2. The Role of Power
The Historical School and Institutionalism condemn economics for disregarding the role which power plays in real life. The basic notion of economics, viz., the choosing and acting individual, is, they say, an unrealistic concept. Real man is not free to choose and to act. He is subject to social pressure, to the sway of irresistible power. It is not the individuals’ value judgments, but the interactions of the forces of power that determine the market phenomena.
These objections are no less spurious than all other statements of the critics of economics.
Praxeology in general and economics and catallactics in particular do not contend or assume that man is free in any metaphysical sense attached to the term freedom. Man is unconditionally subject to the natural conditions of his environment. In acting he must adjust him self to the inexorable regularity of natural phenomena. It is precisely the scarcity of the nature-given conditions of his welfare that enjoins upon man the necessity to act.4
In acting man is directed by ideologies. He chooses ends and means under the influence of ideologies. The might of an ideology is either direct or indirect. It is direct when the actor is convinced that the content of the ideology is correct and that he serves his own interests directly in complying with it. It is indirect when the actor rejects the content of the ideology as false, but is under the necessity of adjusting his actions to the fact that this ideology is endorsed by other people. The mores of their social environment are a power which people are forced to consider. Those recognizing the spuriousness of the generally accepted opinions and habits must in each instance choose between the advantages to be derived from resorting to a more efficient mode of acting and the disadvantages resulting from the con tempt of popular prejudices, superstitions, and folkways.
The same is true with regard to violence. In choosing man must take into account the fact that there is a factor ready to exercise violent compulsion upon him.
All the theorems of catallactics are valid also with regard to actions influenced by such social or physical pressure. The direct or indirect might of an ideology and the threat of physical compulsion are merely data of the market situation. It does not matter, for instance, what kind of considerations motivate a man not to offer a higher bid for the purchase of a commodity than the one he really makes without obtaining the good concerned. For the determination of the market price it is immaterial whether he spontaneously prefers to spend his money for other purposes or whether he is afraid of being looked upon by his fellow men as an upstart, or as a spendthrift, afraid of violating a government-decreed ceiling price or of defying a competitor ready to resort to violent revenge. In any case his abstention from bidding a higher price contributes to the same extent to the emergence of the market price.5
It is customary nowadays to signify the position which the owners of property occupy on the market as economic power. The expediency of this terminology is questionable. The term is at any rate inappropriate as far as it is intended to imply that under the impact of economic power the determination of the market phenomena is controlled by laws other than those dealt with by catallactics.
3. The Historical Role of War and Conquest
Many authors glorify war and revolution, bloodshed and conquest. Carlyle and Ruskin, Nietzsche, Georges Sorel, and Spengler were harbingers of the ideas which Lenin and Stalin, Hitler and Mussolini put into effect.
The course of history, say these philosophies, is not determined by the mean activities of materialistic peddlers and merchants, but by the heroic deeds of warriors and conquerors. The economists err in abstracting from the experience of the shortlived liberal episode a theory to which they ascribe universal validity. This epoch of liberalism, individualism, and capitalism; of democracy, tolerance, and freedom; of the disregard of all “true” and “eternal” values-, and of the supremacy of the rabble is now vanishing and will never return. The dawning age of manliness requires a new theory of human action.
However, no economist ever ventured to deny that war and con quest were of utmost importance in the past and that Huns and Tar tars, Vandals and Vikings, Normans and conquistadors played an enormous part in history. One of the determinants of the present state of mankind is the fact that there were thousands of years of armed conflicts. Yet, what remains and is the essence of human civilization, is not the legacy inherited from the warriors. Civilization is an achievement of the “bourgeois” spirit, not of the spirit of conquest. Those barbarian peoples who did not substitute working for plundering disappeared from the historical scene. If there is still any trace left of their existence, it is in the achievements they accomplished under the influence of the civilization of the subdued peoples. Latin civilization survived in Italy, France, and the Iberian peninsula in defiance of all barbarian invasions. If capitalist entrepreneurs had not succeeded Lord Clive and Warren Hastings, British rule in India might one day become such an insignificant historical reminiscence as are the one hundred and fifty years of Turkish rule in Hungary.
It is not the task of economics to enter into an examination of the endeavors to revive the ideals of the Vikings. It has merely to refute the statements that the fact that there are armed conflicts reduces its teachings to nought. With regard to this problem there is need to emphasize again the following:
First: The teachings of catallactics do not refer to a definite epoch of history, but to all actions characterized by the two conditions private ownership of the means of production and division of labor. Whenever and wherever, in a society in which there is private owner ship of the means of production, people not only produce for the direct satisfaction of their own wants but also consume goods produced by other people, the theorems of catallactics are strictly valid.
Second: If apart from the market and outside of the market there is robbing and plundering, these facts are a datum for the market. The actors must take into account the fact that they are threatened by murderers and robbers. If killing and robbing become so prevalent that any production appears useless, it may finally happen that productive work ceases and mankind plunges into a state of war of every man against every other man.
Third: In order to seize booty, something to be plundered must be available. The heroes can only live if there are enough “bourgeois” to be expropriated. The existence of producers is a condition for the survival of conquerors. But the producers could do without the plunderers.
Fourth: There are, of course, other imaginable systems of a society based on the division of labor besides the capitalist system of private ownership of the means of production. Champions of militarism are consistent in asking for the establishment of socialism. The whole nation should be organized as a community of warriors in which the noncombatants have no other task than that of supplying the fighting forces with all they need. (The problems of socialism are dealt with in the fifth part of this book.)
4. Real Alan as a Datum
Economics deals with the real actions of real men. Its theorems refer neither to ideal nor to perfect men, neither to the phantom of a fabulous economic man (homo oeconomicus) nor to the statistical notion of an average man (homme moyen). Man with all his weaknesses and limitations, every man as he lives and acts, is the subject matter of catallactics. Every human action is a theme of praxeology.
The subject matter of praxeology is not only the study of society, societal relations, and mass phenomena, but the study of all human actions. The term “the social sciences” and all its connotations are in this regard misleading.
There is no yardstick that a scientific investigation can apply to human action other than that of the ultimate goals the acting individual wants to realize in embarking upon a definite action. The ultimate goals themselves are beyond and above any criticism. Nobody is called upon to establish what could make another man happy. What an unaffected observer can question is merely whether or not the means chosen for the attainment of these ultimate goals are fit to bring about the results sought by the actor. Only
in answering this question is economics free to express an opinion about the actions of individuals and groups of individuals, or of the policies of parties, pressure groups, and governments.
It is customary to disguise the arbitrariness of the attacks launched against the value judgments of other people by converting them into a critique of the capitalist system or of the conduct of entrepreneurs. Economics is neutral with regard to all such statements.
To the arbitrary statement that “the balance between the production of different goods is admittedly faulty under capitalism,” 6 the economist does not oppose the statement that this balance is faultless. What the economist asserts is that in the unhampered market economy this balance is in agreement with the conduct of the consumers as displayed in the spending of their incomes.7 It is not the task of the economist to censure his fellow men and to call the result of their actions faulty.
The alternative to the system in which the individual’s value judgments are paramount in the conduct of production processes is autocratic dictatorship. Then the value judgments of the dictators alone decide although they are not less arbitrary than those of other people.
Man is certainly not a perfect being. His human weakness taints all human institutions and thus also the market economy.
5. The Period of Adjustment
Every change in the market data has its definite effects upon the market. It takes a definite length of time before all these effects are consummated, i.e., before the market is completely adjusted to the new state of affairs.
Catallactics has to deal with all the various individuals’ conscious and purposive reactions to the changes in the data and not, of course, merely with the final result brought about in the market structure by the interplay of these actions. It may happen that the effects of one change in the data are counteracted by the effects of another change occurring, by and large, at the same time and to the same extent. Then no considerable change in the market prices finally results. The statistician, exclusively preoccupied with the observation of mass phenomena and the outgrowth of the totality of market transactions as manifested in market prices, ignores the fact that the nonemergence of changes in the height of prices is merely accidental and not the outcome of a continuance in the data and the absence of specific adjustment activities. He fails to see any movement and the social consequences of such movements. Yet each change in the data has its own course, generates certain reactive responses on the part of the individuals affected and disturbs the relation between the various members of the market system even if eventually no considerable changes in the prices of the various goods and no changes at all in the figures concerning the total amount of capital in the whole market system result.8
Economic history can give vague information ex post factum about the length of adjustment periods. The method of attaining such information is, of course, not measurement, but historical understanding. The various adjustment processes are in reality not isolated. Synchronously an indefinite number of them take their course, their paths intersect, and they mutually influence one another. To disentangle this intricate tissue and to observe the chain of actions and reactions set into motion by a definite change in the data is a difficult task for the historian’s understanding and the results are mostly meager and questionable.
The understanding of the length of adjustment periods is also the most difficult task incumbent upon those eager to understand the future, the entrepreneurs. Yet for success in entrepreneurial activities, mere anticipation of the direction in which the market will react to a certain event is of little significance if it is not supplemented by an adequate anticipation of the length of the various adjustment periods involved. Most of the mistakes committed by entrepreneurs in the conduct of affairs and most of the blunders vitiating the prognoses of future business trends on the part of “expert” forecasters are caused by errors concerning the length of adjustment periods.
In dealing with effects brought about by changes in the data, it is customary to distinguish between the temporally nearer and the temporally remoter effects, viz., the short-run effects and the long run effects. This distinction is much older than the terminology in which it is expressed nowadays.
In order to discover the immediate—the short-run—effects brought about by a change in a datum, there is as a rule no need to resort to a thorough investigation. The short-run effects are for the most part obvious and seldom escape the notice of a naive observer unfamiliar with searching investigations. What started economic studies was precisely the fact that some men of genius began to suspect that the remoter consequences of an event may differ from the immediate effects visible even to the most simple-minded layman. The main achievement of economics was the disclosure of such long-run effects hitherto unnoticed by the unaffected observer and neglected by the statesman.
From their startling discoveries the classical economists derived a rule for political practice. Governments, statesmen, and political parties, they argued, in planning and acting should consider not only the short-run consequences but also the long-run consequences of their measures. The correctness of this inference is incontestable and indisputable. Action aims at the substitution of a more satisfactory state of affairs for a less satisfactory. Whether or not the outcome of a definite action will be considered more or less satisfactory depends on a correct anticipation of all its consequences, both short run and long run.
Some people criticize economics for alleged neglect of the short run effects and for alleged preference given to the study of the long run effects. The reproach is nonsensical. Economics has no means of scrutinizing the results of a change in the data other than to start with its immediate consequences and to analyze, step by step, proceeding from the first reaction to the remoter reactions, all the sub sequent consequences, until it finally arrives at its ultimate consequences. The long-run analysis necessarily always fully includes the short-run analysis.
It is easy to understand why certain individuals, parties, and pressure groups are eager to propagate the exclusive sway of the short-run principle. Politics, they say, should never be concerned about the long-run effects of a device and should never abstain from resorting to a measure from which benefits are expected in the short run merely because its long-run effects are detrimental. What counts is only the short-run effects; “in the long run we shall all be dead.” All that economics has to answer to these passionate critics is that every decision should be based on a careful weighing of all its consequences, both those in the short run and those in the long run. There are certainly, both in the actions of individuals and in the conduct of public affairs, situations in which the actors may have good reasons to put up even with very undesirable long-run effects in order to avoid what they consider still more undesirable short-run conditions. It may sometimes be expedient for a man to heat the stove with his furniture. But if he does, he should know what the remoter effects will be. He should not delude himself by believing that he has discovered a wonderful new method of heating his premises.
That is all that economics need oppose to the frenzy of the short run apostles. History, one day, will have to say much more. It will have to establish the role that the recommendation of the short-run principle—this revival of Madame de Pompadour’s notorious phrase après nous le déluge —played in the most serious crisis of Western civilization. It will have to show how welcome this slogan was to governments and parties whose policies aimed at the consumption of the spiritual and material capital inherited from earlier generations.
6. The Limits of Property Rights and the Problems of External Costs and External Economies
Property rights as they are circumscribed by laws and protected by courts and the police, are the outgrowth of an age-long evolution. The history of these ages is the record of struggles aiming at the abolition of private property. Again and again despots and popular movements have tried to restrict the rights of private property or to abolish it altogether. These endeavors, it is true, failed. Bu
t they have left traces in the ideas determining the legal form and definition of property. The legal concepts of property do not fully take account of the social function of private property. There are certain inadequacies and incongruities which are reflected in the determination of the market phenomena.
Carried through consistently, the right of property would entitle the proprietor to claim all the advantages which the good’s employment may generate on the one hand and would burden him with all the disadvantages resulting from its employment on the other hand. Then the proprietor alone would be fully responsible for the outcome. In dealing with his property he would take into account all the expected results of his action, those considered favorable as well as those considered unfavorable. But if some of the consequences of his action are outside of the sphere of the benefits he is entitled to reap and of the drawbacks that are put to his debit, he will not bother in his planning about all the effects of his action. He will disregard those benefits which do not increase his own satisfaction and those costs which do not burden him. His conduct will deviate from the line which it would have followed if the laws were better adjusted to the economic objectives of private ownership. He will embark upon certain projects only because the laws release him from responsibility for some of the costs incurred. He will abstain from other projects merely because the laws prevent him from harvesting all the ad vantages derivable.
The laws concerning liability and indemnification for damages caused were and still are in some respects deficient. By and large the principle is accepted that everybody is liable to damages which his actions have inflicted upon other people. But there were loopholes left which the legislators were slow to fill. In some cases this tardiness was intentional because the imperfections agreed with the plans of the authorities. When in the past in many countries the owners of factories and railroads were not held liable for the damages which the conduct of their enterprises inflicted on the property and health of neighbors, patrons, employees, and other people through smoke, soot, noise, water pollution, and accidents caused by defective or inappropriate equipment, the idea was that one should not undermine the progress of industrialization and the development of transportation facilities. The same doctrines which prompted and still are prompting many governments to encourage investment in factories and railroads through subsidies, tax exemption, tariffs, and cheap credit were at work in the emergence of a legal state of affairs in which the liability of such enterprises was either formally or practically abated. Later again the opposite tendency began to prevail in many countries and the liability of manufacturers and railroads was increased as against that of other citizens and firms. Here again definite political objectives were operative. Legislators wished to protect the poor, the wage earners, and the peasants against the wealthy entrepreneurs and capitalists.
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