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Is the Market a Test of
Truth and Beauty?
 Is the Market a Test
of

TRUTH BEAUTY?
Essays in Political Economy

by
L B. Y

Ludwig von Mises Institute

© by the Ludwig von Mises Institute and published
under the Creative Commons Attribution License .
http://creativecommons.org/licenses/by/3.0/

Ludwig von Mises Institute

West Magnolia Avenue
Auburn, Alabama
mises.org

:
 Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

:
Should Austrians Scorn General Equilibrium eory? . . . .
Why Subjectivism? . . . . . . . . . . . . . . . . . . . . .
Henry George and Austrian Economics . . . . . . . . . . .
e Debate about the Efficiency of a Socialist Economy . . .
e Debate over Calculation and Knowledge . . . . . . . . .
Austrian Economics, Neoclassicism, and the Market Test . . .
Is the Market a Test of Truth and Beauty? . . . . . . . . . .
Macroeconomics and Coordination . . . . . . . . . . . . .
e Keynesian Heritage in Economics . . . . . . . . . . . .
Hutt and Keynes . . . . . . . . . . . . . . . . . . . . . . .
e Image of the Gold Standard . . . . . . . . . . . . . . .
Land, Money, and Capital Formation . . . . . . . . . . . .
Tacit Preachments are the Worst Kind . . . . . . . . . . . .
Tautologies in Economics and the Natural Sciences . . . . . .

:
Free Will and Ethics . . . . . . . . . . . . . . . . . . . . .
Elementos del Economia Politic . . . . . . . . . . . . . . .
Is ere a Bias Toward Overregulation? . . . . . . . . . . .
Economics and Principles . . . . . . . . . . . . . . . . . .
American Democracy Diagnosed . . . . . . . . . . . . . .
Civic Religion Reasserted . . . . . . . . . . . . . . . . . .
A Libertarian Case for Monarchy . . . . . . . . . . . . . .
vi

Contents

Uchronia, or Alternative History . . . . . . . . . . . . . . .

Hayek on the Psychology of Socialism and Freedom . . . . .
Kirzner on the Morality of Capitalist Profit . . . . . . . . .
Mises and His Critics on Ethics, Rights, and Law . . . . . .
e Moral Element in Mises’s Human Action . . . . . . . . .
Can a Liberal Be an Egalitarian? . . . . . . . . . . . . . . .
Rights, Contract, and Utility in Policy Espousal . . . . . . .

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 Introduction

is book’s title is the same as the newly chosen title of chapter , “Is
the Market a Test of Truth and Beauty?” at chapter, along with the
one before it, questions a dangerously false argument for the free-market
economy sometimes made by its supposed friends. eir argument threat-
ens to discredit, by association, the powerful and valid case for the mar-
ket. Asked whether the market is a test of truth and beauty—of excel-
lence—Ayn Rand would presumably give the same answer as mine: “No,
of course not!” Consider her hero of e Fountainhead, Howard Roark.
Political economy is the area of overlap among economics, political
Thscience, and philosophy. Beyond its positive content, political economy
does bear on policy but not only on policy; it is far from a hodge-podge of
different people’s policy prejudices. Economics, when not disregarded, is Th
obviously relevant to policy. So are philosophy and psychology, as when
they underlie doctrines such as redistributionism and egalitarianism. Pol-
icy can affect economics. More exactly, a policy proposal may help clar-
ify a strand of economic analysis even when, considering side-effects, the
author does not actually recommend the policy; “Land, Money, and Cap-
ital Formation,” chapter , provides an example. Regrettably, though,
policy-driven economists do exist who start with their or their employ-
ers’ preferred policies and then twist their analysis into supporting them.
Writings in political economy, being interdisciplinary, typically omit
the deep technicalities of any specific field. Most of this book’s chapters
are semipopular pieces that the attentive “general reader” should under-
stand. ey deal with intersecting fields rather than with advanced details
of any one field. Left out of this book, then, are any of my relatively tech-
nical writings, as on monetary theory and international economics. A few
semitechnical chapters, including numbers and , come close to mak-
ing an exception. Chapter contributes to a field of particular interest
to Austrian economists, capital theory. Yet it too strives for nontechnical
language.
 viii

Introduction

Some linkages among the chosen articles may not be immediately

obvious. But, for example, “Free Will and Ethics” and “Uchronia, or
Alternative History” both illuminate the chance aspects of life. So doing,
both bear on political philosophy (as on the role of luck in personal sta-
tus). Both also underline the difficulty of pinpointing the supposed “deep
parameters” of the economy and so to making quantitative predictions, as
opposed to what F.A. Hayek ( ) called “pattern predictions.” (Far be it
from me, however, to say that the necessary achievements of the econo-
metricians are forever downright impossible.)
About half of the articles deal with economics in particular. “ e
Debate about the Efficiency of a Socialist Economy” and “ e Debate
Over Calculation and Knowledge” are among them. e latter chapter
summarizes points made more fully in my “Mises and Hayek on 1967
Calcula-
tion and Knowledge,” Review of Austrian Economics , no. , , and in
the ensuing debate with Joseph Salerno, Guido Hülsmann, Jeffrey Her-
bener, and Hans-Hermann Hoppe in and issues of that Review.
at debate runs to too many pages for inclusion here (see the Review’s
issues of , , and , online at the Mises Institute’s website).
My “Austrian Economics, Neoclassicism, and the Market Test,” chap-
ter , also provoked controversy, specifically from David Laband and Rob-
ert Tollison in the Quarterly Journal of Austrian Economics , no. , Spring
. e reader should read their article (at the Mises Institute’s website)
along with or before reading my reply in chapter .
Chapters on “Macroeconomics and Coordination,” “ e Keynesian
Heritage in Economics,” “Hutt and Keynes,” and “ e Image of the
Gold Standard” deal with money-macro topics. e last two of the
Economics chapters concern methodology or, rather, countermethodol-
ogy: they advise against being intimidated by narrow methodological
preaching.
Several chapters in the Politics and Philosophy section examine the
merits and demerits of democratic government. Two of them are book 1996
reviews. One of the books treats the American political system realistically.
e other takes the George Stigler/Earl ompson line that—if I may
exaggerate just a bit—whatever institution exists must be optimal or at
1994 it would
least satisfactory; otherwise 1996 already have been
1997 replaced. Other
chapters in the section deal with political philosophy.
Most chapters are reprinted with only slight editing, particularly to
standardize the system of references. Chapter has been expanded (and
renamed) to take account of developments in the fifteen years since it first

2000
 Acknowledgments

appeared, and chapter (also renamed) has been modified at its beginning
to read less like an invited introduction to others’ articles. Several pages of
chapter have been cut out because they rebut a strained interpretation of
Mises’s work that is hardly worth attention. Chapter , “ e Debate about
the Efficiency of a Socialist Economy,” although and perhaps especially
because it dates from , is printed unchanged.
e selection process has just happened to give the book an Austrian
flavor not originally intended. e bulk of my work is not particularly
Austrian. On whether I count as an Austrian economist, see the opening
lines of chapter .
1949

For enjoyable and instructive discussions over many years, I am indebted

to dozens, even hundreds, of students in my graduate Seminar in Polit-
ical Economy at the University of Virginia and at Auburn University.
( at seminar covered its topics in more scope, detail, and technicalities
than the articles included here.) Many persons, including ones both men-
tioned and unmentioned in the individual papers, have given me valu-
able instruction, encouragement, provocation, and warnings. I hesitate to
list names because any such list would be incomplete and would suffer
from my lapses of memory; but it would include Roger Garrison, Luis
Dopico, Daniel Edwards, Robert Greenfield, Roger Koppl, Juergen Back-
haus, Steven Caudill, Warren Nutter, Edgar Browning, William Breit,
Northrup Buechner, Murray Rothbard, James Buchanan, Gordon Tul-
lock, and, to go back many years, Aurelius Morgner, James Waller, and
Clarence Philbrook.
e Ludwig von Mises Institute made no suggestion that I mod-
erate any views contrary to its own. For this and other reasons I am
indebted to Llewellyn Rockwell, the Institute’s chairman, and Douglas
French, its president. Jeffrey Tucker, editorial vice president, encouraged
and patiently supported this book project from the beginning. Perhaps
the Institute’s greatest support has been the services of Miss Lauren Bar-
low. She helped select the papers to reprint; standardized the system of
citations (including placement of notes where they belong, at the bottom
of each page); questioned errors, undue repetition, and infelicitous for-
mulations; coped with many drafts; and gave invaluable support on the
many arduous chores scarcely imaginable by someone who has not tried
to assemble diverse articles into a coherent (I hope) book.
x

Introduction

For these reasons I extend my special admiration and thanks to Lauren

Barlow.

Hayek, F.A. “Degrees of Explanation” and “ e eory of Complex Phenom-

ena.” In Studies in Philosophy, Politics and Economics, – , and – . Chicago:
University of Chicago Press, .
Economics
 [Scale=1.0775]black1
Should Austrians Scorn
General Equilibrium eory?*

Austrian economists try to explain how a whole economic system func-

tions. ey do not focus narrowly on the circumstances of the individual
household or the geometry of the individual firm. ey investigate the
coordination of the mutually influencing yet separately decided activities
of many millions of individual units; they investigate general interdepen-
dence.
General equilibrium is a somewhat narrower concept. (“GE” is a
convenient abbreviation for both “general equilibrium” and, as context
requires, general-equilibrium theory or approach.) By GE I mean work by
and in the tradition of Léon Walras, Vilfredo Pareto, Gustav Cassel, Ger-
ard Debreu ( ), Robert Kuenne ( , ), Kenneth Arrow and Frank
Hahn ( ), and others. Distaste for GE among Austrian economists
is familiar, as it was among Chicago economists such as Milton Fried-
man and George Stigler (who thought that it somehow stood in rivalry
with Marshallian partial-equilibrium analysis). Austrians sometimes state
explicit reasons for their scorn, but often they take the reasons as too well
known to need repeating. I myself have been accused of a GE mindset
in a context that takes such a mindset for granted as a bad thing (Salerno
, pp. – ).

* From Review of Austrian Economics , nos. – ( ): – .

Austrians pursue a line of research marked out by Adam Smith, trying “to explain
how a system of ‘Natural Liberty’, a market economy based upon private ownership and
the self-interested pursuit of utility and profits, could become coordinated in such a way
that it generates ever-expanding circles of productivity, efficiency and growth” (Boettke
and Prychitko , p. x).
Reasons are reviewed by Boettke and Prychitko and in several of the articles
reprinted in the volumes that they edited. eir Introduction, those articles, and the
present article reinforce and supplement each other.

1959 1963 1968

4 I

Part : Economics

Jesús Huerta de Soto provides an example of scorn in his Spanish

book on socialism, economic calculation, and entrepreneurship. It is an
excellent and insightful book, apart from some methodological preaching.
Huerta de Soto regrets

the negative effects that mathematical formalism and the pernicious

obsession with analyses based on full information and on equilibrium
have had on the development of our science. It is likewise necessary to
abandon the functional theory of price determination and replace it with
a theory of prices that explains how these are established dynamically as
the result of a sequential and evolving process driven by the force of
the entrepreneurial function, that is, by the human actions of the actors
involved, and not by the intersection of mysterious curves or functions
lacking any real existence, since the information necessary to formulate
them does not exist even in the minds of the actors involved. (Huerta de
Soto , pp. – )

Jack High ( ) provides another example. Especially since World

War II, he says, mainstream economists shifted their attention from actual
market prices mainly to their hypothetical counterparts in equilibrium.
ose economists could say much about how producers and consumers
would react to given prices but little about how prices were formed and
adjusted. GE existence proofs supposed that producers and consumers
were maximizing with respect to “given” prices. To dodge the question of
how prices reach their equilibrium values, the theory brought in a deus ex
machina, a fictional economywide auctioneer who somehow achieves this
result. “ e fundamental motivating force of economic theory was absent
from the theory of price formation” (High , pp. – , quotation
from p. ).
High invokes the authority of Robert Clower ( / ) for a further
verdict on GE. Although Clower does not classify himself as an Austrian,
overlaps between his1992
and Austrian 34
views 35justify quoting him also.
To argue that neo-Walrasian theory has any bearing on the observable
behavior of an economy actually in motion, we should have to regard it
1994
I cannot find mention of the auctioneer in Walras’s own writings; and Donald Walker,
the leading living U.S. expert on Walras, assured me (in conversation) that the auctioneer
indeed does not appear in them. at prodigious figure is the invention of later theorists
trying to make the theory tighter.
 Chapter : Should Austrians Scorn General Equilibrium eory?

as providing a complete description of actual behavior rather than a partial

description of virtual behavior—and that we surely cannot do. Strictly
interpreted, neo-Walrasian theory is descriptive only of a fairy-tale world
of notional economic activities that bears not the slightest resemblance to
any economy of record, past, present, or future. It is science fiction, pure
and simple—clever and elegant science fiction, no doubt, but science
fiction all the same. (Clower / , p. )

More recently Clower noted

the meretriciousness of the economist’s notion of “equilibrium.” In every
branch of physical science, “equilibrium” refers to a “balance of forces”
[citations omitted] such as might be associated with an olive 1975resting1986 195
at the bottom of a cone-shaped martini glass; and the word mislead-
ingly conjures up analogous images when it is used by economic theo-
rists. Strictly speaking, however, the “equilibria” that neowalrasian the-
ory shows to exist are more correctly called solutions [to a system of
implicitly-defined algebraic equations]. So understood, the important
achievements of neowalrasian equilibrium theory lose much of their
apparent lustre, which should in any case adhere to the mathematical
geniuses Gauss and Brouwer whose work underlies all modern existence
proofs. (Clower , p. ; the eight words in the second pair of brack-
ets are Clower’s.)

Clower justly objects to how some economists have stretched the

concept of equilibrium. Robert Lucas and omas Sargent ( , p. )
appeared to congratulate themselves on the “dramatic development” that
the very meaning of the term “equilibrium” had undergone. Sargent (inter-
viewed in Klamer , pp. – ) expressed satisfaction with “fancier”
notions of equilibrium, “much more complicated” notions of market-
clearing, and “fancy new kinds of equilibrium models.” Well, to recom-
mend destabilizing the meaning of words, subverting communication,
is the kind of methodologizing that needs to be dragged into the open
and inspected. If what economists “with proper sensitivity training” call
the “computable dynamic general equilibrium model” really is the real-
business cycle model, as Bernard Saffran ( , p. ) suggests, then I
share contempt for it.

1995
Some strands of GE do perhaps deserve scorn 317
or neglect. But let us
keep our scorn well focused. e problem lies not with the theory’s
6 I

Part : Economics

central ideas but with some abuses committed in its name. ese include
parades of sham rigor and mathematical games that make no contact
with reality (cf. Buchanan / , Allais ). More specifically, they
arguably include obsession with the mathematical requirements for exis-
1983 out1988
tence, uniqueness, and stability of GE to the extent of crowding atten-
tion to economic substance. (On the other hand, let the would-be mathe-
maticians amuse themselves as they like, provided they not deceive other
people about the significance of their efforts.) A related abuse is pushing
the strongest-link principle, the tacit idea that a theory is as strong not as
its weakest but as its logically most rigorous link (cf. Mayer , pp. x,
– , , – , and passim). Still others are frontiersmanship and other
varieties of tacit methodological preaching (cf. chapter below).
e correct response to abuses is to pinpoint them. If we appraise a
doctrine or approach or technique by whether or not it might be abused,
misinterpreted, distorted, set aside, or taught with unduly narrow and
exclusive emphasis, we are putting it to a test that no doctrine can pass.
GE is often charged with being static and being preoccupied with
an all-around equilibrium in which all plans mesh and all prices, being
at their market-clearing levels, convey exact information. e services of
the mysterious auctioneer leave no scope for entrepreneurial activity and
57 actual
other 63 market
80 127
processes.130 e theory ignores complexity, uncertainty,
judgment, creativity, and enterprise.

In a sense these complaints are correct. Of course formalized equilibrium

theory does not teach us everything about economics, and perhaps not
even the main ideas. No one known to me claims that it is the whole story.
Of course GE leaves room for investigating the processes at work in the
real world of disequilibrium. We cannot learn everything at once, but we
can learn something from a static view and then go on to dynamics and
process. e two strands complement each other; GE affords insights into
general interdependence. We can better understand market pressures and
processes if we have an idea of the state toward which they are working
(if indeed they are equilibrating rather than disequilibrating) and if this
state helps us, by contrast, to contemplate disequilibrium, the nonmesh-
ing of plans. Ludwig von Mises recognized the usefulness of the “evenly
rotating economy” as an analytical benchmark ( / , pp. –
and passim). We need not suppose that the world ever actually reaches
 Chapter : Should Austrians Scorn General Equilibrium eory?

equilibrium; we can remain duly scornful of theories (like a recently fash-

ionable brand of macroeconomics) that treat equilibrium-always as a sub-
stantive proposition.
I taught a course in GE at the University of Virginia for several years
flanking . e professors who had named the course, years earlier,
apparently thought that GE was a fancy name for macroeconomics, but I
took the course title at face value. Large doses of Austrian economics,
including Mises’s and Hayek’s insights into socialist calculation, were
1960
helpful, I think, in rescuing GE from the sterility of its worst versions.
I never saw any necessary tension between GE and Austrian economics.

. GE gives us a view of the economic system as a whole. Analysis

of the behavior of individual firms and households has little point unless
it fits into understanding the system (cf. Eucken , pp. – ). For
example, the charge that a monopoly firm’s output is too small has little
meaning unless it is related to the economywide allocation of resources.
. Especially when bolstered by contemplation of a centrally admin-
istered economy, GE illuminates the complexity of the task performed
by entrepreneurs and other agents, guided by the price system. It illumi-
nates the logic of decentralized decisions for the sake of a fuller use of
knowledge, with prices communicating signals and incentives.
. Contemplating the immense task ideally performed by economy-
wide coordinating processes underlines the attendant scope for things
to go wrong. (Compare medical students’ attention to the physiology of
a healthy body.) e surprising thing is not so much that coordination
sometimes fails as that the processes work at all. Failure is most evident in
depression, when people keenly desire to trade with one another (although
more through multilateral than bilateral exchanges), yet run into frustra-
tion. Alerted to the coordination problem, we can better look for disrup-
tive conditions or events.
. GE illuminates the real significance of the money prices, costs,
and incomes confronting households, firms, and governments. It explains
opportunity cost in a way not possible with partial analysis alone. All too
commonly, opportunity cost is defined in the context of choices made
by a particular decisionmaker: the cost of his chosen course of action is
the next-best course that he thereby forgoes. at definition, bringing to
mind the considerations and even agonies involved in making decisions,
8 I

Part : Economics

seems familiar to the layman. is deceptive familiarity trivializes the con-

cept. What requires the economist’s expertise and the student’s alertness to
learning something new is opportunity cost in a deeper sense—the wider
social significance of money cost. Misunderstanding still abounds. How
often do we hear complaints about desired production and services being
curtailed or worthwhile projects shelved out of grubby concern with mere
money cost? (Even the epithet “greed” gets tossed around.) What needs
repeated explanation is how money costs reflect the subjectively appraised
values of the other outputs and activities necessarily forgone if resources
are withheld from them for the sake of the particular output or activity in
question. What further needs explanation is how money costs and prices
transmit information and incentives to decisionmakers. ( is is not to
say that the information conveyed about opportunity cost is completely
accurate; for one thing, real-world prices are not GE prices. However,
the market process, including entrepreneurial activity, works to weed out
gross inaccuracies.)
Explaining opportunity cost in the nontrivial sense is not easy. Even
Irving Fisher ( / , pp. – , – ) astonishingly denied that
one particular price, the interest rate, measures any genuine opportunity
cost. Precisely because the expository task is such a demanding one, it
is important to beware of deceptively simple and familiar formulations
and examples. is is what a GE framework helps to do. It helps portray
the variety and diffusion of sacrifices of alternative goods, intangible or
subjective as well as tangible, that the money cost of a particular good
measures.
. e GE framework is a necessary background for special strands
of theory. Monetary theory is closely bound up with concepts of general
interdependence, since money is the one good traded on all markets. GE
helps show how price-level determinacy presupposes a nominal anchor,
provided either by a commodity standard (or foreign-exchange standard)
or by quantitative regulation of a fiat currency. In the theory of saving,
capital, and interest, GE helps us understand conceptual distinctions even
between magnitudes that are the same in equilibrium (apart from differ-
ences in risk, liquidity, and the like), such as the interest rate on loans,
1930land, the
rates of return on capital goods and 1970agio of present485 487
over future 534
goods, subjective marginal rates of time preference, and the technolog-
ical marginal productivity of investment in capital goods. It shows the
error of quarreling over supposedly rival partial-equilibrium theories of
interest.
 Chapter : Should Austrians Scorn General Equilibrium eory?

. GE triggers alertness to consequences of particular actions, includ-

ing ones remote in space and time; it alerts one to the Law of Unintended
Consequences (cf. Meade’s primary, secondary, and tertiary effects in his
, esp. chaps. , , ).
Here are some examples of repercussions that GE helps illuminate:
Why monetary expansion lowers interest rates only transitionally; how
1955
monetary expansion affects theXIII XXXI
price level; why surveyXXXII
results on the
supposed interest-insensitivity of investment decisions do not prove that
monetary policy is ineffective (cf. Wicksell’s cumulative process). GE
helps us understand how the strength of some relation about which we
have inadequate direct empirical evidence may be judged indirectly by
empirical evidence on something else that is related to the first, even if
not in an obvious way. One example involves import and export supply
and demand elasticities and purchasing-power parity.

My next three claims, numbers , and , are interrelated and, unfortu-

nately, lengthy. ey concern avoiding fallacies.
. GE analysis helps clarify the distinction between data and vari-
ables of the economic system. (More exactly, the distinction pertains not
so much to objectively existing reality itself as to analysis of a particular
aspect of it, or to a particular strand of analysis. For example, population
may count among the givens in a particular strand of analysis yet count
among the variables to be explained in another strand.) GE emphasizes,
in particular, the distinction between variables that get determined, on
the one hand, and “wants, resources, and technology,” on the other hand.
(“WR&T” also includes social and legal organizations and their rules;
cf. Eucken , pp. , – , and Vining .) GE shows the error of
asking about the effects of a change in a particular magnitude when that
magnitude is a determined variable and not a given. It is a mistake, for
example, to ask how a change in the interest rate will affect investment
or total spending. e question should be rephrased to ask about further
consequences of whatever change in the data underlies the interest-rate
change (e.g., a change in the productivity of investment, in 7thrift,8 or in 9
monetary policy). e error is similar to that of asking about the conse-
quences of a change in the price of wheat whose cause goes unspecified.
Nowadays, similarly, we have been hearing much ignorant chatter about
the consequences of a deficit in foreign trade or on current account.
10 I

Part : Economics

Of course, individual-experiments can be legitimate if performed in

the proper context. What is a dependent variable for the economy as
a whole may be an independent variable or datum for individual units
and aggregates of them. Something that is not a datum for the econ-
omy as a whole may legitimately be taken as a datum in an individual-
experiment (Patinkin develops the distinction between individual-
and market-experiments). But it is important to keep the distinction clear.
(Some examples of making the distinction would involve demand sched-
ule and quantity demanded; Friedman’s “Marshallian” demand curve, sup-
posedly purified of the income effect; the demand for money; and relations
between investment and income.) 1965
It can be legitimate to ask about the consequences for the economy as
a whole of a variable’s accidentally departing from or arbitrarily being set
away from its GE value (even though some theorists, e.g., Archibald and
Lipsey and, more recently, the New Classical macroeconomists, have
been mistakenly unwilling to consider disequilibrium). We might suppose
such a departure to test for stability of equilibrium, to show inconsistency
of plans in a disequilibrium situation, or to show forces at work and rea-
sons why such a disequilibrium could not last. But the theorist must know
what he is doing. Although it can be legitimate to postulate a specified
kind of departure from equilibrium for a particular analytical purpose, the
theorist must not imagine a freedom to postulate just any old change in
a variable so as to trace out the consequences for a supposed different
equilibrium. As for postulating a price floor or ceiling or a change in the
money-supply behavior of the authorities, that can be regarded as a change
in one of what are regarded as ultimate data of the system. (Implicitly I
am referring to Buchanan and Eucken , pp. – .)
. GE shows the error of imagining one-way causation of economic
1958 determination is at work. It is a mistake to ask
variables when mutual
whether price depends on cost or on marginal utility, whether the interest
rate depends on the marginal productivity of capital goods or of invest-
ment or on a subjective discount of future relative to present goods, and
whether the wage rate depends on the marginal value product of labor
or on labor’s marginal disutility or on the marginal utility of alternative
activities forgone to engage in labor.
Avoiding false presuppositions about causality helps give insight
into the identification problem of econometrics. For example, does a pat-
tern of relations between various prices and quantities of some product
reflect a demand function, a supply function, a confused mixture of their
 Chapter : Should Austrians Scorn General Equilibrium eory?

properties, or what? We must ask what differences in wants, resources,

and technology underlie the different price-and-quantity points. Further
such examples concern relations between a country’s balance of payments
and exchange rate, monetary policy and free reserves, and the interest rate
and monetary policy or investment or thrift. Did a change in the interest
rate come from the demand-for-credit side or the supply-of-credit side,
perhaps as influenced by monetary policy?
Recognizing mutual determination does not preclude a causal-genetic
tracing out of response to a particular change in the situation. Compare
tracing out the consequences of adding a new ball to Marshall’s bowl or a
new piece to a Calder mobile.
. GE helps avoid many specific fallacies sometimes abetted by the
partial-equilibrium approach. Some examples follow.
(a) e above-mentioned fallacy about interest-sensitivity and mone-
tary policy.
(b) e purchasing-power argument for artificially boosting particu-
lar wage rates (or product prices). is ancient argument illegitimately
generalizes from a particular firm or industry. If—if—the conditions for
an inelastic derived demand for its labor are satisfied, then a wage-rate
increase will indeed increase the purchasing power of the firm’s or indus-
try’s employees. But what happens to other factor shares? Furthermore,
widespread wage increases lead into questions of monetary theory, which
cannot be handled by partial analysis alone.
(c) e pro-efficiency “shock” effect supposedly achieved by boosting
wage rates through union or government action. Insofar as the greater
efficiency is achieved by greater capital investment, either less capital for-
mation is possible elsewhere or else the “shock” somehow promotes saving,
in which case the argument ought to explain how.
(d) e economies-of-scale case for advertising or consumer trading
stamps. Expanded scale in some operations means shrunken scale in oth-
ers, unless underemployment of resources prevailed and is somehow reme-
died by the advertising. What reason is there to suppose that advertising
promotes the goods that particularly have economies of scale? Anyway,
the argument ought to face up to this general-equilibrium question. If
the argument depends on standardization, that ought to be made explicit.
(e) e decreasing-cost/marginal-cost-pricing/consumer-surplus ar-
gument for subsidizing a particular industry or running it at a loss. Also
12 I

Part : Economics

to be considered are the conditions in industries from which resources are

diverted, as well as the consequences of raising revenue for the subsidies.
(f) Similarly, external-economy (including infant-industry) arguments
for protection or subsidies for particular industries, or arguments for gov-
ernment finance of particular industries on the grounds that the gov-
ernment can borrow more cheaply than private enterprise, or arguments
for credit allocation toward such industries. As GE teaches us, it is not
enough to consider one industry or one aspect at a time.
(g) e idea that government loan guarantees can promote (or rescue)
desirable projects or activities at little or no cost to the taxpayers. e
argument forgets that “capital”—or whatever we may call the resource
whose price is the interest rate and that is further rationed by the decisions
of loan officers and bond buyers—is a scarce resource whose diversion to
some uses necessarily withholds it from other and possibly more highly
desired uses.
(h) Capital-import-and-export arguments for trade interventions. In
a developing country, protecting a particular industry will perhaps have
a “tariff-factory” effect; but will protection in general promote capital
import in general? Agreed, admitting a particular product duty-free may
encourage home firms to export capital to produce that good abroad, but it
does not follow that removal of protection in general will promote overall
capital export.
(i) e fallacious argument for tariffs to the effect that our government
collects taxes on incomes generated by domestic production of import-
competing goods but not on incomes generated by producing imported
goods abroad.
(j) e real-bills doctrine about the absence of inflationary effect of
money and credit created to finance productive activities, a fallacy that
keeps getting independently reinvented in slightly different versions by
incompetent amateur monetary theorists.
(k) Merely superficial attention to secondary or “collateral” effects of
a particular activity, such as supposed benefits to local business of a new
highway or sports stadium, ignoring the diversion of resources from other
places or activities.
(l) A catchall category: other instances of the fallacy of composition
and of policy arguments that unduly restrict attention to close and short-
run effects to the relative neglect of more remote and long-run effects.
GE promotes awareness that the wisdom of a particular measure cannot
 Chapter : Should Austrians Scorn General Equilibrium eory?

be judged solely by the intentions of those who recommend it. ( is is

one of the main themes of Eucken , cf. Frédéric Bastiat on “what is
seen and what is not seen.”) 1952

Fully supporting my many claims for GE would require a whole college

course. Readers might well contemplate, however, one or more of the sys-
tems available in the literature that portray the economy as a whole in
many equations and variables. Pondering such a system, purporting to
describe what an economy would look like in a state of full coordination,
helps one grasp the central fact of general interdependence. It helps one
see how greater production of some goods and services requires lesser pro-
duction of others and how, ultimately and subjectively, greater satisfaction
of some desires costs lesser satisfaction of others. It helps one grasp the
immensity of the coordination task that the price system works toward
performing, although never completely and perfectly.
I doubt that anyone can fully appreciate GE without working his
way through one or more such equation systems. While Gustav Cas-
sel deserves criticism for presenting his simplification of Walras’s system
( / , chap. ) without giving credit to Léon Walras, his system
nevertheless has pedagogic merit. It envisages n goods and services. e
quantity per time period demanded of each is a function of all n prices
and is equal to the quantity supplied. Supply functions are represented by
the conditions that the price of each good is equal to its cost of produc-
tion, which in turn is equal to the sum of the prices times quantities of
the factors of production required to produce one unit of the good. ese
technical requirements and the equilibrium quantities of goods permit
calculating the total quantity demanded of each of the r factors, which in
equilibrium is equal to the quantity available. Cassel shows just enough
equations to determine the quantities of the various goods produced, their
prices, and the prices of the factors of production.
In this first pass at a simplified equation system, Cassel assumes that
the “technical coefficients” (the quantities of each factor required for the
production of one unit of each good) are fixed parameters, as is the total
quantity available of each factor. e total money expenditure of con-
sumers on the purchase of final goods is also fixed. ese simplifying
assumptions can be relaxed, however, in ways represented by increasing
the number of unknown prices and quantities to be determined, and

1932 1967 IV
14 I

Part : Economics

increasing the number of equilibrium equations also, so that the system

remains determinate.
Cassel justifiably claims that his

equations reveal the true nature of pricing, and the pricing process can-
not be accurately presented in any simpler form. e demand for a prod-
uct represents an attempt to attract certain factors of production to a
particular use. Conflicting with this attempt are similar attempts in the
form of demands for other products. ere arises in this way a strug-
gle for the relatively scarce factors of production, which is decided in
the exchange economy by placing uniform prices on the factors, which
prices in turn determine the prices of the products and thus form a
means of effecting the necessary restriction of demand. e demand for
a particular factor of production arising from the continuous demand for
each particular product is totalled for each unit period, to form a total
demand for that factor of production, ... which must, in a state of equi-
librium, equal the given quantity of the factor of production. ( / ,
p. )

In this passage and in the equation system it describes, Cassel thus

provides a deep insight into the nature of cost, opportunity cost. He goes
on to point out how his system portrays the interplay of both subjective
and objective factors in price determination. As he says,

All these factors are essential in determining prices. An “objective” or

“subjective” theory of value, in the sense of a theory that would attribute
the settlement of prices to objective or subjective factors alone, is there-
fore absurd; and the whole of the controversy between these theories of
value, which has occupied such a disproportionately large place in eco-
nomic literature, is a pure waste of energy. (p. )

E.H. Phelps Brown presents a general-equilibrium equation system

simple enough to be solved numerically, as it was even when Brown
first published it in , in the days before computers and even before
145
electronic pocket calculators (though not before mechanical desk calcula-
tors). Nowadays, when computers and calculators remove so much grunt
work, the value of exercises like Brown’s has increased. Much may be
said for working one’s way not only through simplified systems but also
through Walras’s Elements itself, that landmark in the history of economic
thought.
It is easy to say that the points illuminated by GE are “obvious” and
that its pretentious equations are unnecessary. Conceivably so. But are
 Chapter : Should Austrians Scorn General Equilibrium eory?

its critics quite sure that their acquaintance with GE does not help make
those points seem obvious? Would they have grasped their full significance
even without contemplating the equation systems?
Only rather simple mathematics is required for reaping the benefits
claimed for GE. (Understanding work like Gerard Debreu’s is another
matter.) is brings up a related point. Quite a few Austrians maintain
that mathematics is out of place in economics. But how can they be confi-
dent? eir not seeing how to do anything useful with it is no reason
to suppose that no one else can use it any better. People with different
personal abilities, backgrounds, and tastes legitimately pursue different
research topics and employ different methods and styles of exposition. An
approach lacking appeal to oneself may convey valuable insights to other
persons. It is paradoxical for Austrians, especially those who like to expa-
tiate on subjectivity and ineffability and the unpredictability of the future,
to predict the usefulness of particular methods and to try practically to
legislate on such matters.
Alain Enthoven, then applying economics in the Defense Depart-
ment, testified to how overlearning or overstudy, as one might call it, can
help clinch one’s grasp of economic reality. e analytical tools that he
and his colleagues used

are the simplest, most fundamental concepts of economic theory, com-

bined with the simplest quantitative methods. e requirements for suc-
cess in this line of work are a thorough understanding of and, if you
like, belief in the relevance of such concepts as marginal products and
marginal costs, and an ability to discover the marginal products and
costs in complex situations, combined with a good quantitative sense.
e advanced mathematical techniques of econometrics and operations
research have not proved to be particularly useful in dealing with the
problems I have described. Although a good grasp of this kind of mathe-
matics is very valuable as intellectual formation, we are not applying lin-
ear programming, formal game theory, queuing theory, multiple regres-
sion theory, nonlinear programming under uncertainty, or anything like
it. e economic theory we are using is the theory most of us learned as
sophomores. e reason Ph.D.’s are required is that many economists do
not believe what they have learned until they have gone through gradu-
ate school and acquired a vested interest in marginal analysis. (Enthoven
, p. )

Partial-equilibrium, process-oriented, and GE approaches are not nec-

essarily rivals. Admittedly, only partial-equilibrium theory is “operational”
16 I

Part : Economics

in the Chicago sense of yielding fairly specific predictions, as of the conse-

quences of a change in an excise tax. And even this admission goes too far;
GE is not totally without operational application. Still, its main service
is as a conceptual framework accommodating the more readily applicable
strands of partial analysis.
True, the Walrasian system is formal. It is absurd to envisage solving a
Walrasian system for numerical parameters of reality (pace Wassily Leon-
tief ’s aspirations for his input-output system). “Walras’ system was once
correctly described as resembling a palace of no relevance to the housing
problem” (Eucken , p. ).

GE is a major strand of, approach to, and integrating factor of the whole
body of economic theory. A single correct body of theory is what all cre-
ative economists presumably strive for, even though probably no one ever
will achieve it complete and error-free. Reality is consistent with itself,
and so must the correct theory of it be. To say so is not to deny the value
1950 27
of different schools with their own favorite topics, approaches, research
methods, and styles of exposition. A researcher can gain encouragement
and stimulus from knowing that he has colleagues out there who are ready
to read him sympathetically. ey accord him a presumption—defeasible
of course—that he is right. us, there is legitimate scope for the Austrian
School, as for others.
But the Austrians should think of themselves as making their own
distinctive contributions, critical as well as positive, to an emerging single
correct body of theory. eir objective should not be to differentiate them-
selves from the mainstream in a hostile manner but rather to contribute to
the mainstream and help steer it in the right direction. Correct economic
theory does not come in distinct and incompatible brands, one for Aus-
trians, one for Marxians, one for conservatives in the style of William F.
Buckley and Russell Kirk, one for libertarians, one for left-liberals, and
so forth. To suppose that it does is what Ludwig von Mises ( / ,
chap. ) eloquently condemned as “polylogism.”

Allais, Maurice. Remarks at McGill University, Montreal. Reported in IMF Sur-

vey ( June ): .
 Chapter : Should Austrians Scorn General Equilibrium eory?

Archibald, G.C., and R.G. Lipsey. “Monetary and Value eory: A Critique of
Lange and Patinkin.” Review of Economic Studies ( ): – .

Arrow, Kenneth J., and Frank H. Hahn. General Competitive Analysis. San Fran-
cisco: Holden-Day, .

Boettke, Peter J., and David L. Prychitko. “Introduction: Varieties of Market

Process eory.” In Market Process eories, edited by Boettke and Prychitko,
1971
vol. : ix–xxvii. Cheltenham, U.K., and Northampton, Mass.: Elgar, .

Brown, E.H. Phelps. e Framework of the Pricing System. . Lawrence: Uni-

versity of Kansas, Student Union Book Store, .

Buchanan, James M. “Ceteris Paribus: Some Notes on Methodology.” Southern

Economic Journal ( ): – .

1
. “Political Economy: – .” Lecture of April . In Ideas, eir
Origins, and eir Consequences, edited by omas Jefferson Center Founda-
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Cassel, Gustav. e eory of Social Economy. . Translated by S.L. Barron.

New York: Kelley, .

Clower, Robert. “Reflections on the Keynesian Perplex.” . In Money and Mar-

kets, edited by Donald A.Walker, chap. . New York: Cambridge University
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. “Axiomatics in Economics.” Southern Economic Journal ( ):

– . 24 1958 259 270

Debreu, Gerard. eory of Value. New York: Wiley, .

1957of Defense.”
Enthoven, Alain C. “Economic Analysis in the Department 1982 Amer-
ican Economic Review (May ): – .

Eucken, Walter. e Foundations of Economics. Translated by T.W. Hutchison.

119
London: Hodge, 130
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. Grundsätze der Wirtschaftspolitik. Tübingen: Mohr, .

. Kapitaltheoretische Untersuchungen. ⁿ ed. Tübingen: Mohr, . 1932

Fisher, Irving. e eory of Interest. . New York: Kelley,

1967 .

High, Jack. “ e Austrian eory of Price.” In e Elgar Companion to Aus-

trian Economics, edited by Peter J. Boettke, – . Aldershot, U.K., and
Brookfield, Vt.: Elgar, .

14

1986
18 I

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Huerta de Soto, Jesús. Socialismo, Cálculo Económico y Función Empresarial.

Madrid: Unión Editorial, .
1992
Klamer, Arjo. Conversations with Economists. Totowa, N.J.: Rowman & Allan-
held, .

Kuenne, Robert E. e eory of General Economic Equilibrium. Princeton, N.J.:

Princeton University Press, .
1983
. Microeconomic eory of the Market Mechanism: A General Equilibrium
Approach. New York: Macmillan, .

Lucas, Robert E., Jr., and omas J. Sargent. “After Keynesian Macroeco-
nomics.” In After the Phillips Curve: Persistence of High Inflation and High
Unemployment, – . Boston: Federal Reserve Bank of Boston, 1963 .

Mayer, omas. Truth versus Precision in Economics. Aldershot, U.K., and Brook-
field, Vt.: Elgar, .

Meade, James E. Trade and Welfare. London: Oxford University Press, .

1968
Mises, Ludwig von. Human Action. . rev. ed. San Francisco: Fox & Wilkes,
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Patinkin, Don. Money, Interest, and Prices. ⁿ ed. New York: Harper & Row,
.

Saffran, Bernard. “Recommendations for Further Reading.” Journal of Economic

Perspectives (Fall ): – . 49 72

Salerno, Joseph T. “Reply to Leland B. Yeager.” Review of Austrian Economics ,

no. ( ): – .

Vining, Rutledge. On Appraising the Performance of an Economic System. New

York: Cambridge University Press, .1993

Walras, Léon. Elements of Pure Economics. Translated by William Jaffé. Home-

wood, Ill.: Irwin, .

Yeager, Leland B. “Tacit Preachments are the Worst Kind.” Journal of Economic
Methodology ( ): – . Reprinted here as chapter .
1949 3

1966

1965
 [Scale=1.0775]black2
Why Subjectivism?*

Economists of the Austrian School emphasize subjectivism. is article

reviews why subjectivist insights are important, but it also warns against
exaggerations. e latter part, while briefer, particularly warrants atten-
tion in Austrian circles.
Various writers define subjectivism in ways that, though not necessar-
ily inconsistent, do seem quite different. Empirical concepts (as opposed
to mathematical concepts, like “triangle”) necessarily have an “open tex-
ture” (Waismann ). An open-textured concept just cannot be defined
so precisely and comprehensively as to rule out the possibility of an unfore-
seen situation or case or example that would require modifying the earlier
definition. I feel no duty, then, to start with a definition. Instead, the
meaning of subjectivism will emerge from the topics covered and from
contrasts with nonsubjectivist attitudes.

Subjectivist insights contribute to positive economics—to understanding

how the world works (or would work with circumstances changed in spec-
ified ways). ey do not bear primarily on policy. As an expository device,
however, it is convenient to begin by considering subjectivism applied—or
ignored—in policymaking.
Perhaps the broadest subjectivist insight is that economics deals with
human choices and actions, not with mechanistically dependable relations.
e economy is no machine whose “structure” can be ascertained and
manipulated with warranted confidence.
1965 Economics knows nothing com-
parable to Avogadro’s number, atomic weights and numbers, the speed
of light in a vacuum, and similar constants of nature (Mises / ,
* From Review of Austrian Economics , no. ( ): – .
20 I

Part : Economics

p. ).55Or if such constants do exist, an economist could earn a great rep-

utation by demonstrating a few of them. No amount of cleverness with
econometrics can make the nonexistent exist after all.
One reason why no enduring “structural parameters” characterize the
economic system is that how people behave in markets, as in other aspects
of life, depends on their experiences and expectations and on what doc-
trines they have come to believe. (Here is one area of overlap between
Austrian economics and the rational-expectations school.) ese circum-
stances are inherently changeable. One implication warns against policies
whose success presupposes unrealistic kinds or degrees of knowledge. It
warns against overambition in attempting detailed central control.
Subjectivist economics points out, for example, what is lost when pol-
icy makes simplistic distinctions between necessities and luxuries or when,
unlike voluntary transactions, policy fails to take account of subtle differ-
ences between the circumstances and tastes of different people. (I leave
personal rights aside not because they are unimportant but because the
present topic is rather different.)
Examples abound, in ird World countries and elsewhere, of at-
tempts to conserve scarce foreign-exchange earnings for “essentials” by
exchange controls, multiple exchange rates, import quotas, and selective
import duties designed to limit or penalize the waste of foreign exchange
on “luxury” or “nonessential” imports.
e arguments offered for such controls, like arguments for consumer
rationing in wartime, are not always sheer nonsense. But subjectivist con-
siderations severely qualify them. It is impossible to make and implement
a clear distinction between luxuries and essentials. Suppose that a gov-
ernment tightly rations foreign exchange for pleasure cruises and travel
abroad but classifies oil as an essential import. Some of the oil may go
for heating at domestic resorts operating on a larger scale than if the
cruises had not been restricted. e restrictions may in effect divert factors
of production from other activities into providing recreation otherwise
obtainable at lower cost through foreign travel. Because of poor climate
at home, it may well be that the marginal units of foreign exchange spent
on imported oil go to satisfy wants of the same general sort—while satis-
fying them less effectively—as wants otherwise satisfied by foreign travel.
Restricting travel and supposedly nonessential imports is likely to pro-
mote imports of their substitutes and also divert domestic and imported
resources or materials into home production of substitutes. e diversions
may also impede exports that earn foreign exchange.
 Chapter : Why Subjectivism?

It is particularly dubious to try to distinguish between essential and

frivolous imports according to whether they serve production (or “eco-
nomic growth”) or mere consumption. All production supposedly aims
at satisfying human wants, immediately or ultimately. Producing machin-
ery or building factories is no more inherently worthy than producing
restaurant meals or nightclub entertainment, for the machinery or facto-
ries are pointless unless they can sooner or later yield goods or services
that do satisfy human wants. To favor production-oriented (or export-
oriented) imports over consumption-oriented imports is to prefer a round-
about achievement of ultimate consumer satisfactions to their more direct
achievement merely because of the greater roundaboutness. It is to con-
fuse ends and means.
People obtain their satisfactions in highly diverse ways (even altruis-
tic ways). Some policymakers evidently do not understand how the price
system brings into play the dispersed knowledge that people have about
their own tastes and circumstances. A journalist illustrated such misunder-
standing when badgering Alan Greenspan, then Chairman of the Coun-
cil of Economic Advisers, with questions about whether business firms
would continue producing essential goods when frivolous goods happened
to be more profitable. As Greenspan properly replied (in Mitchell ,
pp. – ), people differ widely in their tastes. Some choose to buy extraor-
dinary things and deliberately deprive themselves of other things generally
counted as necessities.
One might conceivably—though not conclusively—urge controls as
correctives for specific market distortions. Barring such identified dis-
tortions, subjectivist economists would let ultimate consumers appraise
“essentiality.” Sweeping philosophical comparisons are unnecessary. Peo-
ple can act on their own comparisons of the satisfactions they expect from
an additional dollar’s worth of this and that. Consumers and businessmen
can judge and act on the intensities of the wants that various goods can sat-
isfy, either directly or by contributing to further processes of production.
Standard theoretical reservations about this suggestion—arguments
for government discriminations in favor of some and against other par-
ticular goods and services—invoke the concepts of externalities, of merit
wants and merit goods, and of income redistribution. Yet how can policy-
makers be confident that supposed externalities are genuine and impor-
tant, that supposed merit wants really deserve cultivation, or that dis-
criminating among goods will accomplish the desired redistribution of
real income? Any one of many goods, considered by itself, might seem

74 76
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Part : Economics

deserving of special favor; yet how relatively deserving different goods

are may remain highly uncertain, particularly when no one knows just
how severely the diversion of resources into particular lines of production
will impair production in other lines that might even be more merito-
rious by the policymaker’s criteria. (Tunnel vision is a failing of policy-
makers not thoroughly familiar with the idea of general economic inter-
dependence.)
More fundamentally, particular goods do not possess qualities deserv-
ing special consideration globally, or by their very nature. On the con-
trary, usefulness or desirability is a relation between things and human
wants. e usefulness of something—specifically, its marginal utility—is
the smaller the more abundant the thing is. Ideally, decisions about adjust-
ing quantities of various things should consider their usefulness at the
margin. It is easy to imagine circumstances in which an additional dol-
lar’s worth or an additional ounce of penicillin or polio vaccine would
contribute less to human satisfaction than an additional unit of orchids.
e concept of priorities does not properly apply in the contexts con-
sidered here. For the reasons mentioned, and also in view of how the politi-
cal process works and of ample experience with controls, it is unrealistic to
expect the government to choose “social priorities” reasonably. Consider,
for example, the botch of energy policy, including the long record of subsi-
dizing energy consumption in travel and transport (through the underpric-
ing of road and airport facilities) and also including tax exemptions and
subsidized loans granted to rural electric cooperatives, even while govern-
ment officials plead for energy conservation.
Policies adopted or advocated during the energy crises of and
betray ignorance of subjectivist insights. Examples are rationing of gaso-
line not so much by price as by the inconvenience and apprehension of
having to hunt around for it and wait in long lines to buy it, or being
allowed to buy gasoline only on odd- or even-numbered days according
to one’s license-plate number. A former chairman of Inland Steel Com-
pany ( Joseph L. Block in Committee for Economic Development ,
pp. – ) suggested requiring each car owner to choose one day of the
week when he would be forbidden to drive. at prohibition, enforced
with appropriate stickers, would supposedly have eliminated some need-
less driving and encouraged use of public transportation. Another example
was a decision by the California Public Utilities Commission banning nat-
ural-gas heating of new swimming pools (Charlottesville Daily Progress,
February , p. ).
 Chapter : Why Subjectivism?

Such measures and proposals underrate the value of freedom and flex-
ibility. Arbitrary measures burden some people lightly and others heav-
ily because different people’s lives afford different scopes of substituting
away from the restricted consumption and make advance scheduling of
activities difficult and unrestricted flexibility important in widely differ-
ing degrees. In unrestricted voluntary transactions, by contrast, people
can allow for such differences.
A narrowly technological outlook is often linked with puritanical mor-
alizing. (I remember my maternal grandmother, who used to bewail the
waste of using a teabag only once if it could be made to serve twice and
of using and washing a large plate if the food could be crammed onto a
small plate.) Recovery techniques left too much oil and gas in the ground,
natural gas on the continental shelf was flared, and the prevailing practice
in coal mining left half of a seam in the ground merely because it was
needed there as a supporting column or because getting it all out was too
expensive—so went one complaint (Freeman , pp. – ). Energy
has been wasted by “too little” insulation of buildings.
Yet so-called waste was probably sensible at the lower energy prices of
the past. ere can be such a thing as too much conservation; for exam-
ple, producing aluminum for storm windows installed under tax incentives
even consumes energy in other directions. Ample heat and air condition-
ing brought comfort, and fast driving saved valuable time. Not having to
concentrate on ferreting out ways to conserve energy saved mental capac-
ity for other purposes. Now, at today’s higher prices, a dollar spent on
energy no longer buys as much comfort or saves as much time or thought
as before; and people respond accordingly. Conceivably, of course, the
energy prices of the past, distorted downward by interventions, may have
led people to consume more energy than they would have done at free-
market prices; but if so, the specific distortions should have been identified
and addressed. Moralizing about ways of consuming less was off the track.
Such moralizing almost regards waste as something perpetrated only
with material resources, not with people’s time or comfort or peace of
mind. Ironically, this strand of materialism sometimes occurs among peo-
ple who announce Galbraithian scorn for the alleged materialism of the
affluent society. Another apparent strand sometimes found in the attitude
of such people is self-congratulation on heroic hard-headedness in recog-
nizing necessary austerities. (Speaking at a conference in Beverly Hills on
April , Senator Gaylord Nelson welcomed the challenge of helping
to create the new and simpler lifestyles of the future.)
24 I

Part : Economics

Materialistic energy-conservation proposals illustrate a kind of think-

ing related to what F.A. Hayek ( ) has called scientism. It is something
quite different from science or the scientific outlook. One aspect of 1952
sci-
entism is the feeling that results somehow do not count unless they have
been deliberately arranged for. A person with the scientistic attitude does
not understand how millions of persons and companies, trading freely
among themselves, can express and arrange for satisfying the wants they
themselves consider most intense. He does not appreciate self-adjusting
processes, like someone’s decision to forgo a gas-heated swimming pool,
or any pool at all, in view of the prices to be paid. He assumes that a
grandmotherly state must take charge, and he performs feats of routine
originality in thinking of new ways for it to do so—as by requiring that
cars get miles to the gallon, by imposing standards for building insula-
tion, or by banning pilot lights in gas appliances. Tax gimmicks and ideas
are a dime a dozen—incentives for storm windows and solar heating and
the plowback of profits into oilfield development and what not. e cur-
rent, or recent, vogue for partial national economic planning under the
name of “industrial policy” provides further examples.
Subjectivist insights illuminate the issue of the military draft. (For
early discussions by University of Virginia Ph.D. graduates and gradu-
ate students, see Miller .) Many persons have advocated the draft
on the grounds that an all-volunteer force is too costly. ey understand
cost in an excessively materialistic and accounting-oriented way. In truth,
costs are subjective—unpleasantnesses incurred and satisfactions forgone.
In keeping down 30 monetary outlays, the draft conceals part of the costs and
shifts it from the taxpayers being defended to the draftees compelled to
serve at wages inadequate to obtain their voluntary service. Furthermore,
the draft increases total costs through inefficiency. It imposes unnecessar-
ily large costs on draftees who find military life particularly unpleasant or
whose foreclosed civilian pursuits are particularly rewarding to themselves
and others. At the same time it wastes opportunities to obtain relatively
low-cost service from men who happen to escape the draft but would have
been willing to serve at wages below those necessary to obtain voluntary
service from men in fact drafted. e opposite method—recruiting the
desired number of service men and women by offering wages adequate
to attract them as volunteers—brings to bear the knowledge that peo-
ple themselves have of their own abilities, inclinations, and alternative
opportunities. So doing, the market-oriented method holds down the
true, subjectively assessed, costs of staffing the armed forces. (Of course,

1968
 Chapter : Why Subjectivism?

considerations in addition to these also figure in arguments over the mili-

tary draft.)
Subjectivist insights help one understand why compensation at actual
market value for property seized under eminent domain probably will not
leave the former owner as well off as he had been. His having continued to
hold the property instead of having already sold it suggests that he valued
it more highly than the sales proceeds or other property purchasable with
those proceeds.
Neglect of subjectivism is central to the fallacy of “comparable worth.”
According to that doctrine, fashionable among feminists and intervention-
ists, the worth of work performed in different jobs can be objectively ascer-
tained and compared. People performing different jobs that are neverthe-
less judged alike, on balance, in their arduousness or pleasantness, their
requirements in ability and training, the degrees of responsibility involved,
and other supposedly ascertainable characteristics should receive the same
pay; and government, presumably, should enforce equal pay. Formulas
should replace wage-setting by voluntary agreements reached under the
influences of supply and demand.
is idea ducks the questions of how to ration jobs sought especially
eagerly at their formula-determined wages and how to prod people into
jobs that would otherwise go unfilled at such wages. It ducks the ques-
tions of what kind of economic system and what kind of society would
take the place of the free-market system, with its processes of coordinat-
ing decentralized voluntary activities. ( ough writing before compara-
ble worth became a prominent issue, Hayek , chap. , aptly warned
against displacing market processes by nonmarket assessments of entitle-
ments to incomes.) e comparable-worth doctrine neglects the ineffable
individual circumstances and subjective feelings that enter into workers’
decisions to seek or avoid particular jobs, employers’ efforts to fill them,
and consumers’ demands for the goods and services produced in them. Yet
wages and prices set through market processes do take account of indi-
vidual circumstances and personal feelings (a point I’ll say more about
later on).
Subjectivist economists recognize the importance of intangible assets,
including knowledge, a kind of “human capital.” ey recognize the scope
for ingenuity in getting around government controls of various kinds,
whereas the layman’s tacit case for controls involves a mechanistic con-
ception of the reality to be manipulated, without due appreciation of
human flexibility. Controls, and responses to them, destroy human capital
26 I

Part : Economics

by artificially hastening the obsolescence of knowledge; they impose the

costs of keeping abreast of the artificially changing scene and divert mate-
rial and intellectual resources, including inventiveness, from productive
employments. Credit-allocation measures and other controls on finan-
cial institutions, for example—even reserve requirements and interest-rate
ceilings—have bred innovations to circumvent them. Managers have to be
trained and other start-up costs borne for new institutions and practices,
and customers must spend time and trouble learning about them. Price
and wage controls and energy-conservation rules provide further illustra-
tions of such wastes.
Arbitrariness and unfairness figure among the costs of controls in-
tended to buck market forces. As controls become more comprehensive
and complex, their administrators are less able to base their decisions on
relatively objective criteria. Bureaucratic rules become more necessary and
decisions based on incomplete information less avoidable. Multiplication
of categories entitled to special treatment invites the pleading of special
interests. Even morality, another intangible asset, is eroded.
e complexity of detailed monitoring and enforcement suggests ap-
pealing for voluntary compliance, compliance with the spirit and not just
the letter of the regulations. (Controls over foreign trade and payments for
balance-of-payments purposes, such as President Johnson attempted in
the mid- s, provide still further examples; see Yeager .) Whether
compliance is avowedly voluntary, or whether ease of evasion makes com-
pliance voluntary in effect, such an approach tends to penalize public-
spirited citizens who do comply and gives the advantage to others. Exhort-
ing people to act against their own economic interest tends to undercut
the signaling and motivating functions of prices. How are people to know,
then, when it is proper and when improper to pursue economic gain?
To exhort people to think of compliance as in their own interest when
it plainly is not, or to call for self-sacrifice as if it were the essence of
morality, is to undercut the rational basis of morality and even undercut
rationality itself.
A kind of perverse selection results. Public-spirited car owners who
heed appeals for restraint in driving thereby leave more gasoline available,
and at a lower price than otherwise, to less public-spirited drivers. Sell-
ers who do comply with price ceilings or guidelines must consequently
turn away some customers unsatisfied, to the profit of black-marketeers
and other less scrupulous sellers. Eventually such effects become evident,
strengthening the idea that morality is for suckers and dupes.

1960
 Chapter : Why Subjectivism?

Subjectivists know better than to erect efficiency, somehow conceived,

into the overriding criterion either of particular processes or institutions
or of entire economic systems. e principle of comparative advantage
discredits the idea that each product should necessarily be produced wher-
ever it can be produced most efficiently in the technological sense. No pre-
sumption holds, furthermore, that any particular line of production neces-
sarily should be carried on in the technologically most advanced way; for
the resources required in such production are demanded by other indus-
tries also, where they may well contribute more at the margin to consumer
satisfactions, as judged by what consumers are willing to pay.
Efficiency in the sense of Pareto optimality is often taken as a cri-
terion of policy. Pareto efficiency is indeed a useful concept in teaching
and studying microeconomic theory. It is useful in contemplating out-
comes of the market process in the form of particular—but abstractly
conceived—allocations of resources and goods. Economists seldom if
ever face an occasion or opportunity to appraise concrete, specific alloca-
tions, in the real world. As Rutledge Vining properly emphasizes, legisla-
tors and their expert advisors necessarily are choosing among alternative
sets of legal and institutional constraints rather than among alternative
specific results or allocations. (See Vining and Yeager .) Such
constraints are rules of the game within which people strive to make the
most of their opportunities amidst ceaseless change in wants, resources,
and technology. e very point of having rules and institutions presup-
poses their having a certain stability and dependability, which would be
undermined by continual efforts to make supposedly optimal changes
in them.
What is useful in policy discussions, then, is not the supposed bench-
mark of Pareto efficiency but, rather, comparison of the economic and
social systems that alternative sets of rules lead to. If we must have a stan-
dard against which to appraise reality, we might well adopt the view of a
competitive market economy as a collection of institutions and practices
for gathering and transmitting information and incentives concerning not-
yet-exhausted opportunities for gains from trade (including “trade with
nature” through production or rearrangements of production).

Subjectivists recognize the many kinds of information that market prices

and processes bring to bear on decisions about production and consumption. 1985
28 I

Part : Economics

ese kinds include what F.A. Hayek ( ) called “knowledge of the par- 1945
ticular circumstances of time and place,” knowledge that could hardly be
codified in textbooks or assembled for the use of central planners, knowl-
edge that can be used, if at all, only by numerous individual “men on the
spot.” It includes knowledge about all sorts of details of running business
firms, including knowledge of fleeting local conditions. It includes what
people know about their own tastes and particular circumstances as con-
sumers, workers, savers, and investors. Subjectivist economists recognize
how such factors not only underlie the prices that consumers are prepared
to pay for goods but also underlie costs of production.
Each consumer decides how much of each particular good to buy
in view of the price of the good itself, the prices of other goods, his
income and wealth, and his own needs and preferences. Subject to qualifi-
cations about how possible and how worthwhile precise calculation seems,
he leaves no opportunity unexploited to increase his total satisfaction by
diverting a dollar from one purchase to another. Under competition, the
price of each good tends to express the total of the prices of the addi-
tional inputs necessary to supply an additional unit of that good. ese
resource prices tend, in turn, to measure the values of other marginal out-
puts sacrificed by diversion of resources away from their production. Prices
therefore tell the consumer how much worth of other production must be
forgone to supply him with each particular good. e money values of for-
gone alternative production tend, in turn, to reflect consumer satisfactions
expectedly obtainable from that forgone production. (I say “reflect”—take
account of—in order not to claim anything about actual measurement of
what is inherently unmeasurable. I speak only of tendencies, furthermore,
for markets never fully reach competitive general equilibrium.)
With prices bringing to their attention the terms of choice posed by
the objective realities of production possibilities and the subjective reali-
ties of other persons’ preferences, consumers choose the patterns of pro-
duction and resource use that they prefer. eir bidding tends to keep any
unit of a resource from going to meet a less intense willingness to pay for
its productive contribution (and thus the denial of a more intense willing-
ness). Ideally—in competitive equilibrium, and subject to qualifications
still to be mentioned—no opportunity remains unexploited to increase
the total value of things produced by transferring a unit of any resource
from one use to another. Changes in technology and consumer prefer-
ences always keep creating such opportunities afresh, but the profit motive
keeps prodding businessmen to ferret them out and exploit them.
 Chapter : Why Subjectivism?

To determine how resources go into producing what things in what

quantities, consumers need freedom to spend their incomes as they wish,
unregimented by actual rationing. But they need more: opportunities to
make choices at unrigged prices tending to reflect true production alter-
natives.
We could speak then of “consumers’ sovereignty,” but the term is a bit
narrow. Insofar as their abilities permit, people can bring their preferences
among occupations as well as among consumer goods to bear on the pat-
tern of production. In fact, investors’ preferences, including notions about
the morality and the glamor of different industries and companies, also
have some influence; and we might speak of “investors’ sovereignty” as
well. (See Rothbard , p. n. , and pp. – on what Rothbard
calls “individual sovereignty.”)
Suppose that many people craved being actors strongly enough to
accept wages below those paid in other jobs requiring similar levels of
ability and training. is willingness would help keep down the cost of
producing plays, and cheap tickets would draw audiences, maintaining
jobs in the theater. Suppose, in contrast, that almost everyone hated min-
ing coal. e high wages needed to attract miners would enter into the
production cost and price of coal, signaling power companies to build
hydroelectric or nuclear or oil-burning rather than coal-burning plants
and signaling consumers to live in warmer climates or smaller or better-
insulated houses than they would do if fuel 1962were cheaper.
452Such responses
12
would hold down the number of distasteful mining jobs to be filled. e
few workers still doing that work would be ones whose distaste for it was
relatively mild and capable of being assuaged by high wages.
No profound distinction holds between workers’ sovereignty and con-
sumers’ sovereignty or between getting satisfactions or avoiding dissatis-
factions in choosing what work to do and what goods to consume. Con-
sumer goods are not ultimate ends in themselves but just particular means
of obtaining satisfactions or avoiding dissatisfactions. People make their
personal tastes and circumstances count by how they act on the markets
for labor and goods alike.
Our broadened concept of consumers’ and workers’ sovereignty by no
means upsets the idea of opportunity cost. We need only recognize that
people choose not simply among commodities but rather among pack-
ages of satisfactions and dissatisfactions. e choice between additional
amounts of A and B is really a choice between satisfactions gained and
dissatisfactions avoided by people as consumers and producers of A and
30 I

Part : Economics

satisfactions gained and dissatisfactions avoided by people as consumers

and producers of B. Choosing package A costs forgoing package B. Ide-
ally, the prices of products A and B indicate the terms of exchange, so to
speak, between the entire combinations of satisfactions gained and dissat-
isfactions avoided at the relevant margins in connection with the two prod-
ucts. Prices reflect intimately personal circumstances and feelings as well
as physical or technological conditions of production and consumption.
None of this amounts to claiming that different persons’ feelings about
goods and jobs (and investment opportunities) can be accurately measured
and compared by price or in any other definite way. However, people’s
feelings do count in the ways that their choices are expressed and their
activities coordinated through the price system, and changes in their feel-
ings do affect the pattern of production in directions that make intuitively
good sense.
Clearly, then, economic theory need not assume that people act exclu-
sively or even primarily from materialistic motives. Pecuniary considera-
tions come into play, but along with others. As the laws of supply and
demand describe, an increase in the pecuniary rewards or charges—or
other rewards or costs—attached to some activity will increase or decrease
its chosen level, other incentives and disincentives remaining unchanged.
Money prices and changes in them can thus influence behavior and
promote coordination of the chosen behaviors of different people, even
though pecuniary considerations do not carry decisive weight and perhaps
not even preponderant weight.

e role of subjectivism in solving the diamond-and-water paradox, re-

placing the labor theory or other real-cost theories of value, and accom-
plishing the marginalist revolution of the s, is too well known to
require more than a bare reminder here. Subjectivism must be distin-
guished from importing psychology into economics (Mises / ,
pp. – , – ). Diminishing marginal utility is a principle of sensi-
ble management rather than of psychology: a person will apply a limited
amount of some good (grain, say, as in Menger / , pp. – ) to
what he considers its most important uses, and a larger and larger amount
will permit its application to successively less important uses also.
Subjectivists do not commit the error of John Ruskin, who thought
that “Whenever material gain follows exchange, for every plus there is a
 Chapter : Why Subjectivism?

precisely equal minus” (quoted in Shand , p. ). ey recognize that 1984

wealth is produced not only by physically shaping things or growing them
but also by exchanging them. In the words of Henry George ( / ,
pp. – ), who independently achieved several Austrian insights, “Each
of the two parties to an exchange ... [gets] something that is more valuable
to him than what he gives.... us there is in the transaction an actual
331 in the332
increase sum of wealth, an actual production of wealth.”
Subjectivists recognize nonmaterial elements in costs as well as de-
mands. Every price is determined by many circumstances classifiable
under the headings of “subjective factors” and “objective factors” (or
“wants” and “resources and technology”). An alternative classification dis-
tinguishes between demand factors and supply factors. is alternative is
not equivalent to the first classification because there is no reason to sup-
pose that subjective factors operate only on the demand side of a market
while objective factors dominate the supply side.
On the contrary, subjective factors operate on both sides. e supply
schedule of a good does not reflect merely the quantities of inputs tech-
nologically required for various amounts of output, together with given
prices of the inputs. e input prices are themselves variables determined
by bidding among various firms and lines of production in the light of the
inputs’ capabilities to contribute to producing goods valued by consumers.
Consumers’ subjective feelings about other goods thus enter into deter-
mining the money costs of supplying quantities of any particular product.
Subjective factors operate in both blades of Marshall’s scissors. (Mis-
leadingly, Marshall / , pp. , ff., had referred to a utility blade
and a cost blade, as if utility and cost were quite distinct.)
By the logic of a price system, then, money cost brings to the attention
of persons deciding on production processes and output volumes in any
particular line—and ultimately to the attention of its consumers—what
conditions prevail in all other sectors of the economy, including persons’
attitudes toward goods and employments. Money prices and costs convey
information about subjective conditions outside the direct ken of particu-
lar decisionmakers.
At this point the subjectivism of Austrian economists reinforces their
awareness of general economic interdependence and their concern with
coordination among the plans and actions of different people. ey are
wary (as many textbook writers seem not to be) of focusing so narrowly
on the choices of the individual household and individual firm as to detract
attention from the big picture.
32 I

Part : Economics

Recognizing the subjective aspects of cost, we gain insights into the

dubiousness of expecting prices to correspond to costs in any precise way.
Costs represent values of forgone alternatives: costs are intimately linked
with acts of choice.
Cost curves are no more objectively given to business firms than are
demand curves for their products. A large part of the task of entrepreneurs
and managers is to learn what the cost (and demand) curves are and to
press the cost curves down, so to speak, through inspired innovations in
technology, organization, purchasing, and marketing. Outsiders are in a
poor position to second-guess their decisions.
Subjectivists appreciate the role of expectations. Well before the
vogue of “rational expectations” in macroeconomics, Ludwig von Mises
( / , pp. – ) recognized that an inflationary policy could not
go on indefinitely giving real “stimulus” to an economy; people would
catch on to what was happening, and the supposed stimulus would dis-
sipate itself in price increases. Mises also argued ( / , p. ) that
disorders such as the corn-hog cycle would be self-corrective. Unless the
government protected farmers from the consequences of unperceptive or
unintelligent behavior, farmers would learn about the cycle, if it did in fact
occur; and by anticipating it would forestall it. ( ose who did not learn
would incur losses and be eliminated from the market.)
Much expressed nowadays are notions such as “the market’s” expecta-
tion of some future magnitude—the dollar-mark exchange rate in three
months, or whatever. Subjectivists are skeptical. ey understand that
“the1953
market” 1981 459
does not form expectations 460
or change light bulbs (“How
many right-wing economists does it take to change a light bulb?”) or do
anything else. People do, people acting and interacting on markets. Since
expectations are formed by people, they are understandably loose, diverse,
and changeable.
All this intertwines with the inherent unpredictability of future human
affairs. It is not even possible to make an exhaustive list of all possible out-
comes of some decision, let alone attach probability scores to outcomes
(Shackle , esp. p. ). Policymakers should take this point to heart
and restrain their optimism about being able to control events.
is is not to deny that some predictions can be made with warranted
confidence, notably the if-this-then-that predictions of economic theory
and of science in general. Foretelling the future is quite another matter.
Economists, like other people, have only limited time and energy. It is
reasonable for each one to stick to work exploiting his own comparative
 Chapter : Why Subjectivism?

advantages and hunches about fruitfulness and not let himself be badgered
into foretelling the unforetellable.
James Buchanan achieved one of the greatest triumphs of subjectivism
in demonstrating ( / ) that the burden of government spending
can indeed be largely shifted onto future generations by deficit financ-
ing through issue of bonds. e conventional wisdom among economists
(shared even by Ludwig von Mises, 1958 though not1999
by the general public)
had been unduly materialistic: the burden cannot be shifted through time,
since resources are used when they are used. Buchanan recognized that a
burden is something subjectively perceived. Persons who voluntarily give
up current command over resources in exchange for government bonds
that they find attractive suffer no burden in doing so. It is in the future
that people—in general, people other than the original bond-buyers—will
bear the burden of paying taxes to service the debt or of losing through
its inflationary or outright repudiation. Furthermore, bond-financed gov-
ernment deficits do affect allocation of resources in time by trenching
on private capital formation, thereby worsening future economic oppor-
tunities.

e ultrasubjectivist view of cost put forward by James Buchanan ( )

and writers in the London School tradition (some of whose articles are
reprinted in Buchanan and irlby / ) has been largely adopted by
Austrian economists (Vaughn and ; Seldon ).
In examining this view, we must avoid false presuppositions about how
words relate to things. It is not true that each word has a single definite
and unequivocal meaning and that it labels a specific thing or action or
relation objectively existing in the world. On the contrary, many words
have wide ranges of meaning. One way to learn what writers mean by
a word is to see what implications they draw from propositions contain-
ing it.
is is true of “cost” as interpreted by Buchanan and the London econ-
omists. ose writers associate particular policy positions with the fuzzi-
ness that they attribute to cost. ey heap scorn on cost-oriented rules for
managing enterprises.

Unaccountably, I somehow forgot to mention this achievement of Buchanan’s until

it was too late to change this article while it was being originally published.
34 I

Part : Economics

Advocates of such rules typically attribute important welfare proper-

ties to them. Probably the most prominent such rule is the one requir-
ing the output of an enterprise to be set at such a level that price equals
marginal costs. (In the same general cost-oriented family, however, would
be rules like the one that total revenue should just cover total cost.) One
strand of argument for socialism, in fact, is that socialized enterprises
could be made to follow such rules, unlike unregulated private enterprises.
Even under capitalism, such rules supposedly might be useful in framing
antimonopoly policy and regulating public utilities. ey might also figure
in other government economic interventions and in simulating market
results in nonmarket settings, as in tort settlements.
e case for socialism and milder government economic interventions
can be weakened, then, by discrediting the measurability and even the con-
ceptual definiteness of “cost.” is, I conjecture, is a clue to the ultrasubjec-
tivist view of the concept. “Cost,” says Buchanan ( , pp. – ), “is that
which the decisionmaker sacrifices or gives up when he makes a choice. It
consists in his own evaluation of the enjoyment or utility that he antici-
pates having to forego as a result of selection among alternative courses of
action.” If cost can thus be portrayed as a thoroughly subjective concept or
magnitude, if no one but the individual decisionmaker (entrepreneur or
manager) can know what cost is or was, and if such knowledge is ineffable
and practically incommunicable, then no outside authority can reasonably
impose cost-oriented rules on him. e case for displacing or overriding
the market dissolves.
is line of argument has some merit. As already observed, cost curves
do not objectively exist. Instead, business decisionmakers have the task of
discovering or inventing them and modifying them by happy innovations.
Unfortunately, as a later section of this article shows, Buchanan and the
London economists carry their subjectivist line too far and so tend to dis-
credit it.
Subjectivist insights about expectations have other notable policy im-
plications. e history of energy policy, and of politicians’ demagogy, pro-
vides reason for expecting future repetition of past infringements on prop-
erty rights. Firms and investors must recognize that if they make decisions
that turn out in some future energy crisis to have been wise—for exam-
ple, stockpiling oil, cultivating nonconventional energy sources, adopting
conservation measures, or building flexibility into their facilities and oper-
ations to be able to cope relatively well with energy squeezes—then they
will not be allowed to reap exceptional profits from their risk-bearing,
 Chapter : Why Subjectivism?

their correct hunches, and their good luck. ey will be victimized

by seizure of oil stocks, by adverse treatment under rationing schemes,
by price controls, or in other ways. Government reassurances, even if
made, would nowadays not be credible. e benefits of diverse private
responses to diverse expectations about energy supplies are thus partly
forestalled.
is example reminds subjectivists of a broader point about remote
repercussions of particular policies, repercussions remote in time or in
economic sector. A violation of property rights may seem the econom-
ical and expedient policy in the individual case. Yet in contributing to
an atmosphere of uncertainty, it can have grave repercussions in the
long run.
Because expectations influence behavior, a policy’s credibility condi-
tions its effectiveness, as the rational-expectations theorists, and William
Fellner ( ) before them, have emphasized. e question of the with-
drawal pangs of ending an entrenched price inflation provides an example.
When money-supply growth is slowed or stopped, the reduced growth of
nominal income is split between price deceleration and slowed real pro-
duction and employment. Expectations affect how favorable or unfavor-
able this split is. If the anti-inflation program is not credible—if wage
negotiators and price-setters think that the policymakers will lose their
nerve and switch gears at the first sign of recessionary side effects—then
those private parties will expect the inflation to continue and will make
their wage and price decisions accordingly; and the monetary slowdown
will bite mainly on real activity. If, on the contrary, people are convinced
that the authorities will persist in monetary restriction indefinitely no mat-
ter how bad the side-effects, so that inflation is bound to abate, then the
perceptive price-setter or wage-negotiator will realize that if he neverthe-
1976 increases at the same old pace, he will find himself
less persists in making
out ahead of the installed inflationary procession and will lose customers
or jobs. People will moderate their price and wage demands, making the
split relatively favorable to continued real activity.
It is only superficially paradoxical, then, that in two alternative situa-
tions with the same degree of monetary restraint, the situation in which
the authorities are believed ready to tolerate severe recessionary side-
effects will actually exhibit milder ones than the situation in which the
authorities are suspected of irresolution. Subjectivists understand how
intangible factors like these can affect outcomes under objectively simi-
lar conditions.
36 I

Part : Economics

Capital and interest theory is a particular case or application of general

value theory, but its subjectivist aspects can conveniently occupy a section
of their own.
Subjectivist insights help dispel some paradoxes cultivated by neo-
Ricardians and neo-Marxists at Cambridge University. ese paradoxes
seem to impugn standard economic theory (particularly the marginal-
productivity theory of factor remuneration), and by implication they call
the entire logic of a market economy into question.
Reviewing the paradoxes in detail is unnecessary here (see Yeager
and Garrison ). One much-employed arithmetical example describes
two alternative techniques for producing a definite amount of some prod-
uct. ey involve different time-patterns of labor inputs. In each tech-
nique, compound interest accrues, so to speak, on the value of invested
labor. Technique A is cheaper at interest rates above percent, B is
cheaper at rates between and percent, and A is cheaper again at
rates below percent.
If a decline of the interest rate through one of these two critical levels
brings a switch from the less to the more capital-intensive of the two tech-
niques, which seems normal enough, then the switch to the other tech-
nique as the interest rate declines through the other switch point is para-
1979 in the opposite direction, an increased
doxical. If we view the latter switch
interest rate prompts a more intensive use of capital. Capital intensity can
respond perversely to the interest rate.
Examples of such perversity seem not to depend on trickery in measur-
ing the stock of capital. e physical specifications of a technique, includ-
ing the timing of its inputs and its output, stay the same regardless of the
interest rate and regardless of whether the technique is actually in use. If
one technique employs physically more capital than the other in relation
to labor or to output at one switch point, then it still employs more at any
other interest rate. is comparison remains valid with any convention
for physically measuring the amount of capital, provided 50 only that 100
one
does not change measurement conventions in mid-example. If the capital
50
intensities of the two techniques are such that the switch between them
at one critical interest rate is nonparadoxical, then the switch at the other
must be paradoxical—a change in capital intensity in the same direction as
the interest rate. We cannot deny perversity at both switch points—unless
we abandon a purely physical conception of capital.
 Chapter : Why Subjectivism?

e paradox-mongers commit several faults. ey slide from compar-

ing alternative static states into speaking of changes in the interest rate
and of responses to those changes. ey avoid specifying what supposedly
determines the interest rate and what makes it change.
e key to dispelling the paradoxes, however, is the insight that capi-
tal—or whatever it is that the interest rate is the price of—cannot be mea-
sured in purely physical terms. One must appreciate the value aspect—the
subjective aspect—of the thing whose price is the interest rate. It is conve-
nient to conceive of that thing as a factor of production. Following Cassel
( / , pp. ff. and passim), we might name it “waiting.” It is the tying
up of value over time, which is necessary in all production processes. ( is
conceptualization is “convenient” not only because it conforms to reality
and because it dispels the paradoxes but also because it displays parallels
between how the interest rate and other factor prices are determined and
what their functions are: it brings capital and interest theory comfortably
into line with general microeconomic theory.)
In a physically specified production process, a reduced interest rate not
only is a cheapening of the waiting (the tying up of value over time) that
1903 be done
must 1971but also reduces
41 its required value-amount. It reduces the
interest element in the notional prices of semifinished and capital goods
for whose ripening into final consumer goods and services still further
waiting must be done. Increased thrift is productive not only because it
supplies more of the waiting required for production but also because, by
lowering the interest rate, it reduces the amount of waiting required by
any physically specified technique.
e amounts of waiting required by alternative physically specified
techniques will in general decline in different degrees, which presents
the possibility of reswitching between techniques, as in the example men-
tioned. When a decline in the interest rate brings an apparently perverse
switch to a technique that is less capital-intensive by some physical crite-
rion, the explanation is that the decline, although reducing the waiting-
intensities of both techniques, reduces them differentially in such a way
as to bring a larger reduction in the overall expense of producing by the
adopted technique.
Preconceived insistence on measuring all factor quantities and factor-
intensities in purely physical terms clashes with the fact of reality—or
arithmetic—that the amount of tying up of value over time required in
achieving a physically specified result does indeed depend on that factor’s
own price. Not only the waiting-intensity of a physically specified process
38 I

Part : Economics

but also the relative waiting-intensities of alternative processes really are

affected by the interest rate. When a switch of technique occurs, the tech-
nique adopted really is the more economical on the whole, the inputs,
waiting included, being valued at their prices. When a rise in the interest
rate triggers a switch of techniques, the displaced one has become rela-
tively too waiting-intensive to remain economically viable. It is irrelevant
as a criticism of economic theory that by some other, inapplicable, criterion
the displaced technique counts as less capital-intensive.
Further discussion of the supposed paradoxes would display parallels
between reswitching and the conceivable phenomenon of multiple inter-
nal rates of return in an investment option, which is hardly mysterious
at all (Hirshleifer , pp. – ). Already, though, I’ve said enough to
show how a subjectivist conceptualization of the factor whose price is the
interest rate can avoid fallacies flowing from a materialist or objective con-
ceptualization.

“ ”

On a few points, some Austrian economists may not have been subjec-
tivist enough. Murray Rothbard ( , pp. – ) seems to think that a
contract under which no property has yet changed hands—for example,
an exchange of promises between a movie actor and a studio—is somehow
less properly enforceable than a contract1970under which some 77 payment
81 has
already been made. Blackmail is a less actionable offense than extortion
through application or threat of physical force ( , p. n. ). If a
villain compels me to sell him my property at a mere token price under
threat of ruining my reputation and my business by spreading vicious but
plausible lies, his action is somehow less of a crime or tort than if he had
instead threatened to kick me in the shins or trample one of my tomato
plants (Rothbard , esp. pp. – , – , and personal correspon-
dence). e material element in a transaction or a threat supposedly makes
a great difference.
I may be at fault in not grasping the distinctions made in these
examples, but it would be helpful to have further explanation of what
superficially seems like an untypical lapse from subjectivism into materi-
alism.
Far more common is the lapse into overstating the subjectivist posi-
tion so badly as to risk discrediting it. F.A. Hayek is not himself to blame,
but a remark of his ( , p. ) has been quoted ad nauseam (for example 1962
 Chapter : Why Subjectivism?

by Ludwig Lachmann in Spadaro 1978

, p. ; Walter Grinder in his intro- 1
duction to Lachmann , p. ; and Littlechild , p. ). It has had a
1977 bear. “It23is probably no
significance attributed to it that it simply cannot
exaggeration to say that every important advance in economic theory dur-
ing the last hundred years was a further step in the consistent application
of subjectivism.”
is proposition of doctrinal history could be strictly correct without
implying that every subjectivist step was an important advance. Moreover,
past success with extending subjectivism in certain degrees and directions
does not imply that any and all further extensions constitute valid contri-
butions to economics.
A theorist is not necessarily entitled to take pride in being able to boast,
“I am more subjectivist than thou.” More important than subjectivism for
its own sake is getting one’s analysis straight.
e most sweeping extensions of subjectivism occur in remarks about
a purely subjective theory of value, including a pure time-preference the-
ory of the interest rate. Closely related remarks scorn the theory of mutual
determination of economic magnitudes, the theory expounded by systems
of simultaneous equations of general equilibrium. e ultrasubjectivists
insist on monocausality instead. Causation supposedly runs in one direc-
tion only, from consumers’ assessments of marginal utility and value and
the relative utilities or values of future and present consumption to prices
and the interest rate and sectoral and temporal patterns of resource allo-
cation and production (Rothbard , pp. – ).
Taken with uncharitable literalness, the ultrasubjectivist slogans imply
that people’s feelings and assessments have everything to do and the real-
ities of nature, science, and technology have nothing to do with deter-
mining prices and interest rates and all interrelated economic magnitudes.
Actually, these objective realities do interact with people’s tastes. ey con-
dition how abundant various resources and goods are, or could be made
to be, and so help determine marginal utilities.
For two reasons I know that the ultrasubjectivists do not really believe
all they say. First, the propositions in question, taken literally, are too pre-
posterous for anyone to believe. Second, subjectivist writings sometimes
discuss production functions, the principle of diminishing marginal phys-
ical product, and other physical relations, conceding some importance to
such matters.
What I object to, then, is not so much substantive beliefs as mislead-
ing language, language that sometimes misleads even its users, language
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Title: A Guide to the Scientific Knowledge of Things Familiar

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*** START OF THE PROJECT GUTENBERG EBOOK A GUIDE TO THE

SCIENTIFIC KNOWLEDGE OF THINGS FAMILIAR ***
 A GUIDE
TO THE
SCIENTIFIC KNOWLEDGE
OF
THINGS FAMILIAR;

BY
THE REV. DR. BREWER,
TRINITY HALL, CAMBRIDGE,
HEAD MASTER OF KING’S COLLEGE SCHOOL,
NORWICH,
IN UNION WITH KING’S COLLEGE, LONDON.

LONDON:
JARROLD AND SONS, 47, ST. PAUL’S CHURCHYARD,
ALSO HAMILTON AND CO., SIMPKIN AND CO.,
AND WHITTAKER AND CO.
 PREFACE.
Of all science, none is more generally interesting than that which
explains the common phenomena of life. We see that salt and snow
are both white, a rose red, leaves green, and the violet a deep
purple; but how few persons ever ask the reason why! We know that
a flute produces a musical sound, and a cracked bell a discordant
one—that fire is hot, ice cold, and a candle luminous—that water
boils when subjected to heat, and freezes from cold; but when a
child looks up into our face and asks us “why,”—how many times is it
silenced with a frown, or called “very foolish for asking such silly
questions!” The object of the present book is to explain about 2000
of these “silly questions” (which are often more easily asked than
answered) in language so simple that a child may understand it, yet
not so childish as to offend the scientific; and in order that the
answers may be strictly correct, not only the most approved modern
authors have been consulted, but the manuscript has been
submitted sheet by sheet to the revision of two gentlemen of
acknowledged reputation for scientific attainments. To the Rev. A.
Bath Power, M. A. especially, great obligation is due, for a careful
revision of the whole manuscript, for many excellent hints, and
useful additions. In conclusion, so much diligence has been
bestowed upon this little work for nearly ten years, so much useful
information has been supplied by scientific friends, and so minute a
revision has been made of every answer, that it is no presumption to
express a hope that this “Guide to the Scientific Knowledge of
Things Familiar” will become generally useful and acceptable, not
only to the young, but to those advanced to maturer life.
In this work some questions occur more than once, because they
serve to illustrate different principles; and whenever cognate
questions occur, the answers have been rendered as similar as
possible, in order to assist the memory of the learner.
 SUBJECTS OF THE CHAPTERS.
PART I.—HEAT.
PAGE
I. The Sun a source of heat 2
II. Electricity a source of heat 3
3-
Thunder and lightning
29
III. Chemical action a source of heat 30
III.—Combustion 36
IV.—Smoke and smoky chimneys 59
V.—Lamps and candles 74
VI.—Animal heat 83
VII. Mechanical action a source of heat 95
VII.—Percussion 95
VIII.—Friction 98
VIII.—Compression 102
IX. Effects of heat 103
X.—Expansion 103
XI.—Liquefaction 126
XI.—Vaporization (clouds) 127
XII.—Evaporation 156
XIII. Communication of heat 164
XIII.—Conduction 164
XIV.—Absorption 184
XV.—Reflection 192
XVI.—Radiation (dew) 195
XVII.—Convection (boiling) 231

PART II.—AIR.
 XVIII. Air 240
Rust 257
Tarnish 259
XIX. Carbonic acid gas 264
Froth. Effervescence. Fermentation, &c. 269
XX. Carburetted hydrogen gas 279
Fire damp 280
Safety lamp 281
XXI. Phosphuretted hydrogen gas 283
Ignis fatuus 285
Ghosts 286
XXII. Wind 287
XXIII. Barometer 317
Ten special Rules 319
XXIV. Snow. Hail. Rain 331
XXV. Water 342
XXVI. Ice 349
Frost 357
Freezing mixtures 360
XXVII. Light 363
Reflection. Telescopes. Refraction 386
Spectacles 389
Rainbows 394
Colour 399
XXVIII. Sound 409
Ear trumpets 415
Echoes 416
XXIX. Miscellaneous 419
Attraction. Anti-putrescents. Sleep.
424
Dreams.
Glossary 426
Index 427
PART I.
HEAT.
 INTRODUCTION.

Q. What is heat?
A. The sensation of warmth.

Q. How is this sensation produced?

A. When we touch a substance of higher temperature than
ourselves, the warmer substance keeps parting with its heat, till
both are of equal temperature.

Q. What is that “stream of heat” called, which flows thus, from

one body, to another?
A. Calo’ric. Caloric, therefore, is the matter of heat, which
passes from body to body; but Heat is the sensation, of
warmth, produced by the influx of Calo’ric.

Q. What are the four principal sources of heat?

A. 1.—The Sun. 2.—Electricity. 3.—Chemical Action: and 4.—
Mechanical Action.

Q. What are the principal effects of heat?

A. Expansion, Liquefaction, Vaporization, and Ignition.
 CHAPTER I.

Q. What is the principal source of Heat?

A. The Sun.

Q. Why do burning glasses set fire to substances submitted to

their power?
A. The rays of the sun, collected by the Burning Glass, are all
bent to one point, called the “focus;” thus the heat and light,
(which should be diffused over the whole glass,) being gathered
together into one point, are very greatly increased.

Q. Why is there a dark rim round this focus?

A. Because the rays of light, which should have fallen there, are
bent into the focus, and the space around, (being deprived of
these rays) is accordingly darkened.
Q. Are all the rays bent into one point?
A. No, not quite all: and, therefore, the rim round the focus is
only slightly shadowed.
 CHAPTER II.

Q. What is the second chief source of heat?

A. Electricity.

Q. What is lightning?

A. Lightning is only an Electric Spark, taken from the clouds.

Q. What causes the discharge of an electric cloud?

A. When a cloud, overcharged with electric fluid, approaches
another which is under-charged, the fluid rushes from the
former into the latter, till both have the same quantity.

Q. Is there any other cause of lightning, besides the one just

mentioned?
A. Yes; sometimes mountains, trees, and steeples, will
discharge a lightning cloud floating near; and sometimes
electric fluid rushes out of the earth, into the clouds.

Q. What produces electricity in the clouds?

A. 1st—The evaporation from the earth’s surface.

2ndly—The chemical changes perpetually going on: and
3rdly—Currents of air of unequal temperature, excite electricity
by friction, as they pass by each other.

Q. How high are the lightning-clouds from the earth?

A. Electrical clouds are the lowest of all clouds; they are rarely
more than 700 yards above the ground; and sometimes, they
actually touch the earth with one of their edges.

Q. How high are the clouds generally?

A. In a fine day, the clouds are often 4 or 5 miles above our
head; but the average height of the clouds is from 1-1/2 to 2
miles.
Q. Why is lightning sometimes forked?

A. When the lightning-cloud is a long way off, the resistance of

the air is so great, that the electrical current is diverted into a
zig-zag course.

Q. Why does the resistance of the air make the lightning zig-
zag?
A. As the lightning condenses the air, in the immediate advance
of its path; it keeps flying from side to side, in order to pass
where there is the least resistance.

Q. How does lightning condense the air in the immediate

advance of its path?
A. The air is condensed by the rapidity of the lightning-flash.

Q. Why is forked lightning more dangerous than a straight flash?

A. Whatever resists the flash, diverts its course; and when
terrestrial objects offer resistance to the current, they are in
great danger of being destroyed.
Q. Why are there sometimes two flashes of forked lightning at
the same moment?
A. Sometimes (in very severe storms) a flash of lightning will
divide into two or more parts; and then each branch assumes
the zig-zag form.

Q. Why is the flash sometimes quite straight?

A. When the lightning-cloud hovers near the earth, as the flash

meets with very little resistance, it is not diverted; or (in other
words) the flash is straight.

Q. What is the cause of sheet lightning?

A. It is only the reflection of distant flashes, not distinctly

visible: and sometimes several flashes (from different clouds)
intermingle, and form one vast blaze or sheet of lightning.

Q. Which form of lightning is the most dangerous?

A. The ball of fire is by far the most dangerous; and the zig-zag
lightning is next in danger. Sheet lightning is not often attended
with danger.

Q. Why are balls of fire so very dangerous?

A. Because (whenever they fall) much mischief is occasioned by
their bursting, which they always do, with an explosion like that
of a cannon.

Q. Do these balls of lightning ever run along the ground?

A. Yes; they often run a considerable way along the ground,
then stop for a little time, and burst in numberless pieces:
sometimes each of these pieces will explode; and at other
times, the whole ball will burst at once, producing most
mischievous consequences.

Q. What mischief will these balls of fire produce?

A. They will set houses and barns on fire; and kill all cattle and
human beings, which happen to be in their course.
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