The "Ought" World

To live is to act (because life is conditional).

To act is to choose.

To choose is to prefer.

To prefer is to value or to pursue values. (Being fallible, we can err in thinking something is good when it is in fact bad.)

To think is to act.

Therefore, to think is to value. (James Ellias of Inductica calls this the "value axiom.")

Whether we like it or not, we're immersed in the "ought" world. Hume et al. were wrong. 

Note the irony: "ought" is associated with choice and free will, yet as long as we are alive, we cannot avoid valuing. No pre-moral choices exist. As Aristotle noticed, all action, logically, aims at an ultimate end--the good, happiness, contentment, call it what you will--because an infinite series of means leading nowhere is incoherent. (How would one resolve conflicting subordinate ends?) Aiming at a certain kind of life is intrinsic to action. It's baked in, pre-"chosen" for us by the logic of action. "For Aristotle, this ultimate end or good is not chosen; it is implicit in every desire and every choice, and all our other ends are to be understood as subordinate to it. The end is, as it were, forced on us; and the task of practical reason is simply to identify it," Roderick T. Long writes in Reason and Value: Aristotle versus Rand.

Ludwig von Mises, the praxeologist, understood this too. Yet Roderick Long has shown elsewhere that Mises, who thought reason could not judge ultimate ends, mistook constitutive means to the ultimate end for the ultimate end itself. A constitutive, or internal, means--as opposed to an instrumental, or external, means--is that without which the end cannot be conceived. To use Long's example, wearing a tie is constitutive of traditional dressing up. Buying a tie is instrumental. In other words, every time a man dresses up, he must wear a tie to be considered dressed up, but every time he dresses up, he need not buy a tie.

Paine on War

"It may with reason be said, that in the manner the English nation is represented, it signifies not where this right resides, whether in the Crown, or in the Parliament. War is the common harvest of all those who participate in the division and expenditure of public money, in all countries. It is the art of conquering at home: the object of it is an increase of revenue; and as revenue cannot be increased without taxes, a pretence must be made for expenditures. In reviewing the history of the English government, its wars and its taxes, a by-stander, not blinded by prejudice, nor warped by interest, would declare, that taxes were not raised to carry on wars, but that wars were raised to carry on taxes."

—Thomas Paine

TGIF: More on Menger on Value

Consumer goods are also called finished goods. The products we buy at the supermarket and other retail stores have, in less finished form, passed through many stages (including distribution), reaching back to the original factors of production: land and labor. Land includes anything nature-given and not produced. We think of those things as natural resources, but as Julian Simon taught us, it takes human ingenuity to convert nature-given stuff, which may have no apparent value for human well-being, into a resource that makes our lives better. (See Simon's invaluable The Ultimate Resource 2.)

We consumers want finished, not unfinished goods. Imagine you ordered a car online, and the next day, the dealer dumped a pile of metal, glass, plastic, computer chips, rubber, and so on on your front lawn. You would not be happy. "I don't want this pile of stuff. I want a car!" What's missing? Labor, producer goods (tools and machines), and time. That's also what you paid for. While you paid for the end product, all you received was some of the means.

Supply and demand in competitive markets set the prices of finished products. Sellers ask prices, and consumers ask themselves, "Is Product X important enough to me to justify giving up what I'm being asked to give up in exchange?" If I spend $5 on something, I forgo the good or service on which I might have spent that $5. Saving the money for a rainy day or lending it at interest are two such services I might have chosen instead.

Since the production of useful finished goods is the object of an economic system, it should be obvious that finished goods cannot be valued according to the presumed value of the factors—land, labor, tools, and semifinished goods—that went into producing them. It's got to be the other way around. This insight was not always apparent to economists. The classical economists, starting with Adam Smith, thought the cost of production, especially labor, determined the exchange value (price) of finished goods. One of the great achievements of Carl Menger, founder of the Austrian school, is his insight into why that is wrong.

As Menger wrote in his world-changing book, Principles of Economics (1871), "Among the most egregious of the fundamental errors that have had the most far-reaching consequences in the previous development of our science is the argument that goods attain value for us because goods were employed in their production that had value to us." In other words, people assumed that finished goods fetched money in the marketplace because valuable land, labor, and capital went into making them. They were wrong: "this argument is ... strictly opposed to all experience," Menger wrote. He went on (pp. 149-52):

[The argument] offers an explanation only for the value of goods we may designate as “products” but not for the value of all other goods, which appear as original factors of production. It does not explain the value of goods directly provided by nature, especially the services of land. It does not explain the value of labor services. Nor does it even ... explain the value of the services of capital. For the value of all these goods cannot be explained by the argument that goods derive their value from the value of the goods expended in their production. Indeed, it makes their value completely incomprehensible.

...The value of goods of lower order cannot, therefore, be determined by the value of the goods of higher order that were employed in their production. On the contrary, it is evident that the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve. The existence of our requirements for goods of higher order is dependent upon the goods they serve to produce having expected economic character and hence expected value.

Higher-order goods are further from the consumer. Lower-order goods are closer. The lowest order is retail. We value means and ends. The question is: in which direction must the imputation of value run? Do we value the ends because we value the means? Or vice versa?

In securing our requirements for the satisfaction of our needs, we do not need command of goods that are suitable for the production of goods of lower order that have no expected value (since we have no requirements for them). We therefore have the principle that the value of goods of higher order is dependent upon the expected value of the goods of lower order they serve to produce. Hence goods of higher order can attain value, or retain it once they have it, only if, or as long as, they serve to produce goods that we expect to have value for us.

Who would argue with that? Imagine a machine that can produce only widgets, which consumers buy in great numbers. If one day, no one wanted widgets anymore, the machine would be worthless (except perhaps for scrap metal).

If this fact is established, it is clear also that the value of goods of higher order cannot be the determining factor in the prospective value of the corresponding goods of lower order. Nor can the value of the goods of higher order already expended in producing a good of lower order be the determining factor in its present value. On the contrary, the value of goods of higher order is, in all cases, regulated by the prospective value of the goods of lower order to whose production they have been or will be assigned by economizing men.

He wrapped up:

Only the satisfaction of our needs has direct and immediate significance to us. In each concrete instance, this significance is measured by the importance of the various satisfactions for our lives and well-being. We next attribute the exact quantitative magnitude of this importance to the specific goods on which we are conscious of being directly dependent for the satisfactions in question—that is, we attribute it to economic goods of first order.... In cases in which our requirements are not met or are only incompletely met by goods of first order, and in which goods of first order therefore attain value for us, we turn to the corresponding goods of the next higher order in our efforts to satisfy our needs as completely as possible, and attribute the value that we attributed to goods of first order in turn to goods of second, third, and still higher orders whenever these goods of higher order have economic character. The value of goods of higher order is therefore, in the final analysis, nothing but a special form of the importance we attribute to our lives and well-being. Thus, as with goods of first order, the factor that is ultimately responsible for the value of goods of higher order is merely the importance that we attribute to those satisfactions with respect to which we are aware of being dependent on the availability of the goods of higher order whose value is under consideration.

Why does this matter? It matters because the free market is an undesigned institution that serves consumers and their idea of well-being. True, a risk-taking entrepreneur may offer something consumers haven't asked for. (Henry Ford said consumers would have asked for faster horses.) How does that turn out? Sometimes consumers are delighted and make an entrepreneur fabulously wealthy. At other times they tell him to get back to the drawing board or lose control of his assets in favor of someone more competent.

Consumers rule! Power to the consumers! Politicians: out of the way!

The Public-School Chickens Come Home Again

In Mahmoud v. Taylor, the U.S. Supreme Court will decide whether parents of children in government schools have a constitutional right to opt out of programs that "expose" their kids to LGBTQ materials. Once again, the chickens have come home to roost.

By that, I mean that if politicians, bureaucrats, and elected boards did not run schools and force (tax) parents and nonparents to finance them, this problem could not arise. This should not be an issue for the political system, and you need not be an anarchist to see it. Free people are capable of educating or buying education for their children, just as they are competent to obtain other goods and services we take for granted every day. Freedom and social cooperation work when they're allowed to, and parents ought to be free to raise their children according to their values. (Beatings and other forms of aggression are not relevant here.) This has nothing to do with the particular issue in the case (LGBTQ programs).

The question is not: "Do parents have a constitutional right to opt their kids out of this and other school programs they dislike?" Rather, it is: "Do parents have a natural individual right to educate their kids through purely voluntary means?"

The answer is yes! So-called public schooling relies on the initiation of force from financing to curriculum. How dare anyone propose that we be compelled to pay for or to send our or other people's kids to schools we disapprove of? Even if you opt out of the schools or have no kids, you still must pay or lose your home, go to jail, etc. Such a system is unfit to exist.

(See my 1994 book, Separating School and State.)

TGIF: Menger on Trade

Even when a line on a map separates two individuals, trade is still trade—that is, mutually beneficial cooperation. Whether the line separates towns, cities, counties, states, or countries, it does not matter. The transactions are win-win.

We could do quite well without the categories of exports and imports. Adam Smith wisely said almost 250 years ago that the balance-of-trade doctrine was "absurd." In a sense, only two kinds of goods and services exist as far as I'm concerned: those that I produce and those that everyone else produces. That is true for you too. Countries don't trade. Individual people do. Where governments don't permit this, they should get out of the way.

Carl Menger, the founder of the Austrian school of economics, eloquently described trade in his pioneering work, Principles of Economics (1871, pp. 175ff). We need to rediscover his insights in this new and perilous Age of Protectionism. Here is some of what he wrote.

"Whether the propensity of men to truck, barter, and exchange one thing for another be one of the original principles in human nature, or whether it be the necessary consequence of the faculties of reason and speech,” or what other causes induce men to exchange goods, is a question Adam Smith left unanswered. The eminent thinker remarks only that it is certain that the propensity to barter and exchange is common to all men and is found in no other species of animals.

First, in order to clarify the problem, suppose that two neighboring farmers each have a great abundance of the same kind of barley after a good harvest, and that there are no barriers to an actual exchange of quantities of barley between them. In this case, the two farmers could give free rein to their propensity to trade, and could exchange 100 bushels or any other quantity of barley back and forth between themselves. Although there is no reason why they should desist from trading in this case if the exchange of goods, by itself, affords pleasure to the participants, I believe nothing is more certain than that these two individuals will forgo trade altogether. If they should nevertheless engage in this sort of exchange, they would be in danger, precisely because of their enjoyment of trade under such circumstances, of being regarded as insane by other economizing individuals.

You'd think they were crazy too. People don't trade because of some propensity. They do so to make their lives better. Kids know this. Two young baseball fans wouldn't trade identical Mickey Mantle or Aaron Judge cards.

Suppose now that a hunter has a great abundance of furs, and hence of materials for clothing, but only a very small store of foodstuffs. His need for clothing is thus fully provided for but his need for food only inadequately. A nearby farmer is assumed to be in precisely the opposite position. Suppose too that there are no barriers to an exchange of the hunter’s foodstuffs for the farmer’s clothing materials. It is evident that an exchange of goods is still less likely in this case than in the first one. If the hunter should exchange a portion of his scanty store of food for a portion of the farmer’s equally scanty stock of furs, the hunter’s surplus clothing materials and the farmer’s surplus of foodstuffs would both become even greater than before the exchange. Since satisfaction of the hunter’s need for food and satisfaction of the farmer’s need for clothing were already insufficiently provided for, the economic position of the traders would be decidedly worsened. No one can maintain, therefore, that these two economizing individuals would experience pleasure from such an exchange. On the contrary, nothing is more certain than that the hunter and farmer will both most firmly resist offers to engage in a trade that would definitely reduce their well-being, or possibly even endanger their lives. If an exchange of this sort had nevertheless taken place, the two men would have nothing more urgent to do than to revoke it.

Precisely! People don't trade for fun. Each expects to profit. And because people value goods and services differently, the parties to a free exchange can profit without exploitation. (Of course, fallible people make mistakes and may regret the choices they made. These days, refunds are routine.)

Since it has been established that exchange is not an end in itself, and still less itself a pleasure for men, the problem in what follows will be to explain its nature and origin.

Menger discussed the case of two farmers, Farmer A, who has a surplus of grain and a shortage of wine, and Farmer B, whose predicament is the reverse.

The first farmer thirsts and the second starves when both could be relieved by the grain A is permitting to spoil on his fields and by the wine B has resolved to pour out. Farmer A could still satisfy his and his family’s need for food as completely as before and indulge besides in the enjoyment of drinking wine, and farmer B could continue to enjoy as much wine as he pleases but would not need to starve. It is therefore evident that we have encountered a case in which, if command of a certain amount of A’s goods were transferred to B and if command of a certain amount of B’s goods were transferred to A, the needs of both economizing individuals could be better satisfied than would be the case in the absence of this reciprocal transfer. [Emphasis in original.]

Who would dispute that?

The case just presented, in which the needs of two persons could be better satisfied than before by a mutual transfer of goods having no value to either of them prior to the exchange, and hence without economic sacrifice on either side, was especially suitable for impressing upon us in the most enlightening manner the nature of the economic relationship leading to trade. But we would construe this relationship too narrowly if we were to confine our attention to cases in which a person who has command of a quantity of one good larger than even his full requirements suffers a deficiency of a second good, while another person has a comparable surplus of this second good and a deficiency of the first. For the relationship in question can also be observed in less obvious cases in which one person possesses goods of which certain quantities have less value to him than quantities of another good owned by a second person who is in the reverse situation.

And so on. Need I add that a tariff is only one way for governments to interfere with benign market relations?

Menger:

If we summarize what has just been said we obtain the following propositions as the result of our investigation thus far: The principle that leads men to exchange is the same principle that guides them in their economic activity as a whole; it is the endeavor to ensure the fullest possible satisfaction of their needs. The enjoyment men derive from an economic exchange of goods is the general feeling of pleasure they experience when some event permits them to make a better provision for the satisfaction of their needs than would otherwise have been possible. But the benefits of a mutual transfer of goods depend, as we have seen, on three conditions: (a) one economizing individual must have command of quantities of goods which have a smaller value to him than other quantities of goods at the disposal of another economizing individual who evaluates the goods in reverse fashion, (b) the two economizing individuals must have recognized this relationship, and (c) they must have the power actually to perform the exchange of goods. The absence of but one of these conditions means that an essential prerequisite for an economic exchange is missing, and that an exchange of goods between two economizing individuals is economically impossible. [Emphasis added.]

We should recognize that at any given time, people's wants are more plentiful than the available labor and resources. That's why we economize. If we find that our satisfaction for good X is well taken care of by one producer, other, disappointed producers will shift to producing other things we (might) want. New products we never dreamed of might be invented. (Ya think?) Markets work well when the state keeps its hands off.

One more thing: people unfriendly to a great commercial society may be okay with one-on-one barter. What gets their goat are the profit-seeking middlemen: the wholesalers, peddlers, shopkeepers, and moneylenders. For the record, hostility to middlemen, who have often been stigmatized as parasitic aliens, has led to unspeakable violence against Jews in Europe, Chinese in Southeast Asia, Lebanese in west Africa, Indians and Pakistanis in east Africa, Armenians in the Ottoman Empire, Ibos in Nigeria, Parsees in India, and Tamils in Sri Lanka. Why? Because they allegedly produced nothing while becoming relatively affluent. Historically, ignorance bred hate, which bred atrocities. To condemn middlemen as unproductive is to believe falsely that potential traders live near each other and possess full knowledge of their trading opportunities. Middlemen are information brokers—matching buyers with sellers and borrowers with lenders. They earn their profits.

Menger had something to say about that:

Because they [middlemen] do not contribute directly to the physical augmentation of goods, their activity has often been considered unproductive. But an economic exchange contributes, as we have seen, to the better satisfaction of human needs and to the increase of the wealth of the participants just as effectively as a physical increase of economic goods. All persons who mediate exchange are therefore—provided always that the exchange operations are economic—just as productive as the farmer or manufacturer. For the end of economy is not the physical augmentation of goods but always the fullest possible satisfaction of human needs. Trades people contribute no less to the attainment of this end than persons who were, for a long time, and from a very one-sided point of view, exclusively called productive.

TGIF: The Objectively Invaluable Menger

Many people are uneasy with the free market. I think that's because they subscribe, implicitly if not explicitly, to the labor theory of value. Workers, people lament, seem not to reap the full and just reward for their labors. Belief in the labor theory puts adherents in good company. Adam Smith and his successor, David Ricardo, were labor theorists. Fédéric Bastiat held a variant of the labor theory.

Of course, labor theorists are also in some bad company, like Karl Marx, a true enemy of the people in whose name hundreds of millions have been murdered. In fairness, it should be acknowledged that Marx did not subscribe to a naïve labor theory, as it is sometimes assumed. He would not have thought a mud pie that took an hour to make would or should fetch the same price as a cherry pie that took as long. Marx wrote in Capital, "A thing cannot have value, if it is not a useful article. If it is not useful, then the labor it contains is also useless, does not count as labor and hence does not create value.” (Austrian economist Eugen von Böhm-Bawerk reproduced this quote in Karl Marx and the Close of His System.)

Nevertheless, the labor theory was the basis of Marx's influential exploitation theory. In the market, so it is said, bosses get away with paying workers less than the value of their product, leaving them to toil for subsistence wages. Never mind the mind-blowing rise in workers' living standards since the Industrial Revolution. Who are you going to believe, Marx or your own eyes? Hey, didn't another guy named Marx say that? (Hint: It wasn't Groucho.)

The evidence of our senses aside, if you refute the labor theory, you also refute the exploitation theory. If the market price of a good is higher than what the workers were paid per unit, the reason is not that their boss screwed them. The chief reason is that time is valuable. Workers want to be paid now, not later, when and if the goods are sold. The employer is willing to wait and take the risk. His return includes, among other things, the implicit interest rate that permeates intertemporal human action.

Opposing the labor theory of value is the subjective theory of value, which has been most consistently developed by the Austrian school. As I noted in a previous article, subjectivism in economics is not the same as subjectivism in philosophy. It means that when economists analyze markets, they must take as given the personal preferences that human beings demonstrate by their actions, which by nature entail choice. This view need not conflict with philosophical objectivism (or Objectivism, for that matter).

Carl Menger radically shifted economics from the labor theory to the subjective marginal utility theory. (People choose among units of goods "on the margin.") We are forever in his debt. Here's some of what he had to say in Part III of his landmark work, Principles of Economics:

When I discussed the nature of value, I observed that value is nothing inherent in goods and that it is not a property of goods. But neither is value an independent thing. There is no reason why a good may not have value to one economizing individual but no value to another individual under different circumstances. The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. While one economizing individual esteems equally a given amount of one good and a greater amount of another good, we frequently observe just the opposite evaluations with another economizing individual. Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals.

I hardly think that anyone could disagree. Note that these differences present people with potential mutual gains from trade. Two people exchange things only because they value the things exchanged differently; each prefers what the other has to what he himself has. Neither sees the items as equivalent in value, and what would be the point in trading equivalents? Prices emerge in a money economy when people with diverse preferences seek their well-being by selling in the dearest market and buying in the cheapest. Competition limits the price range of goods.

I would, however, take issue with Menger's use of the word measure. As one of Menger's intellectual heirs, Ludwig von Mises, would later write, we rank our values; we cannot measure them. No unit analogous to ounces or inches exists. Ordinal, not cardinal, numbers are the order of the day. Note that you can't do math with ordinal numbers. What's first plus second? Third?

Menger now gets to the labor theory:

The value an economizing individual attributes to a good is equal to the importance of the particular satisfaction that depends on his command of the good. There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a [superabundant] quantity of timber in a virgin forest, for example) does not attain [exchange] value for men if large quantities of labor or other economic goods were applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command.

Again, who would disagree? When you shop, does the usefulness of a good depend on how long or how intensely someone worked on it? Do you even inquire?

Goods on which much labor has been expended often have no value, while others, on which little or no labor was expended, have a very high value. Goods on which much labor was expended and others on which little or no labor was expended are often of equal value to economizing men. The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value....

The determining factor in the value of a good, then, is neither the quantity of labor or other goods necessary for its production nor the quantity necessary for its reproduction, but rather the magnitude of importance of those satisfactions with respect to which we are conscious of being dependent on command of the good. This principle of value determination is universally valid, and no exception to it can be found in human economy. The importance of a satisfaction to us is not the result of an arbitrary decision, but rather is measured by the importance, which is not arbitrary, that the satisfaction has for our lives or for our wellbeing. The relative degrees of importance of different satisfactions and of successive acts of satisfaction are nevertheless matters of judgment on the part of economizing men, and for this reason, their knowledge of these degrees of importance is, in some instances, subject to error.... Error is inseparable from all human knowledge...

Economics, then, is about how mortal, fallible individuals peacefully cooperate in a world of time and scarcity to obtain the things they believe will improve their lives. The arrangement is imperfect, but the coercively utopian conjurings of Marx, Lenin, Trotsky, Mussolini, Stalin, Hitler, Mao, Castro, and even Richard Wolff don't even qualify as alternatives. Read some economic history and trust your own eyes.

TGIF: The Great Carl Menger

There can be no doubt among competent historians that if ... the Austrian School has occupied an almost unique position in the development of economic science, this is entirely due to the foundations laid by this one man.... [I]ts fundamental ideas belong fully and wholly to [?].... [W]hat is common to the members of the Austrian School, what constitutes their peculiarity and provided the foundations for their later contributions is their acceptance of the teaching of [?]. —F. A. Hayek

Who was Hayek writing about?

Carl Menger, of course. Menger (1840-1921), a professor at the University of Vienna, launched the Austrian school of economics with his trailblazing Principles of Economics, published in 1871. (It was not translated into English until 1950.) He is famous for being one of three economists who independently and nearly simultaneously shifted economics onto a radically different track: marginal utility. Hence, the term marginal revolution in economics.

This was a radical recasting of value and price theory. "The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves. With changes in this relationship, value arises and disappears...," Menger wrote. "It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being." Menger was not a moral philosopher but an economist, explaining how human action generates market phenomena such as prices.

While the classical economists thought in terms of entire classes of goods and subscribed to the labor, or cost-of-production, theory of value and price, the marginal-utility theorists focused on how individuals act to satisfy their wants. A person chooses and necessarily makes tradeoffs among discrete units of goods—a quart of milk, a dozen eggs, a pound of ground beef—according to his unique personal circumstances: his preferences, purposes, aspirations, likes, and dislikes. He doesn't care how much labor or material went toward making a product. He cares about how useful a product is to his prioritized purposes. The more units he has of a given good, the less valuable any one unit is because he would abandon his lowest ranked purpose if a unit were lost. That's the law of diminishing marginal utility. Overall, that consumers value particular goods imparts value to the factors of production—not vice versa. Means are valued for their contribution to ends. Menger emphasized this change in direction in the flow of value.

In this sense, value is subjective; it's a relationship between a valuer (the subject, or actor) and something he believes will increase his well-being. A person can err about whether a good will affect his well-being, but so long as he expects to benefit, he will value and pursue it. That will influence the market somewhat. (Hence, the commitment to subjectivism in economic analysis does not commit one to subjectivism in philosophy.)

Since personal circumstances vary widely, so do individuals' relative valuation of goods, creating potential mutual gains from trade. In other words, people exchange unequal values from their points of view, contrary to what the classical economists thought. 

Menger took economic subjectivism and marginalism further than his co-revolutionists, William Stanley Jevons and Leon Walras. For instance, he realized that value scales rank rather than measure preferences. There are no utils.

Despite his plan, Menger did not develop his new approach all the way, but he got the ball rolling. That ball was moved further along by his intellectual heirs, including Eugen von Böhm-Bawerk; Ludwig von Mises: F. A. Hayek, who won a Nobel Prize in 1974; Murray Rothbard; Israel Kirzner; and far too many next-generation economists to name. (For more on Menger's achievements, see David Henderson's article "Carl Menger" and Steven Rhoads's "Marginalism." Also see Peter Klein's foreword to the Menger book linked above.)

What I find interesting about Menger lately is his commentary on Adam Smith and the issue Smith is so famous for, the division of labor. I quote from Menger's Principles:

“The greatest improvement in the productive powers of labour,” says Adam Smith, “and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” And: “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.”

In such a manner Adam Smith has made the progressive division of labor the central factor in the economic progress of mankind—in harmony with the overwhelming importance he attributes to labor as an element in human economy. I believe, however, that the distinguished author I have just quoted has cast light, in his chapter on the division of labor, on but a single cause of progress in human welfare while other, no less efficient, causes have escaped his attention.

What escaped Smith's attention? you ask. In reply, Menger described a primitive economy that enjoyed the advantages of dividing up and specializing in the various laborious tasks. To be sure, the people in that economy would be better off than otherwise. But:

Let us now ask whether a division of labor carried so far, would have such an effect on the increase of the quantity of consumable goods available to the members of the tribe as that regarded by Adam Smith as being the consequence of the progressive division of labor. Evidently, as the result of such a change, this tribe (or any other people) will achieve either the same result from their labor with less effort or, with the same effort, a greater result than before. It will thus improve its condition, insofar as this is at all possible, by means of a more appropriate and efficient allocation of occupational tasks. But this improvement is very different from that which we can observe in actual cases of economically progressive
peoples. [Emphasis added.]

Menger here says that the mere division of labor will take a group only so far, but its progress must fall short of what we see in the world. What does he mean?

Let us compare this last case with another. Assume a people which extends its attention to goods of third, fourth, and higher orders, instead of confining its activity merely to the tasks of a primitive collecting economy—that is, to the acquisition of naturally available goods of lowest order (ordinarily goods of first, and possibly second, order). If such a people progressively directs goods of ever higher orders to the satisfaction of its needs, and especially if each step in this direction is accompanied by an appropriate division of labor, we shall doubtless observe that progress in welfare which Adam Smith was disposed to attribute exclusively to the latter factor. We shall see the hunter, who initially pursues game with a club, turning to hunting with bow and hunting net, to stock farming of the simplest kind, and in sequence, to ever more intensive forms of stock farming. We shall see men, living initially on wild plants, turning to ever more intensive forms of agriculture. We shall see the rise of manufactures, and their improvement by means of tools and machines. And in the closest connection with these developments, we shall see the welfare of this people increase.

By "goods of third, fourth, and higher orders," Menger of course meant producer, or capital, goods, that is, intermediate manmade products intended to produce goods for or closer to the consumer level.  Tools, equipment, and machines magnify the productivity of labor many times. Without them, human output is meager, even with a division of labor. This is Menger's complex structure of production, the stages of which are classified according to how close or far in time they are from the retail level.

Time (which implies risk) is revealed as critical. The higher the order, the longer the period until the final good is ready for sale to consumers. "Thus," Menger wrote, "in the process of change by which goods of higher order are gradually transformed into goods of first order, until the latter finally bring about the state called the satisfaction of human needs, time is an essential feature of our observations." Radical.

The further mankind progresses in this direction, the more varied become the kinds of goods, the more varied consequently the occupations, and the more necessary and economic also the progressive division of labor. But it is evident that the increase in the consumption goods at human disposal is not the exclusive effect of the division of labor. Indeed, the division of labor cannot even be designated as the most important cause of the economic progress of mankind. Correctly, it should be regarded only as one factor among the great influences that lead mankind from barbarism and misery to civilization and wealth....

The Austrian school thus started with Menger's observation that Adam Smith, widely held to be the father of economics, overlooked "the most important cause of the economic progress of mankind." That took some confidence.

In its most primitive form, a collecting economy is confined to gathering those goods of lowest order that happen to be offered by nature. Since economizing individuals exert no influence on the production of these goods, their origin is independent of the wishes and needs of men, and hence, so far as they are concerned, accidental.

People in such a condition are fundamentally passive concerning their environment. A low standard of living should surprise no one.

But if men abandon this most primitive form of economy, investigate the ways in which things may be combined in a causal process for the production of consumption goods, take possession of things capable of being so combined, and treat them as goods of higher order, they will obtain consumption goods that are as truly the results of natural processes as the consumption goods of a primitive collecting economy, but the available quantities of these goods will no longer be independent of the wishes and needs of men. Instead, the quantities of consumption goods will be determined by a process that is in the power of men and is regulated by human purposes within the limits set by natural laws. Consumption goods, which before were the product of an accidental concurrence of the circumstances of their origin, become products of human will, within the limits set by natural laws, as soon as men have recognized these circumstances and have achieved control of them.

Human beings moved from passive to active in satisfying their wants. That was a turning point in history.

The quantities of consumption goods at human disposal are limited only by the extent of human knowledge of the causal connections between things, and by the extent of human control over these things. Increasing understanding of the causal connections between things and human welfare, and increasing control of the less proximate conditions responsible for human welfare, have led mankind, therefore, from a state of barbarism and the deepest misery to its present stage of civilization and well-being, and have changed vast regions inhabited by a few miserable, excessively poor, men into densely populated civilized countries. Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge. [Emphasis added.]

If only he could see what reason, capital accumulation, division of labor, and trade have wrought! The lesson we should take from Menger is that all government actions that obstruct the formation of capital and free exchange—such as tariffs, to pick a random example—torpedo human welfare.

TGIF: "Liberalism and Capitalism"

Ludwig von Mises's 1927 path-breaking work in political theory speaks to the current generations. In section 5 of his introduction to Liberalism: The Classical Tradition, Mises sounds impeccably relevant in describing how the opponents of liberalism and the market economy twist facts that are plainly before our eyes. You'll see how he refuted the absurd claim that capitalism serves only a tiny privileged and exploitative group. The work of most thinkers passes away soon after they do. Not so with Ludwig von Mises.

He began the section by acknowledging what should be obvious. Governments have always interfered with individual freedom, free enterprise, and free markets—in a word, capitalism—in substantial ways. Laissez faire has never been allowed. That does not prove it is impossible, only that people either did not understand the system or did not want its success demonstrated. Mises wrote:

A society in which liberal principles are put into effect is usually called a capitalist society, and the condition of that society, capitalism. Since the economic policy of liberalism has everywhere been only more or less closely approximated in practice, conditions as they are in the world today provide us with but an imperfect idea of the meaning and possible accomplishments of capitalism in full flower. Nevertheless, one is altogether justified in calling our age the age of capitalism, because all that has created the wealth of our time can be traced back to capitalist institutions. It is thanks to those liberal ideas that still remain alive in our society, to what yet survives in it of the capitalist system, that the great mass of our contemporaries can enjoy a standard of living far above that which just a few generations ago was possible only to the rich and especially privileged.

This could have been written yesterday. The fabulous wealth that Americans and the inhabitants of other semi-capitalist countries enjoy would have been unfathomable just a short time ago. Previous generations would laugh at how we use the word poor today. That's what even partial freedom has accomplished. Those lagging behind have been compelled to live without the market economy, to their misfortune. We would all be richer with complete freedom.

To be sure, in the customary rhetoric of the demagogues these facts are represented quite differently. To listen to them, one would think that all progress in the techniques of production redounds to the exclusive benefit of a favored few, while the masses sink ever more deeply into misery. However, it requires only a moment’s reflection to realize that the fruits of all technological and industrial innovations make for an improvement in the satisfaction of the wants of the great masses. All big industries that produce consumers’ goods work directly for their benefit; all industries that produce machines and half-finished products work for them indirectly. The great industrial developments of the last decades, like those of the eighteenth century that are designated by the not altogether happily chosen phrase, “the Industrial Revolution,” have resulted, above all, in a better satisfaction of the needs of the masses. The development of the clothing industry, the mechanization of shoe production, and improvements in the processing and distribution of foodstuffs have, by their very nature, benefited the widest public. It is thanks to these industries that the masses today are far better clothed and fed than ever before. However, mass production provides not only for food, shelter, and clothing, but also for other requirements of the multitude. The press serves the masses quite as much as the motion picture industry, and even the theater and similar strongholds of the arts are daily becoming more and more places of mass entertainment.

As economist Bryan Caplan says, mass consumption requires mass production, and nowhere in history has mass production benefited only a small segment of society. Mises continued:

Nevertheless, as a result of the zealous propaganda of the antiliberal parties, which twists the facts the other way round, people today have come to associate the ideas of liberalism and capitalism with the image of a world plunged into ever increasing misery and poverty. To be sure, no amount of depreciatory propaganda could ever succeed, as the demagogues had hoped, in giving the words “liberal” and “liberalism” a completely pejorative connotation. In the last analysis, it is not possible to brush aside the fact that, in spite of all the efforts of antiliberal propaganda, there is something in these expressions that suggests what every normal person feels when he hears the word “freedom.” Antiliberal propaganda, therefore, avoids mentioning the word “liberalism” too often and prefers the infamies that it attributes to the liberal system to be associated with the term “capitalism.” That word brings to mind a flint-hearted capitalist, who thinks of nothing but his own enrichment, even if that is possible only through the exploitation of his fellow men.

Here, things in some ways have changed for the worse. The illiberals of the so-called left and right tribes have indeed made the word liberal a pejorative. It's become almost as pejorative as capitalism. But as Mises pointed out, one simple and undeniable fact about the market economy is overlooked:

It hardly occurs to anyone, when he forms his notion of a capitalist, that a social order organized on genuinely liberal principles is so constituted as to leave the entrepreneurs and the capitalists only one way to wealth, viz., by better providing their fellow men with what they themselves think they need. Instead of speaking of capitalism in connection with the prodigious improvement in the standard of living of the masses, antiliberal propaganda mentions capitalism only in referring to those phenomena whose emergence was made possible solely because of the restraints that were imposed upon liberalism. No reference is made to the fact that capitalism has placed a delectable luxury as well as a food, in the form of sugar, at the disposal of the great masses. Capitalism is mentioned in connection with sugar only when the price of sugar in a country is raised above the world market price by a cartel. As if such a development were even conceivable in a social order in which liberal principles were put into effect! In a country with a liberal regime, in which there are no tariffs, cartels capable of driving the price of a commodity above the world market price would be quite unthinkable.

In other words, the illiberal pins on the market economy the failings that come from the government's subversion of the market economy.

The links in the chain of reasoning by which antiliberal demagogy succeeds in laying upon liberalism and capitalism the blame for all the excesses and evil consequences of antiliberal policies are as follows: One starts from the assumption that liberal principles aim at promoting the interests of the capitalists and entrepreneurs at the expense of the interests of the rest of the population and that liberalism is a policy that favors the rich over the poor. Then one observes that many entrepreneurs and capitalists, under certain conditions, advocate protective tariffs, and still others—the armaments manufacturers—support a policy of “national preparedness”; and, out of hand, one jumps to the conclusion that these must be “capitalistic” policies.

Note his reference to the military-industrial complex as anti-capitalist. In the Trump-tariff age, Mises's next segment is particularly apt.

In fact, however, the case is quite otherwise. Liberalism is not a policy in the interest of any particular group, but a policy in the interest of all mankind. It is, therefore, incorrect to assert that the entrepreneurs and capitalists have any special interest in supporting liberalism. Their interest in championing the liberal program is exactly the same as that of everyone else. There may be individual cases in which some entrepreneurs or capitalists cloak their special interests in the program of liberalism; but opposed to these are always the special interests of other entrepreneurs or capitalists. The matter is not quite so simple as those who everywhere scent “interests” and “interested parties” imagine. That a nation imposes a tariff on iron, for example, cannot “simply” be explained by the fact that this benefits the iron magnates. There are also persons with opposing interests in the country, even among the entrepreneurs; and, in any case, the beneficiaries of the tariff on iron are a steadily diminishing minority. Nor can bribery be the explanation, for the people bribed can likewise be only a minority; and, besides, why does only one group, the protectionists, do the bribing, and not their opponents, the freetraders?

Mises here rebuts the notion that business is a monolithic class that calls all the shots. In fact, diverse interests vie for favors from the state. One industry's subsidy is many other industries' expense. Beware simple models. They will lead you astray. Mises went on:

The fact is that the ideology that makes the protective tariff possible is created neither by the “interested parties” nor by those bribed by them, but by the ideologists, who give the world the ideas that direct the course of all human affairs. In our age, in which antiliberal ideas prevail, virtually everyone thinks accordingly, just as, a hundred years ago, most people thought in terms of the then prevailing liberal ideology. If many entrepreneurs today advocate protective tariffs, this is nothing more than the form that antiliberalism takes in their case. It has nothing to do with liberalism.

Ideas, not interests, rule the world? We need to pay more attention to this guy.