Human Action: A Treatise on Economics

by Ludwig VonMises

  Let us examine briefly the two most popular varieties of these disproportionality doctrines.

  There is first the durable goods doctrine. These goods retain their serviceableness for some time. As long as their life period lasts, the buyer who has acquired a piece abstains from replacing it by the purchase of a new one. Thus, once all people have made their purchases, the demand for new products dwindles. Business becomes bad. A revival is possible only when, after the lapse of some time, the old houses, cars, refrigerators, and the like are worn out, and their owners must buy new ones.

  However, businessmen are as a rule more provident than this doctrine assumes. They are intent upon adjusting the size of their production to the anticipated size of consumers’ demand. The bakers take account of the fact that every day a housewife needs a new loaf of bread, and the manufacturers of coffins take into account the fact that the total annual sale of coffins cannot exceed the number of people deceased during this period. The machine industry reckons with the average “life” of its products no less than do the tailors, the shoemakers, the manufacturers of motorcars, radio sets, and refrigerators, and the construction firms. There are, to be sure, always promoters who in a mood of deceptive optimism are prone to overexpand their enterprises. In the pursuit of such projects they snatch away factors of production from other plants of the same industry and from other branches of industry. Thus their overexpansion results in a relative restriction of output in other fields. One branch goes on expanding while others shrink until the unprofitability of the former and the profitability of the latter rearranges conditions. Both the preceding boom and the following slump concern only a part of business.

  The second variety of these disproportionality doctrines is known as the acceleration principle. A temporary rise in the demand for a certain commodity results in increased production of the commodity concerned. If, then, demand later drops again, the investments made for this expansion of production appear as malinvestments. This becomes especially pernicious in the field of durable producers’ goods. If the demand for the consumers’ good a increases by 10 per cent, business increases the equipment p required for its production by 10 per cent. The resulting rise in the demand for p is the more momentous in proportion to the previous demand for p, the longer the duration of serviceableness of a piece of p is and the smaller consequently the previous demand for the replacement of worn-out pieces of p was. If the life of a piece of p is 10 years, the annual demand for p for replacement was 10 per cent of the stock of p previously employed by the industry. The rise of 10 per cent in the demand for a doubles therefore the demand for p and results in a 100 per cent expansion in the equipment r needed for the production of p. If then the demand for a stops increasing, 50 per cent of the production capacity of r remains idle. If the annual increase in the demand for a drops from 10 per cent to 5 per cent, 25 per cent of the production capacity of r cannot be used.

  The fundamental error of this doctrine is that it considers entrepreneurial activities as a blindly automatic response to the momentary state of demand. Whenever demand increases and renders a branch of business more profitable, production facilities are supposed instantly to expand in proportion. This view is untenable. Entrepreneurs often err. They pay heavily for their errors. But whoever acted in the way the acceleration principle describes would not be an entrepreneur, but a soulless automaton. Yet the real entrepreneur is a speculator,18 a man eager to utilize his opinion about the future structure of the market for business operations promising profits. This specific anticipative understanding of the conditions of the uncertain future defies any rules and systematization. It can be neither taught nor learned. If it were different, everybody could embark upon entrepreneurship with the same prospect of success. What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future. He sees the past and the present as other people do; but he judges the future in a different way. In his actions he is directed by an opinion about the future which deviates from those held by the crowd. The impulse of his actions is that he appraises the factors of production and the future prices of the commodities which can be produced out of them in a different way from other people. If the present structure of prices renders very profitable the business of those who are today selling the articles concerned, their production will expand only to the extent that entrepreneurs believe that the favorable market constellation will last long enough to make new investments pay. If entrepreneurs do not expect this, even very high profits of the enterprises already operating will not bring about an expansion. It is exactly this reluctance of the capitalists and entrepreneurs to invest in lines which they consider unprofitable that is violently criticized by people who do not comprehend the operation of the market economy. Technocratically minded engineers complain that the supremacy of the profit motive prevents consumers from being amply supplied with all those goods with which technological knowledge could provide them. Demagogues cry out against the greed of capitalists intent upon preserving scarcity.

  A satisfactory explanation of business fluctuations must not be built upon the fact that individual firms or groups of firms misjudge the future state of the market and therefore make bad investments. The objective of the trade cycle theory is the general upswing of business activities, the propensity to expand production in all branches of industry, and the following general depression. These phenomena cannot be brought about by the fact that increased profits in some branches of business result in their expansion and a corresponding overproportional investment in the industries manufacturing the equipment needed for such an expansion.

  It is a very well known fact that the more the boom progresses, the harder it becomes to buy machines and other equipment. The plants producing these things are overloaded with orders. Their customers must wait a long time until the machines ordered are delivered. This clearly shows that the producers’ goods industries are not so quick in the expansion of their own production facilities as the acceleration principle assumes.

  But even if, for the sake of argument, we were ready to admit that capitalists and entrepreneurs behave in the way the disproportionality doctrines describe, it remains inexplicable how they could go on in the absence of credit expansion. The striving after such additional investments raises the prices of the complementary factors of production and the rate of interest on the loan market. These effects would curb the expansionist tendencies very soon if there were no credit expansion.

  The supporters of the disproportionality doctrines refer to certain occurrences in the field of farming as a confirmation of their assertion concerning the inherent lack of provision on the part of private business. However, it is impermissible to demonstrate characteristic features of free competitive enterprise as operating in the market economy by pointing to conditions in the sphere of medium-size and small farming. In many countries this sphere is institutionally removed from the supremacy of the market and the consumers. Government interference is eager to protect the farmer against the vicissitudes of the market. These farmers do not operate in a free market; they are privileged and pampered by various devices. The orbit of their production activities is a reservation, as it were, in which technological backwardness, narrow-minded obstinacy, and entrepreneurial inefficiency are artificially preserved at the expense of the nonagricultural strata of the people. If they blunder in their conduct of affairs, the government forces the consumers, the taxpayers, and the mortgagees to foot the bill.

  It is true that there is such a thing as the corn-hog cycle and analogous happenings in the production of other farm products. But the recurrence of such cycles is due to the fact that the penalties which the market applies against inefficient and clumsy entrepreneurs do not affect a great part of the farmers. These farmers are not answerable for their actions because they are the pet children of governments and politicians. If it were no
t so, they would long since have gone bankrupt and their former farms would be operated by more intelligent people.

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  1. Cf. above, pp. 227–229.

  2. The difference between this case (case b) and the case of the expected end of all earthly things dealt with on p. 524 (case a) is this: in case a originary interest increases beyond all measure because future goods become entirely worthless; in case b originary interest does not change while the entrepreneurial component increases beyond all measure.

  3. Cf. Irving Fisher, The Rate of Interest (New York, 1907), pp. 77 ff.

  4. We are dealing here with conditions on an unhampered labor market. About the argument advanced by Lord Keynes, see below, pp. 771 and 786–787.

  5. About the “long-wave” fluctuations, see below, pp. 572–573.

  6. Cf. G. v. Haberler, Prosperity and Depression (new ed. League of Nations’ Report, Geneva, 1939), p. 7.

  7. One should not fall prey to the illusion that these changes in the credit policies of the banks were caused by the bankers’ and the monetary authorities’ insight into the unavoidable consequences of a continued credit expansion. What induced the turn in the banks’ conduct was certain institutional conditions to be dealt with further below, on pp. 790–791. Among the champions of economics some private bankers were prominent; in particular, the elaboration of the early form of the theory of business fluctuations, the Currency Theory, was for the most part an achievement of British bankers. But the management of central banks and the conduct of the various governments’ monetary policies was as a rule entrusted to men who did not find any fault with boundless credit expansion and took offense at every criticism of their expansionist ventures.

  8. Cf. below, pp. 787–789.

  9. See below, p. 778.

  10. See above, p. 467.

  11. Beardsley Ruml, “Taxes for Revenue Are Obsolete,” American Affairs, VIII (1946), 35–36.

  12. Machlup (The Stock Market, Credit and Capital Formation, p. 248) calls this conduct of the banks “passive inflationism.”

  13. Cf. below, p. 472.

  14. In the evenly rotating economy also there may be unused capacity of inconvertible equipment. Its nonutilization does not disturb the equilibrium any more than the fallowness of submarginal soil.

  15. Hayek (Prices and Production [2d ed. London, 1935, pp. 96 ff.) reaches the same conclusion by way of a somewhat different chain of reasoning.

  16. About the fundamental fault of the Marxian and all other underconsumption theories, cf. above, p. 298.

  17. About these currency and credit manipulations, cf. below, pp. 774–799.

  18. It is noteworthy that the same term is employed to signify the premeditation and the ensuing actions of the promoters and entrepreneurs and the purely academic reasoning of theorists that does not directly result in any action.

  XXI. WORK AND WAGES

  1. Introversive Labor and Extroversive Labor

  AMAN may overcome the disutility of labor (forego the enjoyment of leisure) for various reasons.

  1. He may work in order to make his mind and body strong, vigorous, and agile. The disutility of labor is not a price expended for the attainment of these goals; overcoming it is inseparable from the contentment sought. The most conspicuous examples are genuine sport, practiced without any design for reward and social success; the search for truth and knowledge pursued for its own sake and not as a means of improving one’s own efficiency and skill in the performance of other kinds of labor aiming at other ends.1

  2. He may submit to the disutility of labor in order to serve God. He sacrifices leisure to please God and to be rewarded in the beyond by eternal bliss and in the earthly pilgrimage by the supreme delight which the certainty of having complied with all religious duties affords. (If, however, he serves God in order to attain worldly ends—his daily bread and success in his secular affairs—his conduct does not differ substantially from other endeavors to attain mundane advantages by expending labor. Whether the theory guiding his conduct is correct and whether his expectations will materialize is irrelevant to the catallactic qualification of his mode of acting.2)

  3. He may toil in order to avoid greater mischief. He submits to the disutility of labor in order to forget, to escape from depressing thoughts and to banish annoying moods; work for him is, as it were, a perfected refinement of play. This refined playing must not be confused with the simple games of children which are merely pleasure-producing. (However, there are also other children’s games. Children too are sophisticated enough to indulge in refined play.)

  4. He may work because he prefers the proceeds he can earn by working to the disutility of labor and the pleasures of leisure.

  The labor of the classes 1,2, and 3 is expended because the disutility of labor in itself—and not its product—satisfies. One toils and troubles not in order to reach a goal at the termination of the march, but for the very sake of marching. The mountain-climber does not want simply to reach the peak, he wants to reach it by climbing. He disdains the rack railway which would bring him to the summit more quickly and without trouble even though the fare is cheaper than the costs incurred by climbing (e.g., the guide’s fee). The toil of climbing does not gratify him immediately; it involves disutility of labor. But it is precisely overcoming the disutility of labor that satisfies him. A less exerting ascent would please him not better, but less.

  We may call the labor of classes 1, 2, and 3 introversive labor and distinguish it from the extroversive labor of class 4. In some cases introversive labor may bring about—as a by-product as it were— results for the attainment of which other people would submit to the disutility of labor. The devout may nurse sick people for a heavenly reward; the truth seeker, exclusively devoted to the search for knowledge, may discover a practically useful device. To this extent introversive labor may influence the supply on the market. But as a rule catallactics is concerned only with extroversive labor.

  The psychological problems raised by introversive labor are catallactically irrelevant. Seen from the point of view of economics introversive labor is to be qualified as consumption. Its performance as a rule requires not only the personal efforts of the individuals concerned, but also the expenditure of material factors of production and the produce of other peoples’ extroversive, not immediately gratifying labor that must be bought by the payment of wages. The practice of religion requires places of worship and their equipment; sport requires diverse utensils and apparatus, trainers and coaches. All these things belong in the orbit of consumption.

  2. Joy and Tedium of Labor

  Only extroversive, not immediately gratifying labor is a topic of catallactic disquisition. The characteristic mark of this kind of labor is that it is performed for the sake of an end which is beyond its performance and the disutility which it involves. People work because they want to reap the produce of labor. The labor itself causes disutility. But apart from this disutility which is irksome and would enjoin upon man the urge to economize labor even if his power to work were not limited and he were able to perform unlimited work, special emotional phenomena sometimes appear, feelings of joy or tedium, accompanying the execution of certain kinds of labor.

  Both, the joy and the tedium of labor, are in a domain other than the disutility of labor. The joy of labor therefore can neither alleviate nor remove the disutility of labor. Neither must the joy of labor be confused with the immediate gratification provided by certain kinds of work. It is an attendant phenomenon which proceeds either from labor’s mediate gratification, the produce or reward, or from some accessory circumstances.

  People do not submit to the disutility of labor for the sake of the joy which accompanies the labor, but for the sake of its mediate gratification. In fact the joy of labor presupposes for the most part the disutility of the labor concerned.

  The sources from which the joy of labor springs are:

  1. The expectation of the labor’s mediate gratification,
the anticipation of the enjoyment of its success and yield. The toiler looks at his work as a means for the attainment of an end sought, and the progress of his work delights him as an approach toward his goal. His joy is a foretaste of the satisfaction conveyed by the mediate gratification. In the frame of social cooperation this joy manifests itself in the contentment of being capable of holding one’s ground in the social organism and of rendering services which one’s fellowmen appreciate either in buying the product or in remunerating the labor expended. The worker rejoices because he gets self-respect and the consciousness of supporting himself and his family and not being dependent on other people’s mercy.

  2. In the pursuit of his work the worker enjoys the aesthetic appreciation of his skill and its product. This is not merely the contemplative pleasure of the man who views things performed by other people. It is the pride of a man who is in a position to say: I know how to make such things, this is my work.

  3. Having completed a task the worker enjoys the feeling of having successfully overcome all the toil and trouble involved. He is happy in being rid of something difficult, unpleasant, and painful, in being relieved for a certain time of the disutility of labor. His is the feeling of “I have done it.”

  4. Some kinds of work satisfy particular wishes. There are, for example, occupations which meet erotic desires—either conscious or subconscious ones. These desires may be normal or perverse. Also fetishists, homosexuals, sadists and other perverts can sometimes find in their work an opportunity to satisfy their strange appetites. There are occupations which are especially attractive to such people. Cruelty and bloodthirstiness luxuriantly thrive under various occupational cloaks.

  The various kinds of work offer different conditions for the appearance of the joy of labor. These conditions may be by and large more homogeneous in classes 1 and 3 than in class 2. It is obvious that they are more rarely present for class 4.