Tag: Austrian economics

The Impossibility of Socialism

The Impossibility of Socialism

“Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build, it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created.” – Ludwig von Mises

The author is a second year law undergraduate and enthusiast of the Austrian School of economics. You can follow him on Twitter @Hazlitt_3.

This article was originally published on austrianpoliticaleconomy.blogspot.com. Read the original article.


Over a century ago, in 1920, Ludwig von Mises wrote what is undoubtedly the most important essay in the history of the field of economic science, namely: Economic Calculation in The Socialist Commonwealth. In that essay, Mises utterly destroyed the intellectual foundation of the theory of socialism. Mises definitively demonstrated that socialism is impossible in an advanced economy because of the fundamental deficiencies of calculations in kind.

Until the calculation debate of the 1920s, socialist theorists of the Marxian school had failed to pay any attention to the economic problem of resource allocation in an advanced economic society. According to Marx, it was a fact of the inexorable laws of history that socialism would one day usurp capitalism. Socialism was inevitable and therefore it must be workable they thought. In short, the socialist theorists had assumed away the economic problem in their fervent belief in spurious laws of history. 

Before we can see why socialism is doomed to fail, we must first ascertain what functions an economic system must fulfil and how the market economy fulfils them. The task of an economy is to direct scarce resources to the satisfaction of the more urgently felt wants of society’s members. This is true in the case of an isolated individual, such as Robinson Crusoe, and the case of millions of individuals interacting under the division of labour. 

There are, however, two major differences. First, the resources with which Robinson Crusoe deals are minimal. The most versatile resource in his possession is his labour. He also has access to the original nature-given factors of production—land and whatever natural resources he acquires. Because the resources in his inventory would lack a significant degree of versatility, the choices facing Crusoe regarding their use would not be so complicated as to necessitate quantitative calculations about the results of different employments. Secondly, Crusoe is the only intelligent mind appraising the various producer and consumer goods for their utility in satisfying his preferences. For his purposes, calculations in terms of physical output (often called calculations in kind) would be sufficient. Crusoe’s scale of values would operate to determine his actions; objective profit and loss calculations would not be necessary. Contrariwise, these decisions are not as easy to make in a modern economy characterised by an extensive division of labour and intricate exchange transactions.

The greater difficulty of resource allocation can be attributed to the immense array of consumer goods and intermediate capital goods that are capable of being generated by the higher productivity resulting from specialisation and the division of labour. Decisions arise concerning what articles are to be made and in what quantities and qualities they are to be made. In an advanced economy, there is an inconceivable number of alternatives, rendering the task of resource allocation profoundly difficult. For example, steel can be used to make automobiles, but it can also be used to make skyscrapers, refrigerators, washing machines, cargo ships, and surgical scalpels—not to mention the possibility of substitutes. Moreover, in such an advanced economy, there are millions, if not billions, of individuals each acting purposively according to his value scale. It is clear, then, that resources will not be guided to their most fruitful uses if calculations in kind are the only calculations. The allocation of scarce resources would be chaotic and irrational. 

Thus the need emerges for economic calculation. That is, for a means of comparing the results of different resource employments. In this way, resources can be directed to their more important usages. The question arises how are these important usages to be decided. Economic calculation is enabled by the very factor that makes widespread exchange possible: the medium of exchange, viz. money and its concomitant money prices. Money allows for economic calculations precisely because it serves as a common denominator that converts all goods in the market into common terms in the form of market prices. 

It is through the market price system that relative importance is attributed to the multitude of commodities in the market. The money prices that are generated by the market represent exchange ratios between commodities and the medium of exchange. One point that needs stressing is that this does not entail measuring the value of goods. Value is inherently subjective and not capable of being measured. Valuation is manifested in the act of exchange and can therefore only reveal an ordinal ranking of goods; it is never cardinal. Money prices are not measurements of value, they are expressions of valuations. 

Economic calculation permits the determination of money costs and money revenues. Entrepreneurs estimate the total amount of money they must spend on their expenses (hiring workers, buying raw materials, and so forth) and forecast the revenue they expect to receive from consumers when they offer their goods for sale in the market. In brief, entrepreneurs estimate whether their proposed course of production will yield a profit or a loss.

The profit and loss system serves a vital social function. It is the relentless search of entrepreneurs for profit potentials to exploit that results in the shifting of resources from less important employments into employments that better satisfy the more urgent wants of consumers. This is the essence of what Hutt and Mises called “consumer sovereignty.” It is ultimately not the captains of industry who decide how resources will be used to produce goods and services in the market economy—it is the consumers. As Hazlitt states:

“In a free economy, in which wages, costs, and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities—and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labour and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.” 

The Impossibility of Socialism 

In the socialist commonwealth, the only possible calculations are calculations in kind. Monetary and economic calculation is only possible in the market economy where there is private property in the factors of production—without private property, the determination of market prices is not possible. As Mises states:

“The paradox of ‘planning’ is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”

In the absence of market prices and profits, the socialist planning board has no means by which to rationally allocate scarce resources to the satisfaction of urgent wants. It has no idea what to produce and in what quantities and qualities. The result is utter chaos and invariably human tragedy and disaster. 

While economics is a theoretical science, and the criticism developed by Mises is valid a priori, it is helpful to analyse the historical record and see what happened when the socialist programme was implemented. From 1918-21 the Bolsheviks implemented pure socialism in Russia. The means of production were collectivised and the market and money were abolished. What followed was one of the darkest chapters in human history. Trotsky said they stared into the “abyss.” Russia was plunged into deep privation. It was so disastrous that it was abandoned after a few years to prevent total annihilation. Never again did the Soviets attempt to abolish the market. As Austrian economist Peter Boettke points out, from 1921 onwards, the soviet economy was essentially a controlled or hampered market economy. 

One hundred years have passed since Mises proved the impossibility of socialism and yet fervour for socialism, fuelled by economic illiteracy, never dies. It is incontrovertible that the institution of private property—and its corollaries market prices and profits—are the foundations of civilisation. The attempt to abolish them always results in the tragic demise of civilisation. 

H


Bibliography 

Mises. 1949. Human Action

Mises. 1920. Economic Calculation in The Socialist Commonwealth

Boettke. 2000. Calculation and Coordination. 

The CDC’s Housing Takeover

The CDC’s Housing Takeover

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” – Henry Hazlitt, Economics in One Lesson.

Eric Martin and his wife reside in Houston, Texas, with their two children. He is a follower of the Austrian school of economics, defends individual liberty, and promotes a foreign policy of peace, commerce, and honest friendship with all nations; entangling alliances with none.

You can find more of Eric’s political and economic commentaries on his substack, actionaxiom.substack.com. Follow him on Twitter @ericmartintx.


Continuing its attack on private property and the constitution, The Centers for Disease Control and Prevention (CDC) extended its eviction moratorium. A move even the editors at the Washington Post said was illegal. 

The eviction moratorium imposes stiff fines on property owners who evict tenants: Landlords in violation of the moratorium may be subject to a fine of up to $100,000, one year in jail, or both; the fine increases to $250,000 if the violation results in the death of a tenant.

If you think the CDC’s canceling rent for millions of tenants is a slippery slope, you are not alone. In September, Senator Pat Toomey (R-PA) asked,

“If the CDC has the authority to force landlords to effectively give away their product for free, I don’t know where that ends. Can General Motors be forced to give people cars unless they otherwise crowd into subways?”

If they could, the auto industry would suffer the same fate as the housing industry. The eviction moratorium, which applies to 90% of renters, further centralizes the housing market and serves as a national rent control measure—setting the effective price at zero.

Rent control leads to scarcity

The price system in the market economy efficiently allocates scarce resources. It is far easier for politicians and bureaucrats to devise “free lunch” solutions than to get out of the way and allow the market to solve economic problems. If the market were allowed to function, higher rental prices would signal to builders an increased demand for housing. Building more units pushes the prices back down. This is simple supply and demand economics. 

The eviction moratorium, which acts as a form of rent control, ruins the housing market. There will be no new housing construction because there is no incentive to do so. Instead, entrepreneurs who see property owners struggle for months without a rent check will refuse to enter the housing market and invest their money elsewhere. Current owners, who have either significantly reduced profits or no profits at all, will be hesitant to provide more housing units.

The growth in housing inventory has slowed over the last decade, resulting in an “underbuilding gap” of 5.5 million to 6.8 million housing units. Last month, Taylor Morrison CEO Sheryl Palmer told CNBC, “the lack of supply and the overwhelming demand is something that will be with us for years to come.” Morrison added that the new and resale markets are at multi-year lows,” and it will be “very difficult to make up the shortage.” Discouraging potential builders will continue to add to the underbuilding gap, resulting in further housing scarcity and higher prices. 

Neglected buildings

Because property owners cannot evict tenants, renters are incentivized not to pay. Rental property owners pay for the draconian government measures. Without profits, it should come as no surprise then that rental units will start to deteriorate. Repairs are neglected for two reasons: the owner does not have the money to make repairs and get people to move out. Many would rather have no tenant than one that is not paying.

In a properly functioning economy, rental owners reinvest profits into their buildings and property. However, by the time they reach this stage of neglect, it is too late. Instead, these measures often lead to condemned buildings, further decreasing the supply of quality housing. Empty condemned buildings, the result of rent control, and other government regulations are something that we can easily see. 

Property owners will be more selective 

Rent control is intended to help those who are less fortunate. However, single mothers, immigrants, and welfare check recipients often pay the price. Many people are unable to make rent on time–the average renter is behind $3,700. With further uncertainty in the rental market, landlords will be more selective about whom they take on as tenants. 

Not wanting to be left holding the bag the next time, landlords will shift their focus to renting to young people with well-paying jobs, where they know the rent will continue to be paid on time, even during economic slow downs. In the past, property owners have resorted to other methods to avoid low-income renters, such as charging key money (a large deposit for the use of the apartment key), creating waiting lists, and in some cases, outright discrimination.

Not satisfied with the CDC moratorium, Rep. Ilhan Omar wants to forgive the unpaid rent, and fellow squad member Rep. Rashida Tlaib goes even further, introducing a bill to cancel household water, electric, broadband debt. These are short-sighted remedies that begin the cycle of seeking government solutions to problems caused by the government.

The evictions process could take years 

The eviction ban is an assault on private property that will take years to undo. Even if the Supreme Court were to strike down the eviction ban, the process could take years. Josh Blackman, a constitutional law professor at the South Texas College of Law Houston and an adjunct scholar at the Cato Institute, writes,

“Courts will have a massive, 18-month backlog. The clerk will take forever to file the cases, process them, issue summons, provide notice, schedule hearings, etc. Plus, states offer additional ways to challenging evictions based on hardships.”

We need a truly free market in housing that encourages entrepreneurs to build more housing, invest in their property, and allows the profit and loss system to allocate scarce resources properly. The problem in housing and most of the other areas of the economy is not the fault of a market economy. Instead, it is the failure of shortsighted government officials who cater to the needs of one group at the expense of everyone else.

EM


Inflation’s Assault on the Family

Inflation’s Assault on the Family

“The homemaker has the ultimate career. All other careers exist for one purpose only – and that is to support the ultimate career.” – C.S. Lewis


I moved aside and watched our twelve-year-old van pull into the driveway. My wife opened the door, smiled, and told me she got the job. Putting the basketball down, I hugged her and told her I was proud. The job was a part-time evening and weekend position at the local country health food store – a good fit considering my wife’s interests. But deep down, a sense of sadness and partial defeat rolled over me. The ten-year period leading up to this moment had found my wife solely focused on homemaking and homeschooling our three children. A responsibility so demanding that few ever attempt it – even fewer see it through. But there we stood, eleven years into our marriage, resigned to the fact my single income was starting to fall short. Not due to any pay decrease, change in spending habits, or some major unforeseen event – but the result of government lockdowns and central banking monetary policies. I wanted blood.

To bathe in lament would be wrong. My wife and I have been and continue to be abundantly blessed. Our decision to have my wife stay home beyond her initial maternity leave led to a second and third child and an eventual decision to homeschool. All this, on a single income stretched by a string of small sacrifices: being a single used vehicle family, refraining from taking exotic family vacations, and thrift shopping whenever it met our requirements, to name a few. These disciplines afforded us the ability to own a home – a mortgage that is, and more importantly, to homeschool our three children.

Detailing our reasons for homeschooling would overwhelm the subject at hand, so I’ll exercise brevity. Public schools are no longer safe. Teachers no longer have the authority to maintain order and hold students to account; respect hit the offramp several exits ago. Large classrooms don’t afford teachers the ability to better know their students or offer them flexibility based on individual learning styles. Not that academics seem to matter anymore. Then there’s the indiscriminate spewing of left ideologies with little tolerance for pushback. No, thank you – we covet our kids too much, more than a new vehicle, second vehicle, picturesque vacation, and yes, even more than Gap Kids.

I was fortunate enough to receive an annual salary increase two years running, both of which outpaced official inflation numbers. An astute budgeter, I know we haven’t expanded our lifestyle to include more comforts or upgrades. So, we should be getting ahead, but we’re not. Given a choice between working six days a week or having my wife pick up some part-time work, we decided on the latter. This affords our kids more one-on-one time with dad instead of less, hopefully reducing any feelings of guilt, regret or resentment down the road. And needless to say, mom benefits from a bit of time spent away from home. So, what happened? How did we go from building savings every month to relying on those savings just to cover expenses?

Rising consumer prices, aka price inflation, resulting from central bank increases to the money supply, aka monetary inflation. For added depth, we turn to “Monetary Inflation and Price Inflation,” an article published on Mises.org, which is part of economist Robert P. Murphy’s series entitled “Understanding Money Mechanics.” Murphy begins by including the following excerpt from Ludwig von Mises’ “Economic Freedom And Interventionism: An Anthology of Articles and Essays,” which highlights the importance of differentiating between price and monetary inflation,

“There is nowadays a very reprehensible, even dangerous, semantic confusion that makes it extremely difficult for the non-expert to grasp the true state of affairs. Inflation, as this term was always used everywhere and especially in this country [the United States], means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term “inflation” to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. It follows that nobody cares about inflation in the traditional sense of the term. As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil.”

In the absence of any graphs or balance sheets depicting current monetary inflation rates, I recommend anyone interested visit the Federal Reserve Economic Data (FRED) site and access their many tutorials to get started. Verifications aside, none of the following should come as a shock to those following government responses to Covid-19. Having limited economic activity through lockdowns, global governments have turned to their central banks to bail out their citizens and businesses alike. Growing government reliance on central bank monetary policies was evident long before this “pandemic.” Still, many have only recently become aware of the staggering rate at which the money supply has increased. To reiterate, this increase in money supply is what we call “monetary inflation” or simply “inflation.” What does history teach us about this topic?

Murphy’s article demonstrates the dangerous effects by referencing three historical examples of hyperinflation, the US Civil War, the Weimar Republic, and more recently, Zimbabwe, which experienced unimaginable price inflation. Regarding the latter, he writes,

“A more recent (and severe) hyperinflation occurred in Zimbabwe, from 2007 to 2009. In the worst month, November 2008, prices increased more than 79 billion percent, or 98 percent per day. As with other hyperinflations, in Zimbabwe too the connection between monetary and price inflation was evident.”

But how does increasing the quantity of money cause consumer prices to rise?

In his book “What You Should Know About Inflation,” the famous business and economics journalist Henry Hazlitt explained their relationship like this,

“Let us see what happens under inflation, and why it happens. When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase — or does not increase as much as the supply of money — then the prices of goods will go up. Each individual dollar becomes less valuable because there are more dollars. Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before. A ‘price’ is an exchange ratio between a dollar and a unit of goods. When people have more dollars, they value each dollar less. Goods then rise in price, not because goods are scarcer than before, but because dollars are more abundant.”

In the era of global lockdowns, we’ve seen increasing supplies of money, decreasing supplies of goods, and governments financing their citizens to forgo work and stay home. Fewer workers produce fewer goods, and as we’ve just learned, fewer supplied goods with increasing supplies of money lead to higher prices.

Although we haven’t experienced anything remotely close to Murphy’s earlier precedents, many families are being squeezed. Fortunately, avenues do exist, which lead to improved financial outlooks. Living within one’s means, avoiding “bad” debt, implementing a budget, and substituting goods when specific prices soar, to name a few. Sadly, authoritarian governments bridled with central banking policies minimize the positive effects of making responsible personal choices. In my family’s case, having exhausted all other options, increasing our revenue stream was the only card left to play.

I can’t say enough about my wife – she’s a rock. Together, we know what we want for our family despite where the rest of the world may be heading. We knew there would be challenges, and we would need to make sacrifices along the way – but it’s been worth every last one of them. We’re raising our children and leaving little to the state. We won’t shelter them from opposing views – that wouldn’t be right. Instead, we will introduce distinct topics and worldviews on our terms and will encourage our kids to think critically. Some say our aspirations will fail, and perhaps they’re right – God only knows. Until then, you’ll find us here in our home, building up our legacy – inflationary policies be damned.

Towards liberty,

OA

Economics: What It Is and Is Not

Economics: What It Is and Is Not

“Economics is not about things and tangible material objects; it is about men, their meanings, and actions. Goods, commodities, and wealth and all other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.”
– Ludwig von Mises
 

The author is a first year law undergraduate and enthusiast of the Austrian School of economics. You can follow him on Twitter @Hazlitt_3.

This article was originally published on austrianschooleconomics.blogspot.com. Read the original article.


In his seminal treatise, Human Action, Ludwig von Mises put forward a definition of economics as the scientific study of human action. Mises conceived of economics as a branch of what he called praxeology, his term for the general, formal science of human action. For Mises, it was of paramount importance that economic reasoning and analysis be predicated on human action and not material commodities and their physical properties. While this may seem trite, I hope this essay will convince you otherwise.

Human Action 

When we observe phenomena in the world and try to make sense of their underlying causation, we invariably discern between purposeful action and unmotivated behaviour. We can either explain phenomena in terms of the purposive actions of human beings, or we can attribute them to natural laws. In the economic realm, we explain phenomena by reference to purposeful actions on the part of human beings. Mises’ student and intellectual successor, Murray Rothbard, explained purposeful human action as,

“purposeful behaviour toward the attainment of ends in some future period which will involve the fulfilment of wants otherwise remaining unsatisfied.”

When a human acts, he employs means in an endeavour to achieve an end or a goal that he subjectively values. Moreover, since action is intentional we can say it is teleological. It is clear, then, that not all human behaviour constitutes action in the praxeological sense of the word: unconscious or reflexive behaviour — for example, coughing when exposed to tear gas — are evidently not forms of purposeful action. 

The A Priori Nature of Economic Theory

Mises’ definition of economics as the science of human action may not appear very controversial. In fact, it might seem like he is simply stating the obvious. But Mises says of economic theory,

“Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification and falsification on the ground of experience and facts. They are both logically and temporally antecedent to any comprehension of historical facts. They are a necessary requirement of any intellectual grasp of historical events.”

The assertion that economics is an a priori science distinguishes Misesian-Austrians from all other modern schools of thought. Besides the Austrians, all other schools regard economics as an empirical (a posteriori) science and its theorems as a collection of testable hypotheses. 

Mises did not see praxeology as a novel invention. Rather, he saw himself as merely recapitulating and systematizing economics as it had been conceived of by virtually every economist since the genesis of the discipline in the 18th century. While they did not use the term a priori, the view that economics constitutes a deductive science was held by the classical economists. This was also the view of Mises’ predecessors in the Austrian school (Menger, Bohm-Bawerk, and von Weisser).  However, at the same time Mises was formulating his theory of praxeology, a new trend was emerging in the economics profession.

Since the 1930s, an idea has prevailed that physics is the preeminent science and that all other sciences, including the social sciences, and economics in particular, must emulate its methods in order to be truly scientific. In the 1940s, the same decade Mises’ Human Action was published, Paul Samuelson’s highly successful textbook Principles of Economics was adopted by the mainstream pedagogy, and since then the neo-classical mainstream, the Chicago school, and all other non-Austrian schools have all strictly adhered to empiricist-positivism and conceived of economics as a quantitative and mathematical discipline. Only the Austrians remain true to the original and legitimate vision of economics as a deductive science. 

According to Austrian economist Hans-Hermann Hoppe, all true economic theorems can be “deduced by means of formal logic from this incontestably true material knowledge regarding the meaning of action.”  Hoppe rests his defence of Misesian praxeology on Kantian epistemology. The main characteristic of Kantian epistemology is the submission that synthetic a priori propositions exist. These are propositions whose truth is not derived from observational experience but by means of formal logic from a self-evident material axiom. Such axioms are self-evident because it is impossible to reject their validity without self-contradiction; the mere attempt to deny the axiom would result in implicitly assenting to its truth. What is the source of synthetic a priori axioms? They derive not from observational experience, but from internal, reflective introspection and experience.

Thus, the so-called action axiom satisfies the requirements of a synthetic a priori statement. First, any attempt at denial would by logical necessity have to be interpreted as a purposeful action. Secondly, the axiom is not derived from observation, but purely from reflective consideration. Therefore, all the implications that can be logically deduced from the action axiom must contain as much truth as the original axiom itself. It is these implications that constitute the grand edifice of economic theory. 

Conclusion 

So, what is economics? The answer should now be clear: it is the a priori science of human action. And, contrary to the empiricist-positivist trend of the last eighty years, it is emphatically not an empirical science. The damage inflicted by empiricism upon economics cannot be understated. As Hoppe points out, even if there is agreement on a particular theory, this agreement is superficial. For the positivist-empiricists believe such theories to be empirically tested propositions when they are actually true synthetic a priori propositions. Only the Austrians understand the true epistemological nature of economic science.

H


Bibliography 

Mises. 1949. Human Action 
Rothbard. 1962. Man, Economy, and State.
Hoppe. 1995. Economic Science and the Austrian Method.


Economics in 10 Tokens

Economics in 10 Tokens

A free eBooklet devoted to The Austrian School of economics

The Liberty Quill is pleased to offer “economics in 10 tokens” as a free resource for download. This eBooklet presents ten principles of Austrian economics using a tokenized approach. Please share the file found below as often as possible: that’s why it’s there.

Towards liberty.