EPISTEMOLOGICAL PROBLEMS OF ECONOMICS phần 8 pps

In Böhm-Bawerk’s famous example ofthe planter’s five sacks of grain, there is no question of a rank order “eco-of objective correctness, but “eco-of a rank order “eco-of subjective desir

prices as they are, not as they should be If one wishes to do justice

to this task, then in no way may one distinguish between nomic” and “noneconomic” grounds of price determination orlimit oneself to constructing a theory that would apply only to aworld that does not exist In Böhm-Bawerk’s famous example ofthe planter’s five sacks of grain, there is no question of a rank order

“eco-of objective correctness, but “eco-of a rank order “eco-of subjective desires.The boundary that separates the economic from the noneco-nomic is not to be sought within the compass of rational action Itcoincides with the line that separates action from nonaction Actiontakes place only where decisions are to be made, where the neces-sity exists of choosing between possible goals, because all goalseither cannot be achieved at all or not at the same time Men actbecause they are affected by the flux of time They are thereforenot indifferent to the passage of time They act because they are notfully satisfied and satiated and because by acting they are able toenhance the degree of their satisfaction Where these conditionsare not present—as in the case of “free” goods, for example—action does not take place

3 Eudaemonism and the Theory of Value

The most troublesome misunderstandings with which the tory of philosophical thought has been plagued concern the terms

his-“pleasure” and “pain.” These misconceptions have been carriedover into the literature of sociology and economics and havecaused harm there too

Before the introduction of this pair of concepts, ethics was adoctrine of what ought to be It sought to establish the goals thatman should adopt The realization that man seeks satisfaction byacts both of commission and of omission opened the only paththat can lead to a science of human action If Epicurus sees inαταραξια the final goal of action, we can behold in it, if we wish,the state of complete satisfaction and freedom from desire atwhich human action aims without ever being able to attain it.Crude materialistic thinking seeks to circumscribe it in visions ofParadise and Cockaigne Whether this construction may, in fact,

be placed on Epicurus’ words remains, of course, uncertain, inview of the paucity of what has been handed down of his writings.Doubtless it did not happen altogether without the fault of Epi-curus and his school that the concepts of pleasure and pain weretaken in the narrowest and coarsely materialistic sense when onewanted to misconstrue the ideas of hedonism and eudaemonism.And they were not only misconstrued; they were deliberately mis-represented, caricatured, derided, and ridiculed Not until the sev-enteenth century did appreciation of the teachings of Epicurusagain begin to be shown On the foundations provided by it arosemodern utilitarianism, which for its part soon had to contend anewwith the same misrepresentations on the part of its opponents thathad confronted its ancient forerunner Hedonism, eudaemonism,and utilitarianism were condemned and outlawed, and whoeverdid not wish to run the risk of making the whole world his enemyhad to be scrupulously intent upon avoiding the suspicion that heinclined toward these heretical doctrines This must be kept inmind if one wants to understand why many economists went togreat pains to deny the connection between their teachings andthose of utilitarianism.

Even Böhm-Bawerk thought that he had to defend himselfagainst the reproach of hedonism The heart of this defense con-sists in his statement that he had expressly called attention already

in the first exposition of his theory of value to his use of the word

“well-being” in its broadest sense, in which it “embraces not onlythe self-centered interests of a subject, but everything that seems tohim worth aiming at.”2 Böhm-Bawerk did not see that in sayingthis he was adopting the same purely formal view of the character

of the basic eudaemonistic concepts of pleasure and pain—treatingthem as indifferent to content—that all advanced utilitarians haveheld One need only compare with the words quoted from Böhm-Bawerk the following dictum of Jacobi:

2Cf Eugen von Böhm-Bawerk, Kapital und Kapitalzins, Part II, Vol I, p.

236, footnote English translation, Capital and Interest, trans by George D.

Huncke, Hans F Sennholz, consulting economist (South Holland, Ill tarian Press, 1959), Vol II, pp 181–86.

Liber-We originally want or desire an object not because it is able or good, but we call it agreeable or good because we want or desire it; and we do this because our sensuous or supersensuous nature so requires There is, thus, no basis for recognizing what is good and worth wishing for outside of the faculty of desiring—i.e., the original desire and the wish themselves 3

agree-We need not go further into the fact that every ethic, no ter how strict an opponent of eudaemonism it may at first appear

mat-to be, must somehow clandestinely smuggle the idea of happinessinto its system As Böhm-Bawerk has shown, the case is no differ-ent with “ethical” economics.4 That the concepts of pleasure andpain contain no reference to the content of what is aimed at, ought,indeed, scarcely to be still open to misunderstanding

Once this fact is established, the ground is removed from all theobjections advanced by “ethical” economics and related schools.There may be men who aim at different ends from those of the men

we know, but as long as there are men—that is, as long as they donot merely graze like animals or vegetate like plants, but actbecause they seek to attain goals—they will necessarily always besubject to the logic of action, the investigation of which is the task

of our science In this sense that science is universally human, andnot limited by nationality, bound to a particular time, or contingentupon any social class In this sense too it is logically prior to all his-torical and descriptive research

4 Economics and Psychology

The expression “Psychological School” is frequently employed

as a designation of modern subjectivist economics Occasionallytoo the difference in method that exists between the School of Lau-sanne and the Austrian School is indicated by attributing to the latter

3According to Fr A Schmid, quoted by Jodl, Geschichte der Ethik (2nd

ed.), II, 661.

4Cf Böhm-Bawerk’s comments on Schmoller, Kapital und Kapitalzins,

p 239, footnote; on Vierkandt, cf above p 57 English translation, Capital and Interest, Vol II, pp 429–30, n 71.

the “psychological” method It is not surprising that the idea ofeconomics as almost a branch of psychology or applied psychologyshould have arisen from such a habit of speech Today, neither thesemisunderstandings nor their employment in the struggle carried onover the Austrian School are of anything more than historical andliterary interest.

Nevertheless, the relationship of economics to psychology isstill problematical The position due Gossen’s law of the satiation

of wants yet remains to be clarified

Perhaps it will be useful first to look at the route that had to betraversed in order to arrive at the modern treatment of the prob-lem of price formation In this way we shall best succeed in assign-ing Gossen’s first law its position in the system, which is differentfrom the one it occupied when it was first discovered

The earlier attempts to investigate the laws of price tion foundered on the principle of universalism, which wasaccepted under the controlling influence of conceptual realism.The importance of nominalistic thought in antiquity, in the MiddleAges, and at the beginning of the modern era should not, of course,

determina-be underestimated Nevertheless, it is certain that almost allattempts to comprehend social phenomena were at first under-taken on the basis of the principle of universalism And on this basisthey could not but fail hopelessly Whoever wanted to explainprices saw, on the one hand, mankind, the state, and the corpora-tive unit, and, on the other, classes of goods here and money there.There were also nominalistic attempts to solve these problems, and

to them we owe the beginnings of the subjective theory of value.However, they were repeatedly stifled by the prestige of the pre-vailing conceptual realism

Only the disintegration of the universalistic mentality broughtabout by the methodological individualism of the seventeenth andeighteenth centuries cleared the way for the development of a sci-entific catallactics It was seen that on the market it is not mankind,the state, or the corporative unit that acts, but individual men and

groups of men, and that their valuations and their actions are

deci-sive, not those of abstract collectivities To recognize the relationship

between valuation and use value and thus cope with the paradox ofvalue, one had to realize that not classes of goods are involved inexchange, but concrete units of goods This discovery signalizednothing less than a Copernican revolution in social science Yet itrequired more than another hundred years for the step to be taken.This is a short span of time if we view the matter from the standpoint

of world history and if we adequately appreciate the difficultiesinvolved But in the history of our science precisely this periodacquired a special importance, inasmuch as it was during this timethat the marvelous structure of Ricardo’s system was first elaborated

In spite of the serious misunderstanding on which it was constructed,

it became so fruitful that it rightly bears the designation “classical.”The step that leads from classical to modern economics is therealization that classes of goods in the abstract are never exchangedand valued, but always only concrete units of a class of goods If I

want to buy or sell one loaf of bread, I do not take into

considera-tion what “bread” is worth to mankind, or what all the bread rently available is worth, or what 10,000 loaves of bread are worth,

cur-but only the worth of the one loaf in question This realization is

not a deduction from Gossen’s first law It is attained throughreflection on the essence of our action; or, expressed differently,the experience of our action makes any other supposition impossi-ble for our thought

We derive the law of the satiation of wants from this tion and from the further realization, which is obtained by reflectingupon our action, that, in our scales of importance, we order individ-ual units of goods not according to the classes of goods to which theybelong or the classes of wants which they satisfy, but according to theconcrete emergence of wants; that is to say, before one class of wants

proposi-is fully satproposi-isfied we already proceed to the satproposi-isfaction of individualwants of other classes that we would not satisfy if one or severalwants of the first class had not previously been satisfied

Therefore, from our standpoint, Gossen’s law has nothing to

do with psychology It is deduced by economics from reflectionsthat are not of a psychological nature The psychological law of sati-ation is independent of our law, though understandably in harmony

with it, inasmuch as both refer to the same state of affairs Whatdistinguishes the two is the difference of method by which theyhave been arrived at Psychology and economics are differentiated

by their methods of viewing man

To be sure, Bentham, who may be numbered among the est theorists of social science, and who stood at the peak of the eco-nomics of his time, arrived at our law by way of psychology andwas unable to make any application of it to economics; and inGossen’s exposition it appeared as a psychological law, on whicheconomic theory was then constructed But these facts in no wayinvalidate the distinction that we have drawn between the laws ofeconomics and those of psychology Bentham’s great intellect didnot serve one science only We do not know how Gossen arrived athis cognition, and it is a matter of indifference as far as answeringour question is concerned The investigation of the way in whichthis or that truth was first discovered is important only for history,not for a theoretical science It is, of course, obvious that the posi-tion that Gossen then assigned the law in his system can have noauthoritative standing in our view And everyone knows thatMenger, Jevons, and Walras did not arrive at the resolution of theparadox of value by way of Gossen’s law

great-5 Economics and Technology

The system of economic theory is independent of all other ences as well as of psychology This is true also of its relationship

sci-to technology By way of illustration we shall demonstrate this inthe case of the law of returns

Even historically the law of returns did not originate in nology, but in reflections on economics One interpreted the factthat the farmer who wants to produce more also wants to extendthe area under cultivation and that in doing so he even makes use

tech-of poorer soil If the law tech-of returns did not hold true, it could not

be explained how there can be such a thing as “land hunger.” Landwould have to be a free good The natural sciences, in developing

a theory of agriculture, were unable either to substantiate or to

confute these reflections “empirically.” The experience that it took

as its starting point was the fact that arable land is treated as an nomic good.5It is obvious that here too economics and the naturalsciences must meet on common ground

eco-One could not help finally expanding the law of diminishingreturns on the cultivation of land into a general law of returns If agood of higher order is treated as an economic good, then the law

of returns—increasing returns up to a certain point, and beyondthat point diminishing returns—must hold true of this good Sim-ple reflection shows that a good of higher order of which the law

of returns did not hold true could never be regarded as an nomic good: it would be indifferent to us whether larger or smallerquantities of this good were available

eco-The law of population is a special case of the law of returns Ifthe increase in the number of workers were always to bring about

a proportional increase in returns, then the increase in the means

of support would keep pace with the increase in population.Whoever maintains, like Henry George, Franz Oppenheimer,and others, that the law of population is without practical impor-tance assumes that hand in hand with every increase in populationbeyond the optimum necessarily go changes in technology or in thesocial division of labor such that at least no decrease in returnstakes place per capita of the total population and perhaps even anincrease in returns is thereby brought about There is no proof forthis assumption

6 Monetary Calculation and the

“Economic in the Narrower Sense”

All action aims at results and takes on meaning only in relation

to results The preferring and setting aside that are involved inaction take as their standard the importance of the anticipatedresult for the well-being of the actor Whatever directly serves

5Cf Eugen von Böhm-Bawerk, Gesammelte Schriften, ed by F.X Weiss

(Vienna, 1924), I, 193 ff

well-being is, without difficulty, given a rank in accordance with itsimportance, and this provides the rank order in which the goals ofaction stand at any given moment How far it is possible to bringthe relatively remote prerequisites of well-being into this rankorder without resorting to more complicated processes of thoughtdepends on the intelligence of the individual It is certain, however,that even for the most gifted person the difficulties of weighingmeans and ends become insurmountable as soon as one goesbeyond the simplest processes of production involving only a shortperiod of time and few intermediary steps Capitalistic produc-tion—in Böhm-Bawerk’s sense, not in that of the Marxists—requires above all else the tool of economic calculation, throughwhich expenditures of goods and of labor of different kindsbecome comparable Those who act must be capable of recognizingwhich path leads to the goal aimed at with the least expenditure ofmeans This is the function of monetary calculation.

Money—that is, the generally used medium of exchange—thusbecomes an indispensable mental prerequisite of any action thatundertakes to conduct relatively long-range processes of produc-tion Without the aid of monetary calculation, bookkeeping, andthe computation of profit and loss in terms of money, technologywould have had to confine itself to the simplest, and therefore theleast productive, methods If today economic calculation wereagain to disappear from production—as the result, for example, ofthe attainment of full socialization—then the whole structure of cap-italistic production would be transformed within the shortest timeinto a desolate chaos, from which there could be no other way outthan reversion to the economic condition of the most primitive cul-tures Inasmuch as money prices of the means of production can bedetermined only in a social order in which they are privately owned,the proof of the impracticability of socialism necessarily follows.From the standpoint of both politics and history, this proof iscertainly the most important discovery made by economic theory.Its practical significance can scarcely be overestimated It alonegives us the basis for pronouncing a final political judgment on allkinds of socialism, communism, and planned economies; and it

alone will enable future historians to understand how it came aboutthat the victory of the socialist movement did not lead to the cre-ation of the socialist order of society Here we need not go into thisfurther We must consider the problem of monetary calculation inanother respect, namely, in its importance for the separation ofaction, “economic in the narrower sense,” from other action.The characteristic feature of the mental tool provided by mon-etary calculation is responsible for the fact that the sphere in which

it is employed appears to it as a special province within the widerdomain of all action In everyday, popular usage the sphere of theeconomic extends as far as monetary calculations are possible.Whatever goes beyond this is called the noneconomic sphere Wecannot acquiesce in this usage when it treats economic andnoneconomic action as heterogeneous We have seen that such aseparation is misleading However, the very fact that we see in eco-nomic calculation in terms of money the most important and,indeed, the indispensable mental tool of long-range productionmakes a terminological separation between these two spheresappear expedient to us In the light of the comments above, wemust reject the terms “economic” and “noneconomic” or “uneco-nomic,” but we can accept the terms “economic in the narrowersense” and “economic in the broader sense,” provided one does notwant to interpret them as indicating a difference in the scope ofrational and economic action

(We may remark incidentally that monetary calculation is nomore a “function” of money than astronomical navigation is a

“function” of the stars.)

Economic calculation is either the calculation of future bilities as the basis for the decisions that guide action, or the sub-sequent ascertainment of the results, i.e., the computation of profitand loss In no respect can it be called “perfect.” One of the tasks

possi-of the theory possi-of indirect exchange (the theory possi-of money and credit)consists precisely in showing the imperfection—or, more correctly,the limits—of what this method is capable of Nevertheless, it isthe only method available to a society based on the division oflabor when it wants to compare the input and the output of its

production processes All attempts on the part of the apologists ofsocialism to concoct a scheme for a “socialist economic calcula-tion” must, therefore, necessarily fail.

7 Exchange Ratios and the Limits of Monetary Calculation

The money prices of goods and services that we are able toascertain are the ratios in which these goods and services wereexchanged against money at a given moment of the relativelyrecent or remote past These ratios are always past; they alwaysbelong to history They correspond to a market situation that is notthe market situation of today

Economic calculation is able to utilize to a certain extent theprices of the market because, as a rule, they do not shift so rapidlythat such calculation could be essentially falsified by it Moreover,certain deviations and changes can be appraised with so close anapproximation to what really takes place later that action—or

“practice”—is able to manage quite well with monetary calculationnotwithstanding all its deficiencies

It cannot be emphasized strongly enough, however, that thispractice is always the practice of the acting individual who wants

to discover the result of his particular action (as far as it does not

go beyond the orbit of the economic in the narrower sense) Italways occurs within the framework of a social order based on pri-vate ownership of the means of production It is the entrepreneur’scalculation of profitability It can never become anything more.Therefore, it is absurd to want to apply the elements of this cal-culation to problems other than those confronting the individual

actor One may not extend them to res extra commercium One

may not attempt by means of them to include more than the sphere

of the economic in the narrower sense However, this is preciselywhat is attempted by those who undertake to ascertain the mone-tary value of human life, social institutions, national wealth, cul-tural ideals, or the like, or who enter upon highly sophisticatedinvestigations to determine how exchange ratios of the relativelyrecent, not to mention the remote, past could be expressed in terms

of “our money.”

It is no less absurd to fall back upon monetary calculation whenone seeks to contrast the productivity of action to its profitability.

In comparing the profitability and the productivity of action, onecompares the result as it appears to the individual acting within thesocial order of capitalism with the result as it would appear to thecentral director of an imaginary socialist community (We mayignore for the sake of argument the fact that he would be com-pletely unable to carry out such calculations.)

The height of conceptual confusion is reached when one tries

to bring calculation to bear upon the problem of what is called the

“social maximization of profit.” Here the connection with the vidual’s calculation of profitability is intentionally abandoned inorder to go beyond the “individualistic” and “atomistic” and arrive

indi-at “social” findings And again one fails to see and will not see thindi-atthe system of calculation is inseparably connected with the individ-ual’s calculation of profitability

Monetary calculation is not the calculation, and certainly notthe measurement, of value Its basis is the comparison of the moreimportant and the less important It is an ordering according torank, an act of grading (Cuhel), and not an act of measuring It was

a mistake to search for a measure of the value of goods In the lastanalysis, economic calculation does not rest on the measurement ofvalues, but on their arrangement in an order of rank

8 Changes in the Data

The universally valid theory of economic action is necessarilyformal Its material content consists of the data of human circum-stances, which evoke action in the individual case: the goals atwhich men aim and the means by which they seek to attain them.6The equilibrium position of the market corresponds to thespecific configuration of the data If the data change, then theequilibrium position also shifts We grasp the effect of changes in the

6Cf the fruitful investigations of Richard von Strigl, Die ökonomischen Kategorien und die Organisation der Wirtschaft (Jena, 1923)

∨

data by means of our theory With its help we can also predict the

quality—or, rather, the direction—of the changes that, ceteris paribus, must follow definite changes in the data From the known

extent of changes in the latter, we are unable to predeterminequantitatively what these consequent changes will be For changes

in external conditions must, in order to influence action, be lated into volitions that move men from within We know nothingabout this process Even materialism, which professes to havesolved the problem of the relation between the psychical and thephysical by means of the famous simple formula that thinkingstands in the same relationship to the brain as gall does to the blad-der, has not even undertaken the attempt to establish a constantrelationship between definite external events, which are quantita-tively and qualitatively discernible, and thoughts and volitions.All the endeavors that have been and are being devoted to theconstruction of a quantitative theory of catallactics must, therefore,come to grief All that can be accomplished in this area is economichistory It can never go beyond the unique and the nonrepeatable;

trans-it can never acquire universal validtrans-ity.7

9 The Role of Time in the Economy

Classical economics distinguished three factors of production:land, labor, and capital Inasmuch as capital can be resolved intoland and labor, two factors remain: labor and the “conditions ofwell-being” made available by nature If consumption goods aredisregarded, these alone, according to the view to be found in theolder literature, are the objects of economizing

The classical economists, whose attention was directed aboveall to the conduct of the businessman, could not observe that timetoo is economized An account for “time” does not appear in thebusinessman’s books No price is paid for it on markets That it is,nevertheless, taken into consideration in every exchange could not

7 This is also true, for example, of the attempts of Henry L Moore in

partic-ular (Synthetic Economics, New York, 1929) Cf the critique by Ricci, Zeitschrift für Nationalökonomie, I, 694 ff

be seen from the standpoint of an objectivistic theory of value, norcould one be led to this realization by reflection on the popularprecept contained in the saying, “Time is money.” It was one of thegreat achievements of Jevons and Böhm-Bawerk that, in carrying

on the work of Bentham and Rae, they assigned the element of timeits proper place in the system of economic theory

The classical economists failed to recognize the essential tance of time, which manifests its effect directly or indirectly inevery exchange They did not see that action always distinguishesbetween the present and the future—between present goods andfuture goods Yet the time differential is important for the economy

impor-in still another respect All changes impor-in the data can make themselvesfelt only over a period of time A longer or a shorter period mustelapse before the new state of equilibrium, in accordance with theemergence of the new datum, can be reached The static—or, as theclassical economists called it, the natural—price is not reachedimmediately, but only after some time has passed In the interim,deviations ensue that become the source of special profits andlosses The classical economists and their epigones not only did notfail to recognize this fact; on the contrary, they occasionally over-estimated its importance The modern theory too has paid specialattention to it This is true above all of the theory of indirectexchange The theory of changes in the purchasing power ofmoney and of their concomitant social consequences is basedentirely on this fact A short while ago, in a spirit of remarkable ter-minological and scholastic conscientiousness, an attempt was made

to deny to the circulation credit theory of the trade cycle its tomary name, viz., the monetary theory of crises, on the groundthat it is constructed on the basis of a “time lag.”8

cus-As has been stated, economic theory has failed to see the tance of the fact that a shorter or a longer period of time must go

impor-8 Cf Fritz Adolph Burchardt “Entwicklungsgeschichte der monetären

Konjunkturtheorie,” Weltwirtschaftliches Archiv, XXVIII, 140; Löwe, “ ber den Einfluss monetärer Faktoren auf den Konjunkturzylus,” Schriften des Vereins für Sozialpolitik, CLXXIII, 362

by before the equilibrium of the market, once it has been disturbed

by emergence of new data, can again be established This assertionwould never have been made if, for political reasons, repeatedattempts had not been made to embarrass the discussion of eco-nomic questions with irrelevant objections The defenders of inter-ventionism have occasionally attempted to confront the arguments

of the critics of this policy—arguments supported by the irrefutabledeductions of economics—with the alleged fact that the proposi-tions of economics hold true only in the long run Therefore, it wasmaintained, the ineluctable conclusion that interventionist meas-ures are senseless and inexpedient cannot yet be drawn It wouldexceed the scope of this treatise to examine what force this argu-ment has in the dispute over interventionism It is sufficient here topoint out that the liberal doctrine provides a direct, and not merely

an indirect, demonstration of the senselessness and inexpediency ofinterventionism and that its arguments can be refuted only bypointing to interventionist measures that do not, in fact, bringabout effects that run counter to the intentions of those who haverecourse to them

10 “Resistances”

The economist is often prone to look to mechanics as a modelfor his own work Instead of treating the problems posed by his sci-ence with the means appropriate to them, he fetches a metaphorfrom mechanics, which he puts in place of a solution In this waythe idea arose that the laws of catallactics hold true only ideally,i.e., on the assumption that men act in a vacuum, as it were But,

of course, in life everything happens quite differently In life thereare “frictional resistances” of all kinds, which are responsible forthe fact that the outcome of our action is different from what thelaws would lead one to expect From the very outset no way wasseen in which these resistances could be exactly measured or,indeed, fully comprehended even qualitatively So one had to resignoneself to admitting that economics has but slight value both forthe cognition of the relationships of our life in society and for

actual practice And, of course, all those who rejected economicscience for political and related reasons—all the etatists, the social-ists, and the interventionists—joyfully agreed.

Once the distinction between economic and noneconomicaction is abandoned, it is not difficult to see that in all cases of

“resistance” what is involved is the concrete data of economizing,which the theory comprehends fully

For example, we deduce from our theory that when the price of

a commodity rises, its production will be increased However, if theexpansion of production necessitates new investment of capital,which requires considerable time, a certain period of time will elapsebefore the price rise brings about an increase in supply And if thenew investment required to expand production would commit capi-tal in such a way that conversion of invested capital goods in anotherbranch of production is altogether impossible or, if possible, is soonly at the cost of heavy losses, and if one is of the opinion that theprice of the commodity will soon drop again, then the expansion ofproduction does not take place at all In the whole process there isnothing that the theory could not immediately explain to us

Therefore, it is also incorrect to make the assertion that thepropositions of the theory hold true only in the case of perfectlyfree competition This objection must appear all the more remark-able as one could sooner assert that the modern theory of pricedetermination has devoted too much attention to the problem ofmonopoly price It certainly stands to reason that the propositions

of the theory should first be examined with respect to the simplestcase Hence, it is not a legitimate criticism of economic theory that,

in the investigation of competitive prices, it generally starts fromthe assumption that all goods are indefinitely divisible, that noobstacles stand in the way of the mobility of capital and labor, that

no errors are made, etc The subsequent dropping of these tary assumptions one by one then affords no difficulty

elemen-It is true that the classical economists inferred from theirinquiry into the problems of catallactics that, as far as practicaleconomic policy is concerned, all the obstacles that interventionismplaces in the path of competition not only diminish the quantity

and value of the total production, but cannot lead to the goals thatone seeks to attain by such measures The investigations that mod-ern economics has devoted to the same problem lead to the identi-cal conclusion The fact that the politician must draw from theteachings of economic theory the inference that no obstaclesshould be placed in the way of competition unless one has theintention of lowering productivity does not imply that the theory

is unable to cope with the “fettered” economy and “frictionalresistances.”

11 Costs

By costs classical economics understood a quantity of goodsand labor From the standpoint of the modern theory, cost is theimportance of the next most urgent want that can now no longer

be satisfied This conception of cost is clearly expressed outside theorbit of the economic in the narrower sense in a statement like thefollowing, for example: The work involved in preparing for theexamination cost me (i.e., prevented) the trip to Italy Had I nothad to study for the examination, I should have taken a trip to Italy.Only if one employs this concept of cost does one realize theimportance that attaches to profitability The fact that production

is discontinued beyond the point at which it ceases to be profitablemeans that production takes place only as far as the goods of higherorder and the labor required to produce one commodity are notmore urgently needed to produce other commodities This obser-vation shows how unwarranted is the popular practice of objecting

to the limitation of production to profitable undertakings withoutalso mentioning those enterprises that would have to be discontin-ued if others were maintained beyond the point of profitability.The same observation also disposes of the assertion, maderepeatedly, that the subjective theory of value does justice only tothe private aspect of price formation and not to its economic impli-cations for society as well On the contrary, one could turn this objec-tion around and argue that whoever traces the determination ofprices to the costs of production alone does not go beyond the out-look of the individual businessman or producer Only the reduction

of the concept of cost to its ultimate basis, as carried out by the ory of marginal utility, brings the social aspect of economic actionentirely into view.

the-Within the field of modern economics the Austrian School hasshown its superiority to the School of Lausanne and the schoolsrelated to the latter, which favor mathematical formulations, byclarifying the causal relationship between value and cost, while atthe same time eschewing the concept of function, which in our sci-ence is misleading The Austrian School must also be credited withnot having stopped at the concept of cost, but, on the contrary,with carrying on its investigations to the point where it is able totrace back even this concept to subjective value judgments

Once one has correctly grasped the position of the concept ofcost within the framework of modern science, one will have no dif-ficulty in seeing that economics exhibits a continuity of develop-ment no less definite than that presented by the history of other sci-ences The popular assertion that there are various schools ofeconomics whose theories have nothing in common and that everyeconomist begins by destroying the work of his predecessors inorder to construct his own theory on its ruins is no more true thanthe other legends that the proponents of historicism, socialism, andinterventionism have spread about economics In fact, a straightline leads from the system of the classical economists to the subjec-tivist economics of the present The latter is erected not on theruins, but on the foundations, of the classical system Modern eco-nomics has taken from its predecessor the best that it was able tooffer Without the work that the classical economists accomplished,

it would not have been possible to advance to the discoveries of themodern school Indeed, it was the uncertainties of the objectivisticschool itself that necessarily led to the solutions offered by subjec-tivism No work that had been devoted to the problem was done invain Everything that appears to those who have come afterward as

a blind alley or at least as a wrong turning on the way toward asolution was necessary in order to exhaust all possibilities and toexplore and think through to its logical conclusion every consider-ation to which the problems might lead