The Pure Logic Of Choice

Preface

Preface Just as good intentions can pave the road to hell, so, perhaps, some good can come from less than the best intentions. The original motive for writing this book was revenge. I had not had any particular interest in economics until I met Dr. Hans F. Sennholz, a leading proponent of the Austrian School of Economics, at a 1977 week-long seminar given by the Foundation for Economic Education at Irvington-on-Hudson, New York. It is my practice at gatherings of all types to identify the most intelligent and knowlegeable person present, then to pick his brain of whatever I could. Since this person seemed to be Dr. Sennholz, I spent as much time as possible cross-examining him on every economic problem that occurred to me. This is always a dangerous practice, for one never knows what the net may pull in, and the victim of the persistent questioning may skewer his tormentor with one of the ideas he strews out. Such was the case here, for Dr. Sennholz’s suggestion that I study, and teach, economics captured my efforts for many years to come. As I entered my first class in the economics M . A. program at the University of Pittsburgh, my imagination was filled with anticipation of the great and profound insights into the workings of the world that would soon be mine. But it took only a single course to realize that this hope would not be fulfilled, as even a neophyte such as myself could spot the many obvious errors, principally of a methodological nature, in the text and lectures. At first I wrote the professor long letters detailing each supposed error, but I quickly tired of pointing to the foundation while he was discussing the second floor, so these efforts were soon abandoned. Like Charlie Brown, always hopeful that this time Lucy won’t pull the football away, I always hoped that the next course would teach economics instead of calculus, statistics, and theories that could not be applied to people. But they always pulled the football away. Particularly disheartening were the times professors would agree that the material was based on a false premise, only to continue teaching it anyway. The cost of bucking the system was apparently quite high. The course in History of Economic Thought was particularly memorable. [Page ix] I had by then read fairly extensively in Austrian economics, so as soon as I got the textbook I turned to the section on von Mises. It gave only a brief mention to one of the greatest economists ever, but several chapters to Keynes and Marx! Was the measuring rod for greatness in economics the same as in politics — the amount of destruction one wrought? Moreover, according to the book, the principle contribution of von Mises to economics was to argue that rational economic calculation under socialism was impossible, giving Oskar Lange the opportunity of refuting him, thereby advancing socialist economic theory! This was a revelation to me as, having read several articles about the debate, I was under the impression that von Mises (and Hayek) had clearly won. (See The Journal of Libertarian Studies , Winter 1981.) Surely file:///C|/Downloads/Video/Preface.htm (1 of 3) [17-9-2008 17:13:26]

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even a layman, examining the disasters of the socialist economies, would pose the obvious question, “If calculation is possible under socialism, why don’t they do it?” Since a paper was one way of fulfilling the course requirements, I requested the professor’s permission to write about this, perhaps the greatest debate ever in economics. “No,” he replied curtly, “Lange won the debate. The issue is settled and I will not accept a paper on that topic.” Well, so much for the dispassionate academic pursuit of knowledge. “An aberration, perhaps,” I thought. There were surely open-minded professors at Pitt who would examine arguments on their merits, opting for the truth regardless of where the chips fell. And, indeed, in Dr. Mark Perlman, I found such a professor. One of the options for obtaining an M.A. was to write a thesis. By now, I had determined to strike a blow at the underpinnings of the Pitt economic establishment, so I decided to write a thesis on methodology, specifically on causation in economics. I showed Dr. Perlman a draft, and he agreed to be one of the three persons who would sit on my thesis committee. Out of the large economics faculty at Pitt, I expected no trouble finding the other two. I had met an economics doctoral student who concealed his Austrian leanings out of fear of losing his fellowship, and he gave me names of professors who would be most likely to agree to sit on my committee. All refused. I explained this problem to Dr. Perlman, and he very kindly agreed to get the other two professors himself. “Ah, the problem’s solved,” I thought. But at my next meeting with Dr. Perlman, I found that he was unable to persuade any of his colleagues to sit on my committee. “They will sit for a thesis on any type of economics, even Marxian economics,” he explained, still not believing it himself, “but not Austrian economics!” The poor fellow was stunned, but by now I was surprised only that anti-Austrianism was so strong that a request by someone as eminent as Dr. Perlman would be refused. If you continue reading this book, I think you may come to understand [Page x] the depth of feeling against Austrian economics. Austrianism does not quibble about technicalities or argue over superficialities, but attacks the very foundation of all other schools of economics. Moreover, the attack is so convincing, in my opinion, that the only response the opposition has is to ignore or suppress it. One does not spend a lifetime learning a discipline only to toss it out the window because of an oversight in methodology. While my experiences at Pitt provided the vengeful seed for this book, the book soon took on a life of its own and grew of its own accord. I bear no bitterness against the Pitt faculty, and, to the contrary, I am most grateful, for otherwise I would never have written this book. Nor should the University of Pittsburgh be singled out as an unusual example of closed-minded academia, for I am confident that it is entirely typical of most colleges and universities. Next Table of Contents

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Index [Page xi]

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Introduction

Introduction There is nothing more practical than a good

theory. —Jules Henri Poincaré

Economics is not an inductive science, but a deductive science. That is the thesis of this book. Economics is not a physics verified by experience, but a geometry verified by logic. It is knowledge not of facts, but of logical necessity. Its laws are true, not because experience does not contradict them, but because they cannot be untrue. I can not be certain that every physical law holds true everywhere and at all times, but, given necessary conditions, I am certain that the laws of economics, like the laws of geometry, do. It is the view that economics is an empirical science like physics that is responsible for the disarray and error that is so wide spread in the discipline, and the quite justified contempt that members of the general public have for economists. Of all the disciplines of human study, none is so rife with controversy, opposing theories and conclusions, and bitter disputes, as economics. The old joke, that if you laid all the economists in the world end-to-end they wouldn’t reach a conclusion, accurately characterizes the profession. While, as Milton Friedman has pointed out, there is a market for bad economics, so that some of the disparate views can be attributed to the self-interest of economists who propound ideas beneficial to their employers (e.g., corporate economists, labor union economists, government economists, and academic economists who receive government grants or consulting agreements), self-interest would not directly explain the widely differing views of intellectually honest economists whose income does not depend upon promulgating any particular point of view. Although prestige in the profession may be tied to professing certain beliefs, and passionately held political views may bias some economists, one cannot deny that honest differences are there. When one encounters a chaotic scene, one should not simply leap into the fray and deal with the issues on the terms set by the combatants. [Page xv] Rather, one should stand aside, ignore the specific issues for the time being, and ask more fundamental questions. Each economist claims to have knowledge of economics. The dispassionate observer first asks them how they know their knowledge is correct. One says he verified it by applying statistical analysis to economic data, and another says he verified it by applying logic to basic axioms, and a third says it’s common sense. The observer may conclude that this is part of the problem — some of the economists are using methods of verifying knowledge about economics that are inappropriate, and, as a result, some or all of their knowledge is false. … in whatever science there exists, among those who have attended to the subject, file:///C|/Downloads/Video/Introduction.htm (1 of 3) [17-9-2008 17:13:28]

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what are commonly called differences of principle, as distin guished from differences of matter of fact or detail, the cause will be found to be a difference in their conceptions of the philosophic method of the science. The parties who differ are guided, either knowingly or unconsciously, by different views concerning the nature of the evidence appropriate to the subject.(1) When Alice asked the Queen of Hearts where to begin, she was told to begin at the beginning. The beginning is epistemology—the study of how to validate and verify knowledge — and ontology — the study of the nature of those things about which we wish to acquire knowledge. Most of these economists have not begun at the beginning. In order to decide which methods of verification are appropriate to economics, one must know the ontological nature of those things with which economics is concerned, that is, human beings, energy, matter, prices, quantities sold, and so forth, because the appropriateness of a means to knowledge depends on the nature of the objects to which that means to knowledge is to be applied. “The methods we pursue in any inquiry must be determined by the nature and objects of that inquiry. “(2) Economics, as it is taught today, is more of a rationalization for the established order than it is a science. If economics is ever to rise up out of its present state of contradictory teachings and isolated insights to the stature of a consistent, unified, logical science, it must first go down and examine its long-ignored foundations. This book explores these ontological and epistemological questions, argues that a particular methodology is appropriate, and provides a restatement of a deductive theory of economics, called “praxeology,” first put forth as a unified theory by Ludwig von Mises and others of the Austrian School. Thus, in this book, I set forth two analytical schemes, the first describing the nature of changes in what exists, i.e., laws, and the second describing the two domains [Page xvi] that exist, concepts and attributes; the first analytical scheme is applied to the second. Then I try to show that that analysis corresponds to reality and can explain economic phenomena. While von Mises must be given credit for generalizing the subjective, deductive approach to economics into an overall theory of human action, von Mises rejected the idea of presenting his theory in the form of universal axioms, preferring instead to begin with the common experience of all mankind. A theory of action could conceivably be constructed on the assumption that men lacked the possibility of understanding one another by means of symbols, or on the assumption that men — immortal and eternally young — were indifferent in every respect to the passage of time and therefore did not consider it in their action. The axioms of the theory could conceivably be framed in such universal terms as to embrace these and all other possibilities; and it would be conceivable to draw up a formal praxeological system patterned after the science of logic or the science built upon the axioms of, for file:///C|/Downloads/Video/Introduction.htm (2 of 3) [17-9-2008 17:13:28]

Introduction

example, Hilbertian geometry. We forgo these possibilities because conditions that do not correspond to those we encounter in our action interest us only in so far as thinking through their implications in imaginary constructions enables us to further our knowledge of action under given conditions.(3) This book attempts to identify those universal axioms that von Mises referred to, and to “draw up a formal praxeological system patterned after the science of logic or the science . . . of. . . geometry.” It is an attempt to find those “long trains of deductive reasoning” that Alfred Marshall referred to when he said, “It is obvious that there is no room in economics for long trains of deductive reasoning."(4) Next Table of Contents Index FOOTNOTES 1. John Stuart Mill, Essays on Some Unsettled Questions of Political Economy M. Kelley, 1968), 141. Back

, 2nd ed. (Fairfield, N.J.: Augustus

2. John E. Cairnes, The Character and Logical Method of Political Economy Kelley, 1965), 72.Back

(Fairfield, N.].: Augustus M.

3. Ludwig von Mises, Epistemological , trans. George Problems of Economics Reisman (New York: D. Van Nostrand Company, Inc., 1960), 31—32.Back 4. Alfred Marshall, Principles of Economics (New York: The Macmillan Co., 1961), 781. Back [Page xvii]

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Acknowledgments

Acknowledgments Although the terminology is slightly different, the deductive theory of economics presented in this paper is based on the works of Ludwig von Mises, particularly Human Action . Much use was also made of the profound insights into the nature of economics discovered by F. A. Hayek, who inspired many of the ideas presented in this book, and who, with von Mises, provided its title.(1) The reader is referred to Chapters 2, 3, 4, 7, 8, and 9 in “Individualism and the Economic Order,” which deal with knowledge, the facts of the social sciences, and economic calculation. The chapters on knowledge are especially recommended. I would like to thank Dr. Mark Perlman of the University of Pittsburgh for his help in preparing a paper entitled, “Causation in Economics, a Deductive Theory,” which laid some of the groundwork for this book. I would also like to thank the Institute for Humane Studies for inviting me to their 1979 Seminar on Austrian Economics, which was extremely helpful in extending my knowledge. Dr. Israel Kirzner, especially, took time from his hectic schedule to assist me. Dr. Hans F. Sennholz, of Grove City College, also merits thanks for encouraging me to study economics in the first place, and for accepting me as his doctoral student. This book is an extension of the thesis written for that doctorate. Finally, I must thank my friend, Fred Seddon, whose vast knowledge of philosophy enabled me to avoid many errors that I otherwise might have made. Next Table of Contents Index FOOTNOTES 1. F.A. Hayek, Individualism and the Economic Order 35, 39, 46, 47. Back

(Chicago: Henry Regnery Company, 1948),

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[Page xiii]

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PART I

PART I LAWS Next Table of Contents Index

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Chapter 1

Chapter 1 THE NATURE OF SCIENCE Economic history is a description of economic events, of quantities sold at particular prices on particular days, of shipments of goods from place to place, of hours worked, of wages paid and products produced, of buildings erected and crops grown. But economics aspires to something more than a mere description of economic events. Economics is the understanding, the “verstehen ,”(1) that makes sense out of the mere facts of economic history. Indeed, economics aspires to rise to the stature of a science, and to reach this lofty goal it must explain economic events, much as physics and chemistry strive to explain physical and chemical phenomena. “There is little disagreement that explanation is the major aim of science."(2) If economics cannot explain, it cannot claim to be a science. An event can be explained only by giving its cause.(3) Even if the proffered cause is incorrect and is not the actual cause, one has not even attempted to explain the event by any other type of response. “ . . . we cannot feel that we have understood a thing until we can give an account of its causes and its modus operandi.”(4) “Knowledge is the object of our inquiry, and men do not think they know a thing till they have grasped the ‘why’ of it (which is to grasp its primary cause).” (5) To give a cause, as to say that event A caused event B, implies the existence of a law, if A, then B. “Nor can one speak of causes and effects in the individual case unless one possesses a theory that treats certain connections between cause and effect as having a universal range of applicability.”(6) That is, “A caused B” is not an assertion that A is a unique event and that only that particular event could cause an event like event B. Rather, “A caused B” means that any and all events like event A will cause an event like event B. The phrases “like event A” and “like event B” mean that the causal relationship exists between certain aspects of these events, which must be correctly identified. Once these causal aspects are identified, however, then the causal relationship will exist [Page 3] between those aspects in all events that possess them. Striking a match ignites it. “Striking” entails physical contact, air movement across the match, a change in its velocity and perhaps other events, but it is the heat generated by frictional contact that ignites the match. The implication of the statement that heat caused the match to ignite is a general rule, a law, that (an adequate amount of) heat will ignite any and all (properly constructed) matches, regardless of the source of the heat. Economics, then, as a science events.

, is a collection of laws that explain economic

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Table of Contents Index FOOTNOTES 1. Ludwig von Mises, Human Action, 3rd ed. (New Haven: Yale University Press, 1966), 49. Back 2. Sidney Morgenbesser, International Encyclopedia of the Social Sciences, “Scientific Explanation” (New York: Macmillan Company and The Free Press, 1968), 117. Back 3. Ibid. Back 4. Aristotle, The Physics, 26, cited by William P. McEwen, The Problem of Social-Sci entjfic Knowledge (Totowa, N.J.: The Bedminster Press, 1963), 328. Back 5. W.D. Ross, ed., The Works of Aristotle (Oxford: Oxford University Press, 1928), page 194b. Back 6. Ludwig von Mises, Epistemological Problems of Economics, trans. George Reisman (New York: D. Van Nostrand Company. Inc., 1960), 1—2. Back Page 4

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Chapter 2

Chapter 2 ANALYSIS OF LAWS A law is a statement about a causal relationship between two variables, A and B. All laws can be placed in the form, “if A changes, then B changes,” where the “if A changes” is the antecedent, and the “then B changes” is the consequent. The analysis of laws presupposes both the existence of laws and the existence of a knower of those laws, an “observer.” The properties of an observer will be developed more fully as we proceed, but for now let us say merely that an observer is capable both of discovering the relationships between variables that are described by laws and of creating those relation ships. There are, then, two kinds of laws: observer-made laws and natural laws. An observer-made law is a law that describes a relationship created by an observer. Such a relationship is arbitrary, and cannot be independently shown to describe a necessary truth. A natural law, on the other hand, describes a relationship that is discovered by an observer; its truth does not depend upon the thoughts of any particular observer. Statutes, common laws, and contracts (e.g., “if you change your behavior in that way . . . , I will change my behavior in this way . . . “) are observer-made laws. So are mathematical equations, such as x = 2y (“if x changes, then y changes by the same percent”). The relationship between x and y in that equation was not discovered by an observer, but rather it was simply stated to be so. In a natural law, on the other hand, the statement is not an arbitrary relationship, but rather is a relationship that is already true. For example, a law, such as, “if the area of one square changes by A, then the area of a second square, which has a diagonal of the first square as one of its sides, will change by 2A,” is a natural law because the consequent can be discovered to be true by examining the necessary properties of all squares. Unlike an observermade law, the existence of a natural law means that the variable in the consequent of the law must change if the variable in the antecedent changes, whether or not an observer is even [Page 5] aware of the relationship. If there is a law of gravity, then an apple released above the earth must fall, independently of all observers; if it does not fall, there is no law of gravity. This book is concerned with only natural laws. While some laws are more simply stated in the form, “if A exists, then B exists,” they are still laws if “A” is a variable, i.e., it can be more than one thing; that is, A can change from A1 to A2, etc., so that an “if A exists then B exists” statement of a law is merely the limiting case of a vanishingly small change. For example, “if a triangle is inscribed in a semicircle, then it is a right triangle,” is a law because two of the angles of the triangle are free to change and there is a causal relationship between the size of these two angles in that one angle is always 90° minus the other angle. While many laws may not be commonly stated in the “if A changes, file:///C|/Downloads/Video/Chap2.html (1 of 3) [17-9-2008 17:13:32]

Chapter 2

then B changes” format, if they are really laws, they can always be placed in that format. In physics, the conservation laws are commonly stated in the form, “if A changes, then B does not change.” For example, the Law of Conservation of Energy is that (in a closed system) if the form of energy changes, its amount remains constant. This could be restated as, “if one form of energy changes x units, other forms of energy will change -x units.” Similarly, the geometrical law that all triangles have l80° can be restated as, “if one angle of a triangle changes X°, then the sum of the other two angles must change -X°.” Statements such as “the shortest distance between two points (in a flat plane) is a straight line” and “things equal to the same thing are equal to each other,” however, are not laws, but are only deductions from the definitions of “straightness” and “equality,” respectively. Those statements do not describe changes causing changes, as laws do. A statement like, “two straight lines on a flat surface cannot enclose a space,” also follows from the definitions of “straight” and “flat” and is not a law. Similarly, Newton’s First Law, that the resultant force on an object at rest or moving at a constant velocity is zero, is not a “law,” but is only the definition of “resultant force” — that which will change the velocity of an object. Also, a statement that does not describe a causal relationship is not a law. A causal relationship means that a change in A necessitates a change in B. A statement that permits random change, such as “if A1 changes to A2, then B1 changes (arbitrarily) to B2 or B3” is not a law because an arbitrary or random change is not a cause-and-effect relation ship. If the statement is nevertheless true, then the A1 to A2 change is really one of two possible changes, which are not being distinguished. That is, the A1 to A2 change is actually either a C1 to C2 change (producing B1 to B2), or a D1 to D2 change (producing B1 to B3). [Page 6] A statement that a variable in the consequent will change not randomly, but with a particular probability is, however, a law. Constraining the variable to a particular probability demonstrates that a causal relationship exists. If B is just another way of saying A, then a statement of the form, “if A changes, then B changes,” is really the statement, “if A changes, then A changes.” This is an identity, not a law, because it does not describe a change in A as being causally related to a change in any other variable. Mathematical “laws,” for example, such as the Binomial Theorem, “if a+bx +cx 2=0, then x =(-b+(b2-4ac)½)/(2a),” are not laws at all, because the consequent is simply a more useful restatement of the antecedent. The antecedent of a law contains a variable, which, if changed, will cause a variable in the consequent to change. (Statements of laws often include more than two variables, but these can be viewed as agglomerations of several laws.) All laws have two variables, one in the antecedent and one in the consequent. Any statement not meeting this requirement is not a statement of a law. For example, “if x+y+5 and x—y= 1, then x=3 and y=2," is not a law because, although "x" and "y" are called “variables” in mathematics, they cannot vary — their file:///C|/Downloads/Video/Chap2.html (2 of 3) [17-9-2008 17:13:32]

Chapter 2

values are fixed by the statement itself. Something is a variable only if it can change, so that each change in a variable in the antecedent necessitates a corresponding change in a variable in the consequent. For example, “if A > B and B > C, then A > C,” is not a law because a change in a variable in the antecedent does not necessarily compel a change in a variable in the consequent (e.g., if A increases, the consequent does not change). Also, “if a point and a line lie on a flat surface and the point does not lie on the line, then only one line parallel to that line can be drawn through the point,” is not a law since changing the direction of the lines or the distance between the point and the line does not compel a change in any other variable. Next Table of Contents Index [Page 7]

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Chapter 3 THE MECHANISM OF LAWS Heraclitus looked at the world and concluded that everything was change — the fire that no longer burned ceased to exist. In a very fundamental way, Heraclitus was right in that only change can be experienced. That which reflects neither light nor sound, nor deflects our hand, nor otherwise changes our senses, is beyond experience. If something (1) never changes and (2) never even causes anything else to change, there is no way to ever know it exists, and that is the same as non-existence. Moreover, it is difficult to conceive of something that can cause a change without itself in some way changing, so even that which causes change must change. But it is equally difficult to conceive of a change causing a change without something not changing. For something that is changing to cause something else to change, it must “push” against some thing. One cannot push if one has no unchangeable thing against which one can exert a force. Pushing down on one side of a see-saw forces up the other side only if the board is rigid and the fulcrum is fixed. Without an unchangeable quality that required a changing A to change B there would be no causal relationship between A and B; B would then change or not change randomly, and there would be no law, and therefore no science. This unchanging quality is the “constraint” behind a law; it explains why B must change when A changes. One side of the see-saw goes up when the other side goes down because the rigidity of the board and the position of the fulcrum, the constraints, do not change. The magnitude of the change in the variable in the consequent of a law for a given amount of change in the variable in the antecedent of a law is the “proportionality constant.” While proportionality constants define the magnitude of the change, it is the constraints that explain why a change of that magnitude must occur. For example, in the law, “if the diameter of a circle changes d units, then its circumference changes πd units,” the proportionality of the constant is π, but the constraints are the un iformness curvature of the line that forms the circle, the straightness [Page 8] of its diameter, and the flatness of the plane the circle lies in; it is these constraints that impel a proportionality constantly of exactly π. A subset of a variable that is subject to a particular constraint is also subject to the same constraint. Thus, if momentum constrains changes in velocity to changes in mass, then it also constrains angular velocity and the angular velocity of a particular spinning skater. Similarly, if mortality constrains changes in men, then it constrains changes in Socrates. While the constraint is a quality, a property, it must be a quality of some thing — a quality does not exist in the abstract.(1) That which possesses a constraint is an “existent.” file:///C|/Downloads/Video/Chap3.html (1 of 4) [17-9-2008 17:13:34]

Chapter 1

An existent that did not constrain variables would have no existence because only change can be detected — that which neither changes nor causes change does not exist. Every existent must have at least one constraint, and every constraint implies existents. Although the constraint does not change during the operation of the law, at least something about at least some existent must, in some way, change, for one cannot conceive of no change causing change. Following Democritus, that existent will be called the “atomic existent.” (“Atomic existent,” as used in the analysis of laws, is not synonymous with a physical atom.) Atomic existents themselves do not change, but the relationship between atomic existents does change. For example, a triangle is made of lines on a surface. The lines are the atomic existents that change their relative positions to change the angles of the triangle, which are the variables. The constraints of the lines are their straightness and their widthlessness. Atomic existents must change their relationships in some medium, which is the “space.” Since space can also possess constraints (e.g., the flatness of a plane in which a line moves, the straightness of a line along which a point moves) space is also an existent.(2) Finally, all change cannot be instantaneous, for then the sum total of all existence would have come and gone in a flash. It would be meaningless to speak of “laws” if all changes occurred at the same instant, nor could one separate cause from effect if both occurred instantaneously. Since time constrains the rapidity at which the relationship between atomic existents can change, it, too, must be an existent. Thus, a “variable” is really a relationship among atomic existents. When that relationship changes, the variable changes. The relationship may be one of position, so that variables change as atomic existents move, or the relationship may be something other than position, such as stature (see subsequent chapters). An “event” is a change in a variable. If the variable that changes is in the antecedent of a law, then that event “causes” the change in the variable that is in the consequent of the law. (In conceptual and phraseological [Page 9] laws, the causation is a logical, rather than a physical, necessity, and the word “implies” is used.) “Cause” means necessitated by the constraints, which specify which changes in variables must occur when changes in other variables occur. Since all changes in variables are really changes in the relationship between atomic existents, when a change in a variable causes a change in another variable, the underlying cause is a change in the relationship between atomic existents. Thus, one can speak of the cause of the change in a variable as being either a change in another variable or as being a change in the relationship between atomic existents. All ultimate laws are laws of causation, and the only universal law beyond the pale of file:///C|/Downloads/Video/Chap3.html (2 of 4) [17-9-2008 17:13:34]

Chapter 1

mathematics is the law of universal causation, namely, that every phaenomenon has a phaenomenal cause; has some phaenomenon other than itself, or some combination of phaenomena, on which it is invariably and unconditionally consequent. (3) Since it is the relationship between atomic existents that changes, not the relationship between spaces or times, time passing or isolated motion or stillness of atomic existents cannot, in itself, cause change. Unless the relationship between atomic existents is disturbed, no variable will change, regardless of that variable’s position in space or time. “Space does not represent any property of things in themselves . . . (4) “Hence the place of a thing is neither a part nor a state of it, but is separable from it.”(5) Similarly, time passing is not itself an event and cannot cause an event to occur.(6) “Time is not something which exists of itself, or which inheres in things as an objective determination . . . “(7) This does not mean that physical space cannot “curve” or physical time “dilate,”(8) but only that identical atomic existents must remain identical, and variables must change identically, when placed in identical environments regardless of where they are in time or space. (This implies that the fundamental physical laws, discussed in Chapter 5, also must not change in time or space.) Thus, all laws can be analyzed in terms of changing variables causally related to changes in other variables. The mechanism by which a law works is analyzable in terms of atomic existents changing their relationship to other atomic existents in space and time, the variables being these relationships. [Page 10] Next Table of Contents Index FOOTNOTES 1. “ ... nothing is possessed of no attributes, properties, or qualities. For this reason, when we perceive any attribute, we therefore conclude that some existing thing or substance to which it may be attributed, is necessarily present.” Descartes, The Philosophical Works of Descartes , Vol. 1, trans. Haldane & Ross (Cambridge: Cambridge University Press, 1977), 240. Back 2. If space were a non-existent, it would not constrain the movement of physical things through it and the speed of light would be infinite, as no time is required to traverse that which does not constrain movement. Back

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3. John Stuart Mill, Collected Works , Vol. X, ed. J.M. Robson (Toronto: Univ. of Toronto Press, 1969), 293. Mario 1. Rizzo, ed. Time, Uncertainty, and Disequilibrium (Lexington, Mass.: Lexington Books, 1979), “Is Interest the Price of a Factor of Production?” by Sir John Hicks, 54. Back 4. lmmanuel Kant, Critique of Pure Reason , trans. Norman Kemp Smith (New York: Random House, 1958), 46. Back 5. Aristotle, Physics, trans. W.D. Ross, The Works of Aristotle (Oxford: Oxford Univer sity Press, 1947), 209b. Back 6. This is a denial that a passage of time causes radioactive decay. Back 7. Kant, Critique

, 49. Back

8. Since physical space is a physical existent and neither physical existents nor their constraints can be experienced, its rectilinearness or curvature can not be experienced. When Einstein speaks of “curved space” and “time dilation,” he is describing the behavior of attributes (light bending as it passes the sun, for example), not an experience of space. An observer falling toward a black hole would not experience any time dilation, though an observer at a distance would say that attributes changed that show that it occurred. Back [Page 11]

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Chapter 4 TYPES OF LAWS Having presented an analysis of laws and a suggested underlying mechanism by which they “work,” we can now inquire into what sort of domains laws will apply. That is, what is there that exists that will be ruled by law? The answer, though it may be difficult to comprehend, is everything. Nothing can exist without being constrained to be what it is and to not be something else. A horse cannot be a horse if it can sprout fins or plumbing fixtures. A triangle cannot be a triangle unless it is constrained to exactly three sides. Even the Alice in Alice in cannot exist as a character if she is unconstrained and Wonderland becomes anything and everything. If something existed uniformly everywhere, so that it did not not exist anywhere, its existence could never be known, and that is the same as its nonexistence. To exist is to be A and not B. To exist as A means to change in a definite and nonarbitrary way in response to another change, and if a change causes another change, there is a natural law that dictates that relationship. Thus, entities that can change or cause change without obeying a natural law (i.e., the “supernatural”) cannot exist, and changes in attributes that do not follow a natural law (i.e., “random” changes) cannot occur (i.e., “randomness,” change that does not obey a natural law, can exist only as a pure concept). To put this more concisely, ontology is the opposite of architecture in that “function follows form.” That which is constrained to no form can have no function and cannot be known. (This is why many horror movies are not believable—they assert that a function can continue unimpaired although the form is destroyed.)(1) At this point, it is necessary to classify “things that exist” into two categories, . . . the two great departments of existence,” as John E. Cairnes put it, “matter and mind.” Everything that exists is either experienced by an observer or is created by an observer. That which the observer experiences are “attributes,” the variables in physical laws, and that which he creates are “concepts,” the variables in conceptual laws and the existents in physical and conceptual laws. [Page 12] What is the observer in this scheme, matter or mind, or neither? He is not attributes, though he possesses a body, because he is not subject to physical law, though his body is (see Chapter 16). Nor is he a concept, for a concept can neither experience physical variables nor change them. That leaves “neither,” but a more detailed description of the nature of the observer is beyond my understanding.(2) SECTION A — CONCEPTS The link between the observer and the world he observes is concepts. A concept is a thought, file:///C|/Downloads/Video/Chap4.html (1 of 6) [17-9-2008 17:13:37]

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an idea, a meaning. While a concept is not physical, it nevertheless corresponds to a particular physical structure in the observer, in particular, in his brain. (See Appendix A for details.) Concepts are created by observers (3) in the sense that only an observer can assign a particular meaning to a particular physical structure in his brain. A concept is mental, an attribute is physical. Since the observer is the concept-creating awareness itself, and not any attributes with which that awareness may be associated, urges and feelings that originate in the body are attributes that we experience,(4) not concepts that we create. A concept is a “denotative concept” if it is simply a “stand-in” for something that is, or could be, in principle at least, if it existed, experienceable by a suitably positioned observer. That is, a denotative concept substitutes for attributes or changes in attributes (but not for physical existents, which cannot be experienced). “Unicorn” and “pressure,” for example, can be denotative concepts. A concept is a “pure concept” if it is not a “stand-in” for that which would be directly or indirectly sensible if it existed. Pure concepts are creations of the observer, not of the experienced physical world, or even of the supposed experienced world. Concepts such as “justice,” “truthfulness,” and “divide,” for example, are pure concepts. Since they cannot be experienced, all proportionality constants are pure concepts. A physical proportionality constant (e.g., Planck’s constant, the gravitational constant) is a pure concept that results from the choice of the units in which the attributes are measured. As an example of a physical law, “if two charges q and q ’ are a distance r apart in a medium of dielectric constant e , then the electrostatic force between them is (qq ’ )/ 2 ). The proportionality constant of 1/(4πe ) is neither a stand-in (a denotative (4πer concept) for a physical variable, nor is it a constraint or an existent. All economic concepts, such as "prices," "quantity sold," "inflation," "depression," and "unemployment," are pure concepts, not denotative concepts. A “price,” for example, of “7,” is not a stand-in for the ink on this paper [Page 13] that forms that number, nor is it a stand-in for the sound made when someone shouts “seven,” nor is it a stand-in for a tiny magnetic force in a computer. While the ink, sound, and magnetic force are attributes, the concept of price is the meaning attached to those attributes, and that is a pure concept. No one can discover what the symbol “7” means by physically or chemically analyzing attributes — no one can experience a price. One can discover what that ink mark means only by asking the observer what meaning he attaches to that mark. Quantities are denotative concepts, but the “quantity sold” of a given stock is a pure concept, a change in ownership, which cannot be discovered by experiencing the physical properties of the stock. Even the concept “money” is not a stand-in for a physical thing, but is the meaning that observers attach to some physical thing. If “money” were a denotative concept, then as long as the attribute it stood for did not physically change over time, that attribute would continue to be “money.” But the same piece of paper with ink on it can be “money" one day and “not money” the next, even though the paper itself does not change, so “money” is not a denotative concept. file:///C|/Downloads/Video/Chap4.html (2 of 6) [17-9-2008 17:13:37]

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All concepts can, in principle at least, be transferred between observers. That is, a concept created by one observer can, in principle at least, be known by another observer because a concept, even a pure concept, is ultimately defined in terms of denotative concepts, for which one can point to an attribute. For example, one can point to similar plants or animals to illustrate “species,” and point to things that are changing to illustrate “change,” then combine those two concepts to create the concept “evolution.” One can show different rates of vibration to illustrate “frequency”; one can show agglomerations of blocks to illustrate “multiply”; one can show pictures of faces to illustrate pain or joy ; one can even draw a “unicorn” or write formulae for “forty-eight dimensional space.” All concept transfer between observers is via attributes that symbolize concepts. An observer (e.g., a child) exposed to highly selective stimuli may create a particular concept that the stimuli suggests to him, but no attribute can cause him to attach a particular meaning to a particular attribute. Once an observer has created a concept, however, he can confirm the identity of the concept with concepts created by others. For example, a child might create the concept “two” upon being shown pairs of various objects, and attach it to the sound “two” if that sound is heard at the same time. By pointing to a new pair and saying, “two,” he might then confirm, that his concept is identical to the concept to which his teacher attaches the same sound.(5) This does not mean that all observers will agree that a particular attribute should stand for a particular concept, but rather [Page 14] it means that it is possible, in principle at least, for observers to communicate using concepts. We may not agree on which concepts the name “democracy” should be applied, but I can probably get you to understand what I mean by that concept. Measurement is a comparison of attributes with attributes. When something is measured, the attributes of a standard are compared to the attributes of an unknown in order to establish an identity between the unknown and the standard. Any observer can experience the attributes and make the comparison. Establishing the identity of concepts, however, is more personal, since the observer making the comparison must create both concepts, and no other observer can directly test the accuracy of his creations or their identity. When one observer asserts that - 40°C is the same as - 40°F, another observer must re-create those concepts himself to test the comparison, checking with the first observer to see that he has created the same concepts. This is an entirely different process from measurement.(6) When a poll taker asks people a question, a machine can measure the wave pattern of the sound and match it with a printed “yes” or “no” but only an observer can compare the concept that that sound symbolizes with the concepts “yes” and “no.” SECTION B — ATTRIBUTES That which can (or could, if it existed), in principle at least, be experienced by a suitably positioned observer is an “attribute.” An experience occurs when an attribute, directly or file:///C|/Downloads/Video/Chap4.html (3 of 6) [17-9-2008 17:13:37]

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indirectly, changes the senses of the observer’s body, thence the attributes in his brain. (See Appendix A.) Thus, an attribute is a property, the ability to change another attribute in the brain of an observer.(7) The force of a magnetic field, for example, is an attribute, because an observer can experience it by holding a magnet in it. To exist as an attribute is to exhibit a particular behavior. Indeed, the behavior is the attribute. The attribute “hard,” for example, means that a second attribute moving against “hard” will stop abruptly, a particular behavior. If it does not stop abruptly, there is no attribute “hard.” Physical existence without attributes is non-existence, since that which neither can be experienced nor can cause an experience does not have physical existence. A collection or cluster of attributes is an “entity.” While attributes within a cluster of attributes may be changing, as long as the attributes remain a cluster, the cluster itself is referred to as an entity. A river, a rock, an ear, and ten watts of ultra-violet light are all entities. Because “entity” is broadly defined, a man plus a table may together be an entity, but such an aggregate may not be analytically very useful. [Page 15] The entities we must contend with, hard floors, for example, are due to the clustering of trillions upon trillions of attributes of smaller entities, those of atoms, electrons, and neutrons, which in turn are clusters of attributes of still smaller entities, until one reaches a “primary attribute,” a quark, perhaps. Ultimately, all attributes are forces — tendencies for other attributes to change their space-time coordinates. There are four types of natural laws — physical laws, conceptual laws, psychological laws, and praxeological laws, all of the form, “if A changes, then B changes.” These types of natural laws arise from the relationship of the variables to the observer. Laws in which the variables in both the antecedent and the consequent are denotative concepts are physical laws. Laws in which the variables in both the antecedent and the consequent are pure concepts are conceptual laws. Laws in which the variable in the antecedent is a pure concept and the variable in the consequent is a denotative concept are praxeological laws. Laws in which the variable in the antecedent is a denotative concept and the variable in the consequent is a pure concept are psychological laws. A physical law is of the form, “if denotative concept A changes, then denotative concept B changes.” A conceptual law is of the form, “if pure concept A changes, then pure concept B changes.” A praxeological law is in the form, “if pure concept A changes, then denotative concept B changes.” A psychological law is in the form, “if denotative concept A changes, then pure concept B changes. Next Table of Contents Index

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FOOTNOTES 1. If it is true that nothing can exist that is unconstrained, how is free will possible? The assumption behind that question is that a freely willed choice is arbitrary or random, and therefore is not governed by law and cannot exist. But, contrary to John Stuart Mill 1” ... reign of law does not extend to the origination of volition.” John Stuart Mill, The Collected Works of John Stuart Mill , ed. J.M. Robson (Toronto: University of Toronto Press, 1969), 475], everything that exists is governed by law, including “the origination of volition.” First, free will means only “not governed by physical law,” not “ungoverned by natural law.” That is, it means that no change in attributes causes the changes in attributes that occur in an act of free will. It does not mean that the change in attributes is uncaused. Footnote 2, which follows, suggests that observers may be physical atomic existents. Attributes are relationships between physical atomic existents. If certain relationships between physical atomic existents are not expressed as an attribute (i.e., they form a “null attribute”), then a change from a null attribute to an expressed attribute will be observed as being a spontaneous change in attributes — free will. It is not a random change, however, as it still obeys the natural laws that govern the relationships between physical atomic existents. [This may imply, as Northrop suggests, that “the ultimate atomic entities of which everything is constituted have psychical as well as physical and formal properties.” F.S.C. Northrop, Science (Woodbridge: Ox Bow and First Principles Press, 1979), 253.] [Page 16] Back 2. A possibility is that an observer is an arrangement of physical atomic existents (see next chapter), for the following reasons: (1) A cannot affect B unless A is, in some way, the same thing as B. Observers can change attributes, but are not attributes, so they must be physical existents. By changing the relationship between the physical atomic existents that comprise them, observers can generate the attributes necessary to exhibit free will. (2) Physical metalaws (see next chapter) have the same form as praxeological laws, “if pure concept A changes, then denotative concept B changes.” (3) Nothing can experience itself. To experience a thing, one must not be the thing. Observers cannot experience physical atomic existents, perhaps because that is what they are. Back 3. Concept creation should not be confused with pattern recognition, which is a deterministic mechanism that does not require a conscious, concept-creating mind. In pattern recognition, a perceived arrangement (spatial) or sequence (temporal) of attributes is matched with a recalled arrangement or sequence of attributes, and another event indicates that a match has been made. Concept-creation is not a physical matching, but rather is an assignment of meaning to attributes. file:///C|/Downloads/Video/Chap4.html (5 of 6) [17-9-2008 17:13:37]

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Men who are attracted to slender women (who can reproduce) but not to fat women (who are seen as pregnant and therefore not capable of being impregnated), are responding to a builtin pattern recognition mechanism. Similarly, birds that recognize a particular song are also using pattern recognition. Chimpanzees who not only respond to sign language, but who rearrange the signs in original and meaningful ways, however, may be engaging in concept creation, but they could also be simply combining sensations. For example, a chimpanzee knows the sign for “water,” “more,” and “sweet.” To get more watermelon, he signs "more" "sweet” “water.” Is he creating concepts or combining the sensations of sweet and wet to apply to the combined sensations he experiences in eating watermelon? Unless he can create pure concepts, one should assume he is engaging in pattern recognition. Back 4. For praxeological purposes, it does not matter whether the attributes are really only sensations, or are really manifestations of an external reality; “experience” may be interpreted either way, though the latter view will be adopted as it is more conventional. Back 5. Jean Piaget, The Construction of Reality in the Child , trans. Margaret Cook (New York: Basic Books, Inc., 1954). This suggests that children should be taught by creating environments that lead them to create particular concepts. After a confirmation is obtained that the child has created the desired concept, the environment is altered to suggest a second concept that may encompass the preceding concept, until an entire hierarchy of concepts is learned. Back 6. This does not mean that “science” is limited to the physical world of attributes, however, because science is not measurement, as some have said, but rather, science is natural law. Back 7. Murray N. Rothbard, Individualism, and the Philosophy of the Social Sciences

(Cato Institute, 1979), 5. Back [Page 17]

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Chapter 5

Chapter 5 PHYSICAL LAWS Physical laws, laws in which the variables are denotative concepts, describe how attributes, the physical variables, change when other attributes change. While attributes can be experienced by an observer, he can never experience the physical existents responsible for those attributes because only change can be experienced and, while the relationship between atomic existents changes (which is the variable), the existents themselves do not change. That is, physical variables are denotative concepts, and physical existents are pure concepts. As Kant observed, we can know only that attributes exist; we cannot know what it is that is responsible for the attributes: … we can therefore have no knowledge of any object as thing in itself, but only in so far as it is an object of sensible intuition, that is, an appearance...(1) The so-called “constants” of physics — mass, energy, momentum, spin, charge, etc. — are postulated , not experienced, and can never be experienced. “Mass,” for example, is a pure concept we have created to account for attributes such as weight and inertia. Thus, even though “mass" appears in many physical laws, it is actually its purported attributes, weight or inertia, which are experienced in testing the law. That which physicists call “constant” are not physical existents, but rather are agglomerations of attributes, where the agglomeration as a whole does not change, though individual attributes in the agglomeration must change if the agglomeration is to be experienced.(2) These collections of attributes, “entities,” don’t change because the constraints of the atomic, spatial, and temporal existents prevent them from changing (or, which is the same thing, require them to exist as they are). It is attributes and relationships between attributes that are experienced as conserved in physics, not existents. [Page 18] The conservation of attributes, such as the attributes that are attributed to the pure concepts of matter and energy (which can together be called ‘mattergy” since they seem to be two 2)), for example, is due to the constraints of the atomic forms of the same thing (E =MC existents — perhaps their indestructibleness and non-creatableness. Other attributes that are conserved, such as the force attributed to the pure concept “momentum” (mass times velocity), are also due to these constraints. The constancy of the speed of light in a vacuum may derive from the constraint of the permeableness of the spatial existent, which limits the speed of light to 300,000,000 m/sec.(3) Observed physical laws specify how attributes must change when other attributes change. The underlying mechanism is that when physical atomic existents are in particular relationships file:///C|/Downloads/Video/Chap5.html (1 of 7) [17-9-2008 17:13:40]

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with other physical atomic existents, particular attributes can be experienced. (4) For example, if that which is experienced as “electrons” is started moving (relative to a magnet), the force attributed to an electromagnetic field can be experienced around it. The force is an attribute, a detectable property having particular space-time coordinates and its behavior is governed by a physical law. But the relationship between the physical atomic existents which is required to produce the experience of the force, is governed by a “metalaw” that cannot be discovered by experience. An entity, such as rock or an atomic nucleus, may be unchanging as an entity in one law, yet be variable in another law. For example, the nucleus may obey chemical laws as a single entity, yet obey nuclear laws as more than one entity. Utimately, however, there must be a “primary” attribute, an attribute that is not an entity. One can speculate that a primary attribute would be the attribute created by the simplest relationship between two physical atomic existents. Further, one can speculate that a physical metalaw would specify all the attributes created by all possible relationships between physical atomic existents. The reason for this is that two physical metalaws cannot impel contradictory attributes, so physical metalaws cannot “overlap” in time or space. That is, one metalaw could not specify, “if relationship A, then attribute B1,” while another metalaw has the same antecedent but “attribute B2” for a consequent, where B1 and B2 cannot co-exist. (Physical metalaws could specify different magnitudes of the same attribute, which are then summed, but they cannot specify non-additive, contradictory attributes.) Then all physical metalaws could be summed up in a single general physical metalaw. All non-general physical metalaws and all ordinary physical laws would then be deducible from the general physical metalaw, because the general physical metalaw would specify the attributes that result from all possible relationships between the physical atomic existents. [Page 19] In the general physical metalaw, as the relationship between physical atomic existents changed in a single way, the primary attribute generated could only increase or only decrease, and could never reverse direction, because a reversal would imply a change in the spatial existent in which the relationship between the physical atomic existent changes, making the spatial existent experienceable and therefore an attribute instead of an existent. Reversals or points of inflection in the magnitude of attributes would occur only when the attribute is not a primary attribute, or it is a primary attribute and the relationship between physical atomic existents changes in more than one way. A relationship between non-primary attri butes, for example, such as the following:

would be the result of the addition of at least two more fundamental relationships between the attributes such as:

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That is, the above relationships express a compound law, “if attribute A changes, then attribute B changes,” which summarizes at least two more fundamental laws, “if attribute A1 changes, then attribute B changes,” and “if attribute A2 changes, then attribute B changes,” where A is A1 plus A2. For example, the force between two protons goes from attractive to repulsive as the distance between the protons increases. This is because the force is the sum of two more fundamental forces, the attractive strong nuclear force, which dominates at short distances, and the repulsive elec tromagnetic force, which dominates at long distances. [Page 20] Any change in an ordinary physical law must itself obey a physical law, for otherwise changes in physical laws would be random and then changes in attributes would also be random. For example, a physical proportionality constant in a physical law might change, but that change would obey another physical law.(5) A physical event is a change in an attribute. The change in the attribute may or may not be directly observable, but all attributes, and therefore all changes in attributes, are in principle detectable by a suitably positioned observer because an attribute that cannot affect any other attribute has no existence. If the space-time that attributes change in is identical with the spatial and temporal existents, then a change in the spatial or temporal coordinate of an attribute would be continuous because all portions of the spatial and temporal existents are the same as all other portions — otherwise spatial and temporal existents would be attributes, not existents.(6) A dis cretely changing spatial or temporal attribute coordinate would imply an absoluteness to time and space, so that different times and places having identical attribute environments obeyed different physical laws, and time and space could be experienced as attributes. A change in an attribute, however, is discrete because all attributes are detectable. A continuous change in an attribute would imply the existence of an attribute, the attribute gained or lost in the change, which had zero as the limit of its effect on other attributes; such an attribute would not be an attribute because an attribute with no effect on other attributes has no existence. This is consistent with known atomic particles, which are discrete, and with quantum mechanics, which treats the attri butes of energy as existing in discrete packets or quanta. Because attributes change discretely, and attributes are the relationship between physical atomic existents, it follows that the relationship between physical atomic existents must change discretely. This implies that as the relationship between physical atomic existents changes, it changes in a peculiar way, jumping or skipping.

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Physical causation is instantaneous. After each interval of time Δt, an attribute has either changed or it has not changed. Because time is continuous, Δt can be reduced to zero as its limit, so the change in the attribute will be instantaneous. “The infinite divisibility of space implies that of time, as is evident from the nature of motion.”(7) A series of physical events, each caused by the preceding event, is a “chain of causation.” Event A is the “immediate cause” of event B if event A caused event B and there is no other cause of event B nearer in time to event B than event A. Events can have more than one cause in the sense that event A causes event B, which causes event C, so that [Page 21] both A and B cause event C, or in the sense that event B is a statistical physical event (i.e., an event that is the average outcome of numerous substituent events) which can be caused by either event A or event C, but an event cannot have two immediate causes. The continuity of time, and therefore its infinite divisibility, means that perfect simultaneity of unrelated events cannot occur — one event must be closer in time. That is, a situation cannot exist where event A will not cause event B and event C will not cause event B and event A will not cause event C and event C will not cause event A, but events A and C occurring at the same instant will cause event B. Econometric equations such as Y = x 1x 2 where x 1 and x 2 together “cause” Y cannot describe physical causation, even when all the variables are attributes, not concepts, because a physical event can have only one immediate cause. If B is a statistical physical event that may be caused either by event A or event C (e.g., a chemical reaction caused by temperature increase or air pressure decrease), one might observe that event B is caused 60 percent of the time by event A and 40 percent of the time by event C.(8) But an assertion that a primary event (i.e., a change in a primary attribute) is primary caused 60 percent of the time when a second primary event occurs is in error. If event A occurs, then primary event B must occur. Either (1) A is not the immediate cause of B and ceteris paribus has not been maintained (see Chapter 15) so that the chain of events from A to B is being disrupted 40 percent of the time, or (2) A is defined so as to include events that do not cause B (i.e., A is not a primary event), or (3) A is not the cause of B (i.e., there is no “if A changes, then B changes” law). If the appropriate physical atomic existents have the appropriate relationships with the other physical atomic existents, physical laws must be obeyed, and primary event A will cause primary event B all of the time. A law that requires the variable in the consequent to change with a particular probability is not a primary law (i.e., the attributes that change in the law are not primary attributes). As David Hume put it,” . . . what the vulgar call chance is nothing but a secreat and conceal’d cause.”(9) Physical causation must be atomic existent-to-atomic existent because it is changes in the relationships between atomic existents that are manifested as changes in attributes; since the atomic existents themselves cannot be experienced, however, causation will be experienced as attribute-to-attribute. An increase in national income cannot physically cause an increase in national consumption because the abstractions “national income” and “national consumption” file:///C|/Downloads/Video/Chap5.html (4 of 7) [17-9-2008 17:13:40]

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are pure concepts, not attributes.(10) If one speaks of changes in concepts causing events or being caused by events, one is not speaking of physical causation because only attributes can physically cause. [Page 22] The existence of attributes implies a law that is usually considered to be an economic law (but is not a praxeological law), the Law of Diminishing Returns (also known as the Law of Diminishing Marginal Physical Product or the Law of Variable Proportions): “If attributes A and B are required to physically produce C, and B is held constant while A is increased from zero, then C will increase then decrease.” The fact that there are physical laws means that there are at least two types of attributes, one type in the antecedent and one type in the consequent. (11) These two types are distinguishable because a third attribute does not respond the same to them. If one type of attribute is replaced by another type of attribute, the resulting attribute is different, which is the essence of the Law of Diminishing Returns. Now the Law of Diminishing Returns is simply one way of putting the obvious fact that different factors of production are imperfect substitutes for one another.(12) The fact that output changes as more and more of one input is added while the other inputs remain fixed is just another way of saying that attributes are different.(13) Next Table of Contents Index FOOTNOTES 1. Immanuel Kant, The Critique of Pure Reason , trans. Norman Kemp Smith (New York: Random House, 1958), 29. This idea has been called “epistemological dualism.” “Whatever knowledge we have of real objects is indirect or representative, the datum whereby you know any such object is not identical with the object known.” Lovejoy, “The Revolt Against Dualism,” The Philosophy of Social Explanation , ed. Alan Ryan (Oxford: Oxford University Press, 1973), 303. “What would commonly be called a ‘thing’ is nothing but a bundle of coexisting qualities such as redness, hardness, etc.” Bertrand Russell, Inquiry into Meaning and Truth (New York: W. W. Norton & Co., Inc., 1940), 120. “Isolated material particles are abstractions, their properties being definable and observable only through their interactions with other systems.” Niels Bohr. Back file:///C|/Downloads/Video/Chap5.html (5 of 7) [17-9-2008 17:13:40]

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2. This is, perhaps, the explanation for Heisenberg’s Uncertainty Principle. When attributes are agglomerated, a change in one attribute in the agglomeration must be offset by a change in at least one other attribute in the agglomeration, one attribute being the variable in the antecedent of a physical law and the other being the consequent. No attribute can be observed except by changing it. Thus, observing an agglomeration requires changing an attribute in it. When the agglomeration is small, the offsetting change will be large relative to the whole agglomeration. If there are only two attributes in the agglomeration, for example, velocity (i.e., the attributes that we interpret as being “velocity”) and position, then changing velocity to observe it means position must change to [Page 23] offset the change in velocity. Attempting to observe both velocity and position at the same time requires that both be changed at the same time. Since time is continuous, both cannot be changed at exactly the same time and the offsetting changes will reverberate back and forth in a haphazard fashion. Back 3. Note that only one constraint of an existent must be unchanging as the variables in a law change. If space warps in the presence of matter, then “warpness” becomes a variable in a law that relates it to matter, though it may be a constraint in another law. Back 4. Physical atomic existents should not be thought of as having any particular form, since their form cannot be experienced. Back 5. “Does Gravity Change with Time?” by Paul S. Wesson, Physics Today , 33 (July 1980). If gravity has changed, it is not because time has passed, but because attributes, and therefore the relationships between atomic existents, have changed. Back 6. Henry Margenau, The Nature of Physical Reality Inc., 1950), 155—159. Back

(New York: McGraw-Hill Book Co.,

7. David Hume, Treatise of Human Nature (Oxford, 1888), 31. Back 8. Ludwig von Mises, Human Action

, 23. Back

9. David Hume, Treatise, 130. If “randomness” is defined as an uncaused change in an attribute (including the coming into existence of an attribute), i.e., a change which does not obey a natural law, then, randomness cannot be a denotative concept. Most events offered as examples of randomness, such as radioactivity, occur according to rigid schedules, making it virtually impossible for them to be uncaused. Back

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10. “In fact, neither aggregates nor averages do act upon one another, and it will never be possible to establish necessary connections of cause and effect between them as we can between individual phenomena.” F.A. Hayek, Prices and Production (Fairfield, N.J.: A.M. Kelley, 1967), 4 & 5, and A Tiger by the Tail (Cato Institute, 1979), 14. Back 11. The existence of an observer implies at least two types of attributes since an observer can change attributes.The existence of two types of attributes does not imply the existence of two types of physical atomic existents, however, as atomic existents of a single type could be arranged in different relationships to give different attributes. Back 12. Lionel Robbins, An Essay on the Nature and Sign~ficance of Economic Science 1962), 76. Back

(London: Macmillan and Co., Ltd.,

13. A final note — I am not a physicist and I hope the reader will excuse any errors I have made in applying the analysis of laws to the physical domain. Back [Page 24]

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Chapter 6

Chapter 6 CONCEPTUAL LAWS In a conceptual law, the variables, existents, and their constraints are all pure concepts, not denotative concepts. There can be many types of conceptual laws, depending on the definition of the variables, existents, and constraints. The most common systems of conceptual laws are the various geometries. Geometrical variables include angle, degree of curvature, shape, structure, and size. The geometrical atomic existents include the points, lines, and planes that are moved to change the variables. If a point is moved along a line, the point is the atomic existent and the line is the spatial existent in which the point moves. If a line is moved in a plane, the line is the atomic existent and the plane is the spatial existent. Constraints include the dimensionlessness of points, the straightness, widthlessness, or uniformness of curvature of planes. For example, the variable in the consequent of the geometrical conceptual law, “if one angle of a triangle inscribed in a semicircle changes X°, another angle changes -X°,” is constrained to exactly -X° because, as the other angle changes, the uniformness of the circle’s curvature, the straightness of the lines, and the flatness of the surface require that exact angle. There are several conceptual laws that are of interest to the study of economics. In the Laws of Superior and Comparative Advantage (see Appendix B), the atomic existents are factors of production. Just as chemical atoms can form different molecules, depending upon how they are related to each other, so the factors of production can form different products, which depend upon the relationship between the factors. The quantities of factors used in each relationship and the quantities of the resulting products are the variables. The constraints, the “givens,” are the relationships that are possible and the ratio of quantity of factors to quantity of products for each relationship. In the Law of Comparative Advantage, each producer can combine factors in (at least) two ways, resulting in (at least) two products having different prices (the price is the constraint — each producer’s ratio of the number of units of input he [Page 25] must sacrifice per unit of output). Given the prices, the output of the two products in a desired ratio can be increased to a maximum if the factors are combined by each of the two producers according to the law. While the Law of Comparative Advantage is extremely useful, once the epistemic correlation is made (see Chapter 7), it is a conceptual law, not a praxeolog ical law, because it relates pure concepts to pure concepts, not pure concepts to denotative concepts.(1) The perfect competition model, invariably taught in college economic courses, is another economic conceptual law. The only problem with this model is that it cannot be epistemically correlated with the physical domain (see Chapter 7). In Say’s Law (see Appendix C), the atomic existents are money and (non-monetary) goods, and the variables are the quantities of money and goods and the prices of the goods. The file:///C|/Downloads/Video/Chap6.html (1 of 3) [17-9-2008 17:13:42]

Chapter 6

constraint is a property of the “transaction space” through which these atomic existents move; it requires that the amount of money moved must equal the quantity of goods moved times their price. Given that constraint, it follows that as the quantities of goods and money exchanged changes, the prices of the goods must change so that the quantity of money exchanged equals the quantity of goods exchanged times their prices. Another type of conceptual law useful in the study of economics is the Uncertainty Laws (see Appendix D). In one of these laws (the Law of Populational Uncertainty), the atomic existents are the observers themselves, who are isolated or combined so that they can interact. The variables are the uncertainty (the number of possible states that could come into existence), and the constraints are the number of possible interactions, which is “given.” In another Uncertainty Law (the Law of Temporal Uncertainty), the atomic existents, the observers, are moved through the temporal existent, instead of through the spatial existent, and the uncertainty varies with the time from the present. The constraints are the number of prior states that have occurred. In still another Uncertainty Law (the Law of Initial Uncertainty), the variables are initial uncertainty (i.e., the number of states that could come into existence in the next instant), and the uncertainty at future times. The variables are, for example, the number of interacting observers, which would alter the initial uncertainty. The constraints are the number of prior states that have occurred. Economic conceptual laws differ from other types of conceptual laws in that in an economic conceptual law an observer is always required. That is, in a geometrical conceptual law, for example, a machine can as easily “work” the law as an observer. But in the Law of Comparative Advantage, only an observer knows if the two goods are the same or [Page 26] different (see page 90); in the perfect competition model, only observers can specify the prices; in Say’s Law, only observers can set prices; and in the Uncertainty Laws, it is observers who generate the uncertainty. Next Table of Contents Index FOOTNOTES 1. “Factors” and “products” may seem to be denotative concepts, but they are not. Whether an entity, or a change in an entity, is or is not a factor — something useful in king a product — cannot be discovered by examining the entity. “Factor” is not a “stand-in” for an entity, but rather an epistemic correlation (see Chapter 7) must be made between the pure concept “factor” and an entity. The Laws of Superior and Comparative Advantage deal with the same file:///C|/Downloads/Video/Chap6.html (2 of 3) [17-9-2008 17:13:42]

Chapter 6

product produced by different means. Whether or not two entities are the same product cannot be discovered by examining the products. (See page 90). Back [Page 27]

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Chapter 7

Chapter 7 EPISTEMIC CORRELATION If a conceptual law is to be more than just an intellectual exercise, an epistemic correlation must be performed between the conceptual domain and the physical domain.(1) Epistemic correlation means establishing an identity between pure concepts and attributes (or their denotative concepts) . The atomic existents and their constraints in conceptual laws, for example, are not denotative concepts — they are not simply stand-ins for attributes, but are pure concepts, and before a conceptual law can be applied to attributes, one must determine that the attributes are identical to the pure concepts in those respects that are relevant to the operation of the conceptual law. When the constraints of geometrical conceptual laws are epistemically correlated with particular attributes, it is necessary to show that the attributes occupy the spatial positions demanded by the constraints of the conceptual existents. For example, if the “straightness” of a line is epistemically correlated with a line drawn by a ruler, the marks must occupy the positions required by the pure concept “straight.” Different geometries begin with different constraints. For example, for a space such as a surface, the constraint in Euclidean geometry is flatness, in elliptical (Riemann) geometry it’s convexness, and in hyperbolic (Lobachewski) geometry it’s saddle-shapedness. Some constraints may not be epistemi cally correlatable, or the epistemic correlation may unnecessarily compli cate the mathematics. The epistemic correlation of the constraints of economic conceptual laws, such as the Law of Comparative Advantage, is also accomplished by showing that the constraints are true of particular attributes. For example, if the Law of Comparative Advantage (see Appendix B) is to be applied to machines or the bodies of observers, it must be shown that they have fixed input-to-output ratios (prices). The epistemic correlation may, of course not be perfect, and, in fact, the particular attributes may vary widely from the perfect ideal of [Page 28] the constraints. For example, it is impossible for an attribute point to exist that has no dimension or an attribute line to exist that is perfectly straight and widthless. A “point” in Euclidean geometry is not this dot “.“, because a Euclidean point occupies an infinitely small area, while that dot occupies a finite area. But a connection can be made between that dot and a Euclidean point in that the position of the ink that forms that dot is concentrated in a small area. To the extent that the positions of the attributes do not deviate from the ideal of the geometrical constraints, the consequent of the geometrical law will be true of changes in the positions of the attributes. On the other hand, to the extent that the attribute’s positions are dissimilar from the constraints of the existents, the consequent of the geometrical law will not necessarily describe the changes in the positions of attributes. For example, all triangles have 180°, file:///C|/Downloads/Video/Chap7.html (1 of 3) [17-9-2008 17:13:44]

Chapter 7

provided the lines are straight and widthless and the surface is flat. If straight lines are drawn on the surface of a sphere, the triangle will have more than 180°, to the extent that the surface of the sphere is not flat. Similarly, the ratio of input to output by a machine or the body of an observer may vary somewhat, but to the extent that the ratios are fixed, the consequents of the Law of Comparative Advantage will hold. This principle is so important, and so frequently breached, that I have labelled it “The NonCorrelative Principle” to draw attention to it in the hope that it will not be so easily evaded in the future. The principle states, “if the deviation from the identity of constraints in a conceptual law and their epistemically correlated attributes increases, then the certainty of knowledge that the consequent of that law is true of those attributes decreases.” (The NonCorrelative Principle can be described as a “metaconceptual law,” a conceptual law that describes changes in concepts of concepts.(2)) The Principle is epistemological rather than ontological because the consequents could be true of particular attributes even if the deviation from identity is very large.(3) For example, if a triangle is drawn on a sphere with curved lines, its angles could still total 180°. The perfect competition model describes concepts that obey an economic conceptual law. The conceptual atomic existents are the factors, the antecedent variables are the quantity of factors (e.g., the number of producers), and the consequent variables are the price, quantity, and profit of the products. The constraints are the “givens,” the relationships between quantities of factors or products and their cost or price and the other assumptions of the model — the unimpededness of factor movement, the knowledgeableness, market powerlessness, and profit-maximizingness of producers, and so on. The consequents of laws derived from using these concepts are, inter alia, that output is maximized and price is minimized [Page 29] when the number of the producers is large (infinite?). By the Non-Correlative Principle, however, the certainty that these consequents apply to a real economy is extremely low, if not negative, because the deviation between the constraints and the attributes is so great as to almost be in opposition. In particular, as is discussed in more detail later, certain knowledge of the future acts of observers cannot be acquired by observers. A similar analysis and criticism can be made of general equilibrium analysis. The perfect competition and general equilibrium models may describe the gods on Mount Olympus, but when they are applied to humans, the certainty of their consequents is similar to the certainty that the consequents of Euclidean geometry will be true of a non-Euclidean surface. In a physical metalaw (see Chapter 5), a change in a relationship between physical atomic existents is manifested as a change in an attribute. But since physical atomic existents can never be experienced, they are pure concepts, though the relationship between physical atomic existents is identical with attributes. One could, of course, epistemically correlate physical atomic existents with attributes, though it is hard to see what purpose this would serve. file:///C|/Downloads/Video/Chap7.html (2 of 3) [17-9-2008 17:13:44]

Chapter 7

Finally, the epistemic correlation of pure concepts to attributes also occurs in praxeological laws, but in a more complicated way. This is discussed in the next chapter. Next Table of Contents Index FOOTNOTES 1. Epistemic correlation is required only for laws, not for analyses. Thus, the analysis of laws presented in this book is not itself a law and need not be epistemically correlated with attributes. Back 2. “As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain they do not refer to reality.”—Albert Einstein. Another metaconceptual law seems to be Godel’s Theorem. While the theorem may be paraphrased as, “all consistent axiomatic formulations of number theory include undecidable propositions,” a “liberal” restatement might be, “if the completeness of a conceptual system of laws is increased or decreased (by adding or subtracting constraints), its consistency will decrease or increase, respectively.” Douglas R. Hofstadter, Godel, Escher, Bach: An Eternal Golden Braid (New York: Vintage Books, 1979), 17. Back 3. “It is possible for the premisses (sic) of the syllogism to be true, or to be false, or to be the one true, the other false. The conclusion is either true or false necessarily. From true premisses it is not possible to draw a false conclusion, but a true conclusion may be drawn from false premisses, true however only in respect to the fact, not to the reason.” Aristotle, Analytical Priora from The Works of Aristotle , ed. W. D. Ross (Oxford: Oxford University Press), 53b. Back [Page 30]

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Chapter 8

Chapter 8 PRAXEOLOGICAL LAWS While the workings of physical laws and conceptual laws are relatively simple and easy to understand, praxeological laws are inherently more complex because, while the variables in concepts, the variables in the consequent are the antecedent are pure denotative concepts. That is, the laws are of the form “if pure concept A changes, then denotative concept B changes.” The denotative concepts in praxeological laws, however, are not stand-ins for presently-existing attributes, but rather are stand-ins for future attributes, attributes that the observer believes will exist if he acts or does not act. The reader should satisfy himself that the basic analysis presented up to here on attributes, concepts, variables, existents, constraints, and how laws “work” is correct, so that he can understand that praxeological laws must also fit into that analysis. The atomic existents in the antecedents of praxeological laws are “values.” A value is a pure concept of what an observer desires to attain (Chapter 17). All values come in pairs; one value in each pair is attaining the desire and the obverse value is not attaining it. The variable in the antecedent of a praxeological law is the relative importance of the two values in the pair. The observer changes the relative importance of the two values, and that relationship is the variable in the antecedent of the law. The atomic existents in the consequent of a praxeological law are “plans.” A plan is a denotative concept that is a stand-in for the attributes an observer believes he will experience if he acts or does not act. A plan should not be viewed as necessarily having photographic clarity, but as any impression of what attributes are likely to be experienced. All plans come in pairs; a direct plan and an obverse plan make up each pair. A direct plan depicts the attributes an observer believes he will experience if he acts, and the obverse plan depicts the attributes an observer believes he will experience if he does not act. The variable in the consequent of a praxeological law is the plan that is chosen — the concept of the future attributes an observer actually hopes to experience. [Page 31] Now comes the difficult part. How can the atomic existents in the antecedent of a law be pure concepts, when the atomic existents in the consequent of the law are denotative concepts? In the chapter on epistemic correlation, it was stated that pure concepts must be epistemically correlated with denotative concepts, otherwise the pure concepts can say nothing about the world of experience. In praxeological laws, the atomic existents that are the pure concepts in the antecedent — the values — are epistemically correlated with the atomic existents that are the denotative concepts in the consequent — the plans. An observer establishes an identity between his values and his plans. For example, suppose a young man wants to be with his girl friend — a value. The obverse value is to not be with his girl friend, in which case he might consider achieving another value, such as doing homework. The first value is epistemically file:///C|/Downloads/Video/Chap8.html (1 of 5) [17-9-2008 17:13:46]

Chapter 8

correlated with a plan — a denotative concept of himself calling her on the telephone. The obverse value is epistemically correlated with the obverse plan — not calling her on the telephone. Changing the relationship between the values, their relative importance, changes the relationship between the plans, in that the plan corresponding to the more important value will be actualized while the other plan is not. In creating a plan, an observer imagines denotative concepts that depict the change in attributes he thinks he would experience if he acted. He may be entirely wrong about the consequences of his act, but that in no way affects the operation of the praxeological law. Since observers cannot experience physical atomic existents but only physical variables (“attributes”), when observers act, they change the relative positions of collections of presently-existing attributes, i.e., they move “entities.” Entities that are to be changed (or preserved from change) to actualize the arrangement of entities depicted in a plan, are “goods.” To be actualized, every plan requires at least two goods, one being a part of the observer’s body, which the observer will move if he acts, and the other good being an entity relative to which that part of the body will move (which may simply be another part of his body). For example, if throwing a ball is a plan, the goods “observer’s hand” and “ball” must be possessed to actualize that plan. An observer acquires goods to actualize plans that achieve his values.(1) A plan cannot be constructed unless the observer knows how to change presently experienced attributes so that they conform to the attributes depicted in the plan. A person might create a denotative concept of himself seeing the earth from the moon, but if he does not know how to alter the physical world to actualize that concept, it is not a plan to him, but only a day dream. Thus, “catching a leprechaun” is not a plan to people who do not believe in them, but can be a plan to those who do.[Page 32] One observer may have the knowledge needed to construct a plan while another may not, so that the same denotative concept of future attributes may be a plan to one observer, but not to the other. An observer’s knowledge of the behavior of attributes tells him that if he changes presently existing attributes in a particular way, he may expenence an arrangement of attributes that is identical to the arrangement of attributes he imagines in his direct plan. And if he does not change the presently existing attributes, his knowledge tells him that he may experience the arrangement of attributes depicted in the obverse plan. Since one cannot know how to change the physical world and yet not change it, the observer is constrained to only one of the two plans in a pair of plans, and therefore to only one of the two values epistemically correlated with each plan. If he acts, he believes that the direct plan that depicts the imagined result of his action will (or may) be actualized, but that the obverse plan that depicts the result of him not acting will not be actualized — he must choose the one or the other, but not both. For example, the direct plan of listening to a TV program is incompatible with the obverse plan of not listening to a TV program because one cannot know how to arrange physical reality in such a way that a contradictory arrangement of entities can occur at the same time and in the same respect. That is, A and not-A cannot be simultaneously experienced. Thus, the constraint file:///C|/Downloads/Video/Chap8.html (2 of 5) [17-9-2008 17:13:46]

Chapter 8

specifies that only one plan in a pair of plans can be actualized at a time. Since every plan is epistemically correlated with a value, this constraint also requires that only one of the values in a pair of values can be achieved at a time. In other words, the observer must make a choice between the two values and plans. No value can be achieved except by the loss of the obverse value. Every act or possibility of an act implies that the observer has considered the consequences of not acting, and every act (including every non-act — acts that were considered and rejected) implies that a choice has been made between the plan that the observer believed would be actualized if he acted and the plan the observer believed would be actualized if he did not act. The constraint simply identifies the pairs of direct and obverse plans. Values need not change as frequently as plans, nor plans as frequently as goods. One may have an unchanging value, yet epistemically correlate that value with different plans at different times as one’s knowledge changes. On the other hand, a value may change, yet the same plans may be chosen because an observer’s knowledge may tell him that the same plan can achieve the new value as well as the old value — one may go to a concert first from love of music, then later, to maintain an appearance in the community. The plans are the same, but the values are different. When a conceptual law is applied to the physical domain, one must [Page 33] epistemically correlate a pure concept with an attribute. In a praxeological law, the epistemic correlation is made between pure concepts, the values, and denotative concepts, the plans, which must “stand-in” for the attributes because the attributes depicted in the plans have not yet been actualized. This epistemic correlation is made by the observer when he decides which plan is most identical to a particular value. Thus, when observed attributes do not correspond to the direct plan, a change in the importance of the pure concepts in the antecedent of a praxeological law necessarily implies a change in the physical world, because the choice of values means a choice of which plan to actualize. While praxeological laws are of the form, “if pure concept A changes (in relative importance), then denotative concept B changes (in its actualization),” the change in denotative concept B necessary implies a change in attributes caused by the action of the observer, whenever those attributes do not correspond to the direct plan. Thus, praxeological laws bridge the chasm that separates concepts from attributes, and can also take the form, “if pure concept A changes, then attribute B changes.” Of course, the changes the observer actually causes may not correspond to his direct plan, if his knowledge is defective. The relationship between pure concept A and denotative concept B is one of mutual implication — changing pure concept A implies changing denotative concept B, and changing denotative concept B implies that pure concept A was changed (i.e., praxeological laws are symmetric — see Chapter 15). Since praxeological laws contain no spatial, temporal, or cultural constraints, praxeological laws are universal and apply to observers everywhere at every time in every culture. (“The law of supply and demand doesn’t work anymore” is necessarily a false statement.) file:///C|/Downloads/Video/Chap8.html (3 of 5) [17-9-2008 17:13:46]

Chapter 8

In physical laws, changes are discrete (quantized) and the number of possible outcomes is very large, if not infinite. In conceptual laws, the changes and number of possible outcomes vary according to the definition of the existents, constraints, and variables. But because praxeological laws deal with the consequences of a choice between acting and not-acting, they are binary — there are only two possible outcomes, a change either occurs or it does not occur. This means that, in economics, all comparisons must be made between what did happen and what would have happened had the obverse plan been chosen. That is, no actualized plan can be condemned simply because the undesirable occurred — it can only be condemned if it can be shown that less undesirable results would have occurred had the unactualized obverse plan been chosen. For example, if wages are lowered and unemployment increases, this does not prove that lowering wages does not reduce unemployment. The relevant question is whether unemployment would have been even greater had wages not been lowered. [Page 34] “Economic” concepts are those pure concepts that are useful in describing the consequences of choice. For example, in one plan an observer holds out a ten dollar bill for a book and in the obverse plan he does not. The economic concept “price” captures the differences between these plans — that ten dollars are exchanged for a book. A “price” says nothing about the attributes of what is being exchanged, but rather is a concept of so many units of one good moved so that an observer can no longer change or preserve it. Economic concepts, such as price, capital, money, quantity sold, inflation, recession, and the like, are pure concepts, which are epistemically correlated with entities or changes in the positions of entities, not according to the attributes of the entities, but rather according to how the entities function in the plans of observers. Huge stones, pieces of gold, cigarettes, and inked paper are physically dissimilar, but have all been “money” because they are all goods, the presently existing entities that are to be changed or preserved in plans. Next Table of Contents Index FOOTNOTES 1. It follows that, no matter how automated production becomes, or how satiated consumers become, there can never be a “shortage of work” if anyone believes that a changed physical world is epistemically correlated with more important value than an unchanged physical world. Since complete satisfaction with expected future attributes is almost inconceivable, there will always be enough work (though never enough at wages above the market clearing wage — see Chapter 45). Back file:///C|/Downloads/Video/Chap8.html (4 of 5) [17-9-2008 17:13:46]

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Chapter 9

Chapter 9 PSYCHOLOGICAL LAWS A psychological law is the opposite of a praxeological law, and is of the form, “if denotative concept A changes, then pure concept B changes.” Since a denotative concept is a stand-in for an attribute, the change in the denotative concept implies that a change in an attribute occurred, so that a psychological law could also be stated, “if attribute A changes, then pure concept B changes.” That is, a psychological law describes how changes in the environment of an observer change the relationship between his values. To understand how a psychological law works, one must realize that concepts are “attached” to attributes (“symbolic attributes”) in an observer's brain (see Appendix A and Chapter 18). Only the observer himself can assign a particular concept to a particular symbolic attribute, but once he has done so, changes in the relationship between those attributes will change the relationship between the concepts attached to them. For example, “immoral” is a pure concept attached to particular attributes in an observer’s brain. When an observer hears the sound made by the word “immoral,” the attributes to which the pure concept “immoral” is attached are brought to the observer-attribute interface (see Appendix A) and the observer is aware of the concept “immoral .“ If a child touches his “private parts,” a denotative concept, then he is acting according to a praxeological law (Menger’s Law — see Chapter 21), which states that the importance of the value, say “pleasure,” hoped to be achieved by the touching, was, at that time, more important than the obverse value, no pleasure. If his mother makes the sound “immoral” at the same time, she can cause the symbolic attributes to which the pure concept “immoral” is attached to become “stuck to” or associated with the symbolic attributes to which the denotative concept “private parts” is attached. While she cannot change the relative importance of different values, she can change the knowledge of which denotative concepts are epistemically correlated with which values. Prior to her action, the value “pleasure” was epistemically [Page 36] correlated with the plan “touching private parts,” and the value “immoral” was not. After her action, both the value “pleasure” and the value “immoral” were epistemically correlated with the plan “touching private parts.” Now, when the child weighs the importance of the value “pleasure,” it is not simply a case of touching private parts to achieve “pleasure” or not touching private parts to achieve “no pleasure.” No, now it is a case of touching private parts to achieve “pleasure plus immoral” or not touching private parts to achieve “no pleasure plus no immoral,” because the child’s new knowledge tells him that it is not possible to make a plan that is epistemically correlated with the value “pleasure” but not with the value “immoral.” This does not mean that the observer does not have freewill, however, because the changing knowledge does not change the relative importance of the values — only the observer can do that. Changing attributes (i.e., saying “immoral” when the private parts are touched), so that file:///C|/Downloads/Video/Chap9.html (1 of 2) [17-9-2008 17:13:47]

Chapter 9

the atttributes to which the two pure concepts “pleasure” and “immoral” are attached are now associated, does not necessarily cause the child to choose differently. If “pleasure” was more important than “no pleasure,” but “pleasure plus immoral” is less important than “no pleasure plus no immoral,” the child will choose differently. But his free will has not been abrogated — only he can decide the relative importance of different values — only his knowledge has been changed. One can never know whether the same choice would have been made without the new knowledge (see Chapter 20) because one cannot know the relative importance of values until the choice is made, and an observer can change that relative importance at any time. While the effects of changing attributes may never manifest itself in changing actions, psychological laws are nevertheless laws because a change in the relationship between values does occur. In a similar way, changes in knowledge can separate values that were once associated. For example, a belief that night air causes disease means a value that can only be achieved by going out in the night air will be tied to the value of risking disease. Knowledge that night air does not cause disease separates the two values. [Page 37] Next Table of Contents Index

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Chapter 10

Chapter 10 QUANTITATIVE LAWS While the variable in the consequent of any law is constrained, in a quantitative law the variable is constrained to a particular magnitude. A quantitative law is of the type, “if A changes X units, then B changes Y units.” For example, a quantitative physical law is, “if the distance R between two masses M 1 and M 2 changes, then the gravitational force,

F , drawing them together changes, where F

is (GM

1M 2)/R

2,

and G

is a

proportionality constant.” The Pythagorean theorem is an example of a quantitative conceptual law, “if the length of one side of a right triangle changes, then the length of the hypotenuse changes to (x 2 + y 2)½ where x and y are the lengths of the two sides.” While there can be quantitative physical laws and quantitative conceptual laws, there cannot be quantitative praxeological or psychological laws. The reason is that choice is binary — the scale is either tipped toward acting or toward not-acting, but how forcefully it is tipped makes no difference to the outcome of act or don’t act. That is, in computer language, the outcome is either a 1 (act) or a 0 (don’t act), and it doesn’t matter if it is a strongly desired 1 and a weakly desired 0, or vice versa, or if both the 0 and the 1 are strongly or weakly desired. The “amount" of importance in excess of that required to produce a 0 or a 1 outcome is not relevant to that outcome. While it is true that the yardstick of the importance of a value is the observer’s willingness to sacrifice other values for it, and therefore to sacrifice the objective goods that serve those other values (see Chapter 24), the sacrificed goods do not measure importance because an observer may not have to sacrifice as many goods as he might be willing to. (This difference is known as “consumer’s surplus.”) Nor do sacrificed goods even provide an objective measurement of minimum importance because there is no unit of importance that can be applied to different goods. If an observer sacrifices two cows for a horse, it shows that the importance of the horse was greater than the importance of the two cows, but even [Page 38] if two cows was the maximum sacrifice he was willing to make for the horse (and even he cannot know that), we know nothing of the importance of an old gray cat. The difficulty is that there is no unit of importance, and there can be no unit of importance, because the importance of different values is what makes one observer different from another observer. One cannot know the importance of a value to an observer because one cannot become the observer while remaining an independent observer. Nor can one even say that there is a law of conservation of importance, so that the total importance of all values is the same, because its total quantity is not conserved. That is, the quantity of importance in an observer can vary according to the “upness” or “downness” of his moods.

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Chapter 10

The quantity of change that occurs in an economic concept (i.e., price, quantity sold, etc.) cannot be specified by any economic law, and therefore future changes in these concepts cannot be known now. The reason one cannot know the quantity of change that will occur in an economic concept is that such knowledge would require one to know the importance observers will place on their values, and that is unknowable even to the acting observer himself, until he actually makes a choice. For example, suppose that at the present price people offer to buy 10 percent more than is being offered for sale, and one wishes to know how much the price must increase to clear the market. If the price is raised one percent will they choose to buy nothing or 10 percent more? At a one cent higher price, will suppliers choose to to supply 0 percent more or 1000 percent more? There is simply no way to know because one cannot know what the importance of the exchanged goods will be to people when they are faced with that choice. But we nevertheless know a great deal. We can say that particular choices will cause the magnitude of an economic concept to be higher or lower than it , but, otherwise would have been unlike the physicist and the geometrist, we cannot know how much higher or lower. The yearning for knowledge that is not knowable leads only to the pretense of knowledge, thence to error. But knowing that we cannot know something is itself knowledge, and knowledge of a most valuable kind, for it saves us from much wasted effort and many disastrous mistakes. As Josh Billings said, “The trouble with people is not that they don’t know, but that they know so much that ain’t so.” [Page 39] Next Table of Contents Index

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Chapter 11

PART II PROOF OF LAWS This section deals with the proof of laws — establishing the truth of a natural law. All the variables in a law must be validated, which means establishing their existence as definite, identifiable variables, and all laws must be verified, which means establishing the imperativeness of the consequent, given the antecedent. How the observer discovers a law is irrelevant to proof of the law. It is an ad hominem fallacy to impugn a law because of the method by which it was discovered. As long as the law meets validation and verification requirements, it is a good law, regardless of whether it came from observation, inspiration, revelation, or a Ouija board. [Page 41] Next Table of Contents Index [Page 41]

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Chapter 11

Chapter 11 VALIDATION SECTION A—PHYSICAL AND CONCEPTUAL VARIABLES All variables that appear in a law must be validated, which means establishing that the variables in a law are actually cause and effect variables and not merely impressions or vague notions. All variables within a law must be non-contradictory, for example, because contradictory variables cannot exist in the same law since such a law would imply nothing and therefore would not be a law. Moreover, a physical variable, an attribute, which appears in the consequent of one physical law cannot contradict a physical variable that appears in the consequent of another physical law having the same antecedent, because a physical world that is internally contradictory could not be experienced. That is, if “A, then B” and “if A, then not B” are both verified physical laws, then one or both of the variables is not valid. A valid physical variable is one that is experienceable by any suitably positioned observer. The variable need not be “directly” experienced, as the experience may be at the end of a chain of causation, as when a scientist reads meters instead of sensing directly. A postulated attribute that cannot be experienced, such as “Phlogiston” or “the ether that permeates all space,” cannot be a valid physical variable. For a conceptual law, validation means defining a variable in such a way that it has a definite meaning. The variable, “angle,” for example, means the number of degrees of a circle divided into 360° that are encompassed by two of its radii, a precise, unambiguous concept. A variable such as “loyalty,” however, may be too indefinite to be validated.

SECTION B—PRAXEOLOGICAL VARIABLES In a praxeological law, validation can be accomplished by demonstrating that a particular being is, in fact, an observer, and therefore the variables [Page 43] in praxeological laws must exist as concepts in that being. That is, in the analysis presented in this book, “observer" is a pure concept that must be epistemically correlated with an acting being. The identity of the pure concept “observer” with ourselves can be established by introspection. We know that we experience attributes, create concepts, and change attributes because we do it all the time. As you read this, you are experiencing light from the page, creating the concepts symbolized by the words, and changing attributes when you decide to turn the page. The validation problem with praxeological variables centers on free will. Free will exists if a change file:///C|/Downloads/Video/Chap11.html (1 of 5) [17-9-2008 17:13:51]

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in an attribute is not caused by a change in an attribute, i.e., physical change without a physical cause. The cause is the change in the relative importance of values. An observer is a being who can create pure concepts, in particular, values, which means that he has free will. Introspection provides validation because we know that we can make metaphysically free choices to achieve our values. “The economist starts with a knowledge of ultimate causes.” (1) If man does have free will, then one would expect an economic theory based on that premise to be more successful in explaining economic phenomena than economic theories based on a deterministic man, and that indeed seems to be the case. As Hayek put it, “It is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism.” (2) It is possible, but unlikely, that subjectivism, which assumes the freedom of the will, could have been so fruitful if man did not in fact have free will. The validity of the observer is also supported by all the incredible accomplishments of the human mind. It is difficult, if not impossible, to explain what Einstein called, “free inventions of the human intellect,” (3) if all human acts are determined and are not the result of a free choice. That Beethoven’s symphonies and Einstein’s theories were the result of the deterministic interactions of electrons, energy, and atoms obeying rigid physical laws stretches credulity. Can one imagine a determined entity pondering whether he has free will, something beyond his capacity? Can one imagine a determined entity, who is only physical, wondering if he has an immortal personality that will survive the death of his physical body? Unless programmed to do so by an observer, I cannot. Even if we are determined, we could never know that we are determined, because what one believes to be true is, for determined entities, itself determined, not chosen.(4) How is “understanding” in economics or [Page 44] any other discipline possible without a mind that is metaphysically free to choose among alternative possibilities? (5) Moreover, it may be possible to empirically show that human beings are observers. One way, which is as yet beyond our technological capabilities, is to monitor every event that occurs in a human brain, whence one will discover that certain events — willed events — are not caused by any physical event. (6) Another way would be to show that energy disappears in the brain (i.e., is converted into “observer substance”) when one is conscious, only to reappear during consciously directed action. Still another way to validate the existence of observers is to demonstrate that no determined entity can duplicate certain human actions. Imagine two large boxes, one containing a human and the other a com puter, each trying to convince you that it is the human. You can communi cate with either box but cannot see inside. The computer has been programmed with all the knowledge and experience a typical human might have. It can learn, it can reason, it can forget or make mistakes, it can even display emotions. In short, it can do anything that file:///C|/Downloads/Video/Chap11.html (2 of 5) [17-9-2008 17:13:51]

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it is conceivable to program a computer to do. Whatever it does, however, must be entirely determined and explainable by its program. The test, of course, is, is there any way to tell which box the human is in?(7) The answer is, I believe, “yes.” How? You tell a joke.(8) That is, you tell each box ten stories, five of which are funny and five of which are not funny, though they contain the unexpected twists that are a characteris tic of humor. No deterministic computer, however sophisticated, will be able to tell which stories are funny.(9) Why? And what does humor have to do with free will? Humor is a build-up of tension that is released by the “punch line.” The tension, the stress, which is either already present or is created or heightened by the joke, arises because the person must focus on making a decision. Rats who must decide how best to avoid an electrical shock develop ulcers. Rats who are shocked just as much but need not face making a decision don’t develop ulcers.(10) Being faced with having to make a decision, a metaphysically free choice, creates the tension that the joke releases. Since computers (that don’t have free will) are never faced with having to make a choice by exercising free will, they can never appreciate humor. Validation of variables within laws requires that the variables must not be contradictory. An argument can be made that attributes and observers, which are both involved in praxeological laws, cannot co-exist because an event caused by an act of will is not in accord with a physical law. In other words, physical laws specify that particular attributes must exist under particular conditions, and yet an observer causes an unspecified [Page 45] attribute to exist. Isn’t that a contradiction? Not if the observer and physical existents are two forms of the same thing and are transformable into each other (see Notes 1 and 2 , Chapter 4). Just as matter is conserved only when it is not converted into energy, so mattergy would be conserved only when it was not converted into the observer. Next Table of Contents Index FOOTNOTES 1. John E. Cairnes, The Character and Logical Method of Political Economy Kelley, 1965), 87. Back 2. F.A. Hayek, The Counterfile:///C|/Downloads/Video/Chap11.html (3 of 5) [17-9-2008 17:13:51]

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Revolution of Science Inc., 1976), 172. Back

(Sheed and Ward,

3. Cited by F.S .C. Northrop, The Logic of the Sciences and the Humanities (The World Publishing Co., 1966), 123. Back 4. Arthur Koestler, The Ghost in the Machine (Chicago: Henry Regnery Co., 1967), 214, 219. “The question whether the law of causality applies in the same strict sense to human actions as to other phenomena, is the celebrated controversy concerning the freedom of the will, which, from at least as far back as the time of Pelagius, has divided both the philosophical and the religious world. The affirmative opinion is commonly called the doctrine of Necessity, as asserting human volitions and actions to be necessary and inevitable. The negative maintains that the will is not determined, like other phenomena, by antecedents, but determines itself; that our volitions are not, properly speaking, the effects of causes, or at least have no causes which they uniformly and implicitly obey.” I have already made it sufficiently apparent that the former of these opinions is that which I consider the true one; John Stuart Mill, On the Logic of , ed. Henry M. Magid (New York: the Moral Science The Bobbs-Merrill Co., Inc., 1965), 9. Back 5. Murray N. Rothbard, Individualism and the Philosophy of the Social Sciences (Cato Institute, 1979), 6—7. William H. (Martinus Davis, The Freewill Question Nijhoff, 1971). Joseph M. Boyle, Jr., et al., Free Choice: A Self-Referential Argument (South Bend: University of Notre Dame Press, 1976), 40—47. Back 6. “So long as no definite relation is discovered between ideas and physical or chemical events of which they would occur as the regular sequel, the positivist thesis remains an epistemological postulate derived not from scientifically established experience but from a meta-physical world view.” Ludwig von Mises, Theory and History (New Haven: Yale University Press, 1957), 3. Footnote 27 Back 7. Douglas R. Hofstadter, “Metamagical Themas,” Scientific American (May 1981), 15 The Turing test is similar, but is used to

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determine if a computer can “think.” Back [Page 46] 8. I am grateful to my beloved wife, Cindy, for this suggestion. Roger Penrose, in Shadows of the Mind: A Search for the Missing Science of Consciousness , (Oxford, UK: Oxford University Press, 1994), argues that computers can never be conscious because they are Turing machines and Godel's Theorem means that Turing machines cannot solve certain problems that humans can solve. Consciousness is believed to be a prerequisite for free will. Back 9. If the test is to be fair, the computer must rely on analysis of the story and not on an encyclopedia of funny stories. Back 10. Julian Jaynes, The Origin of Consciousness in the Breakdown of the Bicameral Mind (Boston: Houghton Mifflin Company, 1976), 93—94. This should not be taken to mean that rats can have free will under some circumstances. The tension in the rats can be explained as a failure of their deterministic decision-making mechanism to function under these circumstances. But one should not assume that the decision was then made by an exercise of the will. Man can suffer the same tension from his inability to respond deterministically, yet respond by exercizing free will. Back [Page 47]

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Chapter 12 VERIFICATION All natural laws are either inductive laws or deductive laws. In an inductive law, knowing the antecedent does not enable an observer to know the consequent. In a deductive law, an observer, can, in principle at least, know the consequent when he knows the antecedent. In an inductive law, one speaks of changes in variable A causing changes in variable B, while in a deductive law one speaks of changes in variable A implying changes in variable B. Physical laws are inductive because the existents that constrain the variables in the consequent of a physical law are not experienceable or creatable by the observer. Thus, knowledge of changes in the attributes in a consequent can be acquired only by experience. As Northrop points out,(1) in the natural sciences, direct knowledge of the laws themselves is forever denied to man. For example, if I know that the current was 3 and the resistance was 4, I do not know, from that information alone, that the voltage was 12. If one deduces changes in attributes from changes in attributes, one is stating a conceptual law that must be epistemically cor related with attributes.

Verification means establishing the necessity of a consequent, given an antecedent. The verification of physical laws is limited to specific physical laws. That is, a law stated in general terms can imply a more limited statement of the law, and that in turn a still more limited statement, until a specific law is reached, a law that covers only particular variables (e.g., if this water is heated, it will boil). A hierarchy of laws is possible because the antecedent or consequent of a more generally stated law already contains the antecedent or consequent of the more specifically stated law. But since an observer can experience only particular attributes, not attributes in general, only specific physical laws can be venfied. Thus, one cannot directly know that a relationship that held between particular attributes will hold between those same attributes at another time or will hold between other attributes that seem to be of the same type. [Page 48] To assume that a general physical law is true because it subsumes a true specific physical law, commits the logical fallacy of affirming the consequent: if P, then Q; Q, then P. That is, one argues that if P were the general law, then Q would be the specific law, and since Q is the specific law, P must be the general law. That, of course, does not follow unless there can be no general law other than P that subsumes the specific law Q; but the absence of any such other general law cannot be proved.(2) Psychological laws are also inductive for the same reasons — that attributes are being changed, not concepts. Conceptual and praxeological laws, however, are deductive. Conceptual laws are deductive because an observer, having created the existents and their constraints, already has in hand file:///C|/Downloads/Video/Chap12.html (1 of 4) [17-9-2008 17:13:53]

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all the information needed to define the relationships between variables. Praxeological laws are also deductive for the same reason, that the observer has created the plans that describe possible future arrangements of attributes, and has epistemically correlated those plans with values, and it is his knowledge that constitutes the constraints. He can then specify which action will be taken if any value is chosen. (Whether a particular observer is intellectually capable of formulating a deductive law is, of course, another question.) A statement such as, “if the price of potatoes is P and the excess (+) or insufficient (-) demand is D , then the new price will be P + $0.07D ,” cannot be a conceptual or a praxeological law because conceptual and praxeological laws are deductive, and in all deductive laws one can know the consequent if one knows the antecedent. But knowing P and D does not enable one to know that the new price will be P + $0.07D . (Nor can it be a physical law since the price of potatoes is not an attribute.) Another example is, “if the price of gasoline rises 125 percent and its elasticity is 0.2, then the quantity purchased will fall 25 percent. Here the problem is with the concept “elasticity.” Elasticity assumes the existence of a law, “if price changes X percent, then demand changes Y percent.” Once again, knowing that the price changed X percent does not mean that one also knows that demand changed Y percent, so this, too, cannot be a conceptual or a praxeological law. The consequent in a deductive law is, in a sense, already contained within the antecedent, but needs only to be made explicit. As my law school professor put it, “The magician can pull the bunny out of the hat only if the bunny is in the hat.”(3) But while the bunny may be in the hat all along, it may not be obvious to our less-than-perfect minds that the bunny is there until it is carefully explained to us why the bunny must there. To everyone but God, deductive laws are useful. For example, the Pythagorean theorem (“if the two sides of a right triangle are x and y , [Page 49] then the hypotenuse is (x 2 + y 2)½, is a geometrical conceptual law that is not easily deduced.(4) A deductive law is verified by examining its antecedent and consequent to determine if the consequent must necessarily follow from the antecedent. This means that the reasoning from the antecedent to the consequent is entirely “inside” the stated antecedent. That is, there must be no “hidden” antecedents that are also required to reach the consequent (and that may render the law unverifiable or that may contain variables that cannot be validated). For example, the statement, “if people want more national defense, then the government must raise taxes,” has many hidden antecedents, such as “more national defense requires more money,” “more money can come only from taxes,” and “national defense can be provided only by the government.” Also, the consequent must not lie partly inside the antecedent and partly outside the antecedent. The statement, “if all eighteen-year-olds are drafted, the colleges will be empty,” is an example of antecedents and consequents that only partly overlap since not all eighteen-year-olds are in college and not all people in college are eighteen. Thus, these file:///C|/Downloads/Video/Chap12.html (2 of 4) [17-9-2008 17:13:53]

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statements cannot be deductively verified. A statistical law may be inductive or deductive. “If a perfect coin is randomly tossed, heads will come up half the time,” is a deductive or conceptual statistical law. “If this coin is randomly tossed, heads will come up half the time,” is an inductive or physical statistical law. One can verify inductive physical laws by experience, or if there is a corresponding deductive law, one can epistemically correlate (see Chapter 7) the concepts of the deductive statistical law with the attributes of the physical statistical law. For example, one could try to establish an identity between a perfect coin and a real coin, and between random tosses and real tosses. Verification of a deductive statistical law may be conceptually difficult, but is analytically straightforward. Verification of inductive statistical laws, however, may present problems because the variables that actually cause the variables in the consequent to change may not be known. Even though the consequent is a probability, not a certainty, a statistical law, like all laws, nevertheless presumes that a cause-and-effect relationship is responsible for the change in the variable in the consequent. It is for this reason that there can be no statistical laws of the form, “if attribute A changes, then observer chooses B.” Since observers have free will (see Chapter 16), there can be no cause-and-effect relationship be tween attribute A and choice B. Macroeconomic Laws, such as the Phillips curve — ”if inflation increases, unemployment decreases (and vice versa)” — are statistical conceptual laws. Like all conceptual laws, the concepts used in them — ”inflation” and “unemployment” — must be epistemically [Page 50] correlated with attributes. This is difficult since “prices” (that indicate inflation) and “unemployed” are concepts, not attributes. In addition, all conceptual laws are deductive, and an increase in inflation cannot be deduced from a decrease in unemployment. Next Table of Contents Index FOOTNOTES 1. F.S.C. Northrop, The Logic of the Sciences and the Humanities (London: Macmillan Company, 1947), Chapter XIII. Back 2. In fact, according to Poincare, there are an infinite number of theories (i.e., possible general laws) that can explain any data. For example, the data: current = 3, resistance = 4, and vo1tage = 12 can be explained by the possible laws E = IR , E = I + R + 5, 2 E = I R - 24, etc. Occam’s Razor says that the simplest, least arbitrary possible law is least likely to be falsified, but that is a statistical law to which there are exceptions, the file:///C|/Downloads/Video/Chap12.html (3 of 4) [17-9-2008 17:13:53]

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substitution of Einstein’s difficult equations for Newton’s simple equations being the most notable. Back 3. Francis Holahan of the University of Pittsburgh School of Law. Back 4. Jack R. Britton and L. Clifton Snively, Algebra For College Students (New York: Rinehart & Company, 1953), 225—226. Some deductive laws, such as, “if the diameter of a circle changes d units, its circumference will change πd units,” may as yet be unverified, yet they are still, in principle, verifiable because the constraints of the existents require their consequents. Back [Page 51]

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Chapter 13 POSITIVISM Positivism(1) is the doctrine that laws can be verified only by experiencing attributes to see if the attributes actually do change according to the law. In applying positivism to verify physical laws, observations are made that changes in the attributes in the antecedent of a proposed law are followed by changes in the attributes in the consequent of the law. By induction it is then concluded that, when the changes in the antecedent occur in the future, the changes in the consequent will also occur, because the former changes cause the latter changes. Since the concepts an observer creates cannot be directly experienced by another observer, the application of positivism to verify conceptual and praxeological laws must involve experiencing attributes that are epistemically correlated with conceptual variables rather than experiencing the concepts themselves. From the observations of those attributes, it is concluded, by induction, that the changes in the conceptual variables in the antecedent cause the changes in the conceptual variables in the consequent, and therefore the law is verified. Induction is subject to many philosophical difficulties, even when it is applied to physical laws. (2) Nevertheless, the usefulness of induction in verifying physical laws cannot be challenged. Indeed, in the natural sciences, no other technique would seem to be of any value in verifying laws since we are not privy to knowledge of the physical metalaws (see Chapter 5), and we can therefore discover how attributes change only by experience. As Cairnes stated, “the necessity for the method of induction as the path to physical discovery arose entirely from the fact that mankind have no direct knowledge of ultimate physical principles .” (3) While positivism is an entirely appropriate methodology for verifying inductive laws, where knowledge of the changes in the variables in consequents can be obtained only by experiencing attributes, it is inappropriate for verifying deductive laws because concepts in deductive laws are not stand-ins for presently existing attributes. (In a praxeological law, a plan [Page 52] is a stand-in for attributes, but those attributes cannot be experienced until the choice is made because (1) they do not presently exist, (2) the attributes that exist after the choice is made may not be identical to the attributes in the plan, and, (3) the attributes in the obverse plan never come into existence.) If attributes are found to obey a deductive law, that would verify the law only if all the epistemic correlations were perfect, so that every pure concept was identical to a denotative concept. But as of now, such a perfect identity exists only in the mind of God. A deductionist would verify the Euclidean geometrical law that all triangles have 180° (i.e., “if any angle of a triangle changes, one or both of the other angles must also change so that they sum to 180°") by placing a line parallel to one of the sides of any triangle at the apex of the file:///C|/Downloads/Video/Chap13.html (1 of 5) [17-9-2008 17:13:56]

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other two sides. Since the internal opposite angles formed when a line crosses parallel lines are equal (a ’ = a and b ' = b ), and a straight line is defined to be 180°, it necessarily follows that the three angles of the triangle, a , b , and c , must total 180°. The positivist, however, would attempt to verify that geometrical law by measuring the angles of thousands of different triangles. He might arrive at the conclusion that the angles total 180° within a probable error of ±0.01 percent, but he could never prove that the answer was exactly 180°, and he could never prove that the next triangle he measured must total 180° and not an entirely different number. This is because the concepts “line,” “angle,” “straight,” and “fiat” are not stand-ins for the attributes measured, but are pure concepts that must be epistemically correlated with those attributes, and the epistemic correlation may not be perfect. Even if limited to the proof of physical laws, positivism is based on the assumption that if nothing changes except the variable in the antecedent, and then a change occurs in the variable in the consequent, the change in the variable in the antecedent must have caused the change in the variable in the consequent, and therefore the law is verified. But that is only one of three possible conclusions. A second possibility is that a change in variable C (event C), which prior to event A, caused event B (and perhaps event A as well), but there was a time delay between event C and event B, perhaps because a large distance had to be traversed. For example, event C may be the emission of particles in a solar flare, event A may be an earthquake, and event B may be the disruption of a radio signal. Event B is caused by event C even though event A immediately preceded event B. This possibility is usually inconsequential, however, as it can be eliminated by careful and repeated experiments. [Page 53] A third possibility is that event B does not have a physical cause at all. Since observers have free will, they can cause physical changes to occur without any prior physical cause. If event B is caused by the act of an observer, the third possibility renders positivism useless in verifying a physical cause for the event because there is no physical cause. But even if the second and third possibilities are ignored, the first possibility, that if B follows A and nothing else happened, A must have caused B, presents great difficulties in applying positivism to the actions of observers. “To fulfill the condition of inductive inquiry, we ought to be able to observe the effects of a cause coming singly into action, while all other causes remain unaltered.” (4) The condition, that no other events occur, is, however, impossible to fulfill in the real world. In every experiment, the earth moves, neutrino and cosmic ray fluxes change, and so on. This difficulty is overcome by repeating the experiment several times so that sometimes particular uncontrolled events occur and sometimes they do not occur. If the same A—B relationship holds under these varying conditions, then it must have been A, and file:///C|/Downloads/Video/Chap13.html (2 of 5) [17-9-2008 17:13:56]

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not the uncontrolled factors, which caused B. While the number of uncontrolled factors in an economic experiment would be expected to be significantly greater, this would only argue for more repetition, not for the invalidity of the inductive technique. On the other hand, if the experiment is not repeatable because event A cannot be made to occur in each experiment, then one can correctly speak, as Cairnes did, “the utter futility, the necessary impotence” (5) of induction in economics due to the impossibility of repeating experiments. An attempt to repeat an economic “experiment” assumes that the same value has the same relative importance to an observer at two different times. Thus, if the price of a good is seven dollars on two different days, this is “the same event” only if the value of seven dollars and the value of the good have the same relative importance to an observer on both days. But the only way to determine that is to measure the relative importance on both days to see if they are identical, and that is impossible. The importance an observer places on a value is something that only that observer can know. It is the essence of the personality of the observer, and no other observer can know it, except by becoming that observer, in which case he would no longer be an independent observer. This means that it is impossible to eliminate extraneous factors in economic experiments by repeating the experiment, not because the experiment is not necessarily the same experiment each time, but because there is no way, in principle, to know that each experiment is the same. The flaw in applying positivism to the acts of observers is that it assumes determinism — that physical events cause an observer to act.(6) But the importance attached to values, and imputed to the plans epistem ically [Page 54] correlated with those values, and to the goods needed to achieve those plans, is not determined by physical events. To search for an elasticity of demand by observing price (i.e., observing attributes to which the concept of a price is attached) and quantity demanded, for example, is to assume that a concept, the quantity demanded, must be a particular number if another concept, the price, is a particular number. But observers are always free to change the importance of a value, thence a plan, thence a good, and demand quantities at a particular price totally at variance with the quantities they previously demanded at that price. Perhaps the best example of the inapplicability of positivism to the acts of the observer is the failure of the Phillips Curve, an empirically derived inverse relationship between unemployment and inflation that was consistent with an erroneous economic theory, Keynesian economics. As union leaders and government bureaucrats enforcing the minimum wage laws raised wages above equilibrium wages, resulting in a surplus of labor, i.e. unemployment (see Chapter 45), and inflation then lowered real wages and reduced unemployment, the relationship seemed to hold. But when, after a few years, union leaders caught on, and union and minimum wages were adjusted for inflation, the relationship failed. Positivism nevertheless does have a limited role to play in economics, in suggesting that relationships may exist when the praxeological law that defines the relationship has not yet file:///C|/Downloads/Video/Chap13.html (3 of 5) [17-9-2008 17:13:56]

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been discovered. An observation that particular antecedents and consequents are usually associated can provide valuable clues to discovering a praxeological law. For example, a depression often begins in the capital goods industries after a period of “easy” credit. That is an important clue to discovering the cause of depressions. By discovering these associations, positivism can perform a valuable service to the advancement of economics. Positivism can also be useful in predicting future economic activity, though no application of statistics to past events can ever give certain knowledge that an economic event will occur. Statistical prediction is based on the assumption that past relationships, trends, and cycles will be repeated in the future. That may be a reasonable assumption, but there is no way to know that observers will make the same choices in the future that they made in the past. Next Table of Contents Index FOOTNOTES 1. Perhaps the most momentous event in the history of economics was the day Galileo pointed his telescope at Venus and observed that it changed phase, just as did our moon. That was possible, he reasoned, only if the planets revolved around the sun instead of [Page 55] around the earth, as the religious authorities believed. Later, Kepler, using data collected by Tycho Brahe, formulated his laws of planetary motion, which Newton summarized as his universal law of gravitation. The immense success of positivism in the natural sciences convinced economists that that was the way to go, and led them down the wrong path very early in their journey. Back 2. Martin Gardner, “Mathematical Games,” Scientfic American (March 1976). Back 3. John E. Cairnes, The Character and Logical Method of Political Economy Kelley, 1965), 83. Back 4. W. Stanley Jevons, The Theory of Political Economy tus M. Kelley, 1965), 18. Back

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5. Cairnes, Political Economy

, 76. Back

6. F.S.C. Northrop, The Logic of the Sciences and the Humanities (London: Macmillan Company, 1947), Chapter XIII. Ludwig von Mises, The Ultimate Foundation of Economic (Sheed Andrews and McMeel, Inc., 1978), 56. Murray N. Rothbard, Science Individualism and the Philosophy of the Social Sciences (Cato Institute, 1979), 5. Back [Page 56]

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Chapter 14 FALSIFICATION If an experiment that tests a specific physical law is consistent with the general law, the general law is confirmed, but it cannot be verified (unless one can show that no other general law that subsumes the specific law is possible). If the experiment is inconsistent with the general law, the general law is falsified. If a statement of a physical law cannot, in principle, be falsified, it cannot be a statement of a physical law because it does not specify an observer’s experience of attributes.(1) Brand Blandshard argued(2) that falsification is a nonsensical criteria for distinguishing a scientific statement from a non-scientific statement because some general statements can be verified, but cannot be falsified. If we take “scientific statement” to mean a physical law, then he is saying that there are physical laws that can be verified, but not falsified. As an example, he gives, “some swans are white,” which is easily verified by finding a white swan, but which can be falsified only by proving ‘‘no swans are white,” (i.e., all swans are non-white), and that statement is impossible to verify (assuming swans are an open class) because a negative cannot be proved by induction. In terms of laws, which express cause-and-effect relationships variables of a given type, not just some , Blandshard’s “swan between all law” might be interpreted as meaning that no matter how any swan changes, its color will be white. That is not a law because it does not describe the changing of one variable causing a change in another variable, so Blandshard’s observation may apply to “scientific statements,” but it does not apply to physical laws.(3) If a physical law can be falsified by experience, can a deductive law be falsified by experience? As to geometric conceptual laws, since the verification of a deductive law is a mental process of determining that the logic is correct, falsification of the law by experiencing attributes would consist of making observations of attributes that had been epistemically correlated with the atomic existents of the geometric conceptual law, where the attributes do not change in accordance with the consequent [Page 57] of that law. This would imply that the constraints of the existents of the law could not be epistemically correlated with those attributes. That may indeed be true, in which case an error has been exposed, but it in no way falsifies the law itself. The law is falsified only when the epistemic correlation is correct, and yet the consequent is not true of those attributes. But then how is it possible for the observations of the positions of attributes to contradict the deductive conclusions about the same positions? If the observations were not in error, it would be an assertion that physical reality could be both A and non-A at the same time and in the same respect. (4) Yet one of the most basic doctrines of philosophy is the Law of NonContradiction, which states that A cannot be both A and non-A at the same time and in the same respect. According to Aristotle, it is impossible to even argue that the Law of Nonfile:///C|/Downloads/Video/Chap14.html (1 of 4) [17-9-2008 17:13:57]

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Contradiction is false because as soon as one asserts anything, he is simultaneously asserting that the negative of the assertion is not so. Again, if it is impossible to affirm anything truly, then this will also itself be false; namely, to declare no true affirmation to belong to anything. But, if there is any true affirmation, it would appear to refute what is said by those who in raising such objections, would altogether annihilate conversation. (5) There is in things one principle concerning which it is impossible to be mistaken — a principle, I mean, whose truth it is necessary always to recognize; namely, the principle that the same thing cannot at one and the same time be and not be or have any other similar opposites.(6) That is, if one says, “this is a man,” one is also asserting that it is not a non-man, a horse, for example. One must make use of the Law of Non-Contradiction even in arguing that it is false. Were the law false, no knowledge, not even invalid knowledge, would be possible, not even the knowledge that the law is false, and I could not write, nor could you read, these words.(7) That being so, we can conclude that if the atomic existents of a geometrical conceptual law are identical to the attributes in respect to the constraints, then no empirical data can ever be found that will contradict a consequent correctly deduced from the antecedent of the law.(8) Similarly, when physical reality does not conform to the consequents of other conceptual laws, the epistemic correlation is destroyed, but the law is not falsified. As Murray Rothbard aptly put it, “facts cannot refute logic.” As to praxeological laws, an additional difficulty arises when falsification by experience is attempted. The antecedent of praxeological laws is a comparison of two values. To falsify a praxeological law using [Page 58] experience, one would have to experience these two values as the observer does, identifying with the relative importance placed upon them by the observer, then conclude that the action taken by the observer was contrary to the importance the observer placed on his own values, or to his knowledge of which plan is likely to achieve the more important value. Such an observation is inherently impossible to make, since one cannot simultaneously be another person so as to know the relative importance, yet not be another person so as to observe the other person having the experience. For this reason, praxeological laws are a priori and cannot be falsified by experience. As von Mises put it, “But no kind of experience ,can ever force us to discard or modify a priori theorems .. . a propos ition of an aprioristic theory can never be refuted by experience.”(9) An observer who collects data to contradict a verified praxeological law obeys praxeological laws even in collecting data to refute them. Suppose, for example, that praxeological laws, such as the Law of Quan tity Demanded (see Chapter 32), imply that, for any two goods that are exchanged, there is a price at which the quantity supplied will equal the qantity file:///C|/Downloads/Video/Chap14.html (2 of 4) [17-9-2008 17:13:57]

Chapter 14

demanded, and it is shown that there was an excess supply of labor during the depression of the 1930s despite a 30 percent drop in wages. We know then, that the wage drop, as great as it was, was nevertheless insufficient to clear the market. Next Table of Contents Index FOOTNOTES 1. Karl Popper, The Logic of Scientific Discovery (New York: Basic Books, 1959), 251. Back 2. Brand Blanshard, Reason and Analysis Court Publishing Co., 1962), 228. Back

(Open

3. Prediction has also been used as a criteria, but falsification implies prediction since the failure of a predicted event to occur constitutes falsification. Back 4. Just as one who knowingly argues contradictory positions is consistent with an unstated principle, so seemingly contradictory theories of the nature of physical reality (i.e. the waveparticle duality) are resolvable by an as yet undiscovered theory. Reality itself cannot be contradictory. Back 5. Aristotle, Metaphysics University of Michigan Press, 1960), 228. Back 6. Ibid., 229. Murray N. Rothbard, Individualism and the Philosophy of the Social Sciences 7. Brand Blanshard, Reason and Analysis Court Publishing Co., 1962), 79. [Page 59] Back

, trans. Richard Hope (Ann Arbor:

(Cato Institute, 1979), 7. Back (Open

8. Clearly, empirical data from a domain cannot falsify a consequent of a conceptual law where the epistemic correlation with that domain cannot be made. “They [necessary propositionsl none of them provide any matter of fact. In other words, they are entirely devoid of factual content. And, it is for this reason that no experience can refute them.” Alfred Jules file:///C|/Downloads/Video/Chap14.html (3 of 4) [17-9-2008 17:13:57]

Chapter 14

Ayer, Language, Truth and Logic 2nd ed. (New York: Dover Publications, Inc., 1952), 79. Back 9. Ludwig von Mises, Epistemological Problems of Economics Reisman (New York: New York University Press, 1981), 27—29. Back [Page 60]

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,

, trans. George

Chapter 15

Chapter 15 CETERIS PARIBUS If a consequent has only one antecedent, then the “if A changes, then B changes” law is symmetric and could just as easily have been stated, “if B changes, then A changes.” In a symmetric law, the change in A implies the change in B and vice versa. But if a consequent can have more than one antecedent, then “if A1 changes, then B changes,” and “if A2 changes, then B changes” could both be valid and verified statements of laws. Such nonsymmetric laws cannot be reversed (“if B changes, then A1 changes”) because B may be impelled by either or both antecedents (“if B changes, then A1 changes, or A2 changes, or both change.”). If that is the case, then it is not possible to determine the change in A1‘s contribution to a particular change in B unless one can either prevent A2 from changing, or the laws are quantitative laws and one knows the “if A2 changes X

units, then B changes Y

units” law and the magnitude of the change in A2. Thus, the failure of a consequent of a (non-symmetric) law to be observed when the antecedent is observed can mean either the law is incorrect (i.e., it is not a law) or that the law is correct, bul the antecedent of another (non-symmetric) law with the same consequent has occurred, subtracting from the magnitude of the consequent of the first antecedent, which has not been maintained. is to say that ceteris paribus ” means “other things being equal,” but “Ceteris paribus a better definition is that ceteris paribus is maintained for a law if the antecedents of all other laws that have the same consequent do not occur. For example, gravity exerts a force (downward) on a helium-filled balloon, and the weight of the displaced air exerts a force (upward). The change in the velocity of the balloon due only to the force of gravity on it can be observed only by placing the balloon in a vacuum, thereby eliminating the force of the weight of the displaced air. Since the necessity for ceteris paribus arises only when there are two laws with different antecedents and the same consequent, the need [Page 61] to maintain ceteris paribus can never arise if the laws are symmetric. Physical laws (at least non-primary physical laws) are clearly non-symmetric because many physical changes can have more than one possible cause. Conceptual laws could be symmetric or non-symmetric, depending on how the conceptual system is defined. But praxeological laws are laws of mutual implication — a change in the importance of values implies that the observer will change entities, and when an observer changes entities, it implies that he has changed the importance of his values. Thus, the concept of cetenis paribus has no place in praxeological theory.

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Chapter 15

This is, admittedly, a rather startling conclusion, especially for someone of the Austrian School of economics, which has always placed great emphasis on the importance of cetenis panibus . But the reason cetenis paribus took on so much importance was that economic laws were carelessly stated or misstated. For example, that a price can rise because demand increases or supply decreases might be given as an example of the need for the concept of ceteris paribus . But neither an increase in demand (i.e., quantity demanded at a given price) or a decrease in supply (i.e., quantity supplied at a given price) necessarily implies a higher price (see Chapter 34). When all praxeological laws are carefully and correctly stated, one discovers that no two laws have the same consequent but different antecedents. Additional confusion arises because the term “cetenis pariibus ” has also been used to mean that one must not compare different goods as though they were “the same good” (see page 90). For example, an , of two equal economist might say, “ceteris paribus quality goods, the cheaper will be chosen.” By this he means that each of the two (physically different) goods must serve the same value, which is to say that they must be “the same good.” If the buyer feels it would be unfair to the seller to choose the cheaper good, for example, then the two goods are not “the same good” because the cheaper good also serves the value of “fairness,” which is not served by the more expensive good. The concept of the “the same good” supplants this use of “cetenis panibus .” Next Table of Contents Index [Page 62]

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Chapter 16

PART III

THE BASIS OF PRAXEOLOGY The observer is a non-physical existent that can (1) experience attributes, (2) create concepts, and (3) change attributes, usually, but not necessarily, in that order. Because an observer experiences and changes attributes, he must have sensory capabilities and the capacity for action, i.e., a physical body.(1) The observer’s body is a unique entity because at least some of the changes that occur in it are caused by physical events according to physical law, as when the observer experiences attributes, while other events are caused by the observer himself when he changes attributes. All physical events either have physical causes, or, in the body of an observer, are the initial event caused by the observer. “Change can be conceived as the outcome either of the operation of mechanistic causality or of changes in the purposeful behavior “(2) An entity is a “determined entity” if all attributes of the entity have physical events as their immediate cause Thus, every entity is either a determined entity or the body of an observer. But since an observer’s body is an entity, it cannot escape obedience to the entity, albeit a sui generis same physical laws as any other entity. It is only the observer himself,(3) not his body, who is “volitional,”(4) and the observer is not an entity. The creation of concepts may be unconnected with experience, but it is the concepts (plans) that depict future experiences the observer hopes to cause that are of interest. The creation of concepts as a result of experiencing attributes is the process of acquiring knowledge, covered in Chapter 18. [Page 63] Finally, the observer can change attributes by changing the attributes of his body. This is the difficult problem of the will, discussed in the next chapter. Next Table of Contents Index FOOTNOTES

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Chapter 16

1. There may be no reason why experience and action must occur in the same body, though that is no doubt most convenient. Back , 3rd ed. (New Haven: Yale 2. Ludwig von Mises, Human Action University Press, 1966), 25. Back 3. The information that constitutes the observer (i.e., a personality, not memory) must exist somewhere. Existence of the information in a structure of attributes would necessitate obedience to physical laws, a denial of free will, so the existence must not be in attributes. The inadequacy of denotative concepts to describe personalities may be considered as evidence that a personality is not an entity. Back 4. Ludwig von Mises, The Ultimate Foundation of Economic (Sheed Andrews and McMeel, Inc., 1978), 57. Back Science [Page 63]

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Chapter 16

Chapter 16 Free Will Those who thus argue are mostly believers in Free Will, and maintain that every human volition originates a new chain of causation, of which it is itself the commencing link, not connected by invariable sequence with any anterior fact

.(1) —John Stuart Mill

An observer can initiate a chain of causation. That is, in choosing between plans, he can change attributes by an effort of his will. The initiation of chain of causation means that attributes are changed without the change being caused by any other change in attributes, i. e., the observer has "free will.” The observer initiates a chain by changing an attribute of its body, event not caused by a physical event, and that event causes other events to occur in itself or in its environment. If one observed a change in a determined entity, he could, if Laplace were correct(2), trace a chain causation backwards in time, conceivably all the way back to the creation of the universe, the “Big Bang” and beyond. Each event would lead to the preceding event by the application of physical laws. If one traced chains backwards that led to an observer’s body, however, he would find that, at least some of the time (i.e., when the observer initiated a chain), the chain could not, in principle, ever be traced backwards in time from the event initiated by the observer. In an observer’s body, it would seem, a chain of causation has sprung out of nowhere. The actions of an observer are not caused by physical events. Thus, incorrect to say, for example, that advertising “causes” people to buy, that inflationary expectations “caused” the members of the Federal Reserve Board to validate wage increases by expanding the money supply, that an increase in spendable income will “cause” an increase in consump tion, or that male brainwashing “causes” women to choose low-paid occupations. Acts of observers are new chains of causation and no physical event causes them. [Page 65]

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Chapter 16

The observer has only a single option vis-à-vis physical existents — to initiate a chain or to not initiate a chain; all other physical events are determined by physical laws. Since one can choose to think or one can think without choosing to do so, thoughts should be considered to be internal chains of causation, rather than as part of the observer. Drugs or electricity can contract one’s muscles, but that is not an initiation of a chain because it is not willed. Humans can engage in many acts, even extremely complex acts, which are under the control of the voluntary muscle system, but which are not willed. For example, a person can play a very difficult piano piece involving thousands of delicate and coordinated actions, yet be thinking of something entirely different. This is possible because an observer’s body can contain a deterministic internal computer, so that the observer need not will each action. He wills only to “switch on” the “automatic pilot,” or he wills nothing, permitting his internal robot to take over automatically. When he functions by habit, his actions are determined and are not willed. We tend to switch to automatic so often, and to so intertwine willed and determined acts that we are usually not aware of the fundamental difference between a movement that is willed (and is governed by praxeological laws) and a deterministic movement (which is not governed by praxeological laws, but only by physical laws). Because no event can cause an action that is willed, one cannot even say that observers whose bodies are made from the same “mold” will initiate the same chains.(3) Even if two bodies are identical down to the last electron, one cannot say that because the observer associated with one of them acted in a certain manner in a certain environment the other cannot but do the same, because if that were true, the observers would not be capable of initiating a chain, but would only be responding to physical events in obedience to physical laws.(4) Simply because one can successfully predict what an observer will do under particular circumstances does not mean that the observer’s actions are determined. A person in a house on fire is very likely to decide to leave, but if he is an observer, then it is not possible, in principle, to trace a chain of causation from light from the fire striking his retinas event by event, to him running out of the house. Whatever the mechanism of the will is that leads the observer to initiate a particular chain, it is subjective, that is, it is not governed by the application of physical laws to prior physical events. Were this not so, an observer would be only a physical machine and would not have the metaphysical status postulated for him. [Page 66] Next Table of Contents Index FOOTNOTES file:///C|/Downloads/Video/Chap16.html (2 of 3) [17-9-2008 17:14:01]

Chapter 16

1. John Stuart Mill, Collected Works of John Stuart Mill of Toronto Press, 1969), Vol. X, 475. Back

, ed. J.M. Robson (Toronto: University

2. Ilya Prigogine and Isabelle Stengers, Order Out of Chaos (Bantam Books, 1984), 75. Back 3. Murray N. Rothbard, Individualism and the Philosophy of the Social Sciences

(Cato Institute, 1979), 8. Back

4. That identical twins who have been separated are so identical in their choices shows only the extent that we choose to yield to our urges. (See Chapter 19.) Back [Page 67]

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Chapter 17

Chapter 17 VALUES In the strict sense, the end is always the removal of a dissatisfaction. However, we can doubtless also designate as an end the attainment of that condition of the external world which brings about our state of satisfaction either directly or indirectly, or which enables us to perform, without further difficulties the act through which satisfaction is to be obtained.

(1) —Ludwig von Mises

Because a chain of causation changes attributes, and an observer can acquire knowledge of attributes, and therefore of changes in attributes, an observer can know that he can initiate a chain. Since he knows he can initiate a chain, his decision to do so implies that some change in attributes was desired, though not necessarily the change that he actually brought about. That is, the very act of initiating a chain implies that an observer has an objective, a contemplated end,(2) which he wishes to achieve. It also implies that he had a belief about the arrangements of attributes that would exist if he acted or did not act, the plans between which he chooses. Since no physical event can cause an observer to initiate a particular chain, and a plan is a contemplated state that the observer hopes to bring about by initiating the chain, no physical event can cause an observer to choose a particular plan. In other words, physical events cannot cause praxeological events (a change in the importance of a value that results in a change in action, though a physical event can change an observer’s knowledge, thereby separating or agglomerating values — see Chapter 9), but praxeological events can cause physical events. Similarly, no objective factor can cause an observer to choose the particular value that the plan serves; values are metaphysically freely chosen, whether an observer can verbally express his values or not. As Ayn Rand put it, (3) man must have a philosophy because his choices are not made automatically for him.

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Chapter 17

Values can promote the health and well-being of the observer’s body or they can destroy it — one can choose life or death. Values can be [Page 68] embraced with enthusiasm or only reluctantly, varying between a “clear choice” or the best of two nearly equally desirable or undesirable alternatives. Values may be vague, such as the desire for “enlightenment,” “happiness,” or “success,” or they may be very specific, such as having one’s child learn to play a particular piece of music on the piano. Values can be magnificent and require a lifetime to achieve if ever, or they may be fleeting impulses that change minute-to-minute. One observer’s most important value may be satisfying his urges of the moment (see next chapter), while another observer’s most important value may be abstaining from satisfying all his urges. One value can complement another value, so that achieving one aids in achieving the other, while other values may conflict, so that achieving one value impedes the achievement of another value. (The effect of complementary or conflicting values is to agglomerate the values into the direct value-obverse value pair.) But values themselves are neither additive nor associative — a woman may undress in front of her sister or in front of her husband, but not in front of both, and many desired series of events (e.g., marriage and pregnancy) might be undesirable if reversed. An observer may have a hierarchy of values, for example, achieving sustenance, then safety, then comfort, then consummating all his talents. An observer can even have as a value bringing about a change in his own future choices of values (e.g., going to church to become a better person). It is the concern of the ethical philosopher to praise or condemn an observer’s choice of values as good or bad, and that of the logician their consistency, but the task of the economist is limited to explaining the laws that describe the consequences of these choices.(4) The word “plan” means a concept of a future arrangement of attributes that the observer believes he can cause or permit to come into existence.(5) A plan is not presently existing attributes, or a change in presently existing attributes, but a concept of future attributes. When an observer decides to bring about those future attributes, he must change presently existing attributes by initiating (or choosing not to initiate) a chain. A “good,” i.e., the entity to be changed or preserved by the plan, becomes, when the chain is initiated, either a “service,” i. e., the change itself, or a “product,” i.e., the changed or preserved good. For example, a seashell becomes a good when someone plans to pick it up or to alter his stride so as not to crush it; when he acts it becomes the product of his action. The phrase “to value X,” then, means to impute sufficient importance to X to be willing to initiate a chain to change or preserve X, whereupon X “has value.” All goods are necessarily “scarce” because one must initiate a chain to change or preserve them (unlike air or sunlight, from which observers can benefit without initiating chains). But no entity, [Page 69] regardless of how scarce it is (rancid yak butter?), is of any value unless some observer is willing to initiate a chain to change or preserve it. It is impossible to determine which good is related to a particular value by examining only the good itself. Unless one knows the plan that the observer has for using that good, one cannot file:///C|/Downloads/Video/Chap17.html (2 of 4) [17-9-2008 17:14:03]

Chapter 17

know what the good is to the observer who coveted it ;(6) one can know only its attributes. An archaeologist digs up a peculiar man-made object. Is it a medicine, a tool, a game, a weapon, a cooking utensil, or a religious ornament? The answer cannot be found in the physical or chemical nature of the object itself. When I discussed the nature of value, I observed that value is nothing inherent in goods and that it is not a property of goods.(7) (Even if we know it was a medicine to its creator, unless we have the knowledge the observer had who formulated the plan for it, we still do not know why it is a medicine. Perhaps the gods said it was a medicine, perhaps it worked before, perhaps the patient thought it would work.) In the social sciences, what something is is determined entirely by what plans observers hope to realize with it, and those plans are in the observer, not in the object. What (i.e., objective), the natural sciences study is in the object (i.e., and what the social sciences study is in the subject subjective). To a chemist, ice in the summer is the same ice in the winter, but in the social sciences whether summer ice is the same as winter ice depends on the importance of the values served by observers’ plans for it, not on the physical and chemical structure of ice.(8) Next Table of Contents Index FOOTNOTES 1. Ludwig von Mises, Epistemological , trans. George Problems of Economics Reisman (New York: D. Van Nostrand Company, Inc., 1960), 31—32. Back 2. Von Mises described the object of action as the removal of a “felt uneasiness.” It is believed that “value” is a better term because someone may choose to feel uneasy. Ludwig von Mises, Human Action , 3rd ed. (New Haven: Yale University Press, 1966), 14. Back 3. “In order to live, man must act; in order to act, he must make choices; in order to make choices, he must define a code of values; in order to define a code of values, he must know what he is and where is — i.e., he must know his own nature (including his means of knowledge) and the nature of the universe in which he acts — i.e., he needs metaphysics, file:///C|/Downloads/Video/Chap17.html (3 of 4) [17-9-2008 17:14:03]

Chapter 17

epistemology, ethics, which means; philosophy.” Ayn Rand, The Romantic Manifesto (New York: New American Library, Inc., 1969), 30. [Page 70] Back 4. Edwin G. Dolan, ed., The Foundations of Modern Austrian Economics (Sheed & Ward, Inc., 1976), see “Philosophical and Ethical Implications of Austrian Economics,” by Israel M. Kirzner. Von Mises, Human Action Murray N. Rothbard, Individualism and the Philosophy of the (Cato Institute, 1979), 23. Back Social Sciences 5. F.A. Harper, An Introduction to Value Theory

(Institute for Humane Studies, Inc., 1974). Back

6. F.A. Hayek, Individualism and the Economic Order Back 7. Carl Menger, Principles of Economics

47.

(Chicago: Henry Regnery Co., 1972), 57.

(New York: The Free Press, 1970), 145—146. Back

8. Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 1970), 18. “So far as human actions are concerned the things are what the acting people think they are.” F.A. Hayek, The Counter-Revolution of (Indianapolis: Liberty Ness, 1952, 2nd ed. 1979), 44. Back Science [Page 71]

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Chapter 18

Chapter 18 KNOWLEDGE If you bang your fist down on one side of a table and the other side springs up, you would not say that the table has knowledge of your fist striking it. If the table were replaced by a very simple living organism, such as a virus, which simply reacted in a deterministic manner to a stimulus, it could not be said to have knowledge of the stimulus. Even if the chain of causation from the stimulus to the response is extremely complex, as it is in a computer or in a higher organism, knowledge is not acquired if there is only an unbroken chain of causation from stimulus to response. “Knowledge” of “X” by an organism requires the creation of an arrangement of attributes (e. g., a physical state of the brain) in the organism that symbolizes “X.” These “symbolic attributes” can then be safely manipulated by the organism to “act out” changes that might occur in “X” itself. (See Appendix A.) Symbolic attributes are attributes that the organism can “combine” with other symbolic attributes to arrive at virtually any composite symbolic picture. Since symbolic attributes are attributes, their combination must obey physical laws, but it is a property of symbolic attributes that physical laws permit them to be combined in many, if not every, possible way. The organism combines them according to the laws that he believes govern the attributes they symbolize. It is much like making cut-outs of dogs, trees, or whatever one senses, arrang ing the cutouts to form a composite picture, then acting, not directly in response to what is sensed, but rather in response to the composite picture, as though the composite picture were itself being sensed. This does not break the attribute-toattribute chain of causation, however, since it simply imposes a second sensory step between stimulus and response. That is, free will requires the creation of composite pictures that attributes, not simply presently existing attributes. This represent future means that the attribute-to-attribute chain of causation is broken since the observer’s imagination of possible composite pictures is not determined by physical laws. [Page 72] It is therefore difficult to see how the ability to have knowledge, in this sense, can exist apart from free will, because the creation of a composite picture would probably be pointless unless there existed an observer who could create and act on the basis of composite pictures of future attributes.(1) This does not mean that none of an observer’s knowledge is his own creation. An observer has only a single option — to initiate a chain or not to initiate a chain, but he can initiate an internal chain of causation, a "thought,” which results in the creation of a concept. A concept created by an act of an observer is an observer-to-symbolic attribute-to-observer phenomenon, while a concept caused by a stimulus is an attribute-to-obser ver phenomenon. (See Appendix A.) Dreams can be regarded as bringing symbolic attributes to the observerattribute interface at a time when the observer cannot himself initiate a chain.

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Chapter 18

It is possible for an observer to initiate a chain that interferes with the deterministic mechanism for bringing symbolic attributes to his attention (as concepts), and thereby isolate himself from incoming information, but once he chooses to let the deterministic knowledge mechanism operate, he cannot, by an act of will, control the content of the concepts brought to his attention, though he may be able to initiate a chain that removes symbolic attributes to which those concepts are attached from his accessibility. An observer can also, of course, initiate a chain that will enable himself to acquire knowledge, either externally (e.g., reading a book) or internally (e.g., thinking). But there can be no causal relationship beween an observer’s knowledge and his initiation of a particular chain, because then the observer would not be an observer. That is, knowledge cannot deterministically cause an observer to initiate a chain because the attributes that carry the knowledge cannot create the concepts of future attributes upon which the observer acts. An observer’s knowledge may be used in choosing his values, and must be used to epistemically correlate those values with plans.(2) That is, no concept is a plan unless an observer believes he can change or preserve a good to actualize it, and no entity is a good unless an observer believes that changing or preserving that entity will actualize a plan; but no observer can so believe without knowledge of which of the perhaps many possible changes he can cause in an entity are likely to actualize that plan. A computer, for example, is an entity, but it is not a good to a particular observer unless he knows how to change or preserve it to actualize a plan. An observer uses his knowledge to formulate a plan that he believes will achieve his values. He deduces, “If I change or preserve good X, then I will actualize plan Y, and if I actualize plan Y, then I will achieve value Z.” For example, one may relate his value of possessing wealth to [Page 73] a plan for starting a business, then buy and sell goods to actualize that plan. It is knowledge, the internal symbolization of events and entities, which enables an observer to act to actualize plans (see Chapter 8). No entity, however much it glitters, shines, or sparkles, will have any value to an observer who lacks the knowledge to change or preserve it to actualize a plan.(3) An important question is whether the acquisition of knowledge is necessarily a self-corrective process. That is, if new knowledge is acquired that is inconsistent with old knowledge, must the old knowledge necessarily be replaced by the new? The answer must be “no” because it was never assumed that the observer contained any type of mechanism for comparing new and old knowledge to eliminate inconsistencies. Inconsistencies may never be made apparent to the observer, and, if they are, he may find it too costly to determine which view is in error. However, since an observer cannot conceive of a single plan that changes A and does not change A at the same time and in the same respect, all knowledge used to construct an actedupon plan must be consistent. That is, a plan to drive to the store involves knowledge that the car will start. If a sound is heard that is matched with the concept “dead engine,” then the old file:///C|/Downloads/Video/Chap18.html (2 of 6) [17-9-2008 17:14:06]

Chapter 18

knowledge incorporated into the plan — that the car will start — must be corrected. Thus, there is a self-corrective process for knowledge used to construct failed acted-upon plans. Of course, knowledge may be false even if the plan succeeds, but when a failure occurs, an error in knowledge is necessarily exposed, though the observer may not know the correct knowledge or even be able to identify which bit of knowledge was in error. The failure of plans nevertheless serves the highly useful purpose of exposing errors in knowledge. By acquiring knowledge of an entity at two different times and noting that one or more of its attributes are different, an observer can. know that an event has occurred (beyond the events that constitute the observations themselves). By observing the changes in attributes tbat occur under specific conditions, the observer can acquire knowledge of physical laws (though the laws as he states them may be only approximations of the actual laws). At least some elementary rules of logic and calculation can also be acquired by observation of attributes. An observer's knowledge is “valid” as long as he believes that his experiences in acting (or not acting) upon it do not contradict it. That is, “valid” knowledge does not mean knowledge of the ultimate nature of physical reality (“true”. knowledge), but on1y knowledge that is not yet contradicted by experiences of physical reality.(4) Thus, all knowledge is valid until contradicted by experience. Since there is no law that requires an observer to have true knowledge, it is likely that his knowledge will be true about some things [Page 74] and untrue about other things. The knowledge may, in fact, be only the knowledge that he does not have true knowledge and must guess. If “rational” means acting in accordance with one’s knowledge, whether or not the knowledge is true or is believed to be invalid by others, then an observer is always “rational” because, in choosing a particular plan, he initiates a chain that his knowledge tells him will actualize that plan. An observer still acts rationally if he fails to see the logical implications of his knowledge, because the logical implications are then not part of his knowledge. He is also rational if he has forgotten knowledge, since it is only knowledge available to him at the moment of action that is relevant. Nor does “rational” imply a choice of values that we approve of. As von Mises put it, “Whoever says that irrationality plays a role in human action is merely saying that his fellow men behave in a way that he does not consider correct.”(5) An observer may choose to achieve self-destructive values yet be rational. “Action is, by definition, always rational,”(6) because an observer cannot act in opposition to his knowledge; if he appears to do so, it is because he has chosen other values. A stimulus is an experienced event. A stimulus is conceptual only if it was caused by an observer (the observer himself or another observer) who intended it to convey knowledge of events, other than those in the chain of causation of the stimulus. The glimmer of light that enabled Tom Sawyer and Becky Thatcher to find their way out of the cave gave them knowledge, but no knowledge of any event other than itself. Tom couId deduce from the light that events required to cause the light had occurred (e.g., the sun rose), but the light did not provide information to him that events had occurred that were not in its chain of causation. file:///C|/Downloads/Video/Chap18.html (3 of 6) [17-9-2008 17:14:06]

Chapter 18

When Tom’s Aunt Polly screamed, “Tom!” at him, however, he learned .more than just that a particular sound had occurred. He learned that his aunt was angry, perhaps because his deception has been discovered, knowledge not acquired by animals who may have also heard the sound. When a conceptual stimulus occurs, one can learn of events outside the chain of causation. The events that the conceptual stimulus conveys know1edge of, by the way, need not be actual events, but can themselves be symbolic, postulated, or imagined events. For example, ideas are knowledge of a class of postulated events. The idea “loyalty” postulates that a certain behavior will occur in certain situations. Because ideas suggest classes of events that it may be possible for an observer to cause to occur in broad classes of future situations (e.g., socialism, fundamen talism, etc.), they often influence the selection of values.(7) But while the knowledge of the idea can be imposed on an observer, the relative impor tance of that idea as a value to an observer is his free choice. When a stimulus or an observer causes an internal chain of causation [Page 75] that creates or recalls a concept, that chain of causation may also activate urges (see Chapter 19) that increase or decrease the amount of energy required for the observer to act. The “unconscious mind” is not a second observer in the same body, but rather is a deterministic mechanism that creates urges in response to the symbolic attributes to which concepts are attached. This biological restraint on the freedom of the will was no doubt evolved to temper the chains initiated by the observer with his body’s prior experiences in similar situations. This is why the unconscious “mind” obeys a logic that is internally consistent, but which is often totally incongruous in the present time and circumstances.(8) In addition to being the object of action, knowledge can also be an unintended consequence of action. As a result of acting, an observer may learn the positions of entities and how they react to the changes he causes. He may also learn the acts of other observers in particular circumstances and therefore how they are likely to act in the future in similar circumstances. This unintended knowledge he acquires from his act gives rise to a spontaneous order. For example, if observers without a language try to consummate an exchange, they may apply various sounds to the goods involved. In the future, each may expect the same sounds to apply to similar goods, resulting in a language, “which, although the result of deliberate decisions of many people, has yet not been consciously designed by anyone.”(9) In a similar manner, culture, etiquette, market places, roads, business customs, musical forms, weights and measures, standard sizes (e.g., TV sets), money, prices, cities, and even a common law (10) can and do arise without design.(11) Next Table of Contents

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Index FOOTNOTES 1. George H. Smith, Atheism, The Case Against God (Prometheus Books, 1979), 75. Back 2. Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980). This book is highly recommended, and should be read by all social scientists. Back 3. For an excellent discussion of the relationship between knowledge and capital, see the first chapter of Ludwig M. Lachmann, Capital and its Structure (Sheed Andrews and McMeel, Inc., 1976). Back 4. One can imagine a situation where an observer has untrue but valid knowledge of attributes, so that when he acts on his knowledge his experiences are always consistent with his knowledge, even though it is false. Like the cartoon character, Mr. Magoo, he is wrong about everything, but somehow his experiences never contradict his knowledge. Back 5. Von Mises, Epistemological , 33. Back Problems 6. Ibid., 35. Von Mises, Human Action The Economic Point of View (Sheed & Ward, Inc., 1976), 172. [Page 76] Back

, page 19. Israel M. Kirzner,

7. “Indeed,” as Keynes put it, “the world is ruled by little else.” Back 8. Karen Homey, The Neurotic Personality of Our Time (New York: W. W. Norton & Company, Inc., 1937). Karen Homey, Our inner Conflicts (New York: W.W. Norton & Co., 1945). Back 9. F.A. Hayek, The CounterRevolution of Science (Indianapolis: Liberty Press, 1952, 2nd ed. 1979), p 71. See also 148—149. “How can it be the institutions which serve the common welfare and are extremely significant for its development came into being without a common will directed toward establishing them?” Carl Menger, Problems of Economics and Sociology , 1883, reprint, trans. Francis J. Nock, ed. Louis file:///C|/Downloads/Video/Chap18.html (5 of 6) [17-9-2008 17:14:06]

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Schneider (Urbana, Ill.: University of Illinois Press, 1963), 146. Back 10. F.A. Hayek, Law, Legislation, and Liberty (Chicago: University of Chicago Press, 1973). Back 11. Robert Axelrod, The Evolution of Cooperation

(New York: Basic Books, 1984). Back [Page 77]

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Chapter 19

Chapter 19 URGES The event that constitutes the first event in a chain initiated by an observer is an event that would not have occurred had the observer not caused it. Energy is therefore required to cause that event. How much energy depends upon the physical construction of the observer’s body. A quantum of energy may be all the energy that is necessary to cause the initial event, which is then “amplified,” as by an electric relay, into a macro effect. On the other hand, the physical makeup of the body could be such that the observer must summon forth a large quantity of energy to cause that first event in the chain. Both the energy necessary to initiate the chain and the energy available to the observer for initiating the chain are objectively determined by natural laws.(1) An “urge" is an observer’s impression of the quantity of energy necessary and available to initiate a chain. The first event in the chain may overcome the deterministic inertia of the observer’s body, or the first event in the chain may prevent the body from doing that which it otherwise would do. The former can be called “positive chains” and the latter “negative chains.” For example, saying “Hi” to someone and lifting a heavy weight are both positive chains (unless one has to resist an urge to say “Hi” or lift weights), the former requiring little energy and the latter much. Sitting still for a flu shot and holding one’s hand in a flame are both negative chains, the former requiring little energy and the latter much. The bodies of different observers may differ in the amount of energy available to their observers for initiating chains, and an observer’s body may have different amounts of energy available at different times. Thus, it is entirely possible for the observer to lack sufficient energy to prevent a deterministic movement of his body. One may find it difficult to resist jerking away from a pin prick, for example. But when the body movements are a complex series of acts performed over a considerable span of time, such as plotting and carrying out a murder, the argument that the observer lacked the energy necessary to thwart this “irresistable impulse” is consid erably less credible. [Page 78] Feelings(2) are also urges to the extent that they increase or decrease the energy necessary to act. Sadness may make it harder to act with enthusiasm. Guilt may make certain acts very difficult to perform. And, of course, phobias can confront the will with an immense energy barrier to the feared act. On the other hand, elation and adrenalin-stimulating excitement may give the will more energy and make it easier for the observer to act. An observer’s genes can result in a body in which a great deal of energy is available to the will for initiating some types of chains, while the will must overcome great energy barriers to initiating other types of chains. Thus, identical twins reared apart may follow the path of least resistance to the will and make very similar choices. Sociobiologists have also tried to show file:///C|/Downloads/Video/Chap19.html (1 of 2) [17-9-2008 17:14:07]

Chapter 19

that genes affect behavior. However, this does not deny free will, it only demonstrates how difficult it is for the will to overcome these energy inducements or barriers. Like wind whistling a song through window cracks, an environment plays on an observer’s body, causing him to feel particular urges of particular intensities. The environment creates an urge by causing an event to occur in the body of the observer. Whether objective environmental conditions actually do cause a particular urge will, of course, depend on the objective state of the body at that time, so that the same environmental conditions may create different urges in different observers’ bodies or in the same observer’s body at different times. Urges, being the result of physical conditions, are deterministic — an observer cannot directly create an urge or control its intensity by an act of will, though he may be able to initiate a chain that will bring about a physical state in his body that creates or extinguishes an urge. That is, one cannot will himself feel hungry, but, by refusing to eat, he can create that urge. The objective nature of urges means that measurement of the energy barriers of urges is, in principle, possible. Urges, the pains and pleasures of the flesh, however, should not be confused with the importance of values, which cannot be measured. The former are determined by the observer’s body according to physical laws. The latter are freely chosen, and can be, in principle, oblivious to the physical world. Next Table of Contents Index FOOTNOTES 1. Julian Jaynes, The Origin of Consciousness in the Decline of the Bicameral Mind (Boston: Houghton Mifflin Company, 1976), 426—427. Nathaniel Branden, The Disowned Self (Los AngeIes~ Nash Publishing Company, 1971), 108. [Page 79] Back 2. Neurotic feelings may be due to conflicts between the knowledge the observer has and the “hard-wired” response to the same symbolic attributes by his deterministic uncon scious. Back [Page 80]

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Chapter 20

Chapter 20 INFLUENCE Because an observer acts in accordance with his knowledge, and knowledge is objective, other observers can cause an observer’s knowledge to change so that he now must act on the basis of new knowledge. He is still metaphysically free to choose whether or not to initiate a chain, to change the relative importance of various values, but his body is not free from physical laws that permit the imposition of knowledge upon him. If an observer initiates a chain that he would not have initiated had he not been subjected to the new knowledge, or he refrains from initiating a chain that he would have initiated had he not had the new knowledge, the events that constitute the new knowledge are said to have “influenced” his initiation of the chain or his decision to not initiate the chain. Influencing behavior can be viewed as conditional causation because the causation is conditioned upon the decision of the observer to act or not act on the new knowledge. In terms of A, a choice of values, implying B, a physical event, the event B can be due to either a change in the importance of values, or to a change in the knowledge of which plans are epistemically correlated particular values (see Chapter 9). Influence, unlike causation, is uncertain as to its effects and may have different effects on different observers or on the same observer at different times. For example, knowledge that the productivity of capital has increased may influence one observer to save more to take advantage of the increased returns, and may influence another observer to save less because he can now achieve the same future benefits with less sacrifice of present consumption. (A striking example of how the same knowledge can influence different observers to take opposite actions is the knowledge that death is certain. To some people this means that their life is so precious that any crime is justified to preserve or better it. To others, it means that what happens in the unknown eternity that follows life is what is important, and that it would be foolish to jeopardize that for a few fleeting additional pleasures of life.) [Page 81] It is only knowledge considered at the moment of choice that can influence. An increase in national income does not influence someone to increase consumption unless he acts on that knowledge, which is unlikely. Knowledge that an individual’s own income has increased, however, may influence him to consume more. Whether one can know that new knowledge influenced an observer to initiate a particular chain is another question. After the chain has been initiated, the observer may believe that he would not have acted had he not had certain knowledge. If he does not initiate a chain, he may believe that he did not do so because of particular knowledge. Yet it is impossible to determine whether he would have initiated the chain anyway, even if he did not have the new knowledge, or would not have initiated the chain even if he did not have the file:///C|/Downloads/Video/Chap20.html (1 of 2) [17-9-2008 17:14:08]

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new knowledge, because, although an observer must act upon his knowledge, he can, at any time, change the relative importance of his values. Next Table of Contents Index [Page 82]

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PART IV

PART IV

PRAXEOLOGICAL LAWS Parts IV and V describe many praxeological laws, Part IV being limited to consensual relationships, and Part V covering non-consensual relationships. There may be many other praxeological laws that have not been found and that are not described; like geometry, the science is expandable. All of the praxeological laws relate a mental state, a choice of values, to physical action, though this may not always be made explicit in the statement of the law. There are, in fact, many ways to state a law, so the focus should be on the relationship the law describes, not on its particular formulation. Next Table of Contents Index [Page 83]

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Chapter 21

Chapter 21 MENGER'S LAW The importance that goods have for us and which we call value is merely imputed. Basically, only satisfactions have importance for us, because the maintenance of our lives and well-being depend on them. But we logically impute this importance to the goods on whose availability we are conscious of being dependent for these satisfactions.

(1) —Carl Menger

The impetus for an observer to act is the relative importance of the different values between which he can choose. The observer epistemically correlates his values with various plans, which then take on the relative importance of those values. That relative importance is then further passed onto goods, the entities that will be changed or preserved by those plans. Thus, the importance of goods is derived from the importance of the values they serve to achieve. (2) As Menger says in the above quote, the value of goods is due to the imputation of importance to them — to “value” goods is to impute importance to them. The imputation of importance proceeds even farther, from the goods that immediately serve to achieve the values (lower order goods) to goods required to produce those goods (higher order goods). ...the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve.(3) the goods believed to be useful in achieving value, including The imputation is to all goods such as books and lectures that provide knowledge of how to achieve a value. If a good can achieve more than one value, then it is the importance of the entire group of values that it can achieve that is imputed to that good. A good will therefore change in importance as the importance of the value it is expected to file:///C|/Downloads/Video/Chap21.html (1 of 3) [17-9-2008 17:14:10]

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achieve changes. That is, means have value only [Page 85] because, and only to the extent that, their ends are valued. Lionel Robbins gives an especially explicit example of the imputation of the importance of values to goods when he describes the armaments being produced as World War I ended: ...what at 10:55 AM. that morning was wealth and productive power, at 11.5 (sic) had become ‘notwealth,’ an embarrassment, a source of social waste. The substance had not changed. The guns were the same. The potentialities of the machines were the same. From the point of view of the technician, everything was exactly the same. But from the point of view of the economist, everything was different. (4) Israel Kirzner has dubbed Menger’s insight “Menger’s Law,” and has generalized it to say that man attaches the value (importance) of ends (values) to the means (goods) needed to achieve them. (5) While that statement of Menger’s Law is not a “law” as defined in this book, it leads directly to a praxeological law, which can be called “Menger’s Law,” that “if the relative importance of two paired values changes, so that the more important value is now epistemically correlated with the direct plan, then the observer will change the good depicted as changed by him in that plan.” (6) Thus, changes in the relative importance of values implies changes in action as to the goods related (though plans) to those values, and vice versa. The goods needed to achieve a value cannot be collectively more important than the importance of the value itself, but as each of the needed goods is acquired, the imputation will be spread over fewer remaining needed goods, which will then gain added importance. Next Table of Contents Index FOOTNOTES 1. Carl Menger, Principles of Economics (New York: The Free Press, 1950, orig. 1871), 139. Menger’s Law was previously suggested by Jean Bastiste Say, A Treatise on Political Economy , trans. from 4th ed. C.R. Princep (Philadelphia: J.B. Lippincott Co., 1854), 287. Back 2. “Goods always have value to determined Principles of Economics

certain economizing individuals and this value is also only by these individuals.” Carl Menger, (New York:

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The Free Press, 1950), 146. Back 3. Ibid., 150. [Page 86] Back 4. Lionel Robbins, An Essay on the Nature and Significance of Economic Science 48. Back

(New York: Macmillan and Co., 1962),

5. Israel M. Kirzner, Perception, Opportunity, and Profit Univ. of Chicago Press, 1979), 162—164. Back 6. Thus, contrary to Ricardo and the socialists, labor is not the source but is a means to value. Back [Page 87]

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(Chicago:

of value,

Chapter 22

Chapter 22 THE LAW OF MONEY It is not for its own sake that men desire money, but for the sake of what they can purchase with it.

(1) —Adam Smith

The existence of money is an excellent illustration of Menger’ s Law at work. An exchange between observers of one good for another requires each party to possess one of the goods and to impute more importance to the possession of the other good. Antecedent to any exchange, however, is the knowledge of which observers are willing to exchange the particular goods at acceptable ratios. Knowledge of which observers have the necessary coincidence of wants may be exceedingly difficult to acquire. For example, a person having only wheat wishes to acquire a house from a person desiring a yacht, a new car, clothes, etc. Though the quantity of wheat is ample to effect the necessary exchanges, it may be impossible to locate persons willing to make these exchanges, and, even given this knowledge, the transaction costs may be more important than any good that otherwise would have been gained. Clearly what is needed is a good that other observers will accept in exchange, i.e., money. Such a good would enable observers to achieve more important values, and thus a good acceptable in more exchanges, at known ratios, will have more importance imputed to it than it otherwise would have had. That is, it will achieve more important values that it otherwise would have achieved, and therefore will be changed in ways that it otherwise would not have been changed, because it is now chosen over other goods. This is the Law of Money, “if an observer can acquire good A or good B, and he believes that good A can be exchanged for good C, which he values more than either good A or good B, while good B cannot be exchanged for good C, then he will choose good A instead of good B.” For example, if a man can choose to be paid for picking tomatoes either with a portion of the tomatoes or with a piece of paper [Page 88] with green ink on it, and he believes that the green paper can be exchanged for a television set while the tomatoes cannot, and the television set is more important than either the tomatoes or the green paper, then he will choose the paper. While the paper, if not exchangeable for a more preferred good, would have had little or no value imputed to it, it now has the importance of the television set imputed to it. “Money”(2) is a good to which importance is imputed because of its exchangeability for other goods. The gain of this additional importance will induce observers to pro duce money, (3) so long as the importance of the values lost in producing it is less than the importance of the values achieved by the money. (See the Law of Profits.) To the extent that the money is no longer accepted in exchange, the importance imputed to it because it was money will vanish, and it file:///C|/Downloads/Video/Chap22.html (1 of 2) [17-9-2008 17:14:11]

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will have only its non-monetary importance, even if the total quantity of money offered in exchange remains constant.(4) Next Table of Contents Index FOOTNOTES 1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations Chicago Press, 1970, orig. 1776), Vol. 1, 460. Back

(Chicago: The University of

2. Money is very difficult for conventional economists to define because they attempt to define it objectively, as “currency plus demand deposits” or the like. But money, like everything else in the social sciences, cannot be objectively defined. Whether a good is or is not “money” can be found only in the minds of those who impute importance to it. Thus, goods that a distributor buys from a wholesaler to sell to a retailer are as much “money” to him in these exchanges as are the dollar bills he uses to pay for them; it is much like buying one currency with another currency. On the other hand, currency is not “money” to a collector or a miser if he could not care less about exchanging it for other goods. Back 3. Hans F. Sennholz, The Age of Inflation (Western Islands, 1979), 9—11l. Back 4. The Law of Money explains why money can lose its value even when more money is not being printed or is not being printed as rapidly as the loss of value — the importance that had been imputed to the good because it was accepted by everyone vanishes as more and more people refuse to accept it. Back [Page 89]

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Chapter 23

Chapter 23 LAW OF DIMINISHING MARGINAL UTILITY The Law of Diminishing Marginal Utility deals with the imputation of importance to units of the same good. Two goods are (units of) “the same good” to an observer if he believes they will achieve the same value, and therefore treats them interchangeably, regardless of whether they are physically the same or physically different. No two boxes of corn flakes are physically identical, but since they serve the same value, each box is a unit of the same good. Even such obviously physically dissimilar goods as a fishing trip and a case of liquor can be the same good if they both achieve the same value. However, the more physically dissimilar the goods are, the more likely it is that they will serve different values. Conversely, holy water and ordinary water are physically the same, yet are different goods because they do not achieve the same values. Once again, in the social sciences, what physical things are depends on the values they serve, not on their attributes. The Law of Diminishing Marginal Utility deals with the situation where units of the same good can be used to achieve value A or value B. It states, “as to units of the same good, which can be used to achieve more than one value, the first unit acquired will serve to achieve the most important value,or conversely,the first unit sacrificed will be the unit that served to achieve the least important value.”(1) To put it another way, the first acquired units will be used to achieved the most important value and therefore, according to Menger’s Law, will have more importance imputed to them than later acquired units. A person having only one bag of grain will use it to make whiskey rather than to feed a chicken if he believes the whiskey produced will achieve a value of greater importance than the value he believes a fed chicken will achieve. (2) The law does not apply to each physical unit of a good, but only to [Page 90] so many of the physical units as are necessary to achieve a particular value. It does not require that each atom or coin of gold be valued differently, for example. It simply gives the consequences if they serve different values. The physical quantity of a good required to achieve different values may or may not coincide with particular physical units. The law is true by logic, at the moment of choice, regardless of subsequent changes in values. The famous counter-example to the law of the second martini tasting better than the first, and therefore allegedly achieving a more important value, proves only that the urge for a martini has increased (see Chapter on Urges), not that the logic of the law is flawed. If the person chooses as his highest value satisfying the urge of the moment over values such as health, sobriety, and solvency, he will choose the second martini because it achieved a more important value; if he chooses the other values, the second martini will not be chosen, even though the urge is now stronger. The law, like all praxeological laws, is true by logic and does not describe physical changes in attributes, such as the intensification of urges. file:///C|/Downloads/Video/Chap23.html (1 of 2) [17-9-2008 17:14:12]

Chapter 23

Another supposed counter-example is a person who can acquire one more share of stock, which will give him control of a company, and therefore he will pay more for that share than for any of the preceding shares he acquired. Here there are two possibilities. First, the person may have two values, control and income. The last share achieved control as well as income while the preceding shares achieved only income, and control plus income is a more important value than is income alone, so he pays more for the last share. Second, the importance of control is initially imputed to many shares, each acquiring only a small proportion of that importance. But when all the shares but one have been acquired, the entire importance of control is imputed to that single last share. In both supposed counter-examples, the units acquired are being used to achieve the most important value at the moment of choice. Next Table of Contents Index FOOTNOTES 1. Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 23. Back 2. Eugen von Böhm-Bawerk, Value and Price F. Sennholz (Libertarian Press, ,orig. 1889), 29—31. Back [Page 91]

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, trans. Hans

Chapter 24

Chapter 24 CHOICE AND COST Costs are equal to the value attached to satisfaction which one must forego in order to attain the end aimed at.

(1) —Ludwig von Mises

No chain can be initiated without making a choice. An observer must choose between the arrangement of attributes he believes will (or may) exist if the chain is not initiated, and a good is not changed, versus the arrangement of attributes he believes will (or may) exist if the chain is initiated, and a good is changed. Since each good serves a different value (else no choice would be contemplated), he must really make a choice between two values — to choose is to select one value instead of another value. The absence of action is a choice only if action was contemplated and rejected. A choice, whether to act or not to act, however, conclusively establishes which value was more important to the choosing observer at the moment of choice. If an observer believes he can achieve a value by initiating a chain to acquire a good, and that acquiring that good will not necessitate the sacrifice of a more important value he will initiate the chain If he does not initiate the chain, after contemplating it, he must not so believe. Every choice then requires the sacrifice of the unchosen value. How, then, did the first value come to be a value? What value was sacrificed for it? The answer is that there was no first value, only a first pair of values. Just as one cannot split a log without creating two pieces at once, so every value implies the loss of its obverse value. Choice is made with the initiation of the chain. A decision to initiate a chain sometime in the future can always be changed and has no economic effect. The instant the choice is made, the “cost” of the choice becomes the sacrificed value as well as the good that served it. If an observer acts, the objective cost of his action is the arrangement of attributes that he believed would have existed had he not acted, and the subjective cost is [Page 92] the value that arrangement of attributes served. When one writes a check for a hundred dollars for a good, the objective cost is the good lost, the one hundred dollars, and the subjective cost is the value one hoped to achieve by not sacrificing the hundred dollars, perhaps ten dollars in interest. Similarly, if an observer decides not to act, the objective cost of his choice is the arrangement of attributes he believed would have existed had he acted and the subjective cost is the value that plan served. All costs are therefore “opportunity costs” in the sense that a cost is a foregone opportunity to achieve a value. Since a cost is a sacrificed file:///C|/Downloads/Video/Chap24.html (1 of 4) [17-9-2008 17:14:14]

Chapter 24

value, costs increase when the importance of the sacrificed value increases, even if the good that serves that value is the same. Because concepts can be transferred between observers, to the extent that physical laws, the positions of attributes, and rules of calculation are known, it is possible to know what arrangements of attributes would have existed had the observer made the obverse choice. The importance of the value served by that good, however, can never be known by others. Once an observer has acted, the cost that was sacrificed becomes a historical or sunk cost. As to all future acts, a historical cost is not a cost that can be sacrificed because it was already sacrificed and is now “water over the dam.” A historical cost affects present choices only to the extent that it is knowledge to an observer that influences him to act or refrain from acting. For example, knowing that past costs were higher than expected may alter future cost estimates and the decisions based on those estimates. When one value is sacrificed for another value, the importance of one value “minus" the importance of the other value is often called “psychic profit.” The term “psychic profit” has meaning only before choice is made because it is the “net” increase in importance that an observer believes he will achieve by sacrificing one value for another. Once the choice is made, however, the comparison would have to be between the importance of the achieved value and the importance of the sacrificed imagined value, a comparison of no praxeological significance because it is now too late to capture any difference in importance. For this reason, all psychic profit is ex ante , before the choice. If the observer is faced with the choice of initiating one of several chains (or of initiating no chain, of course), then the sacrificed value is not the “sum” of all the other values he might also have chosen, because he could not acquire all the goods that serve those values in a single act. (2) The values that an observer must choose between are not fantasized daydreams, but are values that are epistemically correlated with plans, concepts of future arrangements of entities that he believes he can actualize. [Page 93] Because the values that are the subject of choice are tied to the physical world by an observer’s knowledge, each plan to achieve a value may contain both desirable and undesirable qualities, “package deals,” so to speak. As a result, a value, or collection of values, may epistemically correlate only very imperfectly with any plan. Were an observer able to choose in such a way that all the undesirable values were achieved by one plan and all the desirable values were achieved by the obverse plan, he would no doubt do so, but his knowledge may not enable him to create a plan that does that. An observer can only choose, and except by choosing, he cannot create his choices by an act of will. Choice is not made between types of attributes (e.g., possessing diamonds instead of water), file:///C|/Downloads/Video/Chap24.html (2 of 4) [17-9-2008 17:14:14]

Chapter 24

but between changes in entities, which are specific mattergy (e.g., possessing a one-carat diamond instead of a gallon of water), because one cannot initiate a chain that changes all mattergy of a given type, but only particular entities.(3) Unless the values gained and lost are considered to be certainties by the observer, a choice must be made on the basis of the chance that a value will be gained or lost. In terms of goods which may be gained or lost, the choice is made on the basis of the “probable gain.” A probable gain is a possible increase in units of a good adjusted for risk. One might define it as the units that may be acquired times the probability of acquiring them, less the units that may be lost times the probability of losing them, though an observer may not know either probability with any precision. For example, in a lottery, one may have an unknown chance of acquiring a pot of unknown dollars by paying five dollars; the probable gain cannot be calculated mathematically, but an observer can still place a value on the chance of winning something and compare that value to the certain loss of the value the five dollars would have achieved. The risk of loss may be an especially important consideration when an observer loans a good, transferring possession to another observer. If money is loaned, for example, the money may not be returned, or, while physically identical money may be returned, it may not be the “same good” (see page 90) because, as a result of inflation, the money is not interchangable at the two times. Thus, the interest to be paid must include premiums for the risk of loss due to non-payment and inflation. Next Table of Contents Index FOOTNOTES 1. Ludwig von Mises, Human Action , 3rd ed. (New Haven: Yale University Press, 1966), 97. E.C. Pasour, Jr., “Cost and Choice — Austrian vs. Conventional Views,” Journal of Libertarian Studies, Vol. 2, No. 4, 327—336 (1978). Laurence S. Moss, ed., The Economics of Ludwig von (Sheed & Ward, Inc., 1976), 74. F.A. Hayek, Indi Mises vidualism and the Economic Order (Chicago: Henry Regnery Co., 1972), 122, 168. [Page 94] James M. Buchanan, Cost and Choice (Chicago: Univ. of Chicago Press, 1969). James M. Buchanan and G.F. Thirlby, ed., L.S.E. Essays on Cost (New York: N.Y. University Press, 1981). Mr. Buchanan has called this “Wieser’s Law” (ibid., 22, 27)); but it is not a law, only the definition of “cost.” Back

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2. Robert Nozick, “On Austrian Methodology,” Syntheses pages 353—392 at 372. Back 3. Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 1970), 17. Back [Page 95]

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, 36 (1977),

Chapter 25

Chapter 25 THE LAWS OF EXCHANGE AND PURPOSE It is not true that on an exchange of commodities we give value for value. On the contrary, each of the two contracting parties in every case, gives a less for a greater value.

(1) —Condillac

Every choice involves a value the observer hopes to achieve and a value he must sacrifice, but unless an exchange occurs, the achievement or sacrifice of both values depends upon only a single chain of causation. When an exchange occurs, two chains of causation are initiated by at. least two individuals (i.e., observer-animated entities), each chain being the cost of another chain. Thus, an “exchange with nature,” as when seeds are planted then crops are harvested, is not an “exchange” since there is no bargained-for mutual initiation of chains between individuals. When an exchange is made, at least part of the good acquired by an individual is acquired only when at least one other individual also chooses to initiate a chain. In an exchange, each individual’s hoped-for good is the changed attributes caused by the other individual’s initiation of a chain. The Law of Exchange is, "whenever two or more individuals know that they each relate the other’s good with a value that is more important than the value each relates to his own good, an exchange occurs.” The law requires both (1) a coincidence of wants and (2) knowledge that such a coincidence of wants exists. The exchanges may be bilateral (A to B, B to A) or multilateral (A to B, B to C, C to A). If an individual “holds out” for a better price, it does not mean that the law is invalid, only that he placed more importance on keeping his good in the hope of a higher price that he placed on acquiring the other good now. Like all acts, of course, the risk that the other individual may not initiate his chain must be taken into account in placing a value on the good to be gained (see page 94). [Page 96] If an individual has values that can be achieved only if another individual initiates a chain, he must somehow induce another individual to do so. Now the other individual may also have values, but, to his knowledge, the chains that the first individual wants him to initiate will not achieve more important values than those achieved by not acting, at least not at this time, for if they did he would have already acted. His failure to act shows, if he contemplated acting, that not acting achieved the more important value. Thus, if the first individual is to achieve his value, the second individual must be induced to forego achieving some value by initiating a file:///C|/Downloads/Video/Chap25.html (1 of 3) [17-9-2008 17:14:16]

Chapter 25

chain; that is, he must be induced to incur a cost he otherwise would not have incurred. This he will consent to do only if in doing so he believes he will achieve a value that he prefers to the value he must sacrifice. The first individual, too, will initiate chains that he believes will lose him a value only if, by doing so he is enabled to achieve a value he prefers. Consensual exchange is possible only when the value that each individual expects the other individual to achieve for him is preferred to the value that each individual must forego. In a consensual exchange, one can benefit oneself only by benefiting another.(2) Of course, ex post , a party to a consensual exchange may find that his value, and even the good he believed he would acquire, was not achieved by the exchange even if the other individual initiated the chain that he desired. Indeed, he may find that any chain he initiates may fail to achieve its related value, even if he acquires the hoped-for good. He may be able to induce the other individual to somehow compensate him should the exchange fail to achieve his value, (e.g., “satisfaction guaranteed or your money back”), but he must incur a cost for even that (e.g., in the form of a higher price), so in the end, in consensual relationships costs can be borne only by those who choose. The Law of Exchange implies the Law of Purchase, “when an exchange occurs, the number of units of each good exchanged will be the number at which either party to the exchange places more importance on one more unit of the good he must sacrifice than on any good that another party will exchange for that one more unit.” An observer will trade Y units of good B for a good A, where good A achieves a more important value than the Y units of good B, and where the Y + 1th unit of good B achieves a more important value than good C, which he would acquire for the Y + lth unit. That is, he will sell(3) Y units of a good, but not the Y + 1 unit, when he prefers the good acquired for the Y units to the Y units, but prefers the Y + 1th unit to what would he would acquire for it. (4) The price of a good is therefore determined by the importance of the last unit of the good that was acquired (by the Law of Diminishing Marginal Utility,[Page 97] the least important unit), and by the last units that were sacrificed (by the Law of Diminishing Marginal Utility, the most important units). Next Table of Contents Index FOOTNOTES 1. Condillac, Le Commerce et le Gouvernement Melanges d

’

, ed. Daire et Moiinari in the Econ. Polit

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. Paris, 1847, 267.

Chapter 25

Back 2. Ludwig von Mises, The Ultimate Foundation of Economic Science (Sheed Andrews and McMeel, Inc., 1978), 88. Back 3. “Buying” and “selling” (like “supply” and “demand,” discussed in Chapter 26), are the same thing from two different viewpoints. Thus, whatever is true of buying must be true, in reverse, of selling. A seller is always also a buyer, and a buyer is always also a seller. Back 4. W. Stanley Jevons, The Theory of Political Economy Co., 1888), 91. Back

, 3rd ed. (London: The Macmillan

[Page 98]

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Chapter 26

Chapter 26 THE LAW OF CHOICE That every man desires to obtain additional wealth with as little sacrifice as possible . . . is a matter of consciousness.

(1) —Nassau William Senior

The “price” of a good is the ratio of the number of units of a good that must be sacrificed for each unit of the good acquired. As to goods exchanged in many interchangeable units, individuals may be presented with the choice of sacrificing Y units of good B to acquire X units of good A. The ratio, Y /X , is then the “price” of good A and the ratio, X /Y , is the “price" of good B. Prices need not refer only to exchanges, but can also be applied to the sacrifice of any good to acquire another good. In order to save four of his cows from a flood, a farmer chooses to sacrifice two of his horses. The price of a cow is half a horse, and the price of a horse is two cows. In an “exchange with nature,” nature sets the price, while in an exchange between individuals, an individual sets the price. “Demand” is the number of units of the good that an observer chooses to acquire at a particular price, and “supply” is the number of units of the good that an individual chooses to sacrifice at a particular price. "Demand” and “supply” refer to units chosen and sacrificed, respectively, at some ratio of units of the two goods, that is, at some price. Both terms ire undefined except at a specified price. “We cannot express a person’s demand for a thing by the amount he is willing to buy . . . without reference to the price at which he would buy that amount “ (2) At a price of half a horse per cow (or two cows per horse), the farmer chose to demand four cows and supply two horses. Because demand is always it a price, demand implies a supply that is exchanged for what is demanded — one cannot demand without supplying; the price adjusts to re flect the quantities exchanged. (See “Say’s Law,” Appendix C.) In terms of values, the Law of Choice, which expresses the idea of efficiency in choice, broadly states, “if an individual can achieve value [Page 99] A by sacrificing value B or by sacrificing values B and C, he will choose the former, and if an individual can achieve value A by sacrificing value B or he can achieve values A and C by sacrificing value B, he will choose the latter.” In other words, all individuals want “more for less” because the more that is achieved and the less that is not sacrificed are both values. For example, if a person can achieve the file:///C|/Downloads/Video/Chap26.html (1 of 3) [17-9-2008 17:14:17]

Chapter 26

same value, say health, with the same cost by dancing or lifting weights, and dancing also achieves social pleasures, he will choose dancing. As an example of the obverse case, if a candy bar can be purchased for either a worn coin or a shiny new coin, one would pay for it with the worn coin if he prefers shiny coins. In terms of units of the goods that achieve the values, the Law of Choice is summarized by the statement, “if an individual chooses to demand X units of good A by supplying Y units of good B, he will prefer both to demand X units of good A by supplying fewer than Y units of good B, and, if more than X units of good A are valued, to demand more than X units of good A by supplying Y units of good B.” Similarly, “if an individual chooses to supply Y units of good B in order to achieve X units of good A, then he will prefer both to supply fewer than Y units of good B in order to acquire X units of good A and, if more than X units of good A are valued, to supply Y units of good B in order to acquire more than X units of good A.” In other words, an individual will prefer to demand as many units as possible and to supply as few units as possible, given that the units demanded and supplied serve more important values than any third value. The law is true only within the range of units where both A and B are valued, since the importance of too many units of a good may be less than the importance of fewer units. If the entity to be supplied is undesirable (a “bad,” such as radioactive waste), then the consent of another individual to take it is the good, and the Law of Choice still applies. The law is true by logical deduction because, if each unit of A and B is valued by the individual, then he must prefer to possess more units of both values. This assumes, of course, that a third value, which can be achieved only by sacrificing either or both of the values achieved by acquiring more units of goods A or B, is not more important to the individual. Such a third value might be, for example, the joy of giving a gift or of upholding a religious standard by trading at a “fair” price. The Law of Choice is not invalidated; it is simply that the third value is more important than the values achieved by the additional units. The Law of Choice leads directly to eight more specific laws, the Law of Profits, the Law of Risk, the Law of Price, Giffen‘s Law, the Law of Minimum Demand, the Law of Quantity Demanded, the Law of Complements, and the Law of Supply and Demand. [Page 100] Next Table of Contents Index FOOTNOTES 1. Nassau William Senior, An Outline of the file:///C|/Downloads/Video/Chap26.html (2 of 3) [17-9-2008 17:14:17]

Chapter 26

Science of Political Economy

(New York: Farrar & Rinehart, Inc., 1939), 26. Back

2. Alfred Marshall, Principles of Economics (London: The Macmillan Co., 1961), 96—97. Back [Page 101]

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Chapter 27

Chapter 27 THE LAW OF PROFITS But profit, ma on what it is you

’

am, depends ’ re after. —Ayn Rand

(1)

As discussed in the chapter on choice and cost, the psychic profit is the importance of the difference between a direct value and its obverse value. While psychic profit cannot be measured, the goods that are related to the two values are entities that can be measured. If the goods are different (see page 90 for the meaning of “same” and “different”), however, as for example, when four horses are exchanged for three cows, the difference between them cannot be calculated since one cannot subtract horses from cows. It is only when the cost and the acquired good are units of the same good (e.g., dollars), that one can calculate profit or loss by subtracting the units sacrificed, the cost, from the units gained, the revenue.(2) The Law of Choice states that an individual will prefer to demand as many units of a good as possible and to supply as few units of good as possible. This implies that when the good demanded and the good supplied are the same good, he will not supply any units if the number of units that must be supplied exceeds the number he can demand. That is, he will not pay eight dollars for five dollars because the three-dollar difference is a good to him. It can also be said that, in the absence of costs of greater importance than the three units of the good that may be gained, he will exchange five units for eight units. But since no individual will exchange eight units for five units, the exchange of five units for eight units must involve at least two exchanges that include a different good. For example, one may supply dollars for factors to make a product, then demand dollars when the product is later sold. The Law of Choice also implies that if an observer is given a choice of two exchanges, both involving units of the same good, an individual will choose the exchange yielding the greatest profit, because the additional units gained are a good to him. This is the Law of Profits, “if all units that must be sacrificed and that can be acquired [Page 102] are units of the same good to an individual, he will make only those exchanges that he expects will result in an increase of those units, and he will prefer the exchange that he believes will result in the largest increase.” In other words, if the values achieved by profits are more important than the values that must be sacrificed to acquire those profits, an individual will maximize profits. The law means that no one will intentionally produce at a loss — one must expect the selling price to exceed the costs of production or one will not produce; costs that are not expected to be recoverable in the increased value of the product will not be incurred. Therefore, no one file:///C|/Downloads/Video/Chap27.html (1 of 4) [17-9-2008 17:14:19]

Chapter 27

will pay a more units for a factor of production than the number of units that he thinks that factor will add to the revenue he can acquire for the product. That is, wages will not exceed the expected (discounted) value of the marginal product of the labor, rent(3) will not exceed the income expected from land, and interest will not exceed the expected return to capital (though they may exceed their actual return). Given a choice of goods to produce, one will produce the most profitable good. A producer will increase his production, so long as the conditions of the law are met, until he no longer expects his additional revenue to exceed his additional costs, so that his expected marginal cost and his expected marginal revenue will tend to converge, allowing for risk. (4) Also, the law implies that, given different means of producing the same product, producers will choose the least expensive. Thus, “a rise in wages will encourage capitalists to substitute machinery for labour and vice versa.”(5) It should be clear that the Law of Profits implies that knowledge of present prices will greatly influence decisions as to what will be produced, how much will be produced, how it will be produced, who will produce it, where it will be produced, and when it will be produced. That is, to the extent that present prices are believed to be related to future prices, profitmaximizing producers will, by calculating their expected profits from the various choices they could make, using expected future prices, choose particular modes of production. While individuals for whom the importance of the values served by the profit exceeds the importance of values that must be sacrificed to acquire the profit must logically maximize profits, their very efforts to do so will in certain circumstances drive profits towards zero (see Chapter 37), though a free society in which all profits are zero is virtually impos sible (see Chapter 35). Of all the means to achieve human values, profits have been among .the most maligned. The condemnation of profits is based on the fallacy that when one earns a profit in an exchange he does the other party an injury. That, in turn, is based on the fallacy that the size of the “economic [Page 103] pie” is fixed, so that one individual cannot have without another not having. And that, in turn, is based on the fallacy that the object of human action is entities — physical things — not the achievement of values — mental desires. If the ends of human action were the acquisition of things, then one could not have a physical thing without another not having it, and, to the extent that the number of physical things being exchanged is fixed, earning a profit — a physical thing — would indeed deprive another. But things are means, not ends. While, in any contemplated consensual exchange, a means — a thing — may be lost, an end — a value — is gained. Thus, the value pie is not fixed — both parties are “haves” in a consensual exchange. Indeed, a consensually-earned profit is proof, not only that the other party to the exhange was not injured, but that he actually benefitted, for did he not prefer the exchange to no exchange? (Note that fraud is not consented to, and that the benefits foreseen from any act, including an act in an exchange that creates a profit, are always ex ante that act, not ex post .)

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Chapter 27

Next Table of Contents Index FOOTNOTES 1. Ayn Rand, Atlas Shrugged Library, 1957), 621. Back

(New York: The New American

2. Much has been made of the difference between an economic profit, where “opportunity costs” are subtracted, and an accounting profit, where only objective costs are subtracted. For example, a person who invests one hundred dollars and gets back one hundred-and-five dollars instead of putting it in a bank of 10 percent interest has an accounting profit of five dollars and an economic loss of five dollars. The difficulty with the concept of economic profit is that it substracts subjective costs from objective revenue. That is, earnings that might have been acquired, had the obverse choice been made, are subtracted from revenue that actually was acquired. In calculating an economic profit, one subtracts a value — the dollars that the sacrificed good might have achieved, from a good — the revenue earned. The results of this incorrect procedure are often bizarre. For example, if one foregoes making a return of 70 percent in order to make a return of 100 percent, which then actually returns only 30 percent, one has an economic loss of 40 percent. But if the choice is between losing 13 percent and losing 15 percent, and one chooses the former, there is an economic profit of 2 percent! Back 3. David Ricardo, The Works and Correspondence of David Ricardo , ed. Piero Sraffa, Vol. 1 (Cambridge: Cambridge University Press, 1951), 70—76. Back 4. "... the producer will always stop when the increase in expense exceeds the increase in receipts.” Augustin Cournot, Researches into the Mathematical Principles of the Theory of Wealth (1838), trans, Nathaniel T. Bacon (Homewood, Illinois: Richard D. Irwin, Inc. 1963) 48. Back 5. Friedrick A. Hayek, Profit, Interest and Investment (Fairfield, N.J.: Augustus M. KeIley, 1975), 8. Back [Page 104] file:///C|/Downloads/Video/Chap27.html (3 of 4) [17-9-2008 17:14:19]

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Chapter 28

Chapter 28 THE LAW OF RISK The Law of Risk states, “if an individual can choose between acquiring a good (or its related value) with a certain probability and acquiring the same good (or its related value) with a different probability, then he will prefer the good that has the higher probability.” Obversely, “if an individual can choose between acquiring a good by sacrificing a cost with a certain probability or by sacrificing the same cost with a different probability, then he will prefer the cost with the lower probability.” The law follows logically because the additional good that may be gained, or the additional cost that may be lost, achieves a value for the individual. For example, in the absence of other costs, one would play the numbers instead of the legal lottery, because the pay-out is higher. Conversely, one chooses travel by a safe road, other considerations being equal, because the risk of loss is less. The Law of Risk implies that, given a choice of acquiring, for example, eighty dollars with certainty or of acquiring a hundred dollars with an 85 percent chance (and zero dollars with 15 percent chance), an individual will choose the latter, unless the risk or the absence of the risk is itself a more important value, as it often is. Thus, some people will seek safety or danger even at a lower return (after risk is included). An interesting application of this law occurs when a firm is subsidized. The subsidy is “in the bag” while profits are extremely risky (and go to zero eventually anyway — see Chapter 37). By the Law of Risk, in the absence of other costs, the leaders of the firm will choose to take those actions that will reduce efficiency and entitle it to subsidies, than take those actions that will increase efficiency and earn profits. Another interesting example is the effect of the Affirmative Action laws, which give certain workers a privileged legal status. While profit-seeking employers will not discriminate in the absence of these laws (see Chapter 46), the laws may influence them to discriminate to the extent that the laws reduce the probable gain (see page 94) from hiring a privileged [Page 105] worker. That is, in hiring anyone , a profit-seeking employer hopes that the employee will generate more income than he costs in training, salary, benefits, and lawsuits. The Affirmative Action law imposes a possible cost (e.g., fines, no government contracts, lawsuits) on him if he does not hire the privileged worker, but also increases his risk of loss if he does hire him and later dismisses him or fails to promote him. The latter risk has, in many cases, exceeded the former risk, with the result the Affirmative Action laws have, in those cases, increased discrimination. Next file:///C|/Downloads/Video/Chap28.html (1 of 2) [17-9-2008 17:14:20]

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Table of Contents Index [Page 106]

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Chapter 29

Chapter 29 THE LAW OF PRICE The buyers must be supposed as studious to buy cheap, as the sellers to sell

dear. (1) —John Stuart Mill

As noted on page 90, two goods are “the same good” to an individual if he believes they will both achieve the same value, whether or not they are physically the same or physically different. If two goods both achieve values of the same importance,(2) whether or not they are the same values, they are “complete substitutes.” Thus, if two goods are the same good, they are necessarily complete substitutes, though complete substitutes are not necessarily the same good. If good A achieves value A and good B achieves values A and H, however, then good A is a partial substitute for good B and Giffen’s Law applies rather than the Law of Price (see next chapter). The Law of Price is simply a special case of Giffen’s Law, where value B is zero. Whether or not two goods are the same good or substitutes depends upon the individual who is making that decision. Thus, goods may be substitutes to one individual, but not to another. The Law of Price is, “if goods A and B are complete substitutes to an individual, then he will demand the lower-priced good and supply the higher-priced good.” Bicycles and dolls may not be substitutes to the sellers, but to a buyer to whom they both achieve the value of seeing a child happy (and achieve no other values), they are the same good. By the Law of Price, he will choose the less expensive. Similarly, an individual may accept work in Dallas or Houston interchangeably, and choose the higher-paying job, though to the employers the two jobs are different goods. Since a price is the ratio of units supplied per unit demanded, the Law of Price follows immediately from the Law of Choice because the additional units that would have to be sacrificed at a higher price are a good to the individual. Exchanges of complete substitutes can be made at about the same [Page 107] time at different prices, even though, by the Law of Price, every buyer would have preferred the lower price. An individual buys a good at a particular price when he could have bought a complete substitute at a lower price only because he does not know that he could have bought at a lower price. To the extent that buyers and sellers know the posted prices and quantities available to be sold at those posted prices by other sellers, and transaction and other costs are the same, or, if other cost are different, the posted prices differ by the other costs, they will not buy at all from sellers who post a higher price. (One must distinguish between a posted price, which is only an offer to exchange, and the trade file:///C|/Downloads/Video/Chap29.html (1 of 2) [17-9-2008 17:14:22]

Chapter 29

price at which the exchange actually occurs.) Thus, the Law of Price implies that, in the same market, at any one moment there cannot be two [trade] prices for the same kind of article,” which is known as Jevons’ Law of Indifference. (3) Since a rate of return on an investment is also a price — the ratio of units gained of a good per unit supplied of a good — Jevons’ Law also holds that there cannot be two rates of return for the same investment in the same market. To condemn a person for preferring a low price to a high price is therefore to condemn him for choosing a value that he relates to the additional units he saved by paying the lower price, and praxeology is silent on the selection of (non-right violating) values. Andrew Carnegie, for example, in paying no more in wages than he had to, to secure the labor he wanted, did only what everyone who values money does with every purchase of every good. Next Table of Contents Index FOOTNOTES 1. John Stuart Mill, Principles of Political Economy Longmans, Green & Co., 1929), 440. Back

, ed. Sir W.J. Ashley (London:

2. That two values can have the same importance can only be hypothesized, never demonstrated, since, should an individual ever have to choose between them, he will have to make one more important than the other. Back 3. W. Stanley Jevons, The Theory of , 5th ed. (Fairfield, N.J.: Augustus Political Economy M. Kelley, Bookseller, 1965), 91. Jevons’ Law was previously noted by Anne Robert Jacques Turgot, a Physiocrat. Anne Robert Jacques Turgot, Reflections on the Formation and the Distribution of Riches , trans. William J. Ashley (Fairfield, N.J.: Augustus M. Kelley, 1971), 29, 30. Jevons’ Law is not a praxeological law because it does not describe how changes in values change actions. Back [Page 108]

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Chapter 30

Chapter 30 GIFFEN'S LAW Giffen’s Paradox, as it is usually stated in textbooks, is that as to some inferior goods, the income effect can more than offset the substitution effect, with the result that the quantity demanded can drop when the price drops. For example, in 19th century Ireland, the poor might have had to consume mostly potatoes to stay alive. But if the price of potatoes fell, the money saved on potatoes could be spent on some other good. Since potatoes and meat both achieve the value of sustaining life, the poor could substitute meat for some potatoes and achieve the value of life using meat instead of potatoes. But while the potatoes achieve only the value of life, the meat achieves the value of the pleasure of eating in addition to the value of life. Thus, at the lower price, there was an additional value that would be lost if the same number of potatoes were bought, which would not be lost if that number of potatoes were bought at the higher price, namely the enjoyment of eating meat. In other words, potatoes are a partial substitute for meat. Giffen’s Paradox arises because of the existence of higher-priced goods that also achieve less important additional values. Some units of the partial substitute must still be purchased because, since the other good is higher-priced than the partial substitute, the other good alone could not achieve the value the units the partial substitute did without the sacrifice of some other value, which is a different choice. That is, if a value can be achieved either by good A or by good B, and good B does not achieve any additional values, then a lower price for good A will not permit the individual to achieve any additional, but less important values, by substituting units of good B for some units of good A. But if good B achieves an additional value, then the individual may substitute good B for some units of good A and achieve both values. Good B must be higher priced than good A in order for this condition to present itself, because, it were lower priced, by the Law of Choice, it would be chosen in any case, even if it did not achieve an additional value. [Page 109] These observations can be summed up in Giffen’s Law, which states, “if good A can be acquired by sacrificing X units of good C, and good B can be acquired by sacrificing X + Y units of good C, and good A achieves value A and good B achieves values A and B, then good B will be preferred to good A unless the value achieved by the Y units of good C is more important than value B.” Relating this to the example given above, good C is money, good A is potatoes, good B is meat, value A is life, and value B is the pleasure of eating meat. For example, if, at a price of 10¢, a man buys 5 widgets, would he have bought at least 5 widgets had the price been 9¢ each? Not if there is a 14¢ gidget that achieves the same value as the widget plus an additional value, and the additional value is preferred to any value the additional 5¢ would have achieved, for now he can buy 4 widgets and 1 gidget and achieve both values for the same 50¢ cost. There is now an additional cost to buying the fifth widget file:///C|/Downloads/Video/Chap30.html (1 of 3) [17-9-2008 17:14:23]

Chapter 30

at 9¢, namely, the loss of the additional value achieved by the gidget. (1) While Giffen’s Law is stated as applying to demand, it applies equally well to supply, because supply is simply the obverse of demand. Giffen’s Law would then say that supply might fall off at higher prices, because the income effect might more than offset the substitution effect. As in the case of demand, the explanation is that what is supplied can achieve a less important additional value at the high price that it cannot achieve at the low price. Thus, if an individual receives a higher price, he can achieve the same values by supplying fewer units, plus an additional value that he could not have achieved at the lower price. A good example of Giffen’ s Law applied to supply is in the sale of labor, where a person may work less at a higher wage. That is, if there are values that can be achieved either by leisure or by money (e.g., happy children, achievable by playing with them or by giving them presents), and leisure also enables the worker to achieve an additional value not achieved by money (e.g., a closer relationship with his children), then, at the higher wage, the worker may subsitute some units of leisure for some wages. The additional value achieved by the extra leisure at the higher wage is not achievable at the lower wage (without loss of the more important value) and is therefore an additional cost that would be lost at the higher wage should the individual supply the same number of units of labor. As an example, suppose a woman can get nursery schooling for her child by either helping out at the school or by working at another job and paying the school money. The other job pays three dollars an hour, and she works at it three hours a day to pay nine dollars a day to the school. If she were paid four dollars an hour, would she work at least three hours [Page 110] a day at the job? Not if one hour spent at the school is credited for one dollar in tuition and, by working at the school she is close to her child, a value more important to her than any value the additional three dollars spending money would have achieved. Giffen’s Law applied to supply is, “if X units of good C can be acquired by sacrificing good A, and X + Y units of good C can be acquired by sacrificing good B, and good A achieves value A, and good B achieves values A and B, then sacrificing good B will be preferred to sacrificing good A unless value B is more important than the value achieved by the Y units of good C.” Relating this to the example given above, good A is labor at the school, good B is labor at the other job, good C is money (or credit for money), value A is the value of leisure, and value B is the value of closeness. Acquiring the nine dollars by working at the job two hours for eight dollars and at the school for one hour for one dollar credit requires the sacrifice of only two hours of closeness and leisure and one hour of leisure alone. While an additional three dollars in spending money can be acquired by working at the job for three hours, this requires the loss of three hours of both closeness and leisure. Therefore, the sacrifice of three hours of closeness and leisure will be prefered to the sacrifice of two hours of closeness and leisure and one hour of leisure alone unless one hour of closeness is a more important value than the value achieved by the additional three dollars in spending money. file:///C|/Downloads/Video/Chap30.html (2 of 3) [17-9-2008 17:14:23]

Chapter 30

From the Law of Price, it can be inferred that the demand by an individual for a higher-priced complete substitute will be zero. One should not expect the aggregate demand for that good to be zero, however, unless it is a complete substitute for every buyer, which may be very unlikely. Similarly, it can be inferred from Giffen’s Law that the demand by an individual for the higher-priced good will be zero. But again, the aggregate demand for the good will not be zero unless every buyer decides that the importance of the value sacrificed by paying the additional cost of the higher-priced good is more important than the value achieved by it, and that too may be very unlikely. Next Table of Contents Index FOOTNOTES 1. If P1 and Q1 are the higher price and quantity, P2 and Q2 are the lower price and quantity, and P3 is the price of the other good, then P1Q1 = P2Q2 + (Q1 — Q2)P3. In the example given, P1 = 10, P2 = 9, Q1 = 5, and P3 = 14, so (10) (5) = 9Q2 + (5 — Q2) (14) or Q2 = 4. Back [Page 111]

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Chapter 31

Chapter 31 THE LAW OF MINIMUM DEMAND The Law of Minimum Demand is, “if, at a price of X units per good, a good achieves a more important value for an individual than does the X units, his demand for the good will not be less at a lower price.” Also, “if, at a price of X units per good, a good achieves a less important value for an individual than does the X units, his demand for the good will not be greater at a higher price." Similar statements can be made for supply. The law, like all praxeological laws, relates a mental state — the relative importance of values — to action by an individual — demanding a good. The law states that the quantity an individual buys will not be less if the price is lowered, nor more if the price is raised. He might buy the same quantity or more at the lower price, but he will not buy less, and he might buy the same quantity or less at the higher price, but he will not buy more. For example, a man discovers he can buy his brand of cigars for three dollars a box or four dollars a box. The Law of Price implies that he will choose to buy at three dollar a box because the additional dollar is a good to him. If two boxes achieve a more important value than six dollars, by the Law of Minimum Demand, he will not buy less than two boxes if the price is lowered to two dollars a box, and he will not buy more than two boxes if the price is raised to four dollars a box. The law logically follows from Menger’s Law since the importance of values is imputed to the goods, and he chooses the more important value. The law describes the effect that a change in price has on an individual’s demand. Since a price change implies a time interval between the higher price and the lower price, the law presumes that the relative importance that the individual places on his plans remains the same at the two times. Plans may change in importance if the price change is knowledge to the individual that influences him to anticipate that further price changes are likely. (See Entrepreneurship, Chapter 35.) But under the conditions of the law, if the price falls, an individual would not buy [Page 112] less at time t2 than at time t1 if he attached the same importance to his plans at both times. The law also presumes that the good is “the same good” at the two prices (see page 90). A higher price may itself achieve an additional value, such as proof of wealth or expensive tastes, in which case the lower-priced good is not the same good as a physically identical higher-priced good. A quantity discount, where a person supplies more at a lower price because his transaction costs may be “fixed,” is not a violation of the Law of Minimum Demand. The law says that if file:///C|/Downloads/Video/Chap31.html (1 of 2) [17-9-2008 17:14:25]

Chapter 31

the price had been lower, the seller would not have supplied more. The “price” to the seller is all the goods he must sacrifice per unit of the good acquired. But the goods he must sacrifice need not necessarily be transferred to the buyer. (An unemployment compensation tax, for example, raises the price of labor to the employer, though the employee may never receive this money, which may even exceed the (free market) price of unemployment insurance.) In other words, what the seller supplies is not necessarily the same as what the buyer acquires. A quantity discount is given because, when a large number of units of a good are sold, there are fewer goods that the seller must sacrifice per unit of the good he acquired. The extra goods that he would have had to sacrifice had the quantity been lower were not transferred to the buyer. Thus, when a seller gives a quantity discount, the price to the seller is higher when a small quantity is sold than when a large quantity is sold. For example, it may cost a seller $500 selling cost per car if ten cars are sold one at a time, but only $50 per car if the ten cars are sold all at once. If the car costs the seller $5,000 and sells for $6,000, then the price to the seller of selling one car is ($500 + $5,000)/$6,000 or 92¢ per dollar acquired. But if ten cars are sold at once for $6,000 the price to the seller is ($50 + $5,000)/$6,000 or only 84¢ per dollar acquired. Thus, while the price to the buyer (in dollars per car) remains the same at $6,000, the price to the seller (in cars-converted-to-dollars plus selling cost per dollar) is less when a larger quantity purchased. Giffen’s Law, discussed in the previous chapter, is another example where the price to the seller is not the same as the price to the buyer, this time because a third good, which could have been acquired at the lower price, cannot be acquired at the higher price. Next Table of Contents Index [Page 113]

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Chapter 32

Chapter 32 THE LAW OF QUANTITY DEMANDED By the Law of Minimum Demand, if a good achieves a more important value than its cost, an individual will not demand fewer units of it if the price is lowered, but he will not necessarily units at a lower price. On the other hand, if certain mental conditions demand more exist, it must follow that he will demand more units of the good at a lower price. The Law of Quantity Demanded is, “if, at a price of X units per good, a good achieves a less important value for an individual than does the X units, and, at a lower price of Y units per good, the good achieves a more important value for him than does the Y units, then his demand for the good will increase when the price is lowered from X to Y .” Also, “if, at a price of X units per good, a good achieves a more important value for an individual than does the X units, and, at a higher price of Y units per good, the good achieves a less important value for him than does the Y units, then his demand for the good will decrease when the price is raised from X to Y .” The law relates an individual’s mental state — the relative importance of his values — to the action he will take upon a change in price. The law says, in effect, that if a seller is faced with buyers who have the particular mental state described by the law, he will sell more if he lowers the price or less if he raises it. The law follows directly from Menger’ s Law since the importance of values is imputed to the goods, and he then chooses the more important good. Similar statements can be made for supply, but supply needs more clarification than does demand. First, a decision to supply must be distinguished from a decision to produce. One can only supply what one possesses. (See Chapter 27 for the conditions under which an individual will produce.) Supply must also be distinguished from “stock.” While supply is the [Page 114] quantity individuals choose to exchange, stock is the physical quantity of the good that individuals in the market hold at a particular time. The stock is objective and no change in anything objective can cause an individual to initiate a chain of causation, and thereby to alter the supply. If the stock of a good increases, it does not cause an increase in the supply of the good. An increase in supply would result only if the owner of the increased stock now chose to exchange the stock rather than to store it or use it himself. There is no causal link between changes in stock and changes in supply, though changes in stock may influence the owner’s decision if he has knowledge of the changed stock (see Chapter 20). This distinction is especially important in connection with money. It is the supply of (and demand for) money — the money that is exchanged — that affects the price of money, not the physical stock of money. The stock afffects the price only to the extent that it is knowledge to individuals who believe that the stock will be supplied, and that knowledge influences them to speculate that the additional supply will lower the price. As a result, they demand less money now, which file:///C|/Downloads/Video/Chap32.html (1 of 4) [17-9-2008 17:14:27]

Chapter 32

may lower its price even before the additional stock is supplied. Thus, if money that was in the supply is saved but is not loaned and spent, the supply of money falls, which, by the Law of Supply and Demand (see Chapter 34), may lead to a rise in the price of money (i.e., a fall in the price of other goods). If billions of dollars go overseas to be used in exchanges outside the United States, then the stock of U.S. dollars can be increased without a corresponding loss of purchasing power in the United States. The law provides no clue as to what is the lower price at which demand would have been higher or supply lower. In other words, it says nothing about the position or shape of a supply or demand curve, only their allowable directions. One can know only, from the Law of Quantity Demanded, that, at the instant of choice, the quantities bought or sold at higher or lower prices might have been lower or higher than the quantities that were chosen, but one cannot know how much higher or lower. Graphically, at the moment of choice, one knows only a point:

[Page 115] and that the buyer’s choices at higher and lower prices would logically have been somewhere in the shaded regions: and that the seller’s choices at higher and lower prices would logically have been somewhere in the shaded regions:

Where in the shaded regions the choices would have been made can never be known. Thus, while it is useful to draw lines though the point from the lower to the higher shaded region, one cannot know the slope or shape of those lines. Because the importance of plans can change over time, future choices need not be in the shaded regions at all, but can be anywhere. If there is a different price at a later time, the point and the shaded areas shift, but this does not mean that a line drawn through the earlier and later prices represents a demand or a supply curve. Such a line would represent only a price-quantity history and would say nothing about future price-quantity combinations. Thus, a supply or demand curve that purports to show what the supply or demand will be at future prices is purely a guess of no necessary truth. One knows only what the price-quantity history was; the future price-quantity combinations that such a supply or demand curve purport to show are unknowable because one cannot know the future choices of individuals. [Page 116] This constitutes a rejection of the distinction usually made between “shifts of the demand curve” and “movements along the demand curve,” which is based on the assumption that there is a present-to-future demand curve that shifts or that individuals move along as time file:///C|/Downloads/Video/Chap32.html (2 of 4) [17-9-2008 17:14:27]

Chapter 32

passes. There is no such “curve” in an individual’s mind that determines his choices, so it is impossible, in principle, to distinguish between a “movement along a demand curve” and a “shift in demand curve.” There is only the fact that an individual chooses X 2 units of A for

Y

2

units of B while he had previously chosen X

1

units of A for Y

1

units of B, a different

Y /X ratio. There is no way to tell if the new price is on the “same” demand curve or on a ‘different” demand curve because there is no present-to-future demand curve. To take the worst case, a (conventional) economist may claim that if the good is needed in a fixed quantity (e.g., salt), the demand curve is “inelastic” and an increased price should be explained as a shift in the supply curve: And if the good is acquired in a fixed quantity (e.g., mineral water from a particular spring), the supply curve is “inelastic” and an increased price should be explained as a shift in the demand curve: While this explanation seems reasonable, it assumes that the vertical demand and supply curves are not simply a price-quantity history , but [Page 117] are caused by the operation of an economic law . The implication is that future price-quantity combinations must also lie on the vertical lines because the objective conditions (i.e., limited biological need for salt and limited acquired quantity of mineral water) will cause particular choices to be made. But not only are choices not determined by objective conditions, the economist cannot even know whether the objective conditions influenced the particular choices that were made, though they may have (see Chapter 20). One can supply a quantity greater than one’s stock by borrowing (e.g., going “short” in the stock market), and one can demand more than is biologically needed, if only for storage. Moreover, to say, for example, in the case of selling salt, that it is the demand curve and not the supply curve that is vertical is to imply that the importance of salt to the buyers is greater than the importance of anything else they could acquire for the additional money, while this is not true of the importance the sellers place on the money they acquire from selling the salt. That may be true, but there is no way to know if it is true because one cannot measure importance. One can imagine salt-sel lers who are desperate to sell their salt before a flood washes it away and salt-buyers who could not care less about salt because they are almost out of food. The economist knows only the historical data — that the same quantity was exchanged at different times at two prices. From the above information, all one can say is that, for the same quantity, buyers are now willing to pay more and sellers are not willing to accept less. file:///C|/Downloads/Video/Chap32.html (3 of 4) [17-9-2008 17:14:27]

Chapter 32

The usefulness of supply and demand curves as pedagogical devices showing instantaneous , not present-to-future, supply and demand cannot be denied, however. Instantaneous supply and demand curves are useful, for example, in explaining how total demand (or supply) consists of demand by some added to demand by others (see Chapter 46), and how price controls influence shortages or surpluses (see Chapter 45). [Page 118] The most one can say is that if the price does not change over time then the buyer and seller did not alter the importance of their plans in such a way that it affected the price. That is, if the importance of plans changes, the price may still not change, but if the importance stays the same, the price will not change. For example, if a single unit is desperately needed, then less desperately needed, the price might remain the same. But if both buyer and seller attach the same importance to their plans over time, the price will remain the same. The supposed counter-example to the law of an individual (having unchanged values) who buys more of a particular item after inflation has occurred and prices are generally higher, but the price of this particular item has not risen as much, does not invalidate the law, even assuming the constancy of the importance of values over time. The law applies to a good B that is sacrificed for a good A. After inflation, dollars supplied in 1970, for example, are not the same good as dollars supplied in 1980 because individuals will not accept them interchangeably, even allowing for risk and originary interest. A very interesting supposed counter-example is the passage of a law making some pleasure drug illegal. The result, of course, is that the price of the drug rises, yet demand for the drug can actually rise, as some say the demand for liquor did during Prohibition. In this case, too, the goods are not the same, because they achieve different values. Before the law is passed, the value is only that of taking the drug, but after the law is passed the value is that of taking the drug plus the thrill of defying the authorities (see The Law of Choice). The supposed counter-example of the perfume that sold better when its price was raised shows only that the higher-priced perfume was perceived as being a different good, a better quality or more prestigious perfume. Next Table of Contents Index [Page 119]

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Chapter 33

Chapter 33 THE LAW OF COMPLEMENTS If goods A and B are both required to achieve a value, then the two goods are “complements.” The Law of Complements is, “if an individual believes that goods A and B are both required to achieve a value and he changes the relative importance of that value, changing his demand for the good A, then he will also change his (non-replacement) demand for good B.” The law excludes demand that arises from the need to replace goods that are lost or broken and therefore can no longer achieve the value. Also, many goods (e.g., golf balls and golf clubs) are only approximate complements and do not have the fixed numerical relationship needed for exact quantitive changes (i.e., achieving the value does not require exactly one golf ball and one set of golf clubs). One can think of substitutes (see Chapter 29) as being “in parallel” with a value, because the path to the value can pass through either good, while complements are “in series” with a value, because the path to the value must pass through both goods. In the above diagram, the value can be achieved either through good A or its substitute, good B. But in the following diagram, goods A arid B are complements because they are both needed to achieve the value. Next Table of Contents Index [Page 120]

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Chapter 34

Chapter 34 THE LAW OF SUPPLY AND DEMAND The Law of Supply and Demand is conventionally given as “price moves directly with demand and inversely with supply.”(1) In other words, if demand exceeds supply, the price increases, and if supply exceeds demand, the price decreases. But simply because demand exceeds supply does not mean that buyers will pay a higher price or sellers will ask a higher price, only that buyers wish to buy more than sellers wish to sell at the current price . Buyers may buy X units at the current price and no units at any higher price, and sellers will not ask a higher price if they do not expect at least some buyers to pay it. Also, a price can change although there is an excess of neither supply nor demand. Where a number of units of a good are sold in successive periods of time, there is an “increased demand” for a good if individuals choose to buy more units of it at the same price. But an increased demand does not necessarily indicate a willingness to pay a higher price for the same number of units or even for a larger number of units. The increased demand may, for example, simply be due to more buyers, not to a willingness by each buyer to pay more, so that a higher asking price could simply reduce purchases to zero (e.g., gasoline sales at highly competitive stations). A willingness to pay a higher price requires the good acquired by the exchange to be more important to the buyers than the increased number of units of the good sacrificed. A willingness by buyers to pay a higher price and a willingness by sellers to ask a higher price will result in a greater quantity sold, however, only if the buyers and sellers also choose to exchange the additional quantity at a higher price (see Chapter 25). On the other hand, if supply exceeds demand and a seller expects few buyers to drop out at a higher price, he might increase his price instead of decreasing it as the conventionally stated law would require. If you have only three very desperate buyers for your five life preservers [Page 121] at $1,000 apiece, and expect no more buyers at a lower price, you might raise the price to $2,000 each. But the seller will not raise the price unless he believes that the gain at the higher price will exceed the gain at the lower price. This means that the probable gain acquired at the higher price must exceed the probable gain at the lower price. That is, if no one buys at the higher price, the seller may suffer a large loss; this is why perishable food is sometimes deliberately “underpriced,” so that expected demand exceeds expected supply. A seller might expect a profit of ten dollars at the lower price and a profit of twenty dollars at the higher price if it is sold and a loss of five if it is not sold. If he thinks there is a 50 percent chance of selling it at the higher price, he will not raise the price, because his probable gain at the higher price ($7.50) is less than his probable gain at the lower price ($10). On the other hand, in some cases, the probable gain may be larger if a high price for a time is followed by a “sale” on file:///C|/Downloads/Video/Chap34.html (1 of 3) [17-9-2008 17:14:29]

Chapter 34

unsold goods at a low price, rather than by maintaining the same price over the entire interval. In addition, the seller may incur costs in making a change in price, and that cost must be deducted in estimating the probable gain at a different price. Thus, the Law of Supply and Demand must be more carefully phrased than a simple relationship between supply and demand and price. The law, which follows from the Law of Choice, is, “if an individual believes his probable gain can be increased at a different price, he will change his asking price to that price.” If he believes the buyers will purchase the same quantity at the higher price, then he will raise his price because, by the Law of Choice, the additional units gained are a good to him. If a buyer must compete with other buyers, or a seller with other sellers, the probable gain to buyers from offering too low a price, and to sellers from asking too high a price, decreases since no trades may occur at those prices. As a result, competition among buyers will increase the price, and competition among sellers will decrease the price, over what it otherwise would have been. In other words, the same law that requires profit-seeking sellers to gain as much as possible, requires profit-seeking buyers to prevent them from doing so, and vice versa. Since it is usually the case that an increased stock, which can achieve a value for the seller only if sold, results in more revenue when the price is (at least slightly) lowered, it appears that an increased stock results in an increased supply and a lower price. Thus, an increased stock of money almost invariably results in an increased supply of money and inflation — a lower price for money (i.e., it requires fewer goods to buy the same number of units of money). [Page 122] Next Table of Contents Index FOOTNOTES 1. “ ... at a given time and place, the pnce of a commodity rises in proportion to the increase of the demand and the decrease of the supply, and vice versa; or in other words, that the rise of price is in direct ratio to the demand and inverse ratio to the supply.” Jean Baptiste Say, A Treatise on Political Economy , reprint of 1880 printing (Fairfield, N.J.: Augustus M. KeIley, 1964), 290. “ ... the price of goods is in the inverse ratio of the quantity offered, and in the direct ratio of the quantity demanded.” Augustin Coumot, Researches into the Mathematical Principles of the Theory of file:///C|/Downloads/Video/Chap34.html (2 of 3) [17-9-2008 17:14:29]

Chapter 34

Wealth (1838), trans. by Nathaniel T. Bacon (Homewood, Ill: Richard D. Irwin, Inc., 1963), 36. Back [Page 123]

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Chapter 35

Chapter 35 ENTREPRENEURSHIP A profit can be acquired only if the costs of the factors (a factor is any good, including interest, sacrificed to acquire a product) is less than the price of the product. That is, there must be a price discrepancy between factor costs and product prices. This price discrepancy may be between present factor prices and present product prices, in which case an attempt to acquire the profit is called “arbitrage,” or the price discrepancy may be between present factor prices and future product prices, in which case an attempt to acquire the profit is called “speculation.” (A “present” price is a price so near in time to the present that interest is not calculated as a cost, while interest is a cost for “future” prices.) If the price discrepancy is known and anyone can make the exchanges necessary to acquire the profit, then, in accordance with the Law of Supply and Demand, factor sellers may decide that, because of the increased demand, their maximum probable gain is at a higher price, and product sellers may decide that, because of the increased supply, their maximum probable gain is at a lower price. As a result, factor prices and product prices converge and the profit tends to zero (see Chapter 37). Of course, even if the price discrepancy is known, the probable gain may not be large enough to induce anyone to act to acquire it. That is, individuals may prefer to achieve a value other than the value served by the probable gain. Another possibility is that the price discrepancy is known, but that it is a price discrepancy for some individuals but not others. That is, factor prices are lower, or product prices are higher, for some individuals than for other individuals. This can occur either because (1) offensive coercion imposes costs on some individuals that are not imposed on others, i.e., the privileged individual has a monopoly (see Chapter 44), (2) for some individuals other values are more important than the value served by the profit (e.g., enjoying a sporting event instead of selling soft drinks), or (3) some individuals may be able to buy factors at lower prices or sell products at higher prices than other individuals. A person [Page 124] may work for a person whom he likes at a lower wage than for another person whom he dislikes, for example. That is, for some individuals a factor or a product is not the same good (page 90) as another factor or product, and therefore he will not accept them interchangeably. A known price discrepancy that only certain individuals profit from can be called a “situational profit.” Finally, the alternative to the case of a known price discrepancy is an unknown price discrepancy. In that case the price discrepancy may never be discovered by anyone, in which case no profits are acquired, or it may become known after it is too late for anyone to act to acquire the profit. In that event some individuals may be lucky enough to possess the products and acquire an “accidental” profit. For example, someone may not bother discarding old beer cans, which, at the time, have no value, but which later, to everyone’s surprise, become valuable. file:///C|/Downloads/Video/Chap35.html (1 of 6) [17-9-2008 17:14:32]

Chapter 35

If the price discrepancy is not known, it may be discovered or created by an individual, an “entrepreneur,” in time to act to acquire the profit. The entrepreneur believes that a price discrepancy exists or will exist if he acts to create it, by, for example, developing a new product or method of manufacture. Entrepreneurial profits are acquired because the entrepreneur knows of a (present or future) price discrepancy that is not known to others. Others do not know of the price discrepancy because they do not have the knowledge of facts, reasoning ability, or creativity, that the entrepreneur has. But by letting the entrepreneur strive for the profit, others are nevertheless able to benefit from this knowledge. Every individual makes his choices on the basis of his knowledge, which enables him to construct his plans and achieve his values. To the extent that his choice of values, plans, or goods (1) is based on knowledge that he later decides is invalid, and (2) is later regretted, he has erred. While it is entirely possible to act on knowledge that later proves to be invalid, yet not regret the choice, knowledge exposed as invalid is a necessary condition for error. There are three sources of error. The first is a value error — an individual chooses a value and achieves it, then later decides that he should not have chosen that value. Since individuals can change, become “different” people, they can change their values and later regret their previous choice of values. An altruist may become an egoist, for example, and reject unselfishness as a value. A change in values can, of course, alter purchases and prices, resulting in price discrepancies. The second source of error is a plan error. An individual believes that the actualization of a particular plan will achieve the value epistemically correlated with it; when the plan is actualized but the corresponding value is not achieved, a plan error has occurred.(1) Plan errors are extremely [Page 125] common because no individual can be certain that a change in the physical world, even if it is exactly the change he planned, will achieve the value that he thought it would. One may discover that the new car, house, or even spouse, though it is exactly what one imagined, does not achieve the happiness that one believed it would. The third source of error, physical error, arises from mistaken knowledge as to how the physical world will change. Physical errors can arise from four sources: coordinates, causality, calculation, and choice. Coor dinate errors occur when one does not know the space-time coordinates of entities. Examples are not knowing where oil is located so that drilling does not produce the gusher one hoped for. Causality errors occur when one dooes not know how attributes will change when other attributes are changed because the correct physical law is not known. One might not know that a common chemical cures cancer, for example. Calculation errors arise from faulty or non-existent logical reasoning. One may know an asteroid’s position and velocity, and all the relevant physical laws, yet not be able to calculate its path. To this day, for example, the three-body problem remains unsolved. It can probably be shown that as to knowledge of all determined entities, physical errors are file:///C|/Downloads/Video/Chap35.html (2 of 6) [17-9-2008 17:14:32]

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metaphysically unavoidable, since a physical structure necessary for storing knowledge may not be able to store all the knowledge of its own structure, but this problem will not be dealt with here.(2) The fourth source of physical error is failure to correctly anticipate the choices of others.(3) Choice errors arise because of uncertainty, the inability to know the future choices of individuals, including one’s own future choices, a source of error that can never be eliminated. One cannot, for example, anticipate the choice of others to buy a new product offered by an entrepreneur when one cannot even imagine the existence of the product. Thus, the choices of others may change the physical world in ways that one does not expect. As a result of making an error, an individual may find that the values he can now achieve are less important than the values he could have achieved had he not made the error. The entrepreneur reduces the adverse consequences of these errors. He believes that others are making errors or will make errors, and that they will later come to realize that they have erred. He also believes that, by acting now, he can offer an erring individual a choice that he would prefer to the choices otherwise available to him when he becomes aware of his error. That is, an entrepreneur believes (1) the knowledge of another individual is in error, (2) the error will be exposed to him, (3) when he realizes the error, he will choose to make an exchange with the entrepreneur that he otherwise would not have chosen to make, and (4) he (the entrepreneur) prefers acting now so as to be able to make the exchange over not so acting. (4) That is, as a result [Page 126] of the error, a price discrepancy is created that will become known to others, but the actions of the entrepreneur reduce the price discrepancy to the extent that his demand and supply result in price changes. An entrepreneur is not a seller of knowledge, but an anticipator of error. Just as buyers and sellers in the market induce those best suited for a particular occupation to choose that occupation by thereby enabling them to achieve more of their values, so they also induce those individuals to be entre preneurs who are most skilled at correctly anticipating the exposure of error. An entrepreneur may reduce the consequences to others of their value errors, for example, by starting a religious book store in the belief that people will change their values and become less materialistic and more religious. The consequences of erroneous plans can, for example, be reduced by an entrepreneur who sets up a drug detoxification program for individuals who still value happiness, but now believe that taking drugs is not epistemically correlated with that value. An entrepreneur can reduce the consequences of erroneous physical errors, for example, by preparing to buy the failed oil rig, by selling the cancer cure, or by buying property erroneously believed to be in the asteroid’s path. Finally, the entrepreneur can reduce the consequences of errors that occur when individuals are expected to choose A, but instead choose B, by reducing the demand for A and/or increasing the demand for B. The entrepreneur who is a speculator necessarily must anticipate the future choices of individuals to exchange particular goods at particular ratios (prices). If he expects future file:///C|/Downloads/Video/Chap35.html (3 of 6) [17-9-2008 17:14:32]

Chapter 35

product prices to differ from the present prices of the factors required for their production, he buys or produces them or sells them short. The error is that others believe that present factor prices equal the present value of future product prices, while they do not. If present factor prices are too low relative to future product prices, there will be a price discrepancy between the prices buyers imagined they would have to pay, and the much higher prices they actually will choose to pay. When the speculator produces more of the product himself or buys the product, inducing others to produce more, he reduces the adverse consequences of this error. If present factor prices are too high relative to future product prices, there will be a discrepancy between the future prices at which the producers imagine they will sell their products and the actual prices at which they will sell their products. So the speculator reduces production or sells the product short, reducing the adverse consequences of this error. While the choices an individual will make cannot be known, even the individual’s own future choices, the choices are not necessarily arbitrary or random.(5) They are likely to bear some relationship to the physical nature of the individual’s body, his urges, his past choices, his stated [Page 127] future choices, and other influences. For example, since observers must act through a body, individuals will probably choose goods that are necessary to sustain their bodies. A speculator who is alert to these influences, who is sensitive to the flow of changing values, may be able to anticipate many of the choices that other individuals will make. He can then buy and sell goods, re-aligning the factors of production, so that the goods that are produced are the goods individuals will prefer to the goods that would have been produced had he not acted. In this way he presents himself and other individuals with choices that would not otherwise have been available to them, and thereby enables them to achieve values that they otherwise would not have been able to achieve, values they would prefer to the values they would achieve if he did not act. It is ironic that the entrepreneur, and especially the speculator, who performs one of the most important of all economic functions, is not only neglected in conven tional economics, but is often hated and despised by the very people he benefits. Entrepreneurship is only possible when the knowledge of one individual contradicts the knowledge of another individual. If all individuals agreed on which future events will occur, no individual could act to reduce the consequences to another individual of acts based on his erroneous belief as to the occurrence of those future events. Even if individuals do disagree, however, no entrepreneurial gain is possible unless the entrepreneur acts now so that he can in the future provide the mistaken individuals with a good that the entrepreneur believes they would choose if he presented them with that opportunity. An entrepreneur earns his gain by producing, storing, or otherwise provisioning those goods, thereby lessening the loss of value that the mistaken individuals would otherwise have suffered as a result of their errors. For example, most individuals, anticipating a bountiful harvest, may consume lavishly, expecting future sellers to choose to sell at the same low prices that present sellers do. One individual, however, fearing a drought, may reduce his consumption and store all that he can because he expects future sellers to choose to sell only file:///C|/Downloads/Video/Chap35.html (4 of 6) [17-9-2008 17:14:32]

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at high prices. If a drought occurs, he will be able to save the others from some of the consequences of their error, and thereby acquire an entrepreneurial profit for himself. By buying now, increasing demand, he may drive up present prices (see Chapter 34), leading to conservation and possibly increased production and supply (see Chapter 27), and, by selling during the drought, increasing supply over what it otherwise would have been, he may drive down future prices. It is possible for individuals to always agree on future events, so that no entrepreneurial profits can be earned, but there can be no law requiring this to occur, and it will probably not occur. [Page 128] Next Table of Contents Index FOOTNOTES 1. Ludwig von Mises, Human Action University Press, 1966), 253. Back

, 3rd ed. (New Haven: Yale

2. David Layzer, “The Arrow of Time,” (Scientfic American , December 1975), 56—69 at 69. Arthur Koestler, The (Chicago: Henry Ghost in the Machine Regnery Co., 1967), footnote, 217. Leon Brillouin, Science and Information Theory , 2nd ed. (New York: Academic Press Inc., 1962), 308. Back 3. Von Mises, Human Action Man, Economy, and State Nash Publishing, 1970), 5. Back

, 105. Murray N. Rothbard, (Los Angeles:

4. Israel M. Kirzner, Competition and Entrepreneurship (Chicago: The University of Chicago Press, 1974). Mario 1. Rizzo, ed. Time, Uncertainty, and Disequilibrium (Lexington, Mass.: Lexington Books, 1979), see “Comment: X-Inefficiency, Error, and the Scope for Entrepreneurship,” by Israel M. Kirzner, 140. Back 5. Ludwig von Mises, Theory and History (Arlington House, 1969), 5. Back file:///C|/Downloads/Video/Chap35.html (5 of 6) [17-9-2008 17:14:32]

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Chapter 36

Chapter 36 THE MARKET PROCESS The market process deals with exchanges between individuals, each individual suffering a cost for the benefit of the other. Since the initiation of a chain is the only good that an individual can create by his own volition, a chain is the only good that an individual can buy from or sell to another individual (i.e., while goods are exchanged, it is the initiation of a chain that is bargained for). There are two types of chains — those having no conceptual content (i.e., bluecollar labor, which is exchanged for “wages”), and those having conceptual content. Chains of conceptual content can be further divided into chains where the conceptual content grants or refuses consent to change another good, and those where it does not (i.e., white-collar labor, which is exchanged for “salaries”). Some chains may be mixtures of white-and blue-collar labor (e.g., a drawing made to be reproduced is a white-collar good, but it is also a blue-collar good if the original of the drawing is a good). Chains that grant or refuse consent can be divided into those that consent to the initiation of other chains (e.g., consent to work or to permit the use of property), those that consent to a change in the title of a good (e.g., a clerk hands you a package, indicating that it is now your package), and those that consent to a change in the possession of a good without a change of title (i.e., a loan). If the loaned good is money, it is exchanged for “interest,” otherwise, it is exchanged for “rent.” Further divisions can no doubt be made, but this should suffice to show how conventional economic functions fit into a praxeological analysis. While chains of cognitive content can be purchased, entrepreneurship cannot. One can buy an individual’s guess about future events, but then the purchaser would still have to decide for himself whether or not to act on that knowledge, so one cannot be another’s entrepreneur. In the market process, individuals cooperate, each initiating chains to enable the other party to the exchange to acquire a good. Exchange is possible only when the maximum number of units Y of good B that one [Page 130] individual is willing to sacrifice for X units of good A exceeds the minimum number of units Z of B that the other individual is willing to accept for his X units of A. That is, the maximum price the buyer is willing to pay must exceed the minimum price at which the seller is willing to sell. In addition, an exchange cannot occur unless each party is aware that the other party is willing to exchange at a price that is below his maximum price, or above his minimum price, as the case may be. Thus, one party must anticipate the other party’s choice to consent to the exchange by communicating an offer to him. Each individual can know what he thinks his own choice at a particular price will be, of course, but until a price communication is made, he does not know of any price acceptable to the other party, let alone the other party’s maximum or minimum price. The transmission of a price offer implies that the transmitting individual has file:///C|/Downloads/Video/Chap36.html (1 of 5) [17-9-2008 17:14:34]

Chapter 36

anticipated the choice that the individual receiving the knowledge will make in response to it. The Law of Choice holds that each individual will choose to give up as few units of his good as he can and acquire as many units of the other individual’s good as he can. Thus, the Law of Choice enters every exchange. (The making of an offer to exchange implies the belief that the desired good is also desired by the other individual, for otherwise one would ask for a gift, not an exchange. An individual knows that the Law of Choice applies to himself, but he may not be able to deduce that it must also apply to the other individual, though experience will soon teach him that). Suppose that Smith wants X units of good A for which he is willing to give up Y units of good B, and Jones wants Y units of good B for which he is willing to give up Z units of good A. Applying the Law of Choice, we can see that each party finds himself in a “squeeze play.” To achieve units of one good, he must sacrifice less-valued units of another good. By the Law of Choice, he wants to sacrifice few units, but since the Law of Choice also applies to the other party, he is more likely to acquire the good he desires and less likely to waste the cost of making the offer if he offers to sacrifice more units. Both Smith and Jones are “squeezed” because the greater is the number of units of the good he offers to sacrifice, the more are the values served by those units that he will fail to achieve, yet, if too few units are sacrificed, a more important value, that served by the good to be acquired, will be lost. The same sort of competitive “squeeze play” occurs in a more complicated way when three or more parties form a continuous chain of exchanges. When factors are purchased to produce a product that is sold, for example, the producer must sell the product at a price that exceeds the cost of the factors needed to produce it, yet can succeed in purchasing [Page 131] those factors only by offering at least as much as other buyers, and can sell his products only by asking no more for them than other sellers. Efficiency — getting more product value from less factor value — is the key to survival in this squeeze play. In the free market, the value of one’s chains is not determined by the chain-initiator, but by those who desire the chains. Thus, every chain-initiator consumes according to what others determine is the value of his chains. There is no “return to capital,” or “return to labor,” only a return to capital providers or labor providers. Changes in relative consumption among different individuals then depends upon the supply of and demand for the particular type of chains they initiate. Thus, a new machine does not increase the productivity (and therefore usually the wages) of labor, but rather it increases the productivity of capital, and therefore the return to capital providers. The real wages of labor rise from the increased productivity, which lowers the cost, and therefore usually the price (see Chapter 37), of the product. Since the value of chains is subjectively determined, and the total output consists, ultimately, of chains, changes in the value of total output are subjective. It is impossible to say that people are 10 percent better off because the GNP went up 10 percent. They are better off file:///C|/Downloads/Video/Chap36.html (2 of 5) [17-9-2008 17:14:34]

Chapter 36

(than they thought they would have been) only to the extent that they chose those chains that made GNP go up 10 percent. But if they choose not to initiate the chains that are counted in GNP (i.e., they loafed), and GNP fell 90 percent, they would still be better off. An individual is “better off’ only when he is free to act to achieve his values, because only he can define “better off.” Prices are the bits of knowledge that influence individuals to coordi nate their plans. (1) To the extent that the conditions of the Law of Quantity Demanded apply, a higher price for good A will influence individuals to alter their plans by foregoing purchasing good A, and perhaps instead purchasing good B. Under these same conditions, to the extent that the conditions of the Law of Supply and Demand apply, sellers will ask a higher price for good B, which will influence other individuals to alter their plans by foregoing purchasing good B and instead perhaps purchasing good C, and so on. Like dropping a pebble into a pond, the effect ripples through the economy, each person voluntarily altering his plans so as to coordinate them with the plans of others. (2) In this way, a “spontaneous order” arises, which was the result of purposeful behavior, yet which no single mind conceived and planned.(3) That is the miracle of the free market.(4) [Page 132] Next Table of Contents Index FOOTNOTES 1. Gerald P. O’Driscoll, Jr., Economics as a Coordination Problem McMeel, Inc., 1977). Back 2. F.A. Hayek, Individualism and the Economic Order Back

(Sheed Andrews and

(Chicago: Henry Regnery Co., 1972), 50, 54.

3. Those who complain of the “disorder” of the free market are unaware of the application of the concept of entropy to information. The free market, with its immensely complicated and interconnected flows of goods and services, is a vastly more ordered structure—of lower entropy—than is a centrally directed economy. Claude E. Shannon, The Mathematical Theory of Communication (Urbana: University of Illinois Press, 1949). Back file:///C|/Downloads/Video/Chap36.html (3 of 5) [17-9-2008 17:14:34]

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4. The market process is intriguingly analogous to the process of evolution. In evolution a "gap” between a store of energy and the amount of stored energy that must be expended to acquire that store of energy creates an opportunity for the existence of a species. The larger the gap, the more certainly are heritable characteristics that enable a species to take advantage of the gap rewarded by survival — gap-fillers live and non-gap-fillers don’t. Changes in environment, of course, constantly create new gaps. To the extent that species can and do change to capture energy gaps, there will be a tendency for gaps to go to zero. The capturing of a gap by the evolution of a species may create a new gap, with the new species itself becoming the new gap-creating energy store. When one gap is captured, the entire collection of interrelated living creatures evolves to fill any new gaps created. Because no species can capture all of the energy of a gap (Second Law of Thermodynamics), gaps will become progressively smaller the farther they are removed from the initial gap. Thus, the largest evolutionary changes will be closest in the food chain to that initial gap, and more distant changes will be progressively smaller. If the gap between a store of energy and the energy necessary to acquire the store is replaced by the profit differential between the price of a product and the cost of its factors, the analogy becomes apparent. In the analogy, a species becomes a business enterprise, evolving, changing form, growing, or contracting according to how well the individuals who run it capture these “profit gaps.” Profit gaps are created when people increase the importance of a value relative to another value, altering the ratio (price) of the goods that serve those values. Filling this profit gap creates other, smaller, profit gaps throughout the economy, each progressively smaller the farther they are removed from the initial profit gap, as the profit is spread over more and more factors. As profit gaps are discovered and filled, they, like energy gaps, disappear (see next chapter). While evolution is deterministic and human choice is not, given that important values can be achieved by making a profit, the market process of gap-filling becomes logically necessary. That is, once an individual decides to achieve a value that he knows can be achieved by taking advantage of a profitable opportunity, he must logically do so and fill the profit gap. But both the energy gap and the profit gap are similar in that they are both only potentialities until a species or a product is created to take advantage of them. Another intriguing similarity between evolution and the market process is in the way death, or at least the possibility of death, is required for change to occur. If a species must evolve in order to take advantage of an energy gap, it must have “turnover,” the replacement of old individuals by new individuals. The greater the turnover, the faster the species can evolve. A species in a stable environment may survive better with low turnover, letting its adults maximize energy capture. But if a species in a changing environment has low turnover, it is likely to quickly find itself unable to change as the energy gaps change. Every species faces a trade-off between rapid turnover for rapid change and low turnover for efficient use of energy gaps. If the energy gaps in a species’ environment change sporadically, the species, in order file:///C|/Downloads/Video/Chap36.html (4 of 5) [17-9-2008 17:14:34]

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to survive, must deliberately program its adult members to become enfeebled and die, so that its older members will not crowd its younger members out of its energy gap and prevent rapid turnover from occurring. (The aging trait is heritable because an adult who gradually weakens and dies, turning his energy niche over to his offspring, may be more likely to have his genes survive than is an identical adult who makes no such provision for his offspring. By constantly altering the gene pool, the development of male and female sexes also facilitates evolutionary change.) In the same way, individual business enterprises in a market must be capable of death if individuals in a society are to survive and prosper. Laws that, at least temporarily, prevent a business from dying, or that prolong its life, keep younger, different, and possibly more capable competitors out of that profit gap to the detriment of others in the society. (See Chapter 42.) A final similarity between evolution and the market process is that in both cases the changes that occur are both successful and unsuccessful. That is, there is no inhibitor that prevents non-optimal changes from ever happening. The test of success is survival for evolution and profitability for the market, rather than meeting or failing some pre-screening test. This means that knowledge of whether a change will be successful is not available prior to the occurrence of the change itself. In other words, no natural “mind” changes genes in such a way that the new individuals are always superior. While knowledge of beneficial changes is, in principle, possible in evolution, in the market, no one can ever know “ahead of time” which market structures will succeed because one cannot know the future acts of individuals. When a particular market structure is coercively forced on individuals (see Chapter 42), the coercer presumes he has knowledge that no individual can ever have. Just as optimal biological , not designed , by structures are discovered nature, so optimal social structures must be discovered, and cannot be designed. Back [Page 133]

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Chapter 37

Chapter 37 ZERO PROFITS LAW The natural tendency of profits is to fall

(1) —David Ricardo

In Chapter 35 it was shown that entrepreneurial gains can exist only when individuals disagree and plan for different future events. While gains cannot be eliminated so long as individuals lack perfect knowledge of the future, which they must always lack, under certain conditions, profits earned when the same set of exchanges are repeated will tend to go to zero.(2) As explained in Chapter 27, a profit must involve at least two exchanges since no individual (who prefers the value served by the profits to other values) will exchange more units of a good for fewer units. The two exchanges require three types of individuals, the supplier, the producer, and the customer. The supplier sells “factors” (i.e., costs used in production) to the producer in exchange for the producer’s cost, and the customer supplies the producer’s revenue, in exchange for the product, the “product” being simply the combined factors. If this three-party exchange is repeated over a span of time at expected prices, earning profits, can it be shown that due to the actions of other individuals, there is a tendency for a profit earned in each set of exchanges to be reduced to zero? Such a tendency would require other individuals to compete with the producer, bidding factors away from his suppliers by offering them more, and bidding sales away from his customers by offering the product for less, with the result that product prices and the sum of the factor prices converge, driving his profits to zero. But in order for another individual to decide to compete for the expected profit, he [Page 135] must know that the profit exists and how it is earned, and the profit must be more important to him than the costs of acquiring it. An entity of the type in which the profit is measured (e.g., dollars) is a good to the supplier because he accepts it in return for the factors, it is a good to the customer because he can exchange it for the product, and it is a good to other producers because they buy and sell it. The supplier, customer, and other producers would forego competing for this profit only if they did not know of it or how to acquire it, or if their expected costs of acquiring it exceed their expected profits. Such costs may include the costs of defying open offensive coercion (see Chapter 44), a cost that may not be imposed on the existing producers. Costs may also include foregoing still greater profitable opportunities available to them, and, by The Law of Profits, the most profitable opportunities will be pursued first. Since all production requires file:///C|/Downloads/Video/Chap37.html (1 of 3) [17-9-2008 17:14:36]

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time, another cost is the foregoing of current consumption by the suppliers or others until the product is sold (i.e., interest). The condition that the potential competitor knows that the profit exists and how it is earned, is always at least partly met because the supplier and the customer each have knowledge of the prices they pay and the goods they exchange, though they may not have knowledge of the prices of the other exchanges nor of how the factors are combined. However, if hired labor is a factor, this knowledge may be acquireable. Hiding knowledge of profits and how they are earned is always very difficult, but it is especially difficult to conceal this knowledge from one’s competitors, suppliers, and customers, who can usually calculate costs easily, and who can usually grow most easily by expanding production or “eliminating the middle man,” processes known as “horizontal” integration (if done by other producers), and as “vertical” integration (if done by suppliers or customers). (3) The Zero Profits Law, which simply summarizes these conditions, is that profits from a known repeated set of exchanges that exceed the expected costs to other individuals of making the same exchanges tend to go to zero. A formal statement would be, “if an individual expects profits from another individual’s repeated set of exchanges to continue, and knows how those profits are acquired, and those profits are more important to him than his expected cost of acquiring them, then he will act to acquire them.” To the extent that the additional demand raises factor prices and/or additional supply lowers product prices, he will drive those profits to zero. The additional demand and supply will raise factor prices and lower product prices to the extent that factor sellers and product buyers believe they can increase their probable gain at the higher and [Page 136] lower prices, respectively. (See The Law of Supply and Demand.) As product prices and the sum of the factor prices converge, profits are reduced to zero. This means that the prices of goods in a free market will tend to equal their cost of production. A direct implication of the Zero Profits Law is that, when the conditions of the law have occurred, factors will tend to be paid the (discounted) value of their marginal product, since paying them less would generate a profit and paying them more would violate the Law of Profits. That is, the wages, interest, and rents(4) paid for factors will tend to rise until they equal the value of the factor’s contribution to what is produced, and the price of a capital asset will tend to equal the present value of its expected future income stream. Next Table of Contents Index FOOTNOTES

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1. David Ricardo, The Work and Correspondence of David Ricardo (Cambridge: Syndics of the Cambridge University Library, 1951). Back 2. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations Random House, 1937), 57. Back

, ed. Edwin Cannon (New York:

3. Here we see a motive for outlawing horizontal and vertical integration with anti-trust laws. Back 4. David Ricardo, Works

, ibid., 70—76. Back [Page 137]

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Chapter 38

Chapter 38 EQUILIBRIUM …

the existence of a tendency towards equilibrium is clearly an empirical proposition.

(1) —F.A. Hayek

Equilibrium has been defined as a state of perfect knowledge, where all individuals know all future prices. (It is future prices , not future events or even , which are relevant to reaching equilibrium, since not all future choices events influence choices, and not all choices influence prices.) In such a state, no entrepreneurial profits, or even accidental profits, would be possible. Only situational profits (see page 125), such as monopoly profits, (see Chapter 44) would be possible. But such a state is itself impossible, so there is little reason to define or discuss it. A more useful definition of equilibrium is “a market in which no entrepreneurial profits can be earned, because individuals agree on future prices.” The individuals who must be in agreement are not all the individuals in the market, but only those individuals who would act differently if they did not agree. That is, one person may think that the price of wheat will be fifty cents tomorrow while everyone else thinks it will be forty cents, but if that individual acts on no plan that requires fifty-cent wheat tomorrow, the market is in equilibrium. In equilibrium, future prices would still have to be anticipated, but individuals would act in anticipation of the same future prices, even though they might be wrong. A good way to look at equilibrium is that a single mind is always in equilibrium, and a market can be in equilibrium only when it functions as a single mind. Since a single mind cannot use coercion against itself, in equilibrium there can be no offensive or defensive coercion (see Chapter 42), and therefore no monopoly gains. While the plans an individual acts upon are always consistent with his values and knowledge at that time, in disequilibrium his plans may be inconsistent with the plans of another individual. But in equilibrium, the plans of every individual are consistent with the plans of every other individual (at least insofar as those plans [Page 138] affect prices and they all calculate present values correctly) because they all anticipate the same future prices. Since, in equilibrium, the plans of all individuals are consistent, there can be no excess supply or excess demand, i.e., all prices are “equilibrium prices.” That is, whenever plans are changed, prices must instantly adjust to equilibrium prices, where supply and demand are equal. There must be a price at which supply and demand are (at least approximately) equal if the conditions necessary for the Law of Quantity Demanded to be operable are met, because, under those conditions, the quantity supplied increases with price and quantity demanded file:///C|/Downloads/Video/Chap38.html (1 of 5) [17-9-2008 17:14:38]

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decreases with price, which, if exchanges are to occur, necessitates equality of supply and demand at some price. (If a good, such as one’s life, is more important to an individual than all other goods put together, no exchange will occur and there will be no equilibrium price.) At the equilibrium price, all the individuals who desired to exchange goods A and B must know the least favorable prices at which every other individual would choose to make the exchange, so that no individual could obtain a more favorable price than any other individual. The equilibrium price would be identical to the ratio of the number of units of the two goods offered for exchange. For example, if, at a price of two apples for one orange, one hundred apples and fifty oranges are offered for exchange, no orange seller will find an apple seller who will give him three apples for his orange and no apple seller will find an orange seller who will accept only one apple for an orange. Thus, in equilibrium, everyone must instantly know exactly what everyone else plans to buy at various prices, so that everyone can coordinate his plans with the plans of everyone else. But even if communication between all the individuals in the market were instantaneous and flawless, and all individuals agreed on future prices, so that present prices were always equilibrium prices (a condition virtually impossible to achieve), the knowledge necessary to coordinate present equilibrium prices with future equilibrium prices could be acquired by no one, because no one, not even the acting individual himself, knows whether a plan will be acted upon until it is. That is, all plans are future plans, and all trade prices are past prices. Since no one can know which plans will be acted upon, even if all plans are always coordinated, no one can know whether today’s prices will be consistant with tomorrows actions. For example, suppose that today’s price for copper was ten cents per pound, and that at that price supply equaled demand and all plans were coordinated. Then plans and actions changed, so that tomorrow’s equilibrium price was twenty cents. This would mean that the tencent price was not coordinated with the twenty-cent price (assuming interest rates are not 100 percent a [Page 139] day). Since one cannot know the future choices of individuals, it is impossible to know whether present prices, even equilibrium prices, are coordinated with future prices. Finally, even the concept of an “equilibrium price” is fraught with difficulties, and it is much more difficult to identify an equilibrium price than one might suspect from its simple definition. If all the buyers and sellers are together, a price is announced, the exchanges occur, and there is no excess supply or demand, one can say that that price was an equilibrium price. (If there was excess demand or supply, it can never be known what the equilibrium price would have been, because one cannot know what choices would have been made at other prices.) But suppose the prospective buyers wander past a seller who wishes to sell one hundred units in eight hours. If, at a price of ten cents he sells out in five minutes, was ten cents below the equilibrium price? Not if no other buyer at ten cents appears in the remaining time. Suppose he sells ninety in the first five minutes and ten evenly spaced in the remaining time. Was ten file:///C|/Downloads/Video/Chap38.html (2 of 5) [17-9-2008 17:14:38]

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cents the equilibrium price or were there two equilibrium prices, one, perhaps of fifteen cents in the first five minutes (selling, perhaps fifty), and another, perhaps of five cents in the remaining time (selling the rest)? While a dual pricing system may raise more revenue (if more than fifty are sold in the first five minutes), one would not wish to say that the single price was not an equilibrium price because it met the requirement of no excess supply or demand. Thus, there may be many sets of equilibrium prices. Also, there may be more than one equilibrium price because at prices that differ only slightly, individuals may choose to supply and demand the same quantities. For example, fifty may be supplied and demanded at prices of ten or eleven cents. Other difficulties with the concept of an equilibrium price arise because changes in demand or supply may be in quantities that are not off-setting. For example, at ten cents each, fifty may be supplied and fifty-two demanded and at eleven cents each, fifty-two may be supplied and fifty demanded. Finally, suppose the price is ten dollars and forty are supplied and fifty demanded. Is that a disequilibrium price if the cost of supplying an additional ten is eleven dollars each and none of the buyers will pay more than ten dollars? The important praxeological question is not “how close is an economy to equilibrium?” but rather is, “is there a tendency for an economy to move toward a state of equilibrium?” A tendency towards equilibrium would require diverse opinions about future prices to tend to move to a consensus so that all prices tended to become equilibrium prices and all entrepreneurial profits tended towards zero. Certainly, such a consensus is conceivable, but there is no inexorable logic that requires it. While profits go to zero under special conditions (see The Zero Profit Law), entrep reneurial gains cannot inexorably go to zero unless there is a law that [Page 140] requires different minds to reach a consensus on all future prices, and there is no such law. It is true that poor entrepreneurs suffer losses and tend to drop out of the anticipation business, but there is nothing to minimize their replacement by more poor entrepreneurs, or to keep good entrepreneurs from becoming poor entrepreneurs. So there is no logically necessary tendency for a market to move to a state of agreement among all the individuals in it. The collectivist dream of a singleminded group can be realized only at the point of a gun, and even then not with certainty. It is easy to see that there can be no law that requires actual supply and actual demend to tend to equality. A sudden increase or decrease in the quantity demanded or supplied could easily result in an increase in the difference between them, and this difference may increase if changes in supply or demand become more unpredictable. For example, if demand is steady at a particular price, the difference between quantity supplied and quantity demanded could fall each day from 5 units to 4 to 3 to 2, then jump to 10 units when demand suddenly changes. A change in the actual supply or demand need not even influence a corresponding change in price. For example, suppose a shopkeeper stocks 50 widgets and sells 30. Next week he orders 60 more, raises his price, and sells only 20. Next week he orders 70 more, raises his price again, and sells only 10. This divergence of actual supply and actual file:///C|/Downloads/Video/Chap38.html (3 of 5) [17-9-2008 17:14:38]

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demand is certainly possible and is consistent with the praxeological theory. It could be explained, for example, if the widgets were costumes, this was the week before the Mardi Gras, customers wait to the last minute to buy, and the number of people expected for the Mardi Gras kept increasing. It is also true that anticipated supply and anticipated demand need not tend to equality, because anticipated supply and demand do not take risk into account. A seller does not simply decide what he thinks demand will be at each price and choose the highest price at which the demand equals his supply, unless there is no risk of not selling his supply at that price. A (nearly) riskless situation may exist, for example, when the buyer is contractually bound by a particular demand schedule. But if the seller is not sure what demand will be at a particular price, he must consider the possibility of not selling everything at that price and incurring losses on the unsold units, so, by the Law of Supply and Demand, he tries to maximize his probable gain (see page 94). This is simply an application of the Law of Profits, that individuals (who choose profits over other values) attempt to maximize profits. A situation could exist where the additional gain to be achieved by a higher price is outweighed by the loss that is expected if units are unsold and must be disposed of. For example, a seller of a highly perishable item may lose the entire value of the item if it is unsold, and have expenses in removing the unsold [Page 141 items. For that reason he may set his price below the price at which he anticipates supply and demand to be equal so that he expects there to be excess demand, thereby lowering the risk of loss so as to maximize his probable gain. Nor is it even true that a change in anticipated demand at present prices must result in corresponding change in price. One can expect demand at the present price to double, yet still believe that no one will pay a higher price, perhaps because of the presence of a competing seller. A seller’s asking price need not even change in the same direction as anticipated demand at higher or lower prices. For example, if at present fifty are demanded at ten cents each, and the seller expects demand at eleven cents to increase from zero to one, he will not raise his price to eleven cents. The closest one can come to a tendency towards equilibrium is (1) unrealized plans expose errors and permit their correction, if the errors are identified, and (2) the Law of Supply and Demand means that sellers will adjust their asking prices to try to maximize their probable gain. With perfect knowledge in the market, probable gain is usually maximized at equilibrium prices, so, to the extent that the exposure of error from failed plans creates more accurate knowledge of future choices, sellers will set prices closer to equilibrium prices. In that case, the asking prices of sellers will “chase” the equilibrium prices, which, like mirages in the desert, may change position just as the asking prices approach them, endlessly shifting to file:///C|/Downloads/Video/Chap38.html (4 of 5) [17-9-2008 17:14:38]

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new, unknown locations to reflect constantly changing knowledge and values. “ ... at every moment there may be tendencies towards an equilibrium, yet from moment to moment it is not the same equilibrium towards which there is movement.” (2) Next Table of Contents Index FOOTNOTES 1. F.A.Hayek, Individualism and the Economic Order Back

(Chicago: Henry Regnery Co., 1948), 45.

2. Lionel Robbins, An Essay on the Nature and Sign~ficance of Economic Science 1962), 62. Back

(Lon don: Macmillan and Co., Ltd.,

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Chapter 40

Chapter 40 TIME PREFERENCE When the choice presented to an individual is between physically consuming a good now or physically consuming the same good at some future time, the question of time preference arises. In its broadest terms, the question is whether all individuals must logically choose to consume the good now rather than consume the same good later (a “positive time preference”), and if so, why? A good is desired only because an individual believes that it will enable him to achieve a value. If one is comparing goods at different times, and they are the same goods (see Chapter 23), then the value achieved by those goods must be the same. For example, one does not want dinner immediately after lunch because dinner immediately after lunch does not serve the same value as dinner at dinner time, so the two meals are not the same good. The time-preference question could be stated as follows. Given that an individual believes, with absolute certainty, that he can and will make exactly the same choices between values later as now, will he necessarily choose to achieve a value now rather than later? By hypothesis, value A, achievable now, is presently considered by the individual to be the same as value B, achievable later. The only difference is that value A is a value now while value B is not a value now. Since the individual must choose now , he is really weighing value A versus value C, the value now of achieving value B in the future. There is no apodictic reason for choosing one or the other. But more importantly, that statement of the time preference question removes the risk that value B will not be chosen later, perhaps because the individual no longer desires the value, perhaps because the individual has died or the good required to achieve the value is no longer available. In other words, that statement of the question of time preference removes the possibility of error, and especially uncertainty, which is not removable because the existence of an individual and the absence of uncertainty is a contradiction. An individual necessitates uncertainty because even he cannot know the relative importance of his own future values and therefore what chains he will initiate. Moreover, an individual must know that there is uncertainty because he [Page 147] knows that he does not know all his own future choices. The next question is whether knowledge that there is uncertainty necessitates time preference. This question is part of the larger question of whether any knowledge necessitates a particular choice, which has been repeatedly answered in the negative. Indeed, instead of logically requiring positive time preference, knowledge of uncertainty may influ ence an individual to exhibit a negative time preference. For example, knowledge that uncertainty has increased, that there will be more possible future choices, may influence individuals to consume less now so as to better able to avail themselves file:///C|/Downloads/Video/Chap40.html (1 of 4) [17-9-2008 17:14:40]

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of these increased future opportunities. On the other hand, belief that the world will end tomorrow (i.e., no uncertainty) may influence individuals to consume wildly. Von Mises argued(1) that people must have a positive time preference because, even if they want to postpone consumption now, one can always find some future time in which consumption in the future is not preferred to consumption in the present. If this were not true, von Mises argued, people would never consume. But one can imagine people who always feel insecure, who always add to their savings "just in case” of an emergency that never comes. They do intend to consume at some indefinite future time, but that future time never occurs. Such people would never choose consumption now instead of consumption later. There is, however, another argument that can be made for the logical necessity of time preference. When an individual acts and changes attri butes, he uses up stored energy in his body. Unless he decides never to initiate another chain, the value of having a body capable of initiating a chain must be more important than any other value. Indeed, it is the sine qua non of all other values, and as such, unless he chooses death, it must be preferred to all other values. Even if he is suicidal, until he initiates that last chain that terminates his existence, the value of his ability to initiate the chains necessary to initiate that final chain must be more important than other values. As an entity, an individual’s body has a particular structure that distinguishes it from other entities, a structure that is required for chain initiation. Thus, an individual cannot be indifferent as to when he initiates the chains required to preserve that structure, because that structure must be preserved now or future chains become impossible. Moreover, the initiation of a chain requires the expenditure of stored energy, which, since an infinite amount of energy cannot be stored, must be replaced from time to time if the individual is to continue to initiate chains. The [Page 148] preservation of an ordered structure and the storage of energy in it is physical production, which (see preceding chapter), necessarily requires physical consumption. Therefore, all individuals who value their own existence will have a positive time preference as to goods necessary to maintain their chain-initiating structure. (In a very real sense, however, the individual is choosing the future over the present, because present consumption is only the means to a future end.) This means that there will also be a positive time preference for those goods that are required to produce the goods consumed in maintaining the chain-initiating struc ture. It is hard to see, however, how this necessarily requires an overall positive time preference, since individuals could still store much more than they consume. “Interest” is a good exchanged for a loan. A loan is consent to give possession of a present good for a certain period of time, after which it is returned. The interest rate is a price — the ratio of the number of units of the interest that must be paid per unit of time for every hundred units of the loaned present good (e.g., a 10 percent interest rate means paying file:///C|/Downloads/Video/Chap40.html (2 of 4) [17-9-2008 17:14:40]

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ten units in a year for every hundred units borrowed now and returned in a year.) Like all prices, the interest rate is set according to the Law of Supply and Demand, in this case the supply of and demand for loans. Since an overall positive time preference does not seem to be a logical necessity, one cannot say that interest rates must be positive even if there is no risk and no possibility of inflation. If most individuals wish to save and not consume, one might have to pay someone negative interest for the trouble of holding one’s savings. In addition, risk and deflation may sometimes make interest rates negative. For example, a bountiful harvest of a crop that will soon spoil may be loaned until next season, money in a war zone may be loaned to someone in a safe zone, or someone expecting deflation may loan money, hoping to be paid back with more valuable money. If units of a borrowed good are expected to yield more units of that good as time passes, the Law of Profits (see Chapter 27) implies that individuals will pay units of the good as interest as long as the interest is less than the expected increase, and the Zero Profits Law (see Chapter 37) implies that the expected interest and expected increase will tend to equalize.(2) An increase in yield as a result of exchanges requires successful speculation, and may or may not involve physical production. In physical productivity (see Chapter 39), capitalistic savings result in a workpiece of lower entropy (e.g., seeds grow into crops). At present prices, the lower entropy good may be more valuable than its costs of production, but one must speculate as to what its price will be when it sold. In speculation (see Chapter 35), the borrowing individual anticipates that [Page 149] other individuals will pay a price for the good in the future that will more than cover his costs. The good may simply be stored (plain saving) in the hope that age itself (e.g., antiques) or changing values (e.g., futures contracts) will result in a higher value, or it may undergo physical changes (which are not physically productive) that the borrower hopes will make it more valued (e.g., wine). Next Table of Contents Index FOOTNOTES 1. Ludwig von Mises, Human Action Company, 1963), 483. Back 2. Frank H. Knight, On the History and Method of Economics file:///C|/Downloads/Video/Chap40.html (3 of 4) [17-9-2008 17:14:40]

(Chicago: Henry Regnery

(Chicago: The University of

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Chicago Press, 1956), 24. Back [Page 150]

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PART V

PART V

NON-CONSENSUAL RELATIONSHIPS There is no bread without

freedom. —Polish Solidarity Activist

The values of different individuals conflict when the achievement of those values requires changing the same good in incompatible ways. While it is theoretically possible for no conflicts to arise in a society, this is an extremely unlikely possibility, because many events that individuals can cause will benefit some individuals while harming others. As to events not caused by an individual, one can simply let the chips fall where they may, but as to events caused by individuals, additional analysis is needed. There are only two ways to resolve conflicts between individuals who wish to cause conflicting events: by right or by might.(1) One can either discover who has the right to change the good and let the price system, which then arises spontaneously, resolve the conflicts according to the market process, or one can give free reign to coercion and let the physically more powerful individuals achieve their values at the expense of the physically less powerful. The next chapter discusses rights, and the following chapter discusses coercion. Next Table of Contents Index FOOTNOTES 1. Franz Oppenheimer, The State Albert Jay Nock, Our Enemy The State Editions, 1935, 1973). Back

(Free Life Editions, 1914, 1975). (Free Life

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Chapter 41 RIGHTS Act in such a way that you always treat humanity, whether in your own person or in the person of any other, never simply as a means, but always at the same time as an end.

(1) —Immanuel Kant

Mr. Smith walks up to Mr. Jones and, by force, takes the watch Mr. Jones has on his wrist away from him. What is the praxeological effect of Mr. Smith’s act? The answer is that the question cannot be answered without an additional piece of information — who had the right to the watch?(2) (1) Mr. Jones had the right to the watch and Mr. Smith is a thief. Mr. Jones loses a good and Mr. Smith gains a good. (2) Mr. Smith had the right to watch and was taking back his own watch, which Mr. Jones had previously stolen. Mr. Jones loses a good and Mr. Smith gains a good, in this transaction. But when the previous transaction, the theft of the watch by Mr. Jones, is taken into account, neither Mr. Smith nor Mr. Jones has gained or lost a good, aside from the goods lost in stealing and retrieving the watch. The point is that as long as all relationships between individuals are consensual, their praxeological effects can be analyzed without a theory of rights, but any non-consensual relationship cannot be analyzed without such a theory. A deductive economic paradigm, or any economic paradigm for that matter, is incomplete or defective unless it can specify, in theory at least, who owns which goods. An entity is a good to an individual if he initiates a chain to change it or to prevent its change (by changing another entity). This presupposes that the individual knows of the existence of the entity in question and is in a position to change or preserve it. A diamond, hidden beneath the earth, is a good to no one, for no one can change or preserve that of which he knows not. The moon, until man landed a craft there, was also a good to no one (though its light might have been), since no one could [Page 153] reach it to change it or preserve it. At the instant the first individual acts to change or preserve an entity, it becomes a good to that individual, file:///C|/Downloads/Video/Chap41.html (1 of 10) [17-9-2008 17:14:46]

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the first valuer, but not to all other individuals, who could not or would not change or preserve it. By his act, the first valuer has created a good where there was only an entity before. It is this act of creation that generates a right, and since only individuals have the free will necessary to create goods, only individuals can have rights (a virgin forest has no right not to be cut and “society” has no right to enforce “its” values.) This is the “Entitlement Principle,” which states that he who creates a good, has the right to it.(3) The inherent justice of the Entitlement Principle is acknowledged across the political and philosophical spectrum (except, perhaps, by egalitarians). Marxists argue that laborers should own the products of their labor and conservatives quote St. Paul, “If any would not work [and create goods], neither should he eat [i. e., he should have no claim to the goods created by others].” Israel Kirzner argues, quite validly, that an entrepreneur, by buying oranges for five dollars and making them into twelve-dollar marmalade at a cost of four dollars, is entitled to the additional three dollars since the marmalade is a good that he created. (4) It is only the inconsistent application of the Entitlement Principle that sets these diverse groups apart. The justification for the Entitlement Principle is that the first valuer has the right because, due to the impossibility of knowing the relative importance of the values of another individual, no later valuer can logically claim it. An individual may be able to understand the values of another individual, but the relative importance of another individual’s values is the individual, and therefore no individual can know the relative importance of the values of another individual without becoming that individual and making his choices for him. But an individual who becomes another individual (even if this were possible),(5) is no longer an individual vis-à-vis the individual he has become, so the relative importance of the values has still not become known to another individual. An individual’s choice between values demonstrates which value was more important to him, but even he cannot transfer the knowledge of the relative importance he places on different values to another individual because there is no unit by which he can measure importance. The impossibility of knowing the relative importance of the values of others means that interpersonal comparisons of the relative importance of values are impossible. This statement should not be taken lightly, as some economists do, who concede it, then immediately proceed to do cost-benefit or welfare “economics,” completely oblivious to the contradiction involved. It is impossible, in principle, for one person to know the importance of a value to another person. (6) Period. It is impossible, in [Page 154] principle, to say that Mr. Smith’s values are more important to Mr. Smith than Mr. Jones’s values are to Mr. Jones. Period. And finally, because a good is worthless except to the extent that an individual believes it will achieve a value, it is impossible, in principle, to say that a good is more important to Mr. Smith than to Mr. Jones. Period. When the later valuer changes the first valuer’s good without the consent of the first valuer and without claiming a right to do so, it is implicit that he has weighed the file:///C|/Downloads/Video/Chap41.html (2 of 10) [17-9-2008 17:14:46]

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importance of the value (to him) that he hopes the good will achieve versus the importance of the value (to him) of letting the first valuer achieve the first valuer’s value, and has found the former to be greater. But when he asserts a right to change the entity in question, without the consent of the first valuer, he implicitly asserts that a different comparison has been made, which came out in his favor. Now he is saying, by some standard, he has compared the importance of the first valuer’s value (to the first valuer) to the importance of his value (to him) and has found that his value has greater importance. He cannot assert a right without making this interpersonal “utility” comparison, but such a comparison cannot be made because, since the importance of values cannot be transferred between individuals, he can never know the importance of a value to another individual. Whatever the standard of comparison is, whether it is equality of income or even life itself, it is a standard only because the later valuer has chosen it as a value. The standard may be objective, but no one can show that the units of the standard correspond to differences in the importance of values. Since the later valuer cannot escape making an interpersonal comparison of values, which he cannot make, he cannot assert a right, so only the first valuer can have the right. A violation of a right occurs only when (1) another individual causes a good to be changed without the consent of the right-holder, and (2) as a consequence, the right-holder suffers a loss in the importance of the values he can achieve by changing or preserving that good. As to part (1), changes made by another individual with the consent of the right-hol der are not right-violating because, since they are in accord with the will of the right-holder, they do not decrease the value that he hopes the good will achieve for him. Nor does a change that is not caused by the act of an individual violate rights. Earthquakes, unless caused by an individual, do not violate rights, nor is the mere fact of ownership right-violating (e.g., he who owns the moon is not responsible for damage done by tides). (7) As to part (2), because goods are only the means to achieve values, changes to goods that do not lessen the importance of the values the right-holder can achieve do not violate rights. For example, sending radio waves through our bodies changes the electrons in our bodies but does [Page 155] not violate our rights because, since the changes cannot even be detected by the individual, the value achieved by the changed body is not less preferred than the value achieve by the unchanged body, so no loss of importance occurs. If an individual injures another individual’s pet, the injured pet may then be more important to its owner than the uninjured pet would have been. But if the value achieved by an uninjured pet is preferred to the value achieved by an injured pet, his right has been violated. On the other hand, if the action of one individual does not change another individual’s good, or changes it with its owner’s consent, but the owner of the good preferred the value achieved by the good when the action had not occurred to when it had occurred, no right is violated, because all rights are attached to goods, not to values, and no right-bearing good was changed without consent. That is, one has no right to his ends, his values, only to his means, his goods. For example, personal ridicule may lower the value of someone’s body to him, but if file:///C|/Downloads/Video/Chap41.html (3 of 10) [17-9-2008 17:14:46]

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no (unconsented to) chain is initiated that alters that body, no right is violated. For the same reason, blackmail and verbal threats or obscenities are not right violations unless one does not consent to hear those sounds. Because all rights attach to goods — collections of attributes that an individual changes or preserves to achieve a value — rights can never conflict because attributes can never conflict. But since the changing of one individual’s attributes may change another individual’s attributes, rights do not imply the unrestricted use of a good by its owner; rights define what others cannot do, not what the owner of the good can do. What constitutes the right-bearing good depends upon the value it is hoped the good will achieve. It is not chemistry or physics that defines a good, it is the value related to it in the mind of its owner (see Chapter 17.) For example, a boatman first uses a river to transport goods, then someone puts a chain across the river, blocking the boat. The water molecules that carried the boat are now in the ocean, but it is the river as a boat-supporting medium, not the specific molecules the boat changed, which is the good related to the value of transporting the boat, so the chain violates his rights when it blocks his boat. On the other hand, damning and diverting the river upstream would not violate his rights because the upstream river was never changed by the boatman and was therefore not his good. [Further thought has lead me to change this position.] The water molecules that are diverted upstream do not become the property of the boat owner (as a boat support) until they flow into the portion of the river he is using. As in all cases where mattergy flows from point A to point B (sunlight, rain, fish and animal migration), and an individual changes it at B, acquiring ownership at that point, he has no right to it at point A because he never changed it there. [Page 156] An individual changing the mattergy at A is not changing any good belonging to the individual at B. (8) By the Entitlement Principle, one who sends mattergy into unowned property acquires the right to do so because he is the first to change that property. Thus, when one enters property (without being coerced) into which mattergy is being sent, one consents to the flow of that mattergy into it and the flow does not violate one’s rights. If you move into a neighborhood where backyard barbecues send smoke into your yard and a nearby nuclear reactor sends photons through your body causing cancer, and you are either the first resident or acquire from a resident who consented, then you have consented. This is true whether you know of these activities or not, though you may have grounds for fraud (implicit theft) against the previous owner if you did not know and he did, or for breach of contract if he guaranteed that the land was safe to live on. However, if a new nuclear plant is constructed, you may not have consented to the new radiation, even if it reduces overall radiation by resulting in the closing of a nearby coal-fired power plant. By analogy, if you move into a neighborhood where a shooting feud is occurring, and someone else buys out the feuding parties, reducing the number of bullets in the air, but then he accidentally shoots you, he still violates your rights. Whether you can prove that the photon that caused your cancer came from a particular file:///C|/Downloads/Video/Chap41.html (4 of 10) [17-9-2008 17:14:46]

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nuclear reactor, however, is a completely separate question from whether sending the photon violated your rights. As another example, polluting a stream that flows through unowned property violates no rights, and subsequent downstream owners do not acquire rights to an unpolluted stream. But if new pollutants are added to the stream, which lower the importance of the values of the downstream owners it serves, their rights are violated. Similarly, if what is valued is not the accretion of the mattergy in the unowned property, but the changes that the mattergy causes, then one acquires the right to make those changes. That is, if property has not been changed in a specific way before, and changing it in that way does not violate the rights of others in that property, then the first observer to cause and value those changes acquires the right to do so. This is the justification for rights in the airwaves, which cause the movement of electrons in property.(9) If an individual does not initiate a chain of causation that violates rights, then that individual is liable for the violation of rights only if he agreed to be responsible for the right violation. One individual cannot be held liable for chains initiated by another individual because no individual can cause another individual to initiate a chain (though he may influence him to do so). An individual who orders, encourages, or pays others to [Page 157] commit right violations does not himself commit a right violation, but may be found to have agreed with the right violator to accept responsibility (and therefore liability) for the right violation, with the victim as a thirdparty beneficiary. Stockholders, for example, can agree to be responsible for right-violating acts committed by their employees, in which case the employee and the stockholders are jointly and severally liable to the victim as third-party beneficiary. Such an agreement is probably absent, however, if someone in a crowd shouts “kill those bastards,” and someone else does. On the other hand, such an agreement is probably present when a general orders a private to kill the prisoners.(10) Thus, Hitler, who may have committed no right violations himself, could be found to have agreed to accept responsibility for the right-violations of the other Nazis, while a Nazi secretary may not have. But liability by consent requires actual consent to accept responsibility. One’s mere existence or failure to scream “no!” is not consent (e.g., one does not enter into a “social contract” by being alive or failing to leave a geographical area, nor does one consent to coercion by voting for less of it.) Also, of course, there is no consent if offensive coercion is threatened, or its removal promised, regardless of all the screams of “I consent!” Stockholders are liable for the contracts they authorize their employees to sign, but the employees are not liable, if they have not themselves violated a right by signing the contract, because the employees are mere conveyors of knowledge of the stockholder’s consent. On the other hand, one cannot escape responsibility for the chains one initiates because one’s own rights are being violated — one who kills an innocent person to avoid being murdered still violates the victim’s rights. When the right-holder is no longer willing to initiate a chain to change or preserve his good, it file:///C|/Downloads/Video/Chap41.html (5 of 10) [17-9-2008 17:14:46]

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becomes abandoned and another individual may change it and acquire rights to it. One gains rights to a wild animal when one captures it, but loses them when it escapes and one does not try to recover it. A good given in trade is an abandoned good that is re-created as a new good by the new owner. When an individual is unconscious or dies, he becomes incapable of initiating a chain, but abandonment requires a loss of the will to control, not simply a loss of the capacity to control. His will can be discerned from legal documents (a “will”), or from his failure to contravene his belief as to what others would presume his will to be should he not explicitly state it (e.g., intestate succession). One can abandon the right to control some changes in a good yet retain the right to control other changes. You may abandon your right to prevent children from walking across your yard, but not to dig it up with a shovel. Generally, when an individual is no longer able to control [Page 158] changes in his good, he ceases to try to control them, abandoning his right to do so. A pregnant woman abandons her right to control the form and chemical composition of substances after she has supplied them to the fetus, as she, through her body, cannot control them and does not try to do so. But she does not abandon her right to control the fetus’s position or her right to control the supply of substances to it because she controls her own diet and movement and thereby the fetus’s. As the fetus forms, it gains control over its own body. When the fetus, or the subsequent child, becomes a conscious, and therefore right-bearing, entity is a question of fact, not of rights theory, and rights theory cannot say whether a fetus or a child is conscious. If the fetus is right-bearing, then it can “homestead” the movement and form of its body, which were abandoned by its mother, and thereby acquire those rights to its body. Since the woman retains control of the fetus’s position, its unconsented-to presence in her body is a violation of her rights, assuming the fetus is a right-bearing entity. Thus, she can abort the fetus (or a stowaway can be put off a ship) but she may not unnecessarily destroy the fetus in doing so, or she will violate the rights of the fetus (see footnote 2, Chapter 42). If an uncon sented-to fetus is not a right-bearing entity, it can, of course, be aborted at the woman’s will in any way that suits her. (11) After birth, a mother may still choose not to abandon control over the child’s position or the substances she supplies to it, and may exercise her control without violating the child’s rights, as long as the substances (“nutrients”) do not lower the value of the child’s body to the child. Thus, she may remove the child from the street or feed it food or medicine without violating its rights. In addition, through adoption or baby-sitting, she can permanently or temporarily transfer these rights to others. Gradually, she loses control and ceases to try to control nutrients and position, abandoning these rights, which the child then acquires. (12) If the child is too young to control its own position or feed itself, and the mother abandons her right to control these functions, then these rights can be “homesteaded” by another individual. The mother’s right to send nutrients into the body of her child is analogous to the right of a nuclear power station owner to send radiation into (formerly unowned) property. If another nuclear power station operator later sent radiation into the same property, this would not file:///C|/Downloads/Video/Chap41.html (6 of 10) [17-9-2008 17:14:46]

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lower the value of the property as a radiation dump to the first nuclear power station owner, and therefore would not violate his rights. In the same way, if another person sends nutrients into the body of the child without reducing the capacity of the child to take in the mother’s nutrients, this would not lower the value of the child’s body to the mother as a nutrient dump, and would not violate her rights. Thus, it does not violate the [Page 159] rights of a mother to give her child medicine or food without her consent, but if the child (assuming he is an individual and has homesteaded those rights himself) does not consent, forcing the child to take food or medicine would violate the child’s right. The sale of drugs to a child would not violate the right of the mother, but may violate the child’s right if the drug is fraudulently represented to be non-harmful to the body of the child. Finally, no one has a right to have his rights defended. The refusal to aid a person whose rights are being violated does not in itself violate his rights. An individual may contract to protect some rights of another individual, but not other rights. Nor is a breach of contract in itself a violation of rights, though it can trigger the transfer of rights if that was agreed to in the contract. It is believed that the praxeological theory of rights may overcome some of the difficulties associated with other theories of rights, although it does not overcome the “is-ought” problem (13) since it does not lead to the conclusion that one ought not to violate rights . The theory does not justify procedural rights, (14) intellectual property,(15) or rights in reputa tion, (16) and is consistent with a title-transfer theory of contract. (17) Next Table of Contents Index FOOTNOTES 1. In these times when the word “obscene” is applied to everything from proñts to ink on paper, I would like to suggest that Kant put his finger on the essence of its meaning— treating people as though they were things, not ends in themselves. For a more extensive discussion of natural rights see the book, Natural Rights: A New Theory by Richard D. Fuerle. Back 2. Murray N. Rothbard, The Ethics of Liberty (Highlands, N.J.: Humanities Press, 1982), 51. Back 3. “Though the Earth, and all inferior Creatures be common to all Men, yet every Man has a Property in his own Person . This no Body has any Right to file:///C|/Downloads/Video/Chap41.html (7 of 10) [17-9-2008 17:14:46]

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but himself. The Labour of his Body, and the Work of his Hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property . It being by him removed from the common state Nature placed it in, hath by this labour something annexed to it, that excludes the common right of other Men. For the Labour being the unquestionable Property of the Labourer, no Man but he can have a right to what that is once joyned to, at least where there is enough, and as good left in common for others.” John Locke, Two Treatises of Government (New York: The New American Library, Inc., 1963, orig. 1690), 328—329. It is sometimes useful to distinguish between moral, legal, and economic ownership. The moral owner is the individual who has the right to change a good. The legal owner is the individual who has the permission of the members of the state to change a good (see Chapter 43). The economic owner is the individual who actually controls how the good is changed. The three types of ownership may or may not reside in the same [Page 160] individual. For example, a piece of land may be legally owned by the members of the state. If it was seized by eminent domain from a rightful owner, he retains moral ownership. But a squatter on the land is the economic owner. Back 4. Israel M. Kirzner, Perception, Opportunity, and Profit Univ. of Chicago Press, 1979), 214. Back

(Chicago:

5. Mr. Spock’s “mind meld” on the TV series “Star Trek,” in which his mind joined with the mind of another being, and yet was able to observe the being, would not be possible. One cannot be X and not be X at the same time and in the same respect. That is, he could not observe the importance of another’s values while remaining a separate observer, though he could know another’s feelings and urges. Back 6. “We cannot weigh, nor gauge, nor test the feeling of the mind; there is no unit of labor, or suffering, or enjoyment.” W. Stanley Jevons, The Theory of Political Economy , 5th ed. (Fairfield, N.J.: Augustus M. Kelley, 1965), 7. “ ... it is evident that the disposition of people to sacrifice vanity to comfort, or decency to hunger — is not susceptible of precise measurement.” John E. Cairnes, The Character and Logical Method of Political Economy (Fairfield, N.J.: Augustus M. Kelley, 1965), 127. The idea that the importance of different people’s values can, in some way, be agglomerated to arrive at a “net benefit” is the basis for collectivism. From ancient times, when virgins were sacrificed for a good crop, to modern times, when we are taxed to ward off the Russians, this pernicious doctrine has persisted. file:///C|/Downloads/Video/Chap41.html (8 of 10) [17-9-2008 17:14:46]

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Note that collectivism requires no dispute as to knowledge, only as to the importance of values. The virgins might agree that their sacrifice will save the crops, yet value their lives more than the crops. Similarly, a person today may agree that the Russians are a threat reducible by taxes, yet prefer to spend his money on something else. On the other hand, if the virgins think their sacrifice will not save the crops, or a person today that taxes will not reduce the Russian threat, then the dispute is over who has true knowledge, not over the importance of values, and the issue is paternalism, not collectivism. Collectivism prevents individuals from selecting their own ends, and paternalism prevents individuals from selecting their own means. Back 7. Every individual is responsible for his choices, including the choice to permit his body to operate deterministically (i.e., driving a car), but an individual is not responsible for choices made by another individual. For example, if Mr. Smith causes his body to strike someone, he is responsible; if Mr. Jones causes Mr. Smith’s body to strike someone, Mr. Jones is responsible; and if a meteor (i.e., an “act of God”) causes Mr. Smith’s body to strike someone, no one is responsible. If a putative individual establishes that he is not responsible because he is incapable of initiating chains, then he is not an individual, has no rights, and can be immediately destroyed. Back 8. As an extreme example, someone leaving the earth does not violate the rights of those remaining by reducing the force of gravity pulling them down. Back 9. Arthur S. De Vany et al., A Property System Approach to the Electromagnetic Spectrum: A Legal-EconomicEngineering Study

(Cato Institute, 1980). Back

10. The power of government arises from the fact that it permits people to feel that they are not responsible for their acts. Those who give the orders don’t pull the trigger, and [Page 161] therefore feel that they are not the cause of what they have directed others to do. The trigger-pullers, however, feel that they have turned over their decision-making capacity to “the government” and have become mere automatons who are “only doing their job.” Not having made the decision, they feel they are not responsible for it. Government, then, permits people to act irresponsibly. The heinous and barbarous acts that government people have committed is exactly what is to be expected when such an organization is permitted to function. To destroy the power of governments, we must first realize that no one has power who others will not obey. We must destroy obedience to authority as a value of any importance, and, as was done at Nuremberg, make it clear that no right-violator, however shiny his uniform, noble his ideas, humble his rank, or naive his understanding, is excused from responsibility for his acts. Back

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11. A duty to the fetus (or to any individual) can arise only by consent or from the violation of rights. One does not violate a fetus’s rights by creating it since it is formed from entities (nutrients) belonging to the mother. There cannot be a contract with the fetus prior to it becoming an individual (whenever it does become an individual), because non-individuals do not have rights. The mother may contract with a third party, such as the father or a minister, however, to permit the fetus to use the mother’s womb until its birth, a non-right-violating method for those who oppose abortion to reduce it. Back 12. Somewhat surprisingly, the praxeological theory of rights gives a mother rights in the child that the father does not have unless he contracts with the mother for them. This should not be an unwelcome result, however, since it is in accord with longstanding tradition, embodied in the laws of many countries. Back 13. Alan Gewirth, Moral Rationality (Lawrence: The University of Kansas, 1972). Alan Gewirth, Reason and (Chicago: University of Chicago Press, 1978). Jeffrey Paul, Morality “Gewirth’s Solution to the ‘Is-Ought’ Problem,” Personalist (October 1979). Henry B. Veatch, “Book Review,” Ethics (1979). Roger Pilon, “On the Moral Argument for Freedom of Contract,” (The Liberty Fund, 1979). Back 14. Jeffrey Paul, “Nozick, Anarchism and Procedural Rights,” The Journal of Libertarian , Vol. 1, No. 4 (1977). Back Studies 15. Randall Holcombe and Roger E. Meiners, The Contractual Alternative to Patents (Institute For Humane Studies, 1979). [The difficult question of intellectual property rights is discussed in my book on natural rights.] Back 16. Murray N. Rothbard, For a New Liberty Macmillan Publishing Co., 1973), 106. Back

(New York:

17. Williamson M. Evers, “Toward a Reformation of the Law of Contracts,” The Journal of Libertarian Studies , Vol. 1, No. 1 (1977). Murray N. Rothbard, The (Humanities Press, 1982), 133— Ethics of Liberty 148. Back [Page 162]

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Chapter 42 THE OFFENSIVE COERSION LAW Government cannot make man richer, but it can make man

poorer. —Ludwig von Mises

Coercion exists when one individual changes a good in the face of conflicting claims over who has the right to change that good. There is coercion when an individual initiates a chain that changes a good that another individual claims a right to without his consent, and, as a consequence, the importance of the victim’s values served by that good are lessened. Since only the individual himself knows whether the good as changed is less preferred, and therefore whether he has suffered a loss, his assertion that it is less preferred must be taken as conclusive, unless there is no way for him to directly or indirectly experience the changes (e. g., radio waves passing through one’s body). Also, his ex ante withholding of consent where he can experience the changes must be regarded as ex post conclusive that the changed good is less preferred, though he can later “ratify” the coercion by waiving damages if he wishes to. If the right-claimant does in fact have a right, the coercion is offensive coercion (“crime”); if he does not have a right and the coercer is the rightful owner or his agent, the coercion is defensive coercion; if he does not have a right and the coercer is not the rightful owner or his agent, the coercion is offensive coercion against the rightful owner. In offensive coercion, the coercing individual initiates the coercion, acquiring a good for himself while causing the victimized individual to lose a good. Offensive coercion results in the imposition of an unconsented-to cost upon the victimized right-holder. Thus, the offensive coercer attempts to achieve his values at the expense of the values of his victims, and is therefore an economic parasite, preying upon the producers in the society. All offensive coercion is non-productive. Since the aggressor considers only his own cost, the goods lost by [Page 163] the victim may be astronomical compared to the goods gained by the aggressor. A politician may vote for a project that wastes tens of billions of dollars for campaign contributions of a few thousand dollars.(1) A rapist may expend a few cents in gasoline driving to rape a woman who then loses tens of thousands of dollars in income, to say nothing of values not served by money. An offensive coercer sees other individuals not as having an equal status with himself, but as being goods, mere means to his own ends. To an offensive coercer, the bodies of other individuals are like beasts in the field, to be harnessed to plows, and their property is like the eggs of wild birds, there for the taking. file:///C|/Downloads/Video/Chap42.html (1 of 7) [17-9-2008 17:14:49]

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In defensive coercion, the coercing individual acts to prevent the loss of a rightfully-held good or to re-gain a rightfully-held good from the offensive coercer.(2) Defensive coercion is an attempt to increase, preserve, or restore rightfully held goods in the face of conflicting claims by others; defensive coercion is economically productive. Whether coercion is offensive or defensive cannot be determined without knowing who has the right to (i.e., who owns) the goods in question, which necessitates a theory of rights (see preceding chapter). Coercion, offensive or defensive, can also be classified as cognitive or non-cognitive. In noncognitive coercion, the change is intended to convey no cognitive knowledge. Examples would be physical contact or taking property. In cognitive coercion, an observer’s sensory organs are changed by the receipt of knowledge, a physical event, which contains cognitive content that he did not consent to. Cognitive coercion is right-violating if the recipient individual does not consent to having his sensory organs altered by attributes containing that knowledge, and as a consequence of that changing of a good, his sensory organ, brain, and perhaps other organs in his body, he suffers a loss in the importance of the value that good serves. Hearing unconsented to threats, for example, may cause physical changes in one’s brain or other bodily organs that can result in a loss in the value achieved by the body. Cognitive coercion may be threatening, deceptive, or otherwise not consented to. If the knowledge conveyed is that, unless the coerced individual acts or fails to act as directed, offensive coercion will be used against an individual or his goods, it is a threat. If the knowledge is knowingly false, it is deceptive. All other knowledge that is not consented to (e.g., a wife who says, “I don’t want to hear what a great cook your mother was”), is also cognitive coercion. If one consents to have his sensory organs so changed, of course, no coercion or right violation occurs. A threat presents an individual with the choice of losing a value by acting (or not acting) as the coercer demands or suffering the loss of a more important value (in the judgment of the coercer) by subsequent [Page 164] offensive coercion. A transfer of title made under threat is, of course, null, because the transfer is not consented to. Similarly, deception is right-violating if the receiver of the knowledge does not consent to receive knowledge that the propagator knows to be false, and consequently suffers a loss. In this view the deception itself could be right-violating, but unless it is acted upon, damages would be minimal. One could refuse to consent to receive any knowledge that is false whether or not it is known to the propagator to be false, and, by making this explicit, place the risk of falsity on the propagator. But then one would probably not receive any knowledge without first paying a fee to cover the risk of its falsity. One could also consent to receive knowledge that one knows may be false (e.g., by buying a Hollywood gossip magazine) in which case the deception would not be right-violating. The effect of offensive coercion may be to alter the chains that an individual initiates. This occurs both as a result of non-cognitive coercion, and of cognitive coercion. Bodily injury or the seizure or interference with goods may mean that chains that would have been initiated file:///C|/Downloads/Video/Chap42.html (2 of 7) [17-9-2008 17:14:49]

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can no longer be initiated. Threats and other cognitive coercion may lead individuals to alter their chains due to fears of retaliatory offensive coercion. The victims of the offensive coercion are those individuals who, had they the choice, would prefer the chains that would have been made had there been no offensive coercion to those chains that were influenced by the offensive coercion. This includes not only the individuals who are the direct victims of the offensive coercion, but also those indirect victims who would have benefitted had the offensive coercion not occurred. Admittedly, one cannot know what chains would have been initiated in the absence of the offensive coercion, and therefore one cannot know who the indirect victims are. But one can know who the direct victims are because they are the individuals who did not consent to the changes made in their bodies or goods, and therefore preferred that the chains initiated by the offensive coercers had not been made. It is conceivable that a healthy person would choose to spend the rest of his life in a wheelchair even if thugs had not crippled him. But his failure to consent to being crippled conclusively establishes that the crippling itself was not a chain that he preferred to no crippling. Aside from the direct loss a victim suffers from the offensive coercion, he can also suffer indirectly if he alters his plans to avoid a loss that he believes the offensive coercers would inflict upon him if he acted as he preferred to. That is, he may prefer an act over its obverse act until he learns that offensive coercion (cognitive or non-cognitive) may impose an additional cost on that act. As a result, he chooses the obverse act, losing the value he otherwise would have gained. The change in action [Page 165] gained him no additional value, but only enabled him to retain a more important value (which he believed he would have retained anyway), at the cost of what his gain would have been in the absence of the offensive coercion. The Law of Offensive Coercion states, “if an individual believes he can achieve value A at the sacrifice of its obverse value B by sacrificing good B for good A, and value A is more important than value B, and he is threatened with the loss of value C if he chooses good A, and values B plus C are more important to him than value A, then he will choose good B.” If more chains are changed due to more offensive coercion, then more values are lost by the victims. Since government (as the next chapter points out) is the organization of the open offensive coercers, this law means that the more powerful the government becomes, the lower will be the living standards of its victims, and the weaker the government, the higher the living standards of the victims. Damages that result from acting upon knowledge received by cognitive offensive coercion require proof that the knowledge influenced the action (see Chapter 20). While it is true that it cannot be known whether the victim would have acted the same way even without the knowledge, it is nevertheless true that the knowledge either changed the epistemic correlation between the value and the plan or it did not. For example, a man plans to invest $5,000 in Stock A to make money. He is then told a favorable falsity about the stock, invests the $5,000 and loses it. The false knowledge did not alter the epistemic correlation between the value “making money” and the plan “investing in Stock A,” so damages are zero. No one can know, file:///C|/Downloads/Video/Chap42.html (3 of 7) [17-9-2008 17:14:49]

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by any objective test, whether the knowledge influenced the decision, but one can gather evidence of the relative importance of the victim’s values at that time and the likelihood that he was influenced. As long as it is physically possible for an individual to use offensive coercion, there is no way to prevent him from choosing to do so. At most, the use of offensive coercion can be made irrational by conveying knowledge to the individual that its use is likely to result in the loss of values that may be more important to him than the value he hopes to achieve. To some individuals, the loss they would suffer by breaking a moral code or disobeying the will of God (“Thou shalt not kill;” “Thou shalt not steal”) is more important than any gain they might achieve by using offensive coercion. One can try to convince individuals to choose not using offensive coercion as their most important value, but if they don’t, then individuals will use offensive coercion when more important values can be achieved by it.(3) There are two ways in which individuals who regularly interact with other individuals, a society, can function, given that at least one of the [Page 166] individuals is physically capable of using offensive coercion. A “free society” is structured so that individuals cannot achieve their values by openly using offensive coercion. This is accomplished by the rapid and certain application of defensive coercion to all individuals who openly use offensive coercion. Coercion is “open” (i.e., “legal”) instead of “secret” if the coercer makes no attempt to conceal it from individuals who might use defensive coercion against him. Coercion will be open if the values lost by concealing the offensive coercion are more important to the coercer than the values achieved by not concealing it. The use of open offensive coercion is irrational (and therefore will not be used) when the prospective coercer does not believe it will maximize his probable gains. That is, the advantages of operating openly (e.g., more and better victims) are outweighed by the disadvantages (e.g., an easily identified target for defensive coercion). While it may be irrational to openly use coercion in a free society it may still be rational to use it secretly. Crime can be rampant in a free society, but legal, open crime is non-existent. The other way for the group of interacting individuals to structure a society is so that some individuals can achieve their values by openly using offensive coercion, which is called a “command society.” Since offensive coercion can be used to achieve values, it is very likely that offensive coercion will be used unless the individuals choose the absence of offensive coercion as a more important value than any value the offensive coercion could achieve. However, it would not be unexpected or surprising if some individuals did choose to use offensive coercion to achieve their values since that is undoubtedly why the society was so structured in the first place.(4) Suppose a free society is compared to an “identical” command society facing an identical environment where both societies are equally effective in the use of defensive coercion against secret offensive coercion (i.e., in fighting crime that is not legal crime). If some individuals in file:///C|/Downloads/Video/Chap42.html (4 of 7) [17-9-2008 17:14:49]

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each society do not choose the absence of offensive coercion or another inhibiting value as a more important value, then there will be more offensive coercion in the command society. But since interpersonal comparisons of values are impossible, one cannot say that the importance of the values lost by the victimized individuals exceeds the importance of those gained by the coercing individuals. One can say that there will be more “value minuses” in the command society, however, and that the command society is less economically productive. To the extent that the offensive coercion is used to transfer or destroy goods, one can also say that a command society is physically unproductive (see Chapter 39). Physical unproductivity, of course, ultimately jeopardizes the survival of the individuals in the society. The objective reality [Page 167] that imposes itself on subjective values is the Second Law of Thermodynamics (see Chapter 39), which states that one can never store more energy than one uses to store it — stores of energy can never increase overall (at least in the absence of a gravitational collapse). Any increase in a local energy store must always result in an overall decrease in stored energy. Chain initiation uses up stored energy because it changes mattergy, which requires energy. If an individual is to function in a continuing way, and not simply use up his stored energy and die, the net effect of all his chain initiations must be to store up at least as much energy as he used up initiating the chains. In other words, the Second Law “disciplines” the choices of individuals who choose to continue to choose. An individual is still metaphysically free — he can choose death — but he is not free to violate physical laws, which imply that no physical changes can occur without the expenditure of energy. Some chains may use much energy and store none, and other chains may use little energy and store much, but the net change must not be negative for too long if the individual is to continue to function. Stealing an energy store results in a net decrease in stored energy between the thief and his victim because energy must be used to effect the theft. In terms of energy stores, a command society is a negative-sum game, since transfers by theft use up energy stores and, to the extent that offensive coercion dissipates energy stores by theft or destruction, the survival of the society is jeopardized. A society that hovers on the brink of extinction from famine and pestilence is a high-entropy society. Its members have created few of the capital goods that distance them from extinction by providing a safety margin against disasters. The members of a low-entropy “highly developed” society, on the other hand, have created many highly complex capital goods and can withstand many more disasters before they reach subsistence level. Theft and most other acts of offensive coercion increase entropy and thereby bring the individuals in the society closer to the brink of extinction. Offensive coercion that prevents the destruction of energy stores (e.g., stopping someone from burning his house), however, would not necessarily have this result (though it is still right-violating). Also, if the offensive coercion is used to enslave individuals and force them to file:///C|/Downloads/Video/Chap42.html (5 of 7) [17-9-2008 17:14:49]

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create more energy stores than are used up by the enslavement, overall energy stores could increase and in fact exceed those of an otherwise “identical” free society where the comparable free individuals choose to store less energy. That is, a lethargic society could be forced to increase its physical productive capacity, but this would be lowering of living standards for those who did not choose it. [Page 168] One can also say that a command society presents less opportunity for the achievement of values, because successful coercion reduces choice and therefore reduces uncertainty (see Appendix D). Modern, so-called "consumer advocates," whose principal preoccupation is to reduce the choices available to consumers by government coercion, are therefore actually the enemies of consumers. By logic, an individual choosing from any set of goods is more likely to be able to achieve his values than if his choice is limited to a subset of that set of goods. Therefore, an economy in which additional choices can be made will always be chosen (by an individual who knows of this difference) over an identical economy where the additional choices are not available, where the economies are otherwise equally valued, (e.g., there is no love of homeland). It is no wonder that the flow of refugees is generally from economies of greater coercion to economies of lesser coercion. Finally, since only an individual choosing between values can know how many units of the goods sacrificed and acquired relate to those values, only the choosing individuals themselves can create a price structure that reflects the relative importance of their values. Any attempt to arbitrarily set prices is almost certain to result in prices that differ from the value-re flecting prices that would have arisen spontaneously. (5) Thus, to the extent that a command society sets prices coercively, individuals in that society will fail to achieve values that they otherwise would have achieved, i.e., they will have a lower living standard. In other words, the health of a society is inversely proportional to the strength of its government. Next Table of Contents Index FOOTNOTES 1. Bruce A. Acherman and William T. Hassler, Clean Coal/ Dirty Air (New Haven: Yale University Press, 1981). Before deregulation, the dollar loss of Interstate Commerce Commission regulations per victimized consumer has been estimated to be 400 times the dollar gain per regulated trucker. “Reason,” January, file:///C|/Downloads/Video/Chap42.html (6 of 7) [17-9-2008 17:14:49]

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1984, page 38. An FFC study in 1980 stated that every American job “saved by auto quotas would cost consumers between $90,000 and $155,000 each year.” The destructive power of government arises from the fact that it enables its members to act irresponsibly, imposing costs on others without being held accountable for the suffering they cause. Back 2. Coercion in excess of that required to prevent the loss of or regain a rightfully-held good is offensive coercion. Back 3. The impetus for government is the greed of those individuals who can achieve more of their values by sacrificing the values of others, using offensive coercion against them, than they can by helping them in consensual relationships.[Page 169] Back 4. Charles Beard, An Economic Interpretation of the Constitution (London: The Macmil lan Co., 1935). Gabriel Kolko, The Triumph of Conservatism (New York: The Free Press, 1963). In a command society the members of the state arrogantly presume themselves to have knowledge of a non-existing social organization which is superior in that “better” values will be chosen (which implies that the members have an ability to measure the “worth” of different values), or knowledge of superior means to values. Either case presumes an ability to measure the suffering the members cause for some individuals and compare it to whatever additional happiness they may bring other individuals. Needless to say, such knowledge is impossible to acquire. In contrast, in a free society, the humility that comes from knowledge of one’s own ignorance of the relative worth of non-right-violating values and the “best” means to achieve values reigns supreme. Back 5. F.A. Hayek, Individualism, and the Economic Order (Chicago: Henry Regnery Co., 1972), Chapters II, IV, VII, VIII, and IX. Fritz Machlup, ed. Essays on Hayek (Hillsdale, Mich.: Hillsdale College Press, 1976), see “Hayek’s Contribution to Economics,” by Fritz Machlup, page 13. Laurence S. Moss, The Economics of Ludwig von Mises (Sheed & Ward, Inc., 1976), see “Ludwig von Mises and Economic Calculation Under Socialism,” by Murray N. Rothbard. Also see The Journal of Libertarian Studies , Winter, 1981. Back [Page 170]

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Chapter 43 THE STATE Is it a fact of no significance that robbing the government is everywhere regarded as a crime of less magnitude then robbing an individual, or even a corporation? . . . What lies behind all this, I believe, is a deep sense of the fundamental antagonism between the government and the people it governs. It is apprehended, not as a committee of citizens to carry on the communal business of the whole population, but as a separate and autonomous corporation, mainly devoted to exploiting the population for the benefit of its own members . . When a private citizen is robbed, a worthy man is deprived of the fruits of his industry and thrift; when the government is robbed, the worst that happens is that certain rogues and loafers have less money to play with than they had before. The notion that they have earned that money is never entertained; to most sensible men it would seem ludicrous. —H.L. Mencken, A Mencken file:///C|/Downloads/Video/Chap43.html (1 of 7) [17-9-2008 17:14:53]

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Chrestomathy An organization is a group of individuals (members) who initiate at least some chains according to the rules of the organization. While the members may act as an organization and in the name of the organization, it is readily apparent that the organization itself cannot act, because only individuals can act, and an organization is not an individual, but only a defined relationship between individuals, i.e., knowledge that influences them to act or refrain from acting according to the rules of the organization. (This idea is known as “methodological individualism.”) Thus, a statement that General Motors lowered prices, the United Auto Workers rejected a contract offer, or the United States declared war is holistic and literally false on its face, though its meaning may be easily understood. But because holistic analysis, which is based on the absurdity of acting non-in dividuals, can lead to disastrously false conclusions, it should be religi ously avoided. The members can form or join the organization for non-coercive purposes (to acquire profits by selling goods, to gain religious enlighten ment, etc.), for defensive coercive purposes (a neighborhood patrol or a voluntary militia), or for offensive coercive purposes (to achieve the [Page 171] values of its members by coercing other individuals). If the members of an offensive coercive organization succeed in overcoming defensive coer cion against them, so that they can openly use offensive coercion with little fear of off-setting losses from defensive coercion, the organization is dignified as a “state”;(1) if it fails, it is condemned as “terrorist.” (A Chinese proberb says, “He who succeeds becomes emperor. He who fails is a bandit.”) The members of the state have the ultimate monopoly, the monopoly on open offensive coercion, because only they can openly use offensive coercion to achieve their values. Offensive coercion by the members or by others with their permission (e.g., unions) then becomes “legal” crime. How is it possible for members of an organization to openly use offensive coercion without being defeated by defensive coercion? In the absence of such an organization, a state, all would-be right-violators would undoubtedly choose secret coercion over open coercion in order to avoid the extra costs they would suffer should defensive coercion be used against them. Of course, in the absence of any defensive coercion, open coercion would be less costly, and considerably more lucrative, than secret coercion, since the extra cost of keeping crimes secret would not be incurred and many more victims could be plundered. The state becomes gainful or profitable to its members (and supporters(2)) only when the costs to the members of the additional defensive action against them, because they operate openly instead of secretly, is less than the gain to them from using open coercion instead of secret coercion. Defensive coercion against the members can be suppressed by terrorism, propaganda, or both. In the terrorist approach (e.g., Washington’s suppression of the Whiskey Rebellion), the members threaten those who might defend themselves, to try to convince them that the cost file:///C|/Downloads/Video/Chap43.html (2 of 7) [17-9-2008 17:14:53]

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of the additional offensive coercion they will suffer as a result of their defense will exceed the cost of submitting to the will of the members of the state. An alternative way of suppressing defensive coercion is the propaganda approach, controlling access to knowledge, especially knowledge about acts of the members of the state, in order to influence the host population to act more docilely toward the members. To the members of the state the truth is the enemy, and lies and censorship are dear friends. It is, of course, very useful to the members of the state if individuals in the host population place great importance on values that maintain their power, so that otherwise right-violating acts by the members will be consented to. High priority is therefore placed upon instilling “patriotism” and on controlling the education of the young. Obedience to authority is an especially useful value to them, so that, as every adolescent knows, the revolt against authority is the first step on the path to freedom. [Page 172] If the members of the state succeed in changing the relative importance of their victim’s values, they can rightfully claim their victims’ bodies (e.g., required vaccinations), labor (e.g., the draft, compulsory jury duty, the compulsory filling out of tax and other forms), and goods (e.g., taxes, eminent domain). Whether the acts of the members are consented to (and therefore not right-violating) or not, however, depends upon whether the acts would be consented to in the absence of the threat of offensive coercion. No otherwise right-violating act is consented to unless the victim can refuse consent without suffering offensive coercion. That is, unless there is no penalty for ignoring the members of the state, the acts of the members are not consented to. To make individuals consent requires a quid pro quo — the members of the state must supply goods to the host population so that they can claim a right to the goods seized, as “payment” for the goods supplied. (3) While the host population might willingly pay something for those goods, the value of the goods the members seize always exceeds the value of what they supply, for otherwise there would be no need for offensive coercion. That is, a state is always economically unproductive because what it supplies consists of a portion of what it seizes — the business of government is theft.(4) Tyrants would distribute largesse, a bushel of wheat, a gallon of wine, and a sesterce: and then everybody would shamelessly cry, “Long live the King!” The fools did not realize that they were merely recovering a portion of their own property, and that their ruler could not have given them what they were receiving without having first taken it from them. (“Discourse on Voluntary Servitude,” Etienne de la Boetie , 1553). Like a mugger who robs you of a hundred dollars, then stops to shine your shoes, a service for which you would willingly pay fifty cents, the state is an economic consumer, not an economic file:///C|/Downloads/Video/Chap43.html (3 of 7) [17-9-2008 17:14:53]

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producer. “The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers."(5) That the “services” produced by the state are typically of poor quality should not be surprising because the monopoly gain (see Chapter 44) acquired by the state is imputable to its existence as a monopoloy producer; the satisfaction of its customers is necessary only to the extent that those customers have the power to void or avoid its monopoly if they are not the monopoly when satisfied. (In fact, voters often strengthen dissatisfied with state services, gullibly accepting the arguments that monopolies have lower costs, and that costs determine prices.) The existence of a state immediately divides the populace over which [Page 173] its members have control into parasites and producers — individuals who are net gainers from the offensive coercion and individuals who are net losers from it. While members of the state will certainly be net gainers (at least if they are not coerced into being members), some nonmembers, generally those whose support, or at least acquiescence, is needed by the members of the state, may also be gainers. Since the gainers achieve their values from action by the members of the state, the growth of the state is necessary if they are to achieve more of their values. But the growth of the state necessarily imposes additional cost on the producers who create the goods desired by members of the state and their supporters, and this necessarily diminishes the values that the producers can achieve. As the state continues its growth, it eventually reaches a point where growth must cease. Growth ceases, first, when so many goods are seized from so many producers that the costs to the producers of creating goods exceeds the value to them of the goods that will not be seized. As more and more producers approach that point, each attempt by the members of the state to seize more goods simply results in fewer goods being produced that can be seized, so that the total quantity of seized goods begins to fall.(6) The use of defensive coercion against the members of the state is the other terminator of the growth of the state. When the state is first created, the host producers may decide that the cost of using defensive coercion against the members exceeds the cost of the state, especially if the latter cost is small and the true nature of the state is not apparent. But as the state grows, more and more producers are likely to decide that the cost of the state exceeds the cost of using defensive coercion against it. Attacks on politicians, tax collectors, and the police then begin to increase(7) Repression may permit more state growth, but it also may convince more producers that the (now greater) cost of the state exceeds the cost of defensive coercion against it.(8) Like all parasites, the state is based on a contradiction — it cannot grow unless its host grows, but the more it grows, the more it reduces the growth of its host. This is directly due to the nature of the exchange its members impose on other individuals. In contrast to voluntary file:///C|/Downloads/Video/Chap43.html (4 of 7) [17-9-2008 17:14:53]

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exchanges, which always enlarge the “value pie” because both parties to the exchange achieve their values, involuntary exchanges are “pie-reducing” — the victim’s values are always lost in a coerced exchange. In other words, the relationship between the state and its citizens is parasitic, not symbiotic. In Chapters 39 and 42, it was pointed out that while there is no one-to-one connection between economic productivity and physical pro ductivity, there is nevertheless a connection because individuals must store [Page 174] energy, which means that they (as a group) must be physically productive because they must replace the stored energy they use up in acting. All living things (except, perhaps, uncoated viruses, but they may not be “living”), in fact, must store up energy at some stage of their life cycle since a living thing is a more ordered structure than the inanimate material from which it is formed. This energy may be stored within the life form itself or it may be external (a burrow, a nest, a nut cache, etc.), but it must be stored. All living things, except green plants and autotrophic bacteria, acquire the stored energy they consume from other living things and are, therefore, in a sense, parasitic. (9) However, a species is “autoparasitic" to the extent that some of its members consume energy stores created by other members of the same species. (10) It is immediately obvious from the Second Law of Thermodynamics (see Chapters 39 and 42) that no species can survive solely by autoparasitism. Just as no animal can live for long by eating only its own body, so no society can last for long if all of its members consume only the energy stores of other members, and no one produces energy stores. The greater the autoparasitism, the closer the brink of extinction. Autoparasitism promotes the survival of a species only when (1) it serves a reproductive purpose (e.g., female spiders who eat male spiders after mating, parents who sacrifice for their children, or reproduction itself), or (2) either the member or his external energy store would not have survived anyway (e.g., animals who consume their young when overcrowding occurs). In all other cases, autoparasitism is destructive — a species that preys upon itself, destroys itself. While the above statements are logically true, one can readily see that they are also empirically true in that nature has generally followed this logic. Conflicts between members of the same species are typically ritualistic, not mortal. The sacrifice of an individual for reproduction is programmed into him, and, to the extent that creatures lack free will, so is consumption of other members or of their otherwise-wasted energy stores. A command society is an autoparasitic society.(11) The more powerful a government becomes, the more the society eats itself. The members of the state often uses the second rational for autoparasitism to justify itself — that, for the “good of the society,” goods must be distributed where they are most needed. This argument fails for two reasons. First, were “better” distributions required for the survival of the species, it is highly likely that the mechanism needed to effect this result would already be built into the species (as an “urge" in individuals), and no coercion would be needed. (Perhaps there is a “charity drive” analogous file:///C|/Downloads/Video/Chap43.html (5 of 7) [17-9-2008 17:14:53]

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to the “sex drive.”) And second, when metaphysically free choices are made, the end is not [Page 175] goods or even the survival of the species, but the achievement of values. The members of the state make metaphysically free choices when they use offensive coercion, and they can never show that the importance of whatever values they act to achieve exceeds the importance of the values they destroy (see chapter on Rights). Next Table of Contents Index FOOTNOTES 1. Franz Oppenheimer, The State Nock, Our Enemy the State 1973). Back

(Free Life Editions, 1975). Albert Jay (Free Life Editions,

2. “I consider that it is a tremendous gain for us to have 700,000 annuitants among the very people who think they have nothing to lose, but who sometimes wrongly imagine that they might gain something by a change. These individuals would lose anything from 115 to 200 marks, which just keeps them above water. It is not much, perhaps, but it answers the purpose admirably.” Bismarck, March 18, 1889. See Brodnitz, Bismarck ’ s National Okonomische Ansichten (Jena, 1902), page 141. Back 3. One must avoid the error of assuming that because the members of the state provide a desired good, the good will not be provided without a state. Aside from the fact that the members usually prohibit anyone else from providing the good (which eliminates invidious comparisons), if an individual can initiate a chain of causation as a member of the state, he can initiate the same chain when he is not a member of the state. He may lack the incentives to do so, but never the capacity, and unless he values the state, as such, more than other values he might be enabled to achieve, he can always be given the incentive. Back 4. Since a tax is spent by the members of the state instead of by the tax victims, other economic theories have difficulty explaining why a tax decrease should be “stimulative.” But in praxeology, a tax rewards members of the state for initiating unproductive (i.e., valuedecreasing) chains, while the non-seizure of taxes rewards productive (i.e., value-in creasing) chains. Back

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5. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Chicago: The University of Chicago Press, 1976), Book I, page 352. Adam Smith was probably refering to physical productivity when he made this statement, but it is also true of economic productivity as all offensive coercive organizations are necessarily economic unproductive because offensive coercion decreases the victim’s values. Perhaps the most important message that economics has for the general public is that offensive coercion is economically unproductive. That is, the end of all human action is to achieve values. All relationships between individuals either (1) increase, preserve, or restore (rightfully-achieved) values or (2) destroy (rightfully-achieved) values. Since values are what human action seeks to produce, offensive coercion, which always destroys rightfully-achieved values, is always unproductive. The state cannot be economically productive. Back 6. This is known as the Laffer Curve, after contemporary economist Arthur Laffer, although the effect has been known since ancient times. [Page 176] Back 7. Butler D. Shaffer, Violence as a Product of Imposed Order for Humane Studies, 1976). This is a brilliant essay. Back

(Institute

8. Strangely, a state can become a self-perpetuating loss even for its own members if members threaten other members should they criticize the organization. For example, if secret police members have the job of killing critical members, including deviating secret police members and deviating leader members, then it may be very difficult to change obviously ruinous policies. Back 9. Erwin Schrodinger, What Is Life? Company, 1945), 75. Back

(New York: The Macmillan

10. Arthur Koestler, The Ghost in the Machine (Chicago: Henry Regnery Company, 1967), 302. Back 11. Murray N. Rothbard, The Ethics of Liberty (Humanities Press, 1982), 49. Back [Page 177]

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Chapter 44 MONOPOLY The most obvious way for the members of the state to achieve their values through offensive coercion is to simply seize the goods related to those values from the host population. This is called “taxation,” “eminent domain,” “fines,” “public access,” “equal employment opportunity” and so on, but it differs from theft only in that it is done by the members of the state instead of by other individuals. A tax increases the cost of achieving a particular value. As a result, the taxpayers fail to achieve values they otherwise would have achieved, while the tax consumers — the members of the state and their supporters — achieve values they otherwise would not have achieved. While the members of the state may use offensive coercion to simply seize the goods of their victims and not concern themselves with the choices made by their victims, a more subtle and less noticeable method of plunder is the monopoly.(1) Theft by monopoly occurs when the members of the state threaten other individuals with additional costs should they choose to engage in proscribed exchanges, so that the probable gain from the proscribed exchanges falls below the probable gain from less desirable but non-proscribed, or less proscribed, exchanges, which are either with the members of the state themselves, their supporters, or other individuals the members could not avoid benefitting.(2) A good way of looking at a monopoly is to consider a value that can be achieved either by a chain from producer A or a chain from producer B. [Page 178] In the absence of a monopoly, the two producers each produce a portion of the chains that lead to the value, each producer charging a price that he believes maximizes his probable gain. The members of the state then use offensive coercion to raise the cost to producer B, or to his customers, of achieving the value with chains initiated by producer B, but not with chains initiated by producer A. If producer A believes his probable gain is now greater at a higher price, then he raises his price, very likely turning over a portion of his increased gain to the members of the state as payment for enabling him to fleece his customers. When coercion influences a substitution of exchanges, there is always both a gain and a loss that would not have otherwise occurred, though they need not be equal. The monopoly gain is the additional gain the privileged individuals, the monopolists, acquired by reason of the exchange that would not have been made had there been no offensive coercion. The monopoly loss for the disadvantaged competitor is the gain he would have acquired from the proscribed exchange had there been no offensive coercion and the more costly exchange with file:///C|/Downloads/Video/Chap44.html (1 of 7) [17-9-2008 17:14:56]

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the monopolist had not been made. The monopoly loss for the buyer from the monopolist is the gain he would have made from the exchange with the now-outlawed competitor, less the gain he made from the exchange with the monopolist. If one individual acquires a monopoly gain (or loss), then those individuals with whom he exchanges, but with whom he would not have exchanged had he not had the monopoly gain, also acquire monopoly gains (or losses), though usually they are smaller. While it is impossible to know what exchanges the privileged or excluded individuals would have made had they not acquired the monopoly gain or suffered the monopoly loss, since no one can know their unmade choices ,one can say that the offensive coercion enables the beneficiaries of the monopoly to achieve values they would not otherwise have achieved, and prevents the parties to the proscribed exchange from achieving values they otherwise would have achieved. The monopoly loss can be realized in several ways. First, the good sold by the monopolist might achieve value A, while the good sold by his now-outlawed competitor might achieve values A and B. The buyer then perceives the monopolist as producing goods of poorer quality, since he has now lost value B.(3) Since it is extremely unlikely that all individuals will consider the goods of monopolists and their disadvantaged competitors to be interchangeable, monopolies will, virtually without fail, result in a loss of quality. Second, since at least some of those buyers who lost value B may not buy from the monopolist because value C, sold by others, is preferred to value A (though not to values A and B), total demand for goods that achieve value A may fall. But if some of the victimized seller’s customers [Page 179] now buy from the monopolist, the demand for his good will increase. If the monopolist believes that, because of the increased demand and/or the absence of other sellers, he can acquire a higher gain at a higher price (see Law of Supply and Demand), the price will rise. Thus, monopolies are almost invariably associated with lowerquality goods at higher prices. There is a monopoly gain only if the gain is imputable to the use of coercion. The gain is imputable to the use of coercion if, in the absence of the coercion, it would not have been made. If competitors organize to fix prices, and are thereby able to increase their profits, the increased profits are imputable to the organization (whose stock increases in value), not to coercion, and are therefore not monopoly gains. That is, selling as an organization is a better business structure than selling as separately managed units. Similarly, the profits of an individual who “corners” the stock of a particular good, such as aluminum, which, when singly-owned is more valuable than separately-owned, are imputable to single-owner ship, not to coercion. (4) Since one cannot know what exchange would have been made in the absence of the offensive coercion, a monopoly gain is not measurable, though it is no less real. The goods willingly sacrificed by beneficiaries of the monopoly to protect their monopoly gains, however, is their minimum estimate of the magnitude of the present value of expected future monopoly gains, file:///C|/Downloads/Video/Chap44.html (2 of 7) [17-9-2008 17:14:56]

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and these sacrifices are often immense. The monopoly gain need not be realized as a profit, but can instead be realized as a smaller loss. If the difference between revenue and cost is marked on the scale (below) both in the presence of the coercion and in the absence of the coercion, then the difference between the two gains is the monopoly gain.

In the example given above, coercion reduces a loss from 4 units to 1 unit for a monopoly gain of 3 units. The offensive coercion that influences the substitution of exchanges may either impose a cost on B or on C if the B-C exchange occurs, or it may impose a cost on C if the A-C exchange does not occur. The cost may be sufficient to influence all B-C exchanges to cease or it may simply reduce the number of B-C exchanges. If the number of B-C exchanges is reduced, the exchanges still occurring may be open, or, if B and C find the probable gain from secretly defying the coercion to be greater than the probable gain from an open exchange, a “black marker” may develop. If the sale of a particular good is prohibited, those who sell (legal) substitutes or sell the good on the black market will gain, though only the former are usually the intended beneficiaries of the offensive coercion, and those who would have sold the good will lose. Examples include prohibiting the sale of “unsafe" or “poor quality” cars, food, housing, or whatever, which creates a monopoly gain for the sellers of “safe” or “better” goods. Another example is the drug laws, which prohibit the sale of cheap, natural pleasure drugs (e.g., marijuana and opium), creating monopoly gains for the sellers of expensive synthetic pleasure drugs (e.g., Valium). If the sale of a particular good is prohibited in a particular territory, the monopoly gain is acquired by those outside the territory who sell the good, and by those inside the territory who sell (legal) substitutes for the good or sell the good on the black market. An example is a law creating a “dry” liquor community that may give a monopoly gain to liquor sellers in the next “wet” community and to the sellers of other goods in the dry community.(5) Coercion that prohibits sale at particular times, such as Sunday Blue Laws, which prohibit liquor sales on Sunday, or which increase the cost of selling at a particular time, such as laws requiring time-and-a-half or double-time wages, creates a monopoly gain for those who prefer to sell at the legal or low-cost times, and for those who are still allowed to sell at the high-cost times, and create a monopoly loss for those who would have bought and sold at the high-cost times had it not been for the coercion.

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If the prohibition is against selling more than a particular quantity, then the sellers of the limited quantity will acquire a monopoly gain by way of a higher price, to the extent that buyers are willing to pay a higher price and sellers realize this (see Chapter 34). The buyers and those who would have sold the additional quantity suffer a monopoly loss. Such restrictions are common in agriculture, where the members of the state [Page 181] force some farmers to let food rot in order that the privileged farmers may capture monopoly gains. The use of coercion to prevent competition for profits is often called the absence of “free entry.” This can be accomplished directly by prohibiting the non-privileged individual from buying factors or selling products, or indirectly, by regulations and taxes that fall more heavily upon the non-privileged individuals. Examples include import restrictions, unions,(6) the licensing of the professions, regulated industries where permission is required for new entrants, and immigration restrictions. Other examples include monopolies by members of some state governments on liquor, gambling, and utilities, the monopoly by members of the federal government on money, and the British salt monopoly in India which Gandhi broke. Particularly interesting examples of denials of free entry can arise from victimless crime laws, which may be selectively enforced against newcomers, leaving established traders with immense monopoly profits. Especially in drug trafficking, organized “crime” can wipe out any competition with a phone call to the members of the state, provided anti-drug politicians are elected and the drug laws are enforced.(7) It goes almost without saying, of course, that a for the use of the share of the monopoly gain is the quid pro quo offensive coercion by the members of the state against potential competitors. Monopoly gains and losses continue as long as the offensive coercion that influences individuals to alter their exchanges continues. But a monopoly profit continues only as long as coercion influences individuals to forego competing for that profit, i.e., there is no free entry. For example, assume that a law is passed that outlaws the sale of product, resulting in profits for those who supply substitutes (e.g., the outlawing of marijuana, which increased the profits of tobacco growers and cigarette manufacturers). As long as anyone is free to sell those substitutes, the profits will tend to go to zero (see Chapter 37), but the monopoly gains will continue because gains are being made that would not be made in the absence of the coercion. When free entry is denied, however, the monopoly profits continue indefinitely. This is why businessmen and unions have been the principal proponents of government regulation and are terrified of deregulation, which would wipe out their monopoly profits. If the privilege of acquiring the monopoly profit can be exchanged, however, the privilege “captures” the expected future monopoly profits and sells for their present value, converting the discounted stream of expected monopoly profits into a monopoly gain. For example, in New York City, one must buy a “medallion” (which may sell for $50,000 or more on the market) for the privilege of producing cab service.

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Chapter 44

The difficulty in exposing and halting this vicious exploitation is [Page 182] that the monopoly gains are usually concentrated while the monopoly losses are widely dissipated. Moreover, monopoly gains are goods that are acquired that will not be acquired should the monopoly be terminated, but monopoly losses are lost opportunities to gain goods, and few of the victims realize that they ever suffered a loss because the offer to exchange with them is never made. Next Table of Contents Index FOOTNOTES 1. One can forcibly steal either by taking without consent (i.e., slavery, fraud, taxes, and so on), or by monopoly — using offensive coercion to prevent someone from being able to choose a “better deal," A common definition of a monopoly is a single seller of a good for which there is no close substitute. But whether a seller is a single seller or not depends upon whether buyers regard his goods as the same or different from the goods of others. Two goods are “the same” if they achieve the same values, otherwise they are “different.” Thus, a diamond ring could conceivably be the same good as a horse if the buyer thinks they will achieve the same value (e.g., impressing a girl friend, perhaps). A seller could go from monopoly to non-monopoly or vice versa as the values of buyers change, without his sales changing at all. Similarly, whether a good is or is not a “close substitute” depends on whether buyers regard it as such, not on its physical nature. For this reason, that definition is useless for praxeological analysis. Back 2. Some economists label all command societies “socialism.” If the members of the state are the monopolists, it is called “communism”; if others are the monopolists it is called “fascism”; and if no one is a monopolist, it is called “feudalism." Back 3. An excellent example of this perceived loss of quality occurs when a government seizes a monopoly on money. Free-market money, typically gold or silver, serves the value of being acceptable in exchange as well as other values such as being limited in supply, which helps to preserve its value. Government fiat money, however, serves primarily only the first value, of being acceptable in exchange, and is therefore perceived as being of lower quality. Back 4. Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 1970), Chapter 10. Back file:///C|/Downloads/Video/Chap44.html (5 of 7) [17-9-2008 17:14:56]

Chapter 44

5. An interesting example arises when the members of a state (the “colony”) use open offensive coercion to prevent people outside the territory they control from trading with their host population without their permission, an activity known as “smuggling.” Exchanges across the border must be made with a monopolist, who will buy the goods of the host population at prices below those of his now-excluded competitors and sell goods to the host population at prices above those of his now-excluded competitors. The members of the colony state, if they are not identical with the monopolist, sell the monopoly to the monopolist in return for a share of the monopoly profits. If prospective monopolists simply bid for the monopoly, the price of the monopoly will tend to rise to equal the present value of the expected monopoly profits, offsetting the monopoly profits. But if [Page 183] the monopolist need not pay for the monopoly, he can acquire monopoly profits in addition to monopoly gains. This is possible when members of a second state (the “empire”) purchase the monopoly for the monopolist and pay for it with goods seized from their host population (i.e., “foreign aid”). The payment to the members of the colony state, for the privilege of trading with their host population. may consist of military aid to help the members of the colony state exclude non-privileged buyers and sellers, or to suppress defensive coercion or smuggling by its host population. The monopolist then shares the monopoly profit with the members of the empire state. Thus, the host populations of both states are exploited for the benefit of the members of both states and the monopolist. This cozy arrangement is not seriously threatened by a change in the membership of the colony state, as long as the new members of the colony state are not identical with the traders in the colony state. But if the members and the traders are identical, then the members will simply buy from the lowest-priced sellers and sell to the highest-priced buyers, and the monopolist and the members of the empire state will lose the monopoly profit. The identity of the traders with the members of the colony state occurs only when the new state is communist or fascist, and particularly communist, where the members of the state have more complete economic ownership of the goods being traded (see note 3 on page 160). Because communism and fascism make the members of the colony state identical with the traders, and therefore obliviate the monopoly profits, the monopolist and the members of the empire state may be expected to devote considerable resources to prevent communist or fascist takeovers in their “client” countries. (In addition, communists may seize legal ownership of the monopolist’s property as well, further increasing his loss.) Prior to the American Revolution, the English rulers excluded merchants from other countries from trading with the colonies, to the great advantage of their own merchants. More modern examples can also be cited. If the empire state is communist or fascist while the colony state is not, the members of both states can still acquire a monopoly profit by exploiting the host population of the colony state, forcing them to sell low to and buy high from the members of the empire state. If both states are communist or fascist, exploitation by monopolization of the trade across the border is not possible. Instead, the exploitation is the result of the intranational monopoly of the members, who prevent the host population from exchanging with anyone inside the borders (at least for file:///C|/Downloads/Video/Chap44.html (6 of 7) [17-9-2008 17:14:56]

Chapter 44

some goods) except on terms set by the members of the colony state. Of course, the members of the colony state “buy low and sell high.” This form of exploitation usually necessitates the physical containment of the host population within the borders of the territory controlled by the members. Back 6. People who loathe monopolies often seem to have a blind spot when it comes to labor monopolies, otherwise known as “unions.” Their sympathies clearly lie with the monopolists instead of with their many victims — the employers, the customers, and especially the excluded sellers of labor, who must not only accept less desirable jobs elsewhere, but are branded with the hateword, “scabs.” Back 7. This symbiotic relationship between sub rosa organized crime (the Mafia) and open organized crime (the state) is an uneasy one, since the members of each organization claim the exclusive right to plunder the same victims. Thus, assassinations (e.g., the Kennedys’?) and “wars on crime” may alternate with peaceful cooperation. [See John Helmer, Drugs and Minority Oppression (New York: The Seabury Press, 1975), 104, 136, 138, 139.] More feared by the members of the state than any underground competitors, however, is a society with a smaller state or no state. Not only is such a society a magnet for the [Page 184] productive individuals the members of the state need to maintain their parasitic existence, but it demonstrates the lack of need for a state, indeed, the harmfulness of a state, and destroys all the propaganda efforts by the members of the state to subdue their victims. [See John Hospers, “Conservatives and Libertarians: Differences of Theory and Strategy,” Modern Age , Vol 25, No. 4 (Fall 1981), 369—380.] Back [Page 185]

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Chapter 45

Chapter 45 THE PRICE CONTROL LAWS When the price of any object is legally fixed below the charges of its production, the production of it is discontinued ..."

(1) —Jean Baptiste Say

The Price Control Laws arise when an individual, almost invariably a member of the state, proscribes exchanges of a good above (the Shortage Law) or below (the Surplus Law) a particular price, the “legal price.” Offensive cognitive coercion is used to convey knowledge to an individual that non-cognitive offensive coercion will be used (i.e., he is threatened), if he trades a particular good above (or below) the legal price. The Shortage Law states, “if an individual is willing to sell a good at price X but is not willing to sell the good at a lower price Y , and he is threatened if he sells the good at a price greater than Y with the loss of a value more important to him than the value he believes he will achieve by selling the good at a price greater than Y , then he will not openly sell the good at a price greater than Y .” Since, under the conditions of the Shortage Law, an individual will not sell the good, it also follows that neither will he produce it for sale at the legal price. If a sale occurs it will not be “open,” i.e., it will be concealed from those making the threat, and a “black market” will arise. A failure to sell, however, does not necessarily result in excess demand. There will not be excess demand, for example, if sellers overestimate demand and the threat merely reduces excessive supply so that it is still equal to or greater than demand. A “shortage” does not exist, in the absence of a threat, simply because the quantity demanded at a particular price happens to exceed the quantity supplied. Excess demand may be (see page 126) only the result of poor entrepreneurship because the seller did not correctly anticipate the choices that buyers would make. Even when a seller deliberately under-supplies because he will suffer large losses if goods go unsold, it [Page 186] is poor entrepreneurship, not a shortage. A shortage results only when a threat influences sellers to forego asking a price above the legal price, and they choose not to sell at the legal price, leaving a market that cannot be “cleared.” There is no shortage unless at least part of the excess demand is imputable to the threat (i.e., in the absence of the threat, that part of the excess demand would disappear).

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Chapter 45

Some economists have argued that even if the legal maximum price is above the trade price, offensive coercion may still alter the choices individuals make and eventually result in a shortage. (2) For example, if the legal maximum price is fifty dollars and the trade price is forty-eight dollars, some sellers may forego producing and later exchanging at forty-eight dollars because the possibility of obtaining the prices higher than fifty dollars has been threat (e.g., “If eliminated, thus lowering the probable gain. While that may occur, any you use non-union labor, we’ll close you down.”), may result in reduced production, a smaller supply, and higher probable gains at a higher price. Unless a threat influences a seller to not sell at the legal price, and demand then exceeds supply, there is no shortage. In a free society, such a threat would have to be concealed, for it would subject the rightviolator to defensive coercion were it to be made openly. But in a command society, the threat can be made openly and the right-violator may escape defensive coercion against him. Examples where the members of the state have fixed a maximum price, resulting in a shortage, are easy to find (3) (e.g., rent control laws — shortages of rental units, oil price controls — the 1974 gasoline lines, usury laws — the absence of legally-available funds for borrowing, creating a black market, e.g., loan “sharks”) but a particularly interesting example is Gresham’s Law, loosely stated as “bad money drives out good money." (4) The effects of Gresham’s Law are observed only in the presence of a statuatory law that specifies an exchange price between two monies.(5) In Gresham’s Law individuals refuse to sell “good” money (i.e., money that, in the absence of the exchange law, could be exchanged at more than the legal exchange price) at the legal maximum price, and instead offer “bad” money (i. e., money that, in the absence of the exchange law, could not be exchanged at the legal exchange price). As a result, of course, the “good” money disappears from circulation. For example, the law might specify a price of fifteen pesos per U.S. dollar. If the black-mar ket price is above fifteen, a shortage of dollars (a surplus of pesos) arises, and if the black-market price is below fifteen a surplus of dollars (or a shortage of pesos) is created. The disappearance from circulation of all silver dimes, quarters, half-dollars, and dollars is a good example of Gresham’s Law at work. [Page 187] The Surplus Law is, “if an individual is willing to sell a good at price X , but can not sell the good at higher price Y , and he is threatened if he sells the good at a price less than Y with a loss of value that is more important to him than the value he believes he will achieve by selling the good at a price below Y , then he will not openly sell the good at a price below Y .” Again, if a sale occurs it will be concealed from those making the threat, or at least the actual price will be concealed (i.e., the seller will secretly give the buyer a rebate). Sellers will not produce if they expect no buyer, but if sellers have a stock of the good that they wish to supply at the legal price but cannot find a (willing) buyer, there will be a surplus. If the members of the state buy the surplus at the legal price, they, in essence, use offensive coercion to force unwilling individuals in the host population to purchase the good for them. Examples of price control laws that have created surpluses include pro-union laws and the file:///C|/Downloads/Video/Chap45.html (2 of 4) [17-9-2008 17:14:58]

Chapter 45

minimum wage law that create surplus labor (i.e., “unemployment”),(6) ICC railroad rates that created excess car capacity, and agricultural price supports that created crop surpluses. Next Table of Contents Index FOOTNOTES 1. Jean Baptiste Say, A Treatise on Political Economy M. Kelley, 1964), 291. Back

(1880) (Fairfield, N.J.: Augustus

2. Rex L. Cottle and Myles S. Wallace, “The Nearly Invisible Hand,” The Journal of Libertarian Studies , Vol. V. No. 3 (Summer 1981), 341—343. Back 3. Robert L. Schuettinger and Eamonn F. Butler, Forty Centuries of Wage and Price (The Heritage Foundation, 1978). Back Controls 4. Raymond de Roover, “Gresham on Foreign Exchange,” (Cambridge: Harvard Univer sity Press 1949), 91 to 93. Back

,

5. Hans F. Sennholz, The Age of Inflation (Western Islands, 1979), 165. Back 6. An interesting question arises as to whether there is a conflict between the Law of Profits, the Zero Profit Law, and the Price Control Laws. The Law of Profits implies that a factor will not be paid more than the (discounted) value of his marginal product, and the Zero Profit Law implies that factor payments will tend to equal product prices under some conditions. But under the Price Control Law, a minimum wage law will raise the wages of the workers who are not fired. Why were they not paid the value of their marginal product before the minimum wage law was passed? The answer is that they may have been, but that the minimum wage law, by reducing the number of workers, has increased the value of the marginal product of the remaining workers. It is an application of the Law of Diminishing Returns (see page 23), that output per worker is higher with fewer workers because other factors are imperfect substitutes for workers. Back file:///C|/Downloads/Video/Chap45.html (3 of 4) [17-9-2008 17:14:58]

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[Page 188]

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Chapter 46

Chapter 46 THE DISCRIMINATION LAW The relative importance of values is an ultimate given, and praxeology has no ethical statement to make about the choice of values. One may not like the preferences of others for male waiters with French accents, pretty female stewardesses, white neighborhoods, or black colleges, but it is not logical to condemn the choice of a seemingly arbitrary value, such as a particular race or sex, since all values are “arbitrary” in that choice is physically undetermined. To condemn preferences for particular races, sexes, or whatever, is to stand in judgment of the values of others, and that is outside the scope of praxeology. For the same reason, praxeology is silent as to the ethics of acquiring goods required to achieve any particular value, and of the ethics of producing those goods for others. If customers discriminate on the basis of race, sex, etc., then producers will very likely discriminate on the same basis, provided that the customers are willing to pay for any added costs the producers incur due to the discrimination. But the interesting question is whether producers will discriminate when customers do not discriminate. The Discrimination Law states, “if a producer for non-discriminating customers chooses to maximize profits, then, unless there is no price competition, he will discriminate between suppliers selling the same good, and between customers buying the same good, only on the basis of differences in prices.” If a producer chooses to maximize profits, then, unless there are no differences in price, he will not discriminate, i.e., he will choose the lowest-cost supplier and the highestpaying customer, regardless of their race, sex, and so on. Clearly a producer cannot be a profit maximizer if he buys and sells on the basis of race, sex etc. instead of on the basis of price. Liberals cannot condemn businessmen both for maximizing profits and for discriminating, because they are inconsistent. A profit-maximizing producer for non-discriminating customers may prefer to buy labor from or sell credit to members of a particular class if he believes that members of that class are more productive or more [Page189] credit-worthy than members of other classes. But here the producer does not believe that he is buying or getting paid the same good (see Chapter 23 for the meaning of “same good.”) If members of the class would guarantee the producer the same productivity, or the same loan repayment rates as non-members of the class, the producer would buy the cheapest labor and loan to the highest interest payer, as the Discrimination Law requires. Similarly, if a producer believes that an all male or an all female work force is more productive than a mixed work force, the goods are not the same. Nor does it violate the Discrimination Law for such a producer to treat all members of an easily distinguished, but more costly, class (e.g., teenagers) alike, even though particular members of that class may be superior, when the cost of identifying those members and the additional cost of the risk of error exceeds the expected additional benefit, because, again, the goods are file:///C|/Downloads/Video/Chap46.html (1 of 4) [17-9-2008 17:15:00]

Chapter 46

not the same. If the identification of the superior members is made for the producer, or the additional risk is insured, so that the goods are the same, he will not discriminate. Here is where supply and demand curves are useful as pedagogical devices (see Chapter 32). To the extent that the conditions of the Law of Quantity Demanded exist, at the moment of choice (or over time if values stay constant), the demand curve will be downward-sloping and the supply curve will be upward-sloping. In a free market, a producer cannot engage in discrimination between suppliers selling factors to him, or between customers buying products from him, without incurring an added cost. If the suppliers from whom a producer buys consist of two classes (e.g., male and female workers selling their labor), and the members of both classes are selling the same good, then a producer who limits his purchases to one of those classes must pay a higher price than a producer who selects from both classes. [Page 190] The quantity A of labor sold at wage P1 consists of B units of male labor plus C units of female labor. A producer who buys only male labor must pay price P2, which is greater than the price P1 which he would pay if he did not discriminate. Similarly, a producer who engages in discrimination in selling to only one class of customers (e. g., whites instead of blacks) necessarily receives a lower price for his product. The quantity A demanded by all buyers consists of the quantity B demanded by whites plus the quantity C demanded by blacks. A producer who discriminates by selling only to whites (e. g., he rents apartments only to whites) will necessarily receive a lower price, P2, than the price, P1 he would have received had he not so discriminated. The above analysis is true even where the producer has a monopoly — even the owners of a monopoly will incur a cost if they discriminate. However, the members of the state, who create and enforce the monopoly (virtually invariably in return for a share of the monopoly gains) may value discrimination by the monopolist more than the cost of discriminating. In that case, as long as the monopoly gain exceeds the loss from discrimination, the owners of the monopoly will seek to preserve their monopoly by discriminating to please the members of the state, who could vitiate the monopoly. For example, if the Post Office monopolists hire the friends of politicians instead of selecting the best employees at the lowest wage, the monopoly gain will fall, but that is of less value than protecting the monopoly. For this reason, discrimination in government and other monopolies on the basis of race and sex has always been [Page 191] extensive;(1) discrimination in the private sector, on the other hand, has file:///C|/Downloads/Video/Chap46.html (2 of 4) [17-9-2008 17:15:00]

Chapter 46

been minimal, except where it is required by members of the state for the benefit of a privileged class, (e.g., Jim Crow laws, apartheid, Affir mative Actions laws) or where price controls render it costless (see follow ing discussion). It is only when all suppliers or customers cannot or will not sell or buy except at the same price, i.e., when there is no difference in price, that a profit-maximizing producer can indulge his prejudices without sacrificing any profit. By the Law of Choice (see Chapter 26), if an the individual has a choice of acquiring a profit or of acquiring the same profit and value achieved by discriminating, he will choose the latter. Price competition can be absent for two reasons. First, the suppliers or the customers may, by accident or by intention, refuse to sell or buy except at one price (e.g., union supplied labor). In that case, should their supply or demand exceed the producer’s demand or supply, they have no one to blame but themselves when the producer picks his favorites. The second reason for the absence of differences in price is the existence of open offensive coercion in the form of a price-control law, which imposes additional costs on anyone selling (or buying) above or below a legal price (see previous chapter). The absence of differences in price means that the cost of discriminating is zero. Suppose a price-control law holds the price above what the price would otherwise be, and creates a surplus (see Chapter 45). At the legal price, the suppliers want to sell A units, but the producers only want to buy B units. Since there is a surplus of A minus B units, a producer can discriminate in choosing between the suppliers of the A units, and it won’t cost him a dime because he has to pay the legal price regardless of from whom he buys the factors.(2) [Page 192] Similarly, if the offensive coercion sets a legal price below what the price would otherwise be, and creates a shortage, the producer wants to sell only A units but his customers want to purchase B units. The producer can engage in discrimination in deciding to which of his customers he will sell the A units, and it won’t cost him a dime because he cannot obtain a higher price from the excluded customers. (3) Next Table of Contents

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Chapter 46

Index FOOTNOTES 1. Thomas Sowell, Markets and Minorities (New York: Basic Books, Inc., 1981), 46—50. Widespread discrimination in government, especially at the higher policy-making posi tions, is no accident. In order to preserve or enhance his power, a person who achieves his values by open offensive coercion against others must often delegate some of his power. The delegee must necessarily be a person who is not only willing to gain from offensive coercion, but who either has, or soon will have, the knowledge to use this power successfully. An “unscrupulous” delegee who might supplant his boss may be more of a threat to his boss than the victims of the coercion. Thus, delegees must be selected according to the likelihood that they will place other values above the values the additional gains they could acquire from (unwillingly) supplanting their bosses. Such other values include those of group cohesiveness as evidenced by similarities in physical appearance, dress, accent, languge, birthplace, nationality, ethnicity, race, religion, sex, school, etc. Discrimination enhances loyalty. Mancur Olson, The Rise and Decline of Nations (N.J.: Yale, 1982). Back 2. Markets and Minorities

, 40. Back

3. Ibid., 41. Back [Page 193]

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Conclusion

CONCLUSION It is hoped that this book presents the geometry of praxeology with sufficient clarity to enable the reader to understand it. No doubt the deductions I have made are not exhaustive, though I pray they are correct, and the reader may be able to make many other interesting deductions. One can certainly argue that many of the deductions are too obvious to be labelled “laws,” while others, not so labelled, are too important to be merely described; this is a matter of opinion. Next Table of Contents Contact the author This book may be purchased at XLIBRIS [Page 195]

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Appendix A

Appendix A THE OBSERVER-ATTRIBUTE INTERFACE Since an observer is not physical, yet can both experience and change the physical, there must be an observer-attribute interface. The observer is aware of attributes at that interface as sensations, but some sensations may also have concepts “attached” to them. If an observer creates a concept, the concept is attached to attributes called “symbolic attributes.” When a symbolic attribute appears at an observer-attribute interface,(1) the observer becomes aware of the concept he attached to it. The observer can cause the symbolic attributes to appear at the observer-attribute interface by an act of will,(2) but other attributes in the observer’s body (i.e., dreams) or environment (i.e., a conceptual stimulus) can also cause sym bolic attributes to appear at the observer-attribute interface. There are, then, two kinds of attributes — those to which concepts are attached (symbolic attributes) and those to which concepts are not attached (real attributes). The same attribute can function as either a symbolic or as a real attribute, depending on its relationship to the observer at that time. For example, brain tissue, when it stores concepts, performs as a symbolic attribute, yet it is a real attribute to a brain surgeon. Obviously, the observer must be able to distinguish attributes at the observer-attribute interface which arise from “real” experiences and those which arise from recalling concepts. That is, he must be able to distinguish between real and symbolic attributes. This can be accomplished either by using a single observer-attribute interface and “tagging” the attributes, which cause either the real or the symbolic experience, or it can be accomplished by using two observer-attribute interfaces, one for the real experiences and another for the symbolic experiences. If the mechanism of distinguishing the two types of attributes fails, the observer will halluci nate or become psychotic. The ability to store and recall experiences implies that the observer’s symbolic attributes cannot normally be experienced as real attributes in addition to being experienced as symbolic attributes, because if he could [Page 197 ]also experience the symbolic attributes as real attributes, he could not determine if the experience was real or symbolic. For example, if the concept “lion” was attached to the attribute that a rock caused at the observer-attribute interface, then when he experienced a real rock, he would not know if it was real rock or only a concept of a lion. It is, perhaps, for this reason that brain tissue can be injured without pain. Also, an observer’s brain (i.e., his collection of symbolic attributes) must be constructed so that a real attribute cannot normally cause only symbolic attributes to appear at the interface, because an observer could then not distinguish between the real experience and the symbolic experience. The appearance of a real attribute at the interface may, however, also cause the appearance of a symbolic attribute at the interface. That is, for example, if an odor file:///C|/Downloads/Video/AppendixA.html (1 of 2) [17-9-2008 17:15:02]

Appendix A

is experienced only as “Mom’s pie,” one could never tell that an odor was experienced; it must be experienced as an odor, which then causes the symbolic attributes for “Mom’s pie” to appear at the interface. A real attribute can be experienced only as a concept only by an abnormal, sensory-bypassing procedure, as when an electrode inserted into the brain causes a person to recall memories. Next Table of Contents FOOTNOTES 1. One should not necessarily view the interface as being in a fixed physical location, with the attributes being changed at it. Rather, it can also be viewed as moving through symbolic attributes that are fixed, or as a combination of these two possibilities. Back 2. Since an observer can formulate a statement of a law, he must be able to create and recall those concepts that appear in that statement, which means that he can also cause the symbolic attributes to which the concepts are attached to appear at the interface. This means that to be an observer, a concept-creator, is to be volitional, because the creation and recalling of a concept causes attributes to change at the interface. Back [Page 198]

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Appendix B

Appendix B THE LAW OF COMPARATIVE ADVANTAGE Because choice is undetermined, any two individuals are capable of different acts — they need not initiate the same chains. That is, if units of two different goods are desired by two or more individuals, each individual can specialize in the production of one of the goods and exchange for the other. By Menger’s Law, they will do so whenever they both believe that, by doing so, they can each achieve more preferred values. Specialization and exchange will obviously benefit both individuals (ignoring transaction costs and assuming equal unit costs for producing varying quantities), whenever each producer is superior to the other in producing one of the goods. That is, specialization increases output whenever the price of one good is high to one individual and low to another, and vice versa for a second good. This is the Law of Superior Advantage, “if two goods can each be produced by either of two means, and each means is superior in producing one of the goods (i.e., the ratio of units of one good produced per units of cost is higher), then more units of both goods per unit of cost can be produced by specialization.” The means may be epistemically correlated (see Chapter 7) with the labor of two individuals, the use of two capital goods(1) possessed by the same individual, or a complex mixture of both. In the Law of Superior Advantage, factors are the atomic existents which can be moved through at least two “transformation spaces,” (i.e., the “means”), each of which can combine them in at least two ways, forming at least two products. The variables are the quantities of factors that pass through the different transformation spaces and the quantities of the different products that result. The constraints, the “givens,” are the ratios of quantity of factors to quantity of products for each way that they can be combined in each transformation space. (see page 25) While the law is rather obvious, it is not so obvious that there are conditions under which output can be increased by specialization when one means is the superior producer of both goods. The Law of Comparative Advantage(2) states that even if one means [Page199 ]is superior in producing both goods, output can still be increased by specialization when there is a comparative advantage. A formal statement of the law is, “if two goods can each be produced by either of two means, one of which is superior in producing both goods, and there is a comparative advantage (i.e., the ratio of units of good A per unit of cost to units of good B per unit of cost for one means is not identical to the ratio of units of good A per unit of cost to units of good B per unit of cost for the others means), then more of both goods per unit cost can be produced by specialization.” Again, the means may be capital goods or the labor of individuals or both, but the labor of individuals will be used in the discussion that follows. It is file:///C|/Downloads/Video/AppendixB.html (1 of 4) [17-9-2008 17:15:04]

Appendix B

possible to prove the law and to determine the number of cost units that each individual should devote to the production of each good to maximize output of the goods per unit of cost. (The cost may be any good that must be sacrificed to produce the two goods, for example, dollars, hours of labor, tons of coal, watts, etc.(3)) Let us call the two individuals “Friday” and “Crusoe” and the two goods “fish” and “coconuts.” Friday can produce “a ” units of fish per unit of cost and “b ” units of coconuts per unit of cost. Crusoe can produce “c ” units of fish per unit of cost and “d ” units of coconuts per unit of cost. If a > c and b > d , then Friday is more efficient in producing both goods. If a /b < c /d , then Friday has a comparative advantage in producing coconuts, and specialization and trade can increase the quantity produced of both goods, ignoring “other costs.” Let us say that without trade Friday chooses to devote a fraction, m , of each unit of his cost to the production of fish and the fraction, 1 — m , of each unit of his cost to the production of coconuts, where 0 < m < 1. Crusoe devotes a fraction, p , of each unit of his cost to fish and the fraction, 1 — p , of each unit at his cost to coconuts, where 0 < p < 1. Thus, Friday produces am fish and b ( 1 — m ) coconuts per unit of cost and Crusoe produces cp fish and d ( 1 — p ) coconuts per unit of cost. The total fish/coconut ratio, R , is then

(This assumes that Friday and Crusoe each devote an equal number of units of cost to production. If not,

where r

[Page 200] is the ratio of the number of Friday cost units per Crusoe cost unit.)

If Friday has a comparative advantage (in producing coconuts), can he shift units of cost from producing fish to producing coconuts (and vice versa for Crusoe) so as to increase the production of both fish and coconuts? And if so, how many units of cost should be shifted to maximize production, yet maintain the same ratio, R of fish to coconuts? (It is assumed that Friday and Crusoe desire to consume the increased outpout in the same ratio of fish to coconuts that they are consuming their present output.) To find the division of labor that maximizes output at a desired ratio R of fish to coconuts (where “fish” is the good “Crusoe,” the inferior producer, has the least comparative disadvantage in producing), first try letting Crusoe produce only fish (i.e., p = 1), and let Friday devote a fraction file:///C|/Downloads/Video/AppendixB.html (2 of 4) [17-9-2008 17:15:04]

Appendix B

of his time producing fish, and a fraction, 1 — m , of his time producing coconuts. If m is negative, then let Friday produce only coconuts (i.e., m = 0), and let Crusoe devote a fraction

of his time to producing fish, and a fraction, 1 — p

, of his time to producing coconuts.

An example will illustrate this law. Let Friday and Crusoe each choose to work 8 hours (i.e., 8 units of cost) per day and each choose to produce (and consume) equal quantities of fish and coconuts. If Friday can produce 5 fish per hour (a = 5) and 5 coconuts per hour (b = 5) and Crusoe 2 fish per hour (c = 2) and 2 coconuts per hour (d = 2), then in 8 hours Friday will produce 20 fish and 20 coconuts and Crusoe 8 fish and 8 coconuts. No shift of hours from fish to coconuts (or vice versa) can increase total output while maintaining a fish/ coconut ratio of R = 1 because a /b = 5/5 = 1 = b /d = 2/2. Friday has an absolute advantage, but there is no comparative advantage. Now assume Friday can produce only 3 fish per hour (a = 3) and 5 coconuts per hour (b = 5) while everything else remains the same. Since a /b = 3/5 < c /d = 2/2, Friday now has both an absolute advantage and a comparative advantage in producing coconuts. Without specialization and trade Friday will produce 15 fish in 5 hours and 15 coconuts in 3 hours for a total production of 23 fish and 23 coconuts. Now examine the benefits of specialization and trade by solving for [Page 201]

Friday devotes 3/8 of each hour, or 3 hours of every 8, to produce 9 fish and 5/8 of each hour, or 5 hours of every 8, to produce 25 coconuts, and Crusoe devotes 8 hours to producing 16 fish, so a total of 25 fish and 25 coconuts are produced. If Friday trades 9 coconuts for 7 of Crusoe’s fish, he can consume 16 fish and 16 coconuts (instead of 15 each), and Crusoe can consume 9 fish and 9 coconuts (instead of 8 each). Because a comparative advantage existed, it was possible for both individuals to produce more of both goods by specializing. Since the likelihood that a /b will equal c /d is small, comparative advantages are likely to exist for virtually every pair of goods produced. This does not mean that specialization and trade will be beneficial in each case, of course, because transaction costs can exceed the advantage. Also, the cost of producing a good may increase or decrease as more or less of it is produced, thus possibly adversely changing a , b , c , or d . file:///C|/Downloads/Video/AppendixB.html (3 of 4) [17-9-2008 17:15:04]

Appendix B

Next Table of Contents FOOTNOTES 1. Ludwig M. Lachmann, Capital and its Structure (Sheed Andrews and McMeel, Inc., 1978), 79. Back 2. David Ricardo, The Works and Correspondence of David Ricardo , ed. Piero Sraffa (Cambridge: Cambridge Univ. Press, 1951), 134— 135. Robert Torrens, “An Essay on the External Corn Trade” (1815), 264—265, also describes the Law of Comparative Advantage. Back 3. Gottfried von Haberler, Theory of International Trade with its Applications to Commer cial Policy

(London: The Macmillan Co., 1936), 177. Back [Page 202]

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Appendix C

Appendix C SAY'S LAW The total supply of products and the total demand for them must of necessity be equal, for the total demand is nothing but the whole mass of commodities which have been produced; a general congestion would consequently be an absurdity. —Jean Bastiste Say

(1)

In the above quote, Say states that total supply must equal total demand because total demand is the total supply. While this is immediately obvious, it is not in the form of a law. Moreover, its more profound implications occur when one divides all goods into money and (non-monetary) goods. Is there necessarily an equality between money supplied and (nonmonetary) goods demanded that can be stated in the form of a law, Say’s Law? All goods, including money, must be owned by some individual. In Say’s Law goods and money are the atomic existents that are moved through “transaction space,” from one owner to another, the goods moving one way and the money moving the other. These atomic existents have the constraint that they remain the same goods during the journey through transaction space. This means that they have non-createableness and indestructibleness, in that individuals regard them as the same good they bargained for (i.e., if you hand a person five dollars in exchange, it does not magically turn into fifty dollars or one dollar when he takes it). The variables are the quantities of goods and money and the prices of the goods as they enter transaction space. Transaction space has the constraint that the quantities of money passing through it in a transaction must equal the price of the goods times their quantity in that transaction (see page 26). Since that must be true of each transaction, it follows that it must also be true of any sum of transactions. This means as the quantities of money and goods involved in exchanges change, the prices of the goods must change so that the sum of money exchanged for goods equals the sum of the price times the quantity of those goods. Say’s Law is a quantitative economic conceptual law, “as the quantities of money and [Page 203] (non-monetary) goods exchanged changes, the prices of the goods change so that the quantity of money exchanged equals the quantity of goods exchanged times their prices.” This does not mean that if the quantity of a particular good doubles, its price will fall by half, only that the prices of goods as a group must adjust so that the relationship is file:///C|/Downloads/Video/AppendixC.html (1 of 2) [17-9-2008 17:15:06]

Appendix C

maintained. Say’s Law also implies that the money paid to the factors and the entrepreneurs is the very same money used to buy the products, and therefore the money value of the products must adjust to equal the money with which they can be purchased. To paraphrase Irving Fisher, CF = PT , where CF is costs (including profits) for factors (including entrepreneurs), and PT is product prices times transactions. (Payments to tax collectors and other thieves are included with payments to factors and entrepreneurs, along with money created by the central bank and other counterfeiters.) In other words, Say’s Law implies that profits, factor prices, and product prices will always adjust so that profits and factor payments equals product payments. Even when new money enters the economy, as it is spent on products, it is turned over to factors and entrepreneurs. Once the new money is spent, the payments are equalized, even if the new money is fiat money. Thus, there is no need to worry about a general “insufficient demand” or “overproduction,” as they are logically impossible — only specific products can be “overproduced” or “underdemanded,” not all products. Karl Marx’s teaching that a depression occurs when workers (and presumably other factor providers) don’t make enough to buy what they produce violates Say’s Law. Also, if money is saved but not invested, it is not involved in exchanges, and Say’s Law would then require prices to fall. Thus, Say’s Law does not imply a quantity theory of money because it does not describe a relationship between the stock of money and prices, but only between money (see pages 89 and 115) that is exchanged and the price times quantity. Next Table of Contents FOOTNOTES 1. Jean Bastiste Says, Traite , 1st ed., Vol. 11(1803), 175. Also see Jean Bastiste Say, “Letters to Mr. Malthus,” trans. John Richter (Sherwood, Neely, & Jones, 1821). Henry Hazlitt, The Critics of (Arlington House Keynesian Economics Publisherrs, 1977), 11. Henry Hazlitt, The Failure of (Arlington House Publishers, the ‘ New Economics ’ 1977), 32. W. H. Hutt, A Rehabilitation of Say ’ s Law (Athens, Ohio: Ohio U. Press, 1979). Thomas Sowell, Say ’ s Law. An Historical Analysis (Princeton: Princeton University Press, 1972). Back [Page 204]

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Appendix D

Appendix D THE LAWS OF UNCERTAINTY At every instant of time, there exists a particular state of affair, that is, there are particular attributes at particular spatial coordinates. Were there no individuals, physical laws would dictate (at least the probability of) every possible state of affair at each future instant. But if an individual comes into existence, he can choose between (at least) two states of affair, and it is impossible, in principle, to know which state he will choose, or even the probability that he will make a particular choice. Thus, no longer are all future states of affair determined. The number of perceived possible states that individuals can create at any instant is the “uncertainty.” While the number of states that individuals could bring into existence is objective, it is of no praxeological relevance unless an individual determines that number and that knowledge influences him to act. However, not only would it be an almost impossible task for an individual to calculate the number of possible creatable states, even in a very simple society, but, if the individual lacks complete knowledge of the behavior of determined entities, he will not know in advance the physical results of the chains he initiates, and therefore which chains he can initiate from the new states that result. Moreover, many physically different states will be regarded as the “same” (see page 90) by some or all of the individuals, and there is no way for an individual to know which states will be so regarded, even by himself. But when an individual perceives a choice, he necessarily regards the two possible states as being different. The Laws of Uncertainty that follow are not based on physical differences — two states are different to an individual only if he would act one way in one state and a different way in the other. There are at least three Laws of Uncertainty: the Law of Populational Uncertainty, the Law of Temporal Uncertainty, and the Law of Initial Uncertainty. All of these laws are conceptual laws that can be epistemically correlated (see Chapter 7) with people. All of the Uncertainty Laws involve the movement of individuals, the atomic existents, through space and time, which varies the uncertainty (see page 26). The constraints are the number of choices an individual can make from any given position in time and space. [Page 205] Section 1—The Law of Populational Uncertainty The Law of Populational Uncertainty is, “if the number of interacting individuals increases, uncertainty increases exponentially, and if the mumber of interacting individuals decreases, uncertainty decreases exponentially.” If individuals interact, they must regard interacting as file:///C|/Downloads/Video/AppendixD.html (1 of 6) [17-9-2008 17:15:09]

Appendix D

creating a different structure of attributes than not interacting, otherwise they would not interact. When individuals interact, more choices are available to each individual. Two individuals in isolation have limited choices, and so the number of states of affair they can bring into existence is limited. But when the two individuals can interact, each can present a choice to the other (e.g., they can offer to trade) that would not have been available had they not been able to interact.(1) The number of possible states of affair that can come into existence is therefore greater, so uncertainty is greater that it otherwise would have been. The uncertainty increases exponentially as more individuals interact. For example, if four individuals, each having only one choice (2 states) in isolation, begin to interact, then the number of states of affair for the four individuals as a whole would increase from 16 in isolation (2x2x2x2) to 20 when two can interact (the 16 previous states plus the new one between the two interacting individuals in combination with each of the four still isolated states of the other two individuals) to 30 when three can interact (the 16 isolated states plus two-individual and three-individual interactions among three of the individuals with each of the isolated states of the remaining individuals), to 93 when all four interact (too complicated to describe).(2) Thus, the possibility of interactive choices, of free trade betwen all individuals, immensely increases the number of possible states and the likelihood that each individual can choose a more preferred state and thereby achieve a more preferred value. This can be graphed as follows: One may conclude, therefore, that “living standards” (i.e., the degree to which individuals can achieve their values), are likely to be higher in [Page 206] a society where more interactions are possible than in an otherwise “identical” society where fewer interactions are possible, because the additional states may enable individuals to achieve values that they believe other states will not achieve. The law suggests that statutory laws that reduce interactions and increase isolation (such as tariffs, quotas, victimless crime laws, and price controls) will reduce living standards to a greater extent than perhaps was previously thought.(3) The law also suggests that structures that facilitate interactions, such as specialized markets, money, cities, a common language, or a common law, are likely to be generated spontaneously as a means of achieving values to the extent that the addi tional states are preferred to the cost of these structures (see page 76). Section 2—The Law of Temporal Uncertainty It is possible for an individual to find himself in a situation where, at every instant, he can choose only death or a single other event (e.g., while dismantling a bomb or while living under an extremely severe totalitarian government, such as in a Nazi concentration camp, though even here some non-mortal choices would probably still be possible). Such a situation would file:///C|/Downloads/Video/AppendixD.html (2 of 6) [17-9-2008 17:15:09]

Appendix D

look like this: Here, uncertainty = 2, which can be graphed as: An individual forever faced with such choices would have no need for a choosing mechanism, a will, at all, and would be of little praxeological interest. In all situations where death is not the only alternative in every choice, there will necessarily be an increase with time into the future of [Page 207] the number of perceived states of affair and therefore of the uncertainty as to which state of affair will actually be brought into existence. While death may be an occasional possible choice, the average unit in the chain of possible choices will include choices other than death. Because each choice is made from the state of affair that came into existence, the increase in uncertainty as viewed from the present must be exponential as one looks into the future: If avoiding death is not the only choice, “average” uncertainty (i.e., “averaging out” differences in the number of possible choices at each future instant) will increase by more than the power of two, and therefore uncertainty will increase exponentially with time into the future. That is, each time segment farther in time from the present will encompass exponentially more uncertainty than a time segment of equal length that is closer to the present. Of course, as time passes, uncertainty is resolved as particular states of affair come into existence, though the shape of the curve may remain constant. This is the Law of Temporal Uncertainty, “if an individual has choices other than avoiding death, then uncertainty will increase exponentially as time into the future increases." The increase in uncertainty must be perceived by an individual because he exists in a given state of affair faced with a choice between two states of affair, an increase in uncertainty as he looks farther into the future. He may not, however, be sufficient logical to deduce further increases in uncertainty as he looks farther into the future, and may simply see the more distant future as less and less certain, without attempting the analyze the reasons for the increased uncertainty. The law implies that there are more entrepreneurial opportunities as one looks farther into the future. Of course, it may not be necessary to act now to take advantage of a future opportunity. For example, one would not start building a widget factory that takes two years to construct when one does not anticipate a widget fad for another ten years. Greater [Page 208] uncertainty implies greater difficulty in “guessing” which state will come into existence because more choices must be correctly anticipated; thus, rewards for correct anticipation are likely to be greater for long-term projects.

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Appendix D

Section 3—The Law of Initial Uncertainty The Law of Initial Uncertainty is, “if uncertainty increases now, then uncertainty with time into the future increases more, and if uncertainty decreases now, then uncertainty with time into the future decreases more." By the Law of Temporal Uncertainty, the uncertainty-time curve is upward sloping:

The Law of Initial Uncertainty states that uncertainty-time curves do not simply shift vertically with changes in present uncertainty as curve A to curve B:

[Page 209] Rather, a vertical curve movement results in a greater shift farther into the future, so that an array of uncertainty-time curves would appear like this:

The reason this is so is that uncertainty is the number of perceived states of affair that can come into existence. If one begins with a high number of states, then, because the expansion is exponential, one expands faster than if one begins with fewer states. For example, suppose the number of states at t1 is 2 from each of which at t2 2 more states can be chosen, so that there are 4 possible states at t2. Now suppose the number of states at t1 is raised to 3, perhaps due to the abolition of trade barriers, from each of which at t2 2 more states can be chosen so that there are 6 possible states at t2. The gap between the two uncertainty curves has increased from 1 at y1 (3—2) to 2 at t2 (6— 4), and will continue to increase with time into the future. The increased future uncertainty must be perceived by an individual (at least by one who can add) because when he faces a choice, he knows he can increase uncertainty with time into the future. If he faces an additional choice, then, he must know that he can increase uncertainty with time into the future by means of the additional choice. Thus, a single additional choice now creates more than one possible additional future state. The consequences of the law are most interesting. First, as previously explained, there is a direct relationship between uncertainty and entrepreneurial opportunities. An increase in the file:///C|/Downloads/Video/AppendixD.html (4 of 6) [17-9-2008 17:15:09]

Appendix D

number of future choices that can be made, and therefore the number of possible future states, means that an entrepreneur who correctly anticipates which future states will come into existence, can, if he acts on this knowledge, reap rewards to the extent that individuals value the differences between a future state and the obverse future state that he can enable them to choose. For example, an entrepreneur may (correctly) believe that in two years the market price for sugar will triple — that people will choose to buy and [Page 210] sell sugar at three times its present price. If he initiates chains now that will enable him to supply sugar then, both he and his customers may be able to achieve many more of their values. The more choices that can be made, the more uncertainty there is as to which state of affair will come into existence, and the more opportunity there is to achieve values by correctly anticipating that state. Next, the effect on uncertainty of a lowering of the interest rate must be examined. First, consider the case where the interest rate falls because individuals choose to save more or borrow less. This would not necessarily be expected to have a net effect on the number of choices that could be made in the society, and therefore the number of states of affair and the uncertainty would not change. An individual who chooses to save reduces his present choices, but the borrower increases his present choices. It is true that the saver may have had fewer choices than the borrower, but the reverse could as easily have been the case. Now suppose that the interest rate falls because new money is created that is made available for borrowing. Since there are no new savers, no individual has reduced the number of his possible choices. But the new borrowers now have choices that they did not have before. The net number of possible choices in the society increases, the number of possible states of affair increases, and the uncertainty increases. More importantly, by the Law of Initial Uncertainty, the uncertainty farther into the future increases even more, creating even more entrepreneurial opportunities farther into the future.(4) Graphically, if the return-on-investment (ROI) of various projects is randomly (a pure concept) distributed with time into the future, then a lower present interest rate will make the uncertainty-time curve fall below more projects that are farther from the present than projects that are close to the present. Projects 1 and 4, which will be completed soon, will be undertaken at interest rate A. At interest rate B, projects 3, 6, 7, 9, and 10, which are necessarily more into the future, will also be undertaken. This analysis may clarify one of the objections to the Austrian Bus iness Cycle Theory (5) in that it explains why the credit expansion is stimulative, especially to the capital goods industries, but the subsequent collapse is not stimulative, even to the consumer goods industries — the credit expansion increased entrepreneurial opportunity and its cessation de file:///C|/Downloads/Video/AppendixD.html (5 of 6) [17-9-2008 17:15:09]

Appendix D

creased it. Other interesting Uncertainty Laws may also be provable, such as a direct relationship between the expected stability of the uncertainty-time curve and its slope. Next Table of Contents FOOTNOTES 1. This suggests that, aside from other considerations, an individual is more likely to be able to achieve his values when other individuals, with whom he can consensually interact, are present, than when they are not present. Genocide, war, and forced population control will necessarily have a negative effect on the ability of the remaining individuals to achieve their values, though not necessarily a net negative effect. Back 2. This law is analogous to the well-known genetic law that a doubling of the gene pool more than doubles the number of possible characteristics that can be expressed in the population. It is also analogous to the factorial increase that occurs in entropy when the number of states increases. In Boise-Einstein statistics. The number of states is n , the number of cells is g , and K log W is the entropy (K is Bolzmann’s Constant). Back 3. For example, knowledge of the Smoot-Hawley Act, which wiped out much international trade with high tariffs, may have influenced individuals to sell stocks, resulting in the stock market crash of 1929 and deepening the Great Depression. Jude Wanniski, The Way the World Works (New York: Simon and Schuster, 1978), 125. Back , 1907, 213ff, “The 4. Knut Wicksell, Economic Journal Influence of the Rate of Interest on Prices.” Back 5. Ludwig von Mises, Gottfried Haberler, Murray N. Rothbard, and F.A. Hayek, The Austrian Theory of the Trade Cycle and Other Essays (New York: Center for Libertarian Studies, 1978). Mario J. Rizzo, Time, Uncertainty, and , see “Rational Expectations, Politics, and Disequilibrium Stagflation,” by Gerald O’Driscoll (Lexington, Mass: Lexington Books, 1979), 153. Jeffrey Rogers Hummell, “Problems with Austrian Business Cycle Theory,” Reason Papers , No. 5, Winter 1979, 41. Back

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Glossary

Glossary ATOMIC EXISTENT. An existent that changes its relationship with other atomic existents. ATTRIBUTE. A physical variable; a variable experienceable by an observer; a property. CHAIN OF CAUSATION. A series of physical events, each caused by the preceding event in the series. CHOICE. A decision by an observer to initiate or refrain from initiating a chain of causation. COMMAND SOCIETY. A society in which values can be achieved by open offen sive coercion. CONCEPT. A thought; a variable or existent created by an observer. CONCEPTUAL LAW. A law of the form, “if pure concept A changes, then pure concept B changes.” CONSTRAINT. That which restricts changes in variables. COST. A sacrificed good (objective cost) or the value it achieves (subjective cost). DEDUCTION. A process of logically reasoning from antecedents to their con sequents. DEMAND. The number of units of a good that individuals wish to acquire at a particular price. DENOTATIVE CONCEPT. A concept that is a stand-in for an attribute. DETERMINED. Not caused by the act of an observer; caused by obedience to physical laws. ECONOMIC CAPITAL GOOD. A good to which an individual has imputed value because he plans to use it to acquire another good. ECONOMIC PRODUCTION. Increasing, preserving, or restoring the value of rightfully held goods; any act that is not offensively coercive. ENTITY. A cluster of attributes; specific mattergy. ENTERPRENEUR. An individual who acts to reduce the adverse consequences of the errors of others. file:///C|/Downloads/Video/Glossary.html (1 of 4) [17-9-2008 17:15:10]

Glossary

EPISTEMIC CORRELATION. Establishing an identity between a pure concept and an attribute (or its denotative concept). EVENT. A change in a variable. EXCHANGE. Mutual acts bargained for by two or more individuals. EXISTENT. That which does not itself change; that which possesses a constraint. FACTOR. A good acquired to produce a product. FREE SOCIETY. A society in which values cannot be achieved by open offensive coercion. FREE WILL. A change in an attribute caused by an observer, not by a prior change in another attribute. GAIN. An increase in units of a good, whether it is a positive increase or a smaller loss. GOOD. An entity or a change in an entity that an observer believes will actualize a plan and achieve a value. IMPORTANCE. The “weight” an observer gives to one value over another value. INDIVIDUAL. An observer animated entity; an entity actuated by free will. INDUCTION. Reasoning to a general law from knowledge of changes in specific variables. INFLUENCE. (Conditional causation)—to change an observer’s knowledge, when the observer acts or refrains from acting on the new knowledge. KNOWLEDGE. The creation of a concept as a “stand-in” for an attribute or a change in an attribute or for a concept or a change in a concept. LAW. A relationship between two variables, such that a change in one variable causes a change in the other. MATTERGY. Matter or energy, two forms of the same physical atomic existent. MONEY. A good to which value has been imputed because individuals believe that other individuals will accept it in exchange. file:///C|/Downloads/Video/Glossary.html (2 of 4) [17-9-2008 17:15:10]

Glossary

MONOPOLIST. A producer upon whose competitor or potential competitor offensive coercion imposes costs not imposed on him. MONOPOLY GAIN OR LOSS. A gain or loss made in consensual exchange which is imputable to the use of offensive coercion. OBSERVER. A being that can experience attributes, create concepts, and change attributes. OBSERVER-ATTRIBUTE INTERFACE. The “place” where attributes create sensations for an observer and chains of causation are initiated. PHYSICAL LAW. A law of the form, “if denotative concept A changes, then denotative concept B changes.” PHYSICAL CAPITAL GOOD. A good that decreases or preserves the entropy of a workpiece. PHYSICALLY PRODUCTIVE. Decreasing or preserving the entropy of a workpiece. PLAN. A conceptual atomic existent, a denotative concept, constructed by an observer to describe future states of affair that he believes will exist if he acts or does not act. PRAXEOLOGICAL LAW. A law of the form, “if pure concept A changes, then denotative concept B changes.” PRAXEOLOGY. The study of praxeological laws. PRICE. A ratio of a number of units of a sacrificed good per unit of an acquired good. PROBABLE GAIN. A possible gain adjusted for risk. PRODUCER. One who combines factors to make products. PROFIT. An absolute increase in units of a good, acquired by exchange between individuals. PSYCHOLOGICAL LAW. A law of the form, “if denotative concept A changes, then pure concept B changes.” PURE CONCEPT. A concept that is not a “stand-in” for an attribute. RIGHT. A claim by an individual of exclusivity in changing an attribute.

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Glossary

SPACE-TIME. The medium in which the relationships between atomic existents change. STATE. An organization of individuals who seek to achieve their values by open offensive coercion. STATE OF AFFAIR. A particular spatial arrangement of attributes at a particular time. SUPPLY. The number of units of a good that individuals wish to sacrifice at a particular price. SYMBOLIC ATTRIBUTE. An attribute to which a concept is attached. UNCERTAINTY. The inability to know the future choices of individuals; the number of different states of affair that could come into existence. UNOWNED ENTITY. An entity that is not a good to any individual. URGE. The amount of energy an observer perceives is needed to act. VALUE. Noun: a purpose, the goal plans achieve; verb: to impute importance to a good. VARIABLE. That which changes during the operation of a law. Next Table of Contents

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Bibliography

BIBLIOGRAPHY John E. Cairnes. The Character and Logical Method of Political Economy Kelley, 1965.

. Fairfield, N.J.: Augustus M.

Edwin G. Dolan, ed. The Foundations of Modern Austrian Economics Sheed & Ward, Inc., 1976.

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Friedrich A. Hayek. Kinds of Order in Society . Institute for Humane Studies, 1975. Individualism and the Economic Order . Chicago: Henry Regnery Co., 1972. The Counter-Revolution of . Indianapolis: Liberty Press, 1979. Science Julian Jaynes. The Origin of Consciousness in the Breakdown of the Bicameral Mind Israel M. Kirzner. Perception, Opportunity, and Profit Univ. of Chicago Press, 1979. Competition and Entrepreneurship 1973. The Economic Point of View Sheed and Ward, Inc., 1976.

. Boston: Houghton Mifflin Company, 1976.

. Chicago: . Chicago: Univ. of Chicago Press,

Carl Menger. Principles of Economics Institute for Humane Studies, 1979.

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Gerald P. O’Driscoll Jr. Economics as a Coordination Problem McMeel, Inc., 1977.

. Sheed Andrews &

Mario 1. Rizzo, ed. Time, Uncertainty, and Disequilibrium Books, 1979.

. Lexington, Mass.: Lexington

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Murray N. Rothbard. Freedom, Inequality, Primitivism and the Division of Labor . Institute for Humane Studies, Inc., 1976. Toward a Reconstruction of Utility and Welfare Economics . The Center for Libertarian Studies, 1977. Man, Economy, and State . Los Angeles: Nash Publishing Corp., 1970. Individualism and the Philosophy of the Social Sciences . Cato Institute, 1979. America ’ s Great Depression . Sheed and Ward, Inc., 1963. Power and Market . Institute For Humane Studies, Inc., 1970. What Has Government Done to Our Money . Libertarian Publishers, 1964. Hans F. Sennholz. Age of Inflation 1979.

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Thomas Sowell. Knowledge and Decisions . New York: Basic Books, 1980. Louis M. Spadaro, ed. New Directions in Austrian Economics Inc., 1978.

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Ludwig Von Mises. Epistemological Problems of Economics . New York: New York University Press, 1981. The Ultimate Foundation of Economic Science . Sheed Andrews and McMeel, Inc., 1978. Human Action , 3rd ed. Chicago: Henry Regnery Co., 1978. The Austrian Theory of the Trade Cycle and Other . The Center for Libertarian Studies, 1978. Theory Essays and History . Arlington House, 1969, orig. 1957. The Theory of Money and Credit . Irving-on-Hudson: Foundation for Economic Education, 1971. Laurence H. White. Methodology of the Austrian School Studies, 1977.

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. New York: The Center of Libertarian

Bibliography

Next Table of Contents

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Index

Index Abortion,159,162 Anti-trust, 136-137 Atoms, 9 Attributes, xvi,11,12-17,18-23,28-30,31-35,36-37,43,94,143-44,197-98 Autoparasitism, 175 Cairnes, John E., 12,44,52,54 Causation, 3,5-7,8-10,21-22,48,54,63,65,126 Ceteris Paribus, 61-62 Choice, Law of, 99-102,107,109,119,122,131,192 Coercion, 151,163-170171-177,178-185,186-188,189 Collectivism, 161 Comparative Advantage, Law of, 25-27,28-29,199-202 Complements, Law of, 100,120 Concepts, 12-17 Denotative, 13-14,25,31,36 Economic, 13-14,35,39,50 Pure, 13,25,30-31,31-32 Conceptual Laws, 16,25-27,28,33,43,49,60 Constants, 8-11,12,18 Constraints, 8-9,25-26,28-29,199,203,205 Consumer's Surplus, 38 Consumption Physical, 143-146,148, Economic, 145-146148 Cost Objective, 38,92,93 Opportunity, 93,104 Subjective, 92-93, Crime, 163,167,172,182,184 Deduction, 48-51,53 Demand, 99,203 Determinism, 44,54,63,65-66,72-73,78-80,161 Diminshing Marginal Physical Product, Law of, 23,188 Diminishing Marginal Utility, Law of, 90-91,97-98 Diminishing Returns, Law of, 23,188 Discrimination Law, 105,118,189-193 file:///C|/Downloads/Video/Index.html (1 of 6) [17-9-2008 17:15:14]

Index

Elasticity, 49,117 Entitlement Principle, 154,157 Entity, 15-16,18-19,32,63,104,153 Entrepreneurship, 103,112,124-129,135,149,186 Entropy, 133-134,143-146,167-168,175 Epistemic Correlation, 26,28-30,32-35,60,199,205 Equilibrium tendency towards, 138-142 general, 30 Error, 125-128,142 Euclidean geometry, 25,28-30,38,53 Event, 9,21 Evolution, 14,133-134 Exchange, Law of, 96-98,121 Existent, 9-11, 18-19, 25-26,28-30,31-32,199,203,205 Factors, 25,27,29,135,137,199 Falsiñcation, 57-60 Free Will, 16-17,37,44-47,50,64-68 Giffen’s Law, 100,107,109-111,113 Goods, 69-70,85,153,156 physical capital, 144-145 economic capital, 145 Gresham’s Law, 187 Hayek,F.A., x,xiii,24,44,70-71,76,103,132,138,169, Individual, 96 Induction, 52-54 Inflation, 51,55,115,119,122,149,204 Influence, 81-82,93,115,118,166 Jevons’ Law, 108 Kant, Immanuel, 10,18,23,153 Kirzner, Israel, 86,154 Knowledge, 37,68,72-77,81-82,125,164,170 Laws, 3-4,5-7,8-11,12 Analysis of, 5-7 Laws: Choice, Law of, 99-102,107,109,119,122,131,192 Comparative Advantage, Law of, 25-2728-29199-202 Complements, Law of, 100,120 Diminshing Marginal Physical Product, Law of, 23,188 file:///C|/Downloads/Video/Index.html (2 of 6) [17-9-2008 17:15:14]

Index

Diminishing Marginal Utility, Law of, 90-91,97-98 Diminishing Returns, Law of, 23,188 Discrimination Law, 105,118,189-193 Exchange, Law of, 96-98,121 Giffen’s Law, 100,107,109-111,113 Gresham’s Law, 187 Jevons’ Law, 108 Mechanism, 8-11 Menger’s Law, 36,85-87,88,90,112,114,199 Minimum Demand, Law of, 100,112-113,114 Money, Law of, 88-89 Non-Contradiction, Law of, 58 Offensive Coercion, Law of, 134,159,163-170 Price, Law of, 134,159,163-170 Price Control Laws, 55,118,186-188 Profits, Law of, 89,100,102-104,114,128,135-137,141,149,188-189 Purchase, Law of, 97-98 Quantity Demanded, Law of, 59,100,114-119,132,139,190 Risk, Law of, 100,105-106, Say’s Law, 26-27, 99, 203-204 Second Law of Thermodynamics, 133, 143-145 167,175 Shortages, Law of, 118,186-187,193, Superior Advantage, Law of, 25, 27,199 Supply and Demand, Law of, 34,62,100,115,121-123,128-129,132,137,141142,149,181 Surpluses, Law of, 118,188,192 Uncertainty, Laws of, 26-27,205-212 Populational Uncertainty, Law of, 26,206-207 Temporal Uncertainty, Law of, 26,206-209 Initial Uncertainty, Law of, 26,209-212 Variable Proportions, Law of, 23,188 Zero Profits Law, 103,105,124,132-133,135-137,140,149,182,188 Types, 12-17 Conceptual Laws, 16,25-27,28,33,43,49,60 Conservation Laws, 6,18-19 Deductive Laws, 48-51,57-59 Inductive Laws, 48-51, Metaconceptual Laws, 29-3

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Index

Physical Laws, 10,16,18-24,43,48,57 Physical Metalaws, 17,19,20,30,52 Praxeological Laws, 16,31-35,43-44,49,52,62,83 Psychological Laws, 16,36-37 Quantitative Laws, 38-39 Statistical Laws, 22,50-51 Symmetric Laws, 61-62 Market Process, 130-134 Measurement, 15-17 Menger’s Law, 36,85-87,88,90,112,114,199 Methodological Individualism, 171 Minimum Demand, Law of, 100,112-113 Mises, Ludwig von, x, xiii,xvii,59,63,68,70,75-76,92,148,163 Money, 14,26,35,76,88-89,115,119,122,183,203-204,207,211 Law of, 88-89 Monopoly, 124,136,138,173,178-185,191 Mr. Magoo Effect, 76 Non-Correlative Principle, 29-30 Observer, 5,24,26-27,44-46,54,63-64,65,73,197-198 Nature of, 13,17 Interface with attributes, 73,197-198 Occam’s Razor, 51 Offensive Coercion Law, 134,159,163-170 Ownership, 160,184 Pattern Recognition, 17 Perfect Competition, 26-27,29 Phillips Curve, 50-51,55 Physical Laws, 10,16,18-24,43,48,57 Plans, 31-35,52-53,69,73-75,93,125 Positivism, 52-56 Praxeological Laws, 16,31-35,43-44,49,52,62,83 Price definition of, 35,99,108 Law of, 100,107-108,111-112,120 Price Control Laws, 55,118,186-188 Probable Gain, 94,96,105,122,124,136,141 Production physical, 143-146,149-150,167-168,174-175 economic, 145-146,174 file:///C|/Downloads/Video/Index.html (4 of 6) [17-9-2008 17:15:14]

Index

Products, 25,27,135 Profit accidental, 125 definition of, 102,104,124-125,138,182 entrepreneurial, 125 Law of, 89,100,102-104,114,128,135-137,141,149,188-189 psychic, 93,102 situational, 125 Purchase, Law of, 97-98 Psychological Laws, 16,36-37 Quantitative Laws, 38-39 Quantity Demanded, Law of, 59,100,114-119,132,139,190 Quantity Discount, 113 Randomness, 7,12,24,50,127 Rational, 75 Rights, 151,153-162,163-164 Risk, Law of, 100,105-106 Rothbard, Murray, 44,58,70,94,143 Same Good, 26-27,54,62,90,94,102,107,113,119,125,147,183,190,205 Savings, 146,149,150 Say’s Law, 26-27,99,203-204 Science, nature of, 3-4,17 Second Law of Thermodynamics, 133,143-145,167,175 Shortages, Law of, 118,186-187,193 Smith, Adam, 88,173,176 Society, 166-169 Space-time, 10-11,21,205 Speculation, 124,127-128,149 Spontaneous Order, 76,132,169,207 State, 160 Structure, 143-144,148,175,206 Substitutes complete, 107-108,111,120,183 partial, 107,109 Superior Advantage, Law of, 25,27,199 Supply and Demand, Law of, 34,62,100,115,121-123,128-129,132,137,141142,149,181 Surpluses, Law of, 118,188,192 Threats, 164-165,178,186-187 file:///C|/Downloads/Video/Index.html (5 of 6) [17-9-2008 17:15:14]

Index

Time Preference, 147-150 Uncertainty, 147-148 Laws of, 26-27,205-212 Urges, 78-80,91,175 Validation, 43-47 Values, 31-34,36-37,68-71,99-100,151,154-155,169,189 Variables, 5,12,57 Conceptual, 25 Physical, 18 Metalaws, 19 Praxeological, 31 Definition of, 9 Variable Proportions, Law of, 23,188 Verification, 48-51 Zero-Profit Law, 103,105,124,132-133,135-137,140,149,182,188 Home

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