Human Action: A Treatise on Economics

by Ludwig VonMises

  Daily experience teaches people that the exchange ratios of the market are mutable. One would assume that their ideas about prices would take full account of this fact. Nevertheless all popular notions of production and consumption, marketing and prices are more or less contaminated by a vague and contradictory notion of price rigidity. The layman is prone to consider the preservation of yesterday’s price structure both as normal and as fair, and to condemn changes in the exchange ratios as a violation of the rules of nature and of justice.

  It would be a mistake to explain these popular beliefs as a precipitate of old opinions conceived in earlier ages of more stable conditions of production and marketing. It is questionable whether or not prices were less changeable in those older days. On the contrary, it could rather be asserted that the merger of local markets into larger national markets, the final emergence of a world embracing world market, and the evolution of commerce aiming at continuously supplying the consumers have made price changes less frequent and less sharp. In precapitalistic times there was more stability in technological methods of production, but there was much more irregularity in supplying the various local markets and in adjusting supply to their changing demands. But even if it were true that prices were somewhat more stable in a remote past, it would be of little avail for our age. The popular notions about money and money prices are not derived from ideas formed in the past. It would be wrong to interpret them as atavistic remnants. Under modern conditions every individual is daily faced with so many problems of buying and selling that we are right in assuming that his thinking about these matters is not simply a thoughtless reception of traditional ideas.

  It is easy to understand why those whose short-run interests are hurt by a change in prices resent such changes, emphasize that the previous prices were not only fairer but also more normal, and maintain that price stability is in conformity with the laws of nature and of morality. But every change in prices furthers the short-run interests of other people. Those favored will certainly not be prompted by the urge to stress the fairness and normalcy of price rigidity.

  Neither atavistic reminiscences nor the state of selfish group interests can explain the popularity of the idea of price stability. Its roots are to be seen in the fact that notions concerning social relations have been constructed according to the pattern of the natural sciences. The economists and sociologists who aimed at shaping the social sciences according to the pattern of physics or physiology only indulged in a way of thinking which popular fallacies had adopted long before.

  Even the classical economists were slow to free themselves from this error. With them value was something objective, i.e., a phenomenon of the external world and a quality inherent in things and therefore measurable. They utterly failed to comprehend the purely human and voluntaristic character of value judgments. As far as we can see today it was Samuel Bailey who first disclosed what is going on in preferring one thing to another.1 But his book was overlooked as were the writings of other precursors of the subjective theory of value.

  It is not only a task of economic science to discard the errors concerning measurability in the field of action. It is no less a task of economic policy. For the failures of present-day economic policies are to some extent due to the lamentable confusion brought about by the idea that there is something fixed and therefore measurable in interhuman relations.

  4. Stabilization

  An outgrowth of all these errors is the idea of stabilization.

  Shortcomings in the governments’ handling of monetary matters and the disastrous consequences of policies aimed at lowering the rate of interest and at encouraging business activities through credit expansion gave birth to the ideas which finally generated the slogan “stabilization.” One can explain its emergence and its popular appeal, one can understand it as the fruit of the last hundred and fifty years’ history of currency and banking, one can, as it were, plead extenuating circumstances for the error involved. But no such sympathetic appreciation can render its fallacies any more tenable.

  Stability, the establishment of which the program of stabilization aims at, is an empty and contradictory notion. The urge toward action, i.e., improvement of the conditions of life, is inborn in man. Man himself changes from moment to moment and his valuations, volitions, and acts change with him. In the realm of action there is nothing perpetual but change. There is no fixed point in this ceaseless fluctuation other than the eternal aprioristic categories of action. It is vain to sever valuation and action from man’s unsteadiness and the changeability of his conduct and to argue as if there were in the universe eternal values independent of human value judgments and suitable to serve as a yardstick for the appraisal of real action.2

  All methods suggested for a measurement of the changes in the monetary unit’s purchasing power are more or less unwittingly founded on the illusory image of an eternal and immutable being who determines by the application of an immutable standard the quantity of satisfaction which a unit of money conveys to him. It is a poor justification of this ill-thought idea that what is wanted is merely to measure changes in the purchasing power of money. The crux of the stability notion lies precisely in this concept of purchasing power. The layman, laboring under the ideas of physics, once considered money as a yardstick of prices. He believed that fluctuations of exchange ratios occur only in the relations between the various commodities and services and not also in the relation between money and the “totality” of goods and services. Later, people reversed the argument. It was no longer money to which constancy of value was attributed, but the “totality” of things vendible and purchasable. People began to devise methods for working up complexes of commodity units to be contrasted to the monetary unit. Eagerness to find indexes for the measurement of purchasing power silenced all scruples. Both the doubtfulness and the incomparability of the price records employed and the arbitrary character of the procedures used for the computation of averages were disregarded.

  Irving Fisher, the eminent economist, who was the champion of the American stabilization movement, contrasts with the dollar a basket containing all the goods the housewife buys on the market for the current provision of her household. In the proportion in which the amount of money required for the purchase of the content of this basket changes, the purchasing power of the dollar has changed. The goal assigned to the policy of stabilization is the preservation of the immutability of this money expenditure.3 This would be all right if the housewife and her imaginary basket were constant elements, if the basket were always to contain the same goods and the same quantity of each and if the role which this assortment of goods plays in the family’s life were not to change. But we are living in a world in which none of these conditions is realized.

  First of all there is the fact that the quality of the commodities produced and consumed changes continuously. It is a mistake to identify wheat with wheat, not to speak of shoes, hats, and other manufactures. The great price differences in the synchronous sales of commodities which mundane speech and statistics arrange in the same class clearly evidence this truism. An idiomatic expression asserts that two peas are alike; but buyers and sellers distinguish various qualities and grades of peas. A comparison of prices paid at different places or at different dates for commodities which technology or statistics call by the same name, is useless if it is not certain that their qualities—but for the place difference—are perfectly the same. Quality means in this connection: all those properties to which the buyers and would-be-buyers pay heed. The mere fact that the quality of all goods and services of the first order is subject to change explodes one of the fundamental assumptions of all index number methods. It is irrelevant that a limited amount of goods of the higher orders— especially metals and chemicals which can be uniquely determined by a formula—are liable to a precise description of their characteristic features. A measurement of purchasing power would have to rely upon the prices of the goods and services of the first order and, what is more, of all of t
hem. To employ the prices of the producers’ goods is not helpful because it could not avoid counting the various stages of the production of one and the same consumers’ good several times and thus falsifying the result. A restriction to a group of selected goods would be quite arbitrary and therefore vicious.

  But even apart from all these insurmountable obstacles the task would remain insoluble. For not only do the technological features of commodities change and new kinds of goods appear while many old ones disappear. Valuations change too, and they cause changes in demand and production. The assumptions of the measurement doctrine would require men whose wants and valuations are rigid. Only if people were to value the same things always in the same wav, could we consider price changes as expressive of changes in the power of money to buy things.

  As it is impossible to establish the total amount of money spent at a given fraction of time for consumers’ goods, statisticians must rely upon the prices paid for individual commodities. This raises two further problems for which there is no apodictic solution. It becomes necessary to attach to the various commodities coefficients of importance. It would be manifestly wrong to let the prices of various commodities enter into the computation without taking into account the different roles they play in the total system of the individuals’ households. But the establishment of such proper weighting is again arbitrary. Secondly, it becomes necessary to compute averages out of the data collected and adjusted. But there exist different methods for the computation of averages. There are the arithmetic, the geometric, the harmonic averages, there is the quasi-average known as the median. Each of them leads to different results. None of them can be recognized as the unique way to attain a logically unassailable answer. The decision in favor of one of these methods of computation is arbitrary.

  If all human conditions were unchangeable, if all people were always to repeat the same actions because their uneasiness and their ideas about its removal were constant, or if we were in a position to assume that changes in these factors occurring with some individuals or groups are always outweighed by opposite changes with other individuals or groups and therefore do not affect total demand and total supply, we would live in a world of stability. But the idea that in such a world money’s purchasing power could change is contradictory. As will be shown later, changes in the purchasing power of money must necessarily affect the prices of different commodities and services at different times and to different extents; they must consequently bring about changes in demand and supply, in production and consumption.4 The idea implied in the inappropriate term level of prices, as if—other things being equal—all prices could rise or drop evenly, is untenable. Other things cannot remain equal if the purchasing power of money changes.

  In the field of praxeology and economics no sense can be given to the notion of measurement. In the hypothetical state of rigid conditions there are no changes to be measured. In the actual world of change there are no fixed points, dimensions, or relations which could serve as a standard. The monetary unit’s purchasing power never changes evenly with regard to all things vendible and purchasable. The notions of stability and stabilization are empty if they do not refer to a state of rigidity and its preservation. However this state of rigidity cannot even be thought out consistently to its ultimate logical consequences; still less can it be realized.5 Where there is action, there is change. Action is a lever of change.

  The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred. In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life. A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell. She has little use for computations disregarding changes both in quality and in the amount of goods which she is able or permitted to buy at the prices entering into the computation. If she “measures” the changes for her personal appreciation by taking the prices of only two or three commodities as a yardstick, she is no less “scientific” and no more arbitrary than the sophisticated mathematicians in choosing their methods for the manipulation of the data of the market.

  In practical life nobody lets himself be fooled by index numbers. Nobody agrees with the fiction that they are to be considered as measurements. Where quantities are measured, all further doubts and disagreements concerning their dimensions cease. These questions are settled. Nobody ventures to argue with the meteorologists about their measurements of temperature, humidity, atmospheric pressure, and other meteorological data. But on the other hand nobody acquiesces in an index number if he does not expect a personal advantage from its acknowledgment by public opinion. The establishment of index numbers does not settle disputes; it merely shifts them into a field in which the clash of antagonistic opinions and interests is irreconcilable.

  Human action originates change. As far as there is human action there is no stability, but ceaseless alteration. The historical process is a sequence of changes. It is beyond the power of man to stop it and to bring about an age of stability in which all history comes to a standstill. It is man’s nature to strive after improvement, to beget new ideas, and to rearrange the conditions of his life according to these ideas.

  The prices of the market are historical facts expressive of a state of affairs that prevailed at a definite instant of the irreversible historical process. In the praxeological orbit the concept of measurement does not make any sense. In the imaginary—and, of course, unrealizable? state of rigidity and stability there are no changes to be measured. In the actual world of permanent change there are no fixed points, objects, qualities or relations with regard to which changes could be measured.

  5. The Root of the Stabilization Idea

  Economic calculation does not require monetary stability in the sense in which this term is used by the champions of the stabilization movement. The fact that rigidity in the monetary unit’s purchasing power is unthinkable and unrealizable does not impair the methods of economic calculation. What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference. The endeavors to expand the quantity of money in circulation either in order to increase the government’s capacity to spend or in order to bring about a temporary lowering of the rate of interest disintegrate all currency matters and derange economic calculation. The first aim of monetary policy must be to prevent governments from embarking upon inflation and from creating conditions which encourage credit expansion on the part of banks. But this program is very different from the confused and self-contradictory program of stabilizing purchasing power.

  For the sake of economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money. Gold and, up to the middle of the nineteenth century, silver served very well all the purposes of economic calculation. Changes in the relation between the supply of and the demand for the precious metals and the resulting alterations in purchasing power went on so slowly that the entrepreneur’s economic calculation could disregard them without going too far afield. Precision is unattainable in economic calculation quite apart from the shortcomings emanating from not paying due consideration to monetary changes.6 The planning businessman cannot help employing data concerning the unknown future; he deals with future prices and future costs of production. Accounting and bookkeeping in their endeavors to establish the result of past action are in the same position as far as they rely upon the estimation of fixed equipment, inventories, and receivables. In spite of all these uncertainties economic calculation can achieve its tasks. For these uncertainties do not stem from deficiencies of the system of calculation. They are inherent in the essence
of acting that always deals with the uncertain future.

  The idea of rendering purchasing power stable did not originate from endeavors to make economic calculation more correct. Its source is the wish to create a sphere withdrawn from the ceaseless flux of human affairs, a realm which the historical process does not affect. Endowments which were designed to provide in perpetuity for an ecclesiastic body, for a charitable institution, or for a family were long established in land or in disbursement of agricultural products in kind. Later annuities to be settled in money were added. Endowers and beneficiaries expected that an annuity determined in terms of a definite amount of precious metals would not be affected by changes in economic conditions. But these hopes were illusory. Later generations learned that the plans of their ancestors were not realized. Stimulated by this experience they began to investigate how the aims sought could be attained. Thus they embarked upon attempts to measure changes in purchasing power and to eliminate such changes.

  The problem assumed much greater importance when governments initiated their policies of long-term irredeemable and perpetual loans. The state, this new deity of the dawning age of statolatry, this eternal and superhuman institution beyond the reach of earthly frailties, offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable income secure against all vicissitudes. It opened a way to free the individual from the necessity of risking and acquiring his wealth and his income anew each day in the capitalist market. He who invested his funds in bonds issued by the government and its subdivisions was no longer subject to the inescapable laws of the market and to the sovereignty of the consumers. He was no longer under the necessity of investing his funds in such a way that they would best serve the wants and needs of the consumers. He was secure, he was safeguarded against the dangers of the competitive market in which losses are the penalty of inefficiency; the eternal state had taken him under its wing and guaranteed him the undisturbed enjoyment of his funds. Henceforth his income no longer stemmed from the process of supplying the wants of the consumers in the best possible way, but from the taxes levied by the state’s apparatus of compulsion and coercion. He was no longer a servant of his fellow citizens, subject to their sovereignty; he was a partner of the government which ruled the people and exacted tribute from them. What the government paid as interest was less than the market offered. But this difference was far outweighed by the unquestionable solvency of the debtor, the state whose revenue did not depend on satisfying the public, but on insisting on the payment of taxes.