decide between gold and iron. Acting man is not in a position in which he must choose between all the gold and all the iron. He chooses at a definite time and place under definite conditions between a strictly limited quantity of gold and a strictly limited quantity of iron. His decision in choosing between 100 ounces of gold and 100 tons of iron does not depend at all on the decision he would make if he were in the highly improbable situation of choosing between all the gold and all the iron. What counts alone for his actual choice is whether under existing conditions he considers the direct or indirect satisfaction which 100 ounces of gold could give him as greater or smaller than the direct or indirect satisfaction he could derive from 100 tons of iron. He does not express an academic or philosophical judgment concerning the “absolute” value of gold and of iron; he does not determine whether gold or iron is more important for mankind; he does not perorate as an author of books on the philosophy of history or on ethical principles. He simply chooses between two satisfactions both of which he cannot have together.