- En Torno a La Funcion Del Capital, Joaquín Reig
- Reflections On the Keynesian Episode, W. H. Hutt
- Ludwig Von Mises and the Market Process, L. M. Lachmann
- Values, Prices and Statistics, Bettina Bien
- The Tax System and a Free Society, Oswald Brownlee
- How “should” Common-access Facilities Be Financed?, James M. Buchanan
- Pitfalls In Planning: Veterans' Housing After World War Ii, Marshall R. Colberg
- Presents For the Poor, R. L. Cunningham
- Restrictions On International Trade: Why Do They Persist? W. Marshall Curtiss
- “human Action”, E. W. Dykes
- The Genius of Mises' Insights, Lawrence Fertig
- On Behalf of Profits, Percy L. Greaves, Jr.
- Tax Reform: Two Ways to Progress, C. Lowell Harriss
- The Future of Capitalism, Henry Hazlitt
- Prices and Property Rights In the Command Economy, Arthur Kemp
- The Inevitable Bankruptcy of the Socialist State, Howard E. Kershner
- Entrepreneurship and the Market Approach to Development, Israel M. Kirzner
- The New Science of Freedom, George Koether
- Financing, Correcting, and Adjustment: Three Ways to Deal With an Imbalance of Payments, Fritz Machlup
- On Protecting One's Self From One's Friends, Don Paarlberg
- Recollections Re a Kindred Spirit, William A. Paton
- Ludwig Von Mises, William H. Peterson
- The Economic-power Syndrome, Sylvester Petro
- Ownership As a Social Function, Paul L. Poirot
- To Abdicate Or Not, Leonard E. Read
- The Book In the Market Place, Henry Regnery
- Lange, Mises and Praxeology: the Retreat From Marxism, Murray N. Rothbard
- The Production and Exchange of Used Body Parts, Simon Rottenberg
- The Education of Lord Acton, Robert L. Schuettinger
- Chicago Monetary Tradition In the Light of Austrian Theory, Hans F. Sennholz
- Hubris and Environmental Variance, Joseph J. Spengler
- An Application of Economics In Biology, Gordon Tullock
- What Mises Did For Me, John V. Van Sickle
- Economics In a Changing World, G. C. Wiegand
- Can a Liberal Be an Equalitarian? Leland B. Yeager
- The Political Economy of Nostalgia, Ramon Diaz
Values, Prices and Statistics
Statistics and the “New Economics”
During the course of his New York University graduate seminar, Mises frequently criticized the propensity of the “new economists” to compile historical data in numerical form. Many of his seminar students, imbued with the thinking of their predominately Keynesian professors, could not understand why Mises persisted in this criticism. When they asked his reasons for opposing statistics, he always denied that he was “against statistics” in any way. But, he added, they should remember that statistics were always history, and only history. Statistics could in no way advance the understanding of economic theory.
Many things can be counted and measured, Mises said, such as miles of railroad tracks, numbers of automobiles, bales of cotton, pounds of tea, pairs of shoes, and so on. Entrepreneurs were well advised to take advantage of any such information available. But Mises always cautioned his questioners to keep in mind that such statistics were historical data, not economic theory. If statistical data are to be useful, they should be recognized for what they are and interpreted in the light of economic understanding. It is the ideas that are the basis for the selection and interpretation of statistics that are important. It is the ideas by which statistics are interpreted that give them whatever significance they have.
One of the major theses of the “Austrian School of Economics,” of which Mises is the most eminent spokesman, is that economic institutions are developed from personal ideas and market prices are derived from subjective values. It is Mises steadfast defense of this position which has made him such a vigorous and persistent critic of the “new economics” and its use of statistical data.
Mises' Interest in Economics
It was not family background or environment that led young Mises to the study of economics. His father was a professional engineer for the nationalized Austro-Hungarian railroad system. Few of Mises' teachers were much concerned with philosophical or ideological matters and the majority of them were socialistically inclined. Yet Mises had an inquiring mind. His interest and understanding of theory was primarily an intellectual achievement, developed largely through his wide reading. Thus, his real economic education came from books. As a result, he has great respect for the benefits to be derived from reading and frequently remarks that “books are the best university.”
As a young man, Mises was impressed with Carl Menger's Grundsätze der Volkswirtschaftslehre (1871). Menger, a former University of Vienna Professor, whom Mises later came to know personally, was then no longer actively teaching. In Menger's book, economics was described as a science based on the ideas, values and actions of individuals. Menger's presentation of economics and his explanation of the marginal utility subjective theory of value was undoubtedly instrumental in channelling young Mises' interests into theory. By the time Mises received his doctorate in 1906, his driving interest had become the study of human action as the explanation of economic institutions and an aid to individuals in planning their future actions.
Mises' first serious work as a mature person was in the field of human action—THEORIE DES GELDES UND DER UMLAUFSMITTEL (1912), the second edition of which appeared in 1924 and was translated into English as THE THEORY OF MONEY AND CREDIT. In this first of his major books, Mises explained the institutions of money and credit as developments emerging from the separate actions of many individuals, acting in the light of their respective ideas and subjective values.
The thesis that economic institutions develop from ideas, subjective values and the actions of countless individuals, performing independently or in cooperation with others, to attain their various ends, is basic in all the teachings of Mises. Once it is recognized that all market institutions, such as prices, money, credit, and the like, are outcomes of conscious human actions, it is obvious that economic theory differs sharply from the physical sciences. This recognition also makes it clear that economics is not simply a study of physical quantities of raw materials and goods produced. Economics is a qualitative science, pertaining to purposive choices and actions, for which there is no standard of measurement.
The “new economists” try to express economic doctrines in statistical averages and aggregates based on monetary figures. In doing this, they assume that human ideas, values and actions can be measured by a common standard. With adding machines and computers they juggle figures based on the reports of many individuals, as to their monetary receipts and expenditures. The “new economists” construct averages, aggregates and complex indices of prices, assuming that these statistics describe and explain complicated economic phenomena. In making this assumption, the “new economists” forget, if they do not completely ignore, the axiomatic truth of economics, the fact that the human actions from which their data stem, develop out of personal, subjective ideas and values, for which there is not, and cannot be, any standard of measurement.
All attempts to explain economic theory with the help of mathematics rest on extremely muddled thinking. To eliminate the confusion, it is necessary to analyze the various economic institutions and demonstrate how they arise from the ideas of individuals, each acting on the basis of ideas and subjective values. This calls for re-emphasizing the subjectivity of the values which precede and are responsible for the purposive actions which follow. It also calls for understanding clearly what “subjective” really means.
“Subjective” contrasts with “objective” as the impressions an object makes on a person's senses and thoughts contrast with the object's physical properties which may be measured and stated in numbers. Subjective analyses rest on interpretations, ideas and the values of the subject making the analysis. Objective characteristics are intrinsic to the object being described. Objectively described, a crowbar is “a bar of iron or steel, usually wedge-shaped at the point or working end and more or less bent.” Subjectively described, a crowbar may be “valuable” as a tool for lifting heavy loads or as an instrument for murder. Subjective values are always the same. Subjective values cannot be meaningfully counted, added or measured. Subjective values, like love, can only be compared by the person doing the valuing and arranged by him according to his own personal scale of values.
Consciously or unconsciously, everyone arranges all the various things he wants—material goods, services and immaterial or spiritual values—according to his personal, subjective, scale of values at the time. He is always most eager to acquire or to hold the things he values highest. He will strive more energetically and offer more for them, than he will for things he values less. At any moment, he is always aiming at the goals he considers most important. It is his actions, with the actions of others, that create the market processes.
Individuals do not act in a vacuum, and they seldom act alone. They take into consideration not only the physical world of reality but also the society in which they live. Their decisions, choices and actions are always made in the light of physical conditions. Their decisions, choices and actions are also always made in the light of the decisions, choices and actions being taken by other persons.
The world in which men are acting is a world in constant flux. Changes are continually going on in the physical world. Stocks of existing goods are being used, new raw materials are being unearthed and physical changes are altering material conditions. Other changes are also always being wrought by the purposive actions of individuals in response to their ideas and their changing environment. Persons are continually acquiring new ideas, reassessing old ones, and shifting their values according to their relative subjective importance under new conditions. Persons must make decisions and plan actions to be taken over varying periods of time, in anticipation of uncertain changes in the future. Ideas influence values; values determine actions; actions lead to changes; and changes in turn affect ideas, subjective values and, thus, the future actions of individuals. In this way, step by step over centuries, the market economy we know today evolved from the billions and billions of actions of countless persons.
Individuals cooperate, divide the labor, compete and trade with one another—each in the attempt to attain his most important realistically attainable subjective values. The specialization of individuals results in exchange. Their specialization and exchanges lead to increased production, savings, investments and further changes on the market. Eventually, over time, a fantastically complex network of interlocking, interpersonal exchanges evolves. This network of transactions is the market. Economic theory explains this complicated network very simply—as the outcome of purposive actions of countless individuals, on the basis of their ideas and subjective values.
The statistics Mises censures so severely are not those composed of countable and measurable physical goods. Mises' criticism is directed at attempts to use “prices” as if they represented quantitative measurements of something. This misunderstanding is compounded when prices are made the basis for complex statistical averages and aggregates such as price “levels,” price index numbers, price “deflators,” the so-called “standard dollar,” “national income” estimates, “gross national product” figures, and the like. To explain the fallacy on which these statistical concepts rest, Mises applies the analysis of the marginal utility subjective value theory of the “Austrian School.”
The urgency of a person's subjective values becomes apparent through his actions. The more eager he is, the greater effort he will put forth and the more he will be willing to offer in the hope of attaining what he wants. As he acts through the market, his subjective values come into contact with the subjective values of many other persons as they too express their personal values through their respective actions. In this way, the values and the actions of everyone have an impact on the actions of everyone else.
Everyone always does the best he can, in the light of his limited personal knowledge, abilities, understanding and circumstances, to attain the various subjective ends he values. Every person's eagerness to attain his goals is an open invitation to others, who are seeking to accomplish their own ends by trying to supply, through the market, what others are demanding. Thus, the market processes tend to draw together persons who have some prospect of helping one another.
When two persons trade, the ratio at which that exchange takes place, at that particular time and place, depends on comparisons of their respective subjective values. Each particular transaction takes place at a definite ratio or “price.” At the instant the trade is made, a specific quantity of a good or service is exchanged for a definite quantity of a specific monetary unit. This ratio emerges out of the relative subjective values of all interested parties for the specific items being traded, as compared with their evaluations of all available alternatives known. A price always refers to a specific transaction. Prices are merely representations of fleeting ratios expressed in monetary terms.
In logic it is said—and certainly nobody denies it—that two things equal to the same thing are equal to each other. The fact that prices are stated in numbers may make it appear that two items which were exchanged for the same quantity of money at different times and places must have some fixed relationship to one another. However, prices are the outcomes of conscious human actions. In the field of human action, two things which exist at different times and places, although they may otherwise appear to be the same, are never equal to the same thing, nor equal to each other.
In the first place, they are distinguished from one another by their different geographical and historical settings. These two features alone affect the values they have for acting human beings. But more than that, objects are always being valued—in the light of historical events, changing physical conditions, altered supplies and demands and new social and economic situations—by persons whose ideas, values, ends, and needs are also always changing. As their ends change, so do the means they consider appropriate and the values they attribute to various means. As a consequence of all these changes, prices represent transitory exchange ratios only, at specific times and places. Prices are crystallized representations of relative subjective values at specific historical instants when definite trades were concluded.
Figures indicating sums of money may be added, subtracted, multiplied and divided. But the traders' subjective evaluations of the two sums of money cannot be measured or expressed in numbers. If two prices, arising at two different times or places, are used for mathematical computations as if they were two physical quantities of the monetary unit, their true significance is lost. Combining the two monetary figures yields a third figure. But this new figure bears no meaningful relationship to either of the two market prices. Nor is it related in any way to the subjective values on which the two market prices were based.
Money was not created by the wave of a magic wand, royal decree, government fiat, or any act of a parliamentary body. Money was a product of the market, a medium of exchange that came into use because men found it made transactions easier and enabled them to satisfy their various subjective values better. Money is perhaps the most important of all the market institutions which have emerged from the conscious actions of men.
Because men have subjective values and goals, they value any means which they expect will facilitate the pursuit of their goals. Goods and services expected to be useful acquire value through the market as many acting individuals compete for them. In the course of historical evolution some commodities came to be more highly valued and more widely desired than most others. Sooner or later, in some community—no one knows just where or when—some such commodity, high on the subjective value scales of many persons, was introduced into trade to facilitate exchanges. In this way, indirect exchange was born.
As men specialized more, traded more frequently over greater distances, arranging transactions that involved longer periods of time, direct exchange (barter) grew increasingly cumbersome. The first person to recognize the advantages of indirect exchange could have been a hunter, seeking to exchange hides for a new bow and arrow. If he had failed to persuade an owner of bows and arrows to take his hides in trade, he may have pulled a gold bracelet from his arm, arguing that many persons liked gold. If the bow and arrow owner would take the hunter's bracelet now in trade for a bow and arrows, he would have gold—something others valued. The bracelet of gold could then be used at a later time to trade for whatever might be wanted.
We cannot know precisely how the first cow, strip of wampum, piece of silver or gold nugget came to be used as a medium of exchange, but at that instant indirect exchange was introduced. When traders were ready to accept an intermediate commodity as a temporary expedient, pending an opportunity to obtain what they really wanted, it became easier to arrange transactions. The use of a medium of exchange permitted greater specialization and enabled everyone to use the market to better advantage to satisfy their various subjective values.
The market value of any particular commodity is always shifting in response to the changing subjective values of the individuals living and trading at particular times and places. Similarly, the market value of the commodity used as money shifts in response to the changing subjective values of the participants in that market.
The convenience of using a medium of exchange, instead of having to rely entirely on barter, enhances the desirability of the commodity used for this purpose. Once its greater marketability becomes widely recognized, so that it comes into general use as money, its acceptability in exchange increases still more. Thus, its market value rises on that account also. As a result, this commodity will command more highly valued goods and services on the market in its role as a medium of exchange than it can simply as another useful commodity. Still it is possible to trace this higher exchange ratio for this commodity in its role as money to the varying unequal subjective values of acting individuals and their ensuing purposive actions.
Money is a commodity, the most marketable commodity in the community which it serves as the medium of exchange. Like other commodities, the value of the monetary unit on the market, the ratio at which it is traded for other goods and services, its purchasing power, emerges from the ever-changing subjective values of acting individuals. Understanding of this subjective origin of money explains why monetary prices are not objective measurements.
The Role of the Entrepreneur
The successful entrepreneur is the true “creator” of market values, values which are derived through the market from the interplay of subjective evaluations. The entrepreneur looks for opportunities to buy, transport, combine, and/or process various factors of production in the expectation of increasing consumer satisfactions. He tries to convert factors of production to purposes of greater value, in the subjective judgments of other individuals, than they would have had in other uses. If the entrepreneur succeeds in his anticipations, he will have transformed factors of production into new forms, combinations or locations that yield greater consumer satisfactions than they would have otherwise.
A simple example of entrepreneurial activity which increases the satisfaction of consumers is a “white elephant” sale. The person who arranges to offer for sale one family's attic “junk” and finds buyers who place higher subjective values on such “junk” converts “white elephants” into “treasures.” By arranging the transaction, he increases satisfactions all around.
Similarly entrepreneurs on the market are continually looking for opportunities to move, combine or process economic “white elephants,” so to speak, in the hope of transforming them into something consumers value more. Entrepreneurs may purchase raw materials (iron, wood pulp, chemicals, etc.), tools and machinery, the services of workers (labor), and so on, anything they believe will serve their purpose. If the entrepreneurs succeed in selling the processed factors of production to consumers who consider them more valuable in their new forms than in other arrangements, they can earn profits.
Entrepreneurs always act as middlemen, transferring and/or transforming factors of production with relatively low values into finished goods or services they hope will have higher values. When this job is done, they usually ask prices—they can never set or “administer” prices—which will more than cover their costs. Whether or not an entrepreneur receives the sum he asks for will always depend on the relative subjective values of consumers. The entrepreneur's profit or loss, as the case may be, will be determined in every instance by the exchange ratios at which his products are finally traded when they reach the market.
Price Statistics and Economic Reality
Mises' criticism of the statistics used in the “new economics” rests on an understanding of the real world of human action. The market economy is the product of personal, ever-changing, subjective ideas and values which result in billions and billions of actions. As all economic institutions are interrelated through the market, a shift in the subjective value judgments of one individual alters the interrelationships of all market data. Thus, all market phenomena are in a constant state of flux.
With irrefutable logic, Mises has demonstrated how the ideas and values of countless individuals have contributed, step by step over millenia, to the development of today's complex economic institutions. The subjective values attributed by individuals at any instant to their available quantities of money, relative to the values they attach to the various goods and services available on the market, lead them to take specific actions. These countless individual actions, in turn, are always effecting changes and influencing the ideas and values of other acting men.
When men discovered that it was easier to gain their subjective values through the division of labor and trade, their actions gave rise to the market economy. As trade increased and barter proved clumsy, the conscious choices of countless persons, each seeking his own subjective values, led in time to indirect exchange and the use of a commodity as money. Through their contacts with one another on the market, exchange ratios among the relative subjective values of individuals developed and gained expression in the form of prices. At any instant, the exchange ratio between a quantity of money and the other goods and services being traded reflects the relative subjective values of all the participants on that market. The value of the money side of the exchange ratio fluctuates constantly as does the value of the goods or services side of the ratio. Such transient ratios emerging from countless ever-changing values cannot be measured. Nor can they be used with meaning as the basis for mathematical computations.
The understanding derived from the doctrines of the “Austrian School of Economics” enables us to retrace the complex interrelationships of today's market economy back to their origins. We find that the entire world of economic reality and all market institutions rest on the ideas of individuals, individuals who are continually ranking their subjective values at any moment, in the order of their relative importance to them—always preferring, choosing, deciding and acting in accordance with their respective ideas, abilities, interests and circumstances.
Every development in this entire sequence of events in the development of market institutions is relative to everything else in the economy. Every ratio among the various phenomena is interrelated and subject to constant shifting whenever any actor alters one component factor for any reason. Yet, in the last analysis, every step is logically explainable as the outcome of the ever-changing subjective value judgments of acting individuals, comparing available assets with available opportunities for action at every instant.
The true significance of prices stems from their role as fleeting exchange ratios of specific transactions, ratios which arise from the interplay through market processes of relative subjective values of acting individuals. As such, prices furnish some of the keys to understanding the world of economic reality. Prices can help entrepreneurs to plan for future production, so as to convert factors of production more effectively into more valuable uses. Treating historical prices as if they were quantitative measurements of something stable, expressed in a monetary unit assumed to be a constant standard, is to consider them as something they are not.
Market values and market conditions are always fluctuating. Statistics which purport to portray such market phenomena misrepresent, misinterpret and mislead. They tend to deny the significance of the connection between particular prices and specific historical situations. They also tend to ignore the interconnexity of all prices. But more than this, statistics based on prices assume a stability of money as the standard of measure and an objectivity which is foreign to the market economy, where everything is forever changing on the basis of ever-shifting subjective values. Thus, market phenomena lack the two qualifications required for statistical analyses to have meaning—a constant standard for measuring and characteristics which may be objectively described and measured.
Subjectivity remains at the root of every human action. As a result, subjectivity is also the basis of all our market institutions. It was recognition of the subjective nature of the values on which all economic activities are based that enabled the “Austrians” to solve the paradox of value which had stumped earlier “Classical” economists. This subjectivity is the clue that makes intelligible the very complex interlocking economic relationships that have developed throughout the years. Thus, Mises maintains that it is extremely important to point out that the statistics of the “new economics,” which are based on averages and aggregates of monetary prices, have no meaning for economic theory.
As Mises explained to his seminar students, the statistics of the “new economics” fail to contribute to an understanding of economic reality. The real world of economic action is a world of subjective values and resulting human actions. This is a world that is in a constant state of flux.