Human Action: A Treatise on Economics

by Ludwig VonMises

  We are not dealing at this point of our investigation with the problem of a “quantitative science of economics,” but with the analysis of the mental processes performed by acting man in applying quantitative distinctions when planning conduct. As action is always directed toward influencing a future state of affairs, economic calculation always deals with the future. As far as it takes past events and exchange ratios of the past into consideration, it does so only for the sake of an arrangement of future action.

  The task which acting man wants to achieve by economic calculation is to establish the outcome of acting by contrasting input and output. Economic calculation is either an estimate of the expected outcome of future action or the establishment of the outcome of past action. But the latter does not serve merely historical and didactic aims. Its practical meaning is to show how much one is free to consume without impairing the future capacity to produce. It is with regard to this problem that the fundamental notions of economic calculation—capital and income, profit and loss, spending and saving, cost and yield—are developed. The practical employment of these notions and of all notions derived from them is inseparably linked with the operation of a market in which goods and services of all orders are exchanged against a universally used medium of exchange, viz., money. They would be merely academic, without any relevance for acting within a world with a different structure of action.

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  1. The German Historical School expressed this by asserting that private ownership of the means of production, market exchange, and money are “historical categories.”

  2. Cf. especially Eugen von Böhm-Bawerk, Kapital und Kapitalzins, Pt. II, Bk. III.

  3. See below, pp. 237–257.

  4. Neglect of the problems of indirect exchange was certainly influenced by political prepossessions. People did not want to give up the thesis according to which economic depressions are an evil inherent in the capitalist mode of production and are in no way caused by attempts to lower the rate of interest by credit expansion. Fashionable teachers of economics deemed it “unscientific” to explain depressions as a phenomenon originating “only” out of events in the sphere of money and credit. There were even surveys of the history of business cycle theory which omitted any discussion of the monetary thesis. Cf., e.g., Ernst von Bergmann, Geschichte der nationalökonomischen Krisentheorien (Stuttgart, 1895).

  5. For a critical analysis and refutation of Fisher’s argument, cf. Mises, The Theory of Money and Credit, trans. by H. E. Batson (London, 1934), pp. 42–44; for the same with regard to Wieser’s argument, Mises, Nationalökonomie (Geneva, 1940), pp. 192–194.

  6. Cf. Friedrich von. Wieser, Der natürliche Wert (Vienna, 1889), p. 60, n. 3.

  7. Cf. A. Eddington, The Philosophy of Physical Science, pp. 70–79, 168–169.

  XII. THE SPHERE OF ECONOMIC CALCULATION

  1. The Character of Monetary Entries

  ECONOMIC calculation can comprehend everything that is exchanged against money.

  The prices of goods and services are either historical data describing past events or anticipations of probable future events. Information about a past price conveys the knowledge that one or several acts of interpersonal exchange were effected according to this ratio. It does not convey directly any knowledge about future prices. We may often assume that the market conditions which determined the formation of prices in the recent past will not change at all or at least not change considerably in the immediate future so that prices too will remain unchanged or change only slightly. Such expectations are reasonable if the prices concerned were the result of the interaction of many people ready to buy or to sell provided the exchange ratios seemed propitious to them and if the market situation was not influenced by conditions which are considered as accidental, extraordinary, and not likely to return. However, the main task of economic calculation is not to deal with the problems of unchanging or only slightly changing market situations and prices, but to deal with change. The acting individual either anticipates changes which will occur without his own interference and wants to adjust his actions to this anticipated state of affairs; or he wants to embark upon a project which will change conditions even if no other factors produce a change. The prices of the past are for him merely starting points in his endeavors to anticipate future prices.

  Historians and statisticians content themselves with prices of the past. Practical man looks at the prices of the future, be it only the immediate future of the next hour, day, or month. For him the prices of the past are merely a help in anticipating future prices. Not only in his preliminary calculation of the expected outcome of planned action, but no less in his attempts to establish the result of his past transactions, he is primarily concerned with future prices.

  In balance sheets and in profit-and-loss statements the result of past action becomes visible as the difference between the money equivalent of funds owned (total assets minus total liabilities) at the beginning and at the end of the period reported, and as the difference between the money equivalent of costs incurred and gross proceeds earned. In such statements it is necessary to enter the estimated money equivalent of all assets and liabilities other than cash. These items should be appraised according to the prices at which they could probably be sold in the future or, as is especially the case with equipment for production processes, in reference to the prices to be expected in the sale of merchandise manufactured with their aid. However, old business customs and the provisions of commercial law and of the tax laws have brought about a deviation from sound principles of accounting which aim merely at the best attainable degree of correctness. These customs and laws are not so much concerned with correctness in balance sheets and profit-and-loss statements as with the pursuit of other aims. Commercial legislation aims at a method of accounting which could indirectly protect creditors against loss. It tends more or less to an appraisal of assets below their estimated market value in order to make the net profit and the total funds owned appear smaller than they really arc. Thus a safety margin is created which reduces the danger that, to the prejudice of creditors, too much might be withdrawn from the firm as alleged profit and that an already insolvent firm might go on until it had exhausted the means available for the satisfaction of its creditors. Contrariwise tax laws often tend toward a method of computation which makes earnings appear higher than an unbiased method would. The idea is to raise effective tax rates without making this raise visible in the nominal tax rate schedules. We must therefore distinguish between economic calculation as it is practiced by businessmen planning future transactions and those computations of business facts which serve other purposes. The determination of taxes due and economic calculation are two different things. If a law imposing a tax upon the keeping of domestic servants prescribes that one male servant should be counted as two female servants, nobody would interpret such a provision as anything other than a method for determining the amount of tax due. Likewise if an inheritance tax law prescribes that securities should be appraised at the stock market quotation on the day of the decedent’s death, we are merely provided with a way of determining the amount of the tax.

  The duly kept accounts in a system of correct bookkeeping are accurate as to dollars and cents. They display an impressive precision, and the numerical exactitude of their items seems to remove all doubts. In fact, the most important figures they contain are speculative anticipations of future market constellations. It is a mistake to compare the items of any commercial account to the items used in purely technological reckoning, e.g., in the design for the construction of a machine. The engineer—as far as he attends to the technological side of his job—applies only numerical relations established by the methods of the experimental natural sciences; the businessman cannot avoid numerical terms which are the outcome of his understanding of future human conduct. The main thing in balance sheets and in profit-and-loss statements is the evaluation of assets and liabilities not embodied in cash. All such balances
and statements are virtually interim balances and interim statements. They describe as well as possible the state of affairs at an arbitrarily chosen instant while life and action go on and do not stop. It is possible to wind up individual business units, but the whole system of social production never ceases. Nor are the assets and liabilities consisting in cash exempt from the indeterminacy inherent in all business accounting items. They depend on the future constellation of the market no less than any item of inventory or equipment. The numerical exactitude of business accounts and calculations must not prevent us from realizing the uncertainty and speculative character of their items and of all computations based on them.

  Yet, these facts do not detract from the efficiency of economic calculation. Economic calculation is as efficient as it can be. No reform could add to its efficiency. It renders to acting man all the services which he can obtain from numerical computation. It is, of course, not a means of knowing future conditions with certainty, and it does not deprive action of its speculative character. But this can be considered a deficiency only by those who do not come to recognize the facts that life is not rigid, that all things are perpetually fluctuating, and that men have no certain knowledge about the future.

  It is not the task of economic calculation to expand man’s information about future conditions. Its task is to adjust his actions as well as possible to his present opinion concerning want-satisfaction in the future. For this purpose acting man needs a method of computation, and computation requires a common denominator to which all items entered are to be referable. The common denominator of economic calculation is money.

  2. The Limits of Economic Calculation

  Economic calculation cannot comprehend things which are not sold and bought against money.

  There are things which are not for sale and for whose acquisition sacrifices other than money and money’s worth must be expended. He who wants to train himself for great achievements must employ many means, some of which may require expenditure of money. But the essential things to be devoted to such an endeavor are not purchasable. Honor, virtue, glory, and likewise vigor, health, and life itself play a role in action both as means and as ends; but they do not enter into economic calculation.

  There are things which cannot at all be evaluated in money, and there are other things which can be appraised in money only with regard to a fraction of the value assigned to them. The appraisal of an old building must disregard its artistic and historical eminence as far as these qualities are not a source of proceeds in money or goods vendible. What touches a man’s heart only and does not induce other people to make sacrifices for its attainment remains outside the pale of economic calculation.

  However, all this does not in the least impair the usefulness of economic calculation. Those things which do not enter into the items of accountancy and calculation are either ends or goods of the first order. No calculation is required to acknowledge them fully and to make due allowance for them. All that acting man needs in order to make his choice is to contrast them with the total amount of costs their acquisition or preservation requires. Let us assume that a town council has to decide between two water supply projects. One of them implies the demolition of a historical landmark, while the other at the cost of an increase in money expenditure spares this landmark. The fact that the feelings which recommend the conservation of the monument cannot be estimated in a sum of money does not in any way impede the councilmen’s decision. The values that are not reflected in any monetary exchange ratio are, on the contrary, by this very fact lifted into a particular position which makes the decision rather easier. No complaint is less justified than the lamentation that the computation methods of the market do not comprehend things not vendible. Moral and aesthetic values do not suffer any damage on account of this fact.

  Money, money prices, market transactions, and economic calculation based upon them are the main targets of criticism. Loquacious sermonizers disparage Western civilization as a mean system of mongering and peddling. Complacency, self-righteousness, and hypocrisy exult in scorning the “dollar-philosophy” of our age. Neurotic reformers, mentally unbalanced literati, and ambitious demagogues take pleasure in indicting “rationality” and in preaching the gospel of the “irrational.” In the eyes of these babblers money and calculation are the source of the most serious evils. However, the fact that men have developed a method of ascertaining as far as possible the expediency of their actions and of removing uneasiness in the most practical and economic way does not prevent anybody from arranging his conduct according to the principle he considers to be right. The “materialism” of the stock exchange and of business accountancy does not hinder anybody from living up to the standards of Thomas à Kempis or from dying for a noble cause. The fact that the masses prefer detective stories to poetry and that it therefore pays better to write the former than the latter, is not caused by the use of money and monetary accounting. It is not the fault of money that there are gangsters, thieves, murderers, prostitutes, corruptible officials and judges. It is not true that honesty does not “pay.” It pays for those who prefer fidelity to what they consider to be right to the advantages which they could derive from a different attitude.

  Other critics of economic calculation fail to realize that it is a method available only to people acting in the economic system of the division of labor in a social order based upon private ownership of the means of production. It can only serve the considerations of individuals or groups of individuals operating in the institutional setting of this social order. It is consequently a calculation of private profits and not of “social welfare.” This means that the prices of the market are the ultimate fact for economic calculation. It cannot be applied for considerations whose standard is not the demand of the consumers as manifested on the market but the hypothetical valuations of a dictatorial body managing all national or earthly affairs. He who seeks to judge actions from the point of view of a pretended “social value,” i.e., from the point of view of the “whole society,” and to criticize them by comparison with the events in an imaginary socialist system in which his own will is supreme, has no use for economic calculation. Economic calculation in terms of money prices is the calculation of entrepreneurs producing for the consumers of a market society. It is of no avail for other tasks.

  He who wants to employ economic calculation must not look at affairs in the manner of a despotic mind. Prices can be used for calculation by the entrepreneurs, capitalists, landowners, and wage earners of a capitalist society. For matters beyond the pursuits of these categories it is inadequate. It is nonsensical to evaluate in money objects which are not negotiated on the market and to employ in calculations arbitrary items which do not refer to reality. The law determines the amount which ought to be paid as indemnification for having caused a man’s death. But the prescription enacted for the determination of the amends due does not mean that there is a price for human life. Where there is slavery, there are market prices of slaves. Where there is no slavery man, human life, and health are res extra commercium. In a society of free men the preservation of life and health are ends, not means. They do not enter into any process of accounting means.

  It is possible to determine in terms of money prices the sum of the income or the wealth of a number of people. But it is nonsensical to reckon national income or national wealth. As soon as we embark upon considerations foreign to the reasoning of a man operating within the pale of a market society, we are no longer helped by monetary calculation methods. The attempts to determine in money the wealth of a nation or of the whole of mankind are as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimensions of the pyramid of Cheops. If a business calculation values a supply of potatoes at $100, the idea is that it will be possible to sell it or to replace it against this sum. If a whole entrepreneurial unit is estimated $1,000,000, it means that one expects to sell it for this amount. But what is the meaning of the items in a statement of a nati
on’s total wealth? What is the meaning of the computation’s final result? What must be entered into it and what is to be left outside? Is it correct or not to enclose the “value” of the country’s climate and the people’s innate abilities and acquired skill? The businessman can convert his property into money, but a nation cannot.

  The money equivalents as used in acting and in economic calculation are money prices, i.e., exchange ratios between money and other goods and services. The prices are not measured in money; they consist in money. Prices are either prices of the past or expected prices of the future. A price is necessarily a historical fact either of the past or of the future. There is nothing in prices which permits one to liken them to the measurement of physical and chemical phenomena.

  3. The Changeability of Prices

  Exchange ratios are subject to perpetual change because the conditions which produce them are perpetually changing. The value that an individual attaches both to money and to various goods and services is the outcome of a moment’s choice. Every later instant may generate something new and bring about other considerations and valuations. Not that prices are fluctuating, but that they do not alter more quickly could fairly be deemed a problem requiring explanation.