ńňđ. 8
(âńĺăî 10)



Of course, all of that is true of any private investment as
well: to commit resources to project X is always to withhold
them from some other project Y. So the question becomes:

Who is likely to be better at picking projects in which it is
worth investing, the government or private investors?1
Once we examine the incentives presented to those
involved, the answer should be clear. Private investors will
personally suffer a loss if their project fails and personally profit
if it succeeds. Recall that a profit is a sign that the entrepreneur
has better assessed the desires of the consumers as they relate
to the resources expended for the project than others bidding
for those resources did. A loss is a sign that the entrepreneur
was mistaken—the resources were more in demand for some
other use than the one to which he put them.
Given his intense personal interest in the project, the entre-
preneur has strong motivation to ensure that resources are
used in a manner conforming to the wishes of the consumers.
And he has knowledge of the “particular circumstances of
time and place” that he faces. Furthermore, those entrepre-
neurs who are best at assessing the future state of the market
are the ones who will increase the resources at their disposal.
Those who frequently misestimate will soon cease to have
resources to invest. Entrepreneurs will make mistakes, but
there is a weeding-out process in the market that rewards the
entrepreneurs who are most often correct.

There is an important issue relating to the morality of the gov-
ernment forcibly extracting money from Bill to invest in Joe’s proj-
ect. Ludwig von Mises, Henry Hazlitt, F.A. Hayek, Murray N. Roth-
bard, Hans-Hermann Hoppe, Walter Block, Stephan Kinsella, and
other Austrians have dealt with this issue at great length. Without
meaning to downplay the importance of this aspect of the problem,
I will simply say that a discussion of it is beyond the scope of this

The incentives for government “investors” are quite differ-
ent. Governor Rowland of Connecticut would neither garner
the profits nor suffer the losses from any stadium project. Of
course, the voters could have indirectly made him suffer a tiny
fraction of the potential loss by voting him out of office. That
is a very weak incentive. For one thing, he might have already
left office long before the ultimate outcome of the project
became clear. At that point, the voters would have no
recourse whatsoever.
The Public Choice School has pointed out another force
weakening that incentive, indeed, in most cases, completely
negating it. Strong incentives exist for politicians to favor spe-
cial-interest groups at the expense of the general public.
Those upon whom benefits are concentrated are motivated to
campaign hard for those benefits. As the costs of most politi-
cal actions are spread across the public as a whole, the aver-
age person has little motivation to become involved.
In the context of the stadium project, we can see that, even
at a total cost of $374 million, the cost to each Connecticut res-
ident is only about $100. It is simply not worth much of any
individual citizen’s time to become devoted to the cause of
stopping the stadium. However, for the construction compa-
nies who hope to get work on the stadium and the owners of
businesses and land nearby, the potential benefits are enor-
mous. They have a strong incentive to lobby hard for the proj-
ect, to donate to the campaigns of politicians who support it,
and to sponsor studies that will make the project look good.
In fact, if there were a profit to be made in some particu-
lar investment, private investors would be likely to act quickly
to take advantage of the opportunity with their own funds.
For instance, Chicago Bulls owner Jerry Reinsdorf and
Chicago Blackhawks owner Bill Wirtz privately financed the

United Center in Chicago. Between hockey games, basketball
games, conventions, ice shows, and other events, the arena is
kept busy many nights out of the year.
Private investors will turn to the risky business of lobbying
the government to support a project only when it is not clear
to them that it is profitable without taxpayer subsidies. Thus,
the government is likely to specialize in money-losing projects.
Empirical work backs up these theoretical considerations.
In their Executive Summary, the Heartland Institute of
Chicago, which has studied the sports stadium issue in depth,
Between 1954 and 1986, the 14 stadiums for which
sufficient data were available had an aggregate net
accumulated value of negative $139.3 million. This
loss of wealth to the host city’s taxpayers ranged
from $836,021 for Buffalo’s War Memorial Stadium
to $70,356,950 for the New Orleans Superdome. The
only facility to have a positive net accumulated
value was privately built, owned, and operated
Dodger Stadium.

Larry Margasak of the Associated Press, in a June 1, 2001
article entitled “Producing a Farm-Fresh Flop,” describes a U.S.
Agriculture Department program:
The idea was to invest government money in agri-
cultural start-ups to turn sugar cane into furniture,
sunflower seeds into motor oil and milkweed into
comforters—with taxpayers reaping the returns.

But some $40 million later, the Agriculture Depart-
ment’s much ballyhooed experiment to create the
government equivalent of a venture capital firm has
delivered hardly any return, according to documents

obtained by the Associated Press. Congress has
given up and shut the doors to new spending.
Investment money to 16 companies has been writ-
ten off as a total loss, and an additional 28 compa-
nies have failed to produce any significant returns—
although there’s still hope for some of them. All
told, investments totaling $40.3 million have
brought just $1.2 million in returns since 1993, the
documents show.


T in justifying the use of public funds
for stadium construction apply to all such public invest-
ment. In a recent review of, Nothing Like It in the World:
The Men Who Built the Transcontinental Railroad, 1863–
1869, Newt Gingrich wrote:
This book is also a useful reminder to its modern
audience that much of American success has been a
public-private partnership. . . . The government
played the most critical role by providing finances
and incentives. Without those public contributions
the [transcontinental] railroad could not have been
built for at least another generation.

Using similar reasoning, we could say that without slave
labor, the pyramids in Egypt might not be built even yet.2 But

Some scholars have recently questioned whether the con-
struction of the pyramids relied on slave labor. If it turns out that
it didn’t, simply substitute some other project that did rely on slave
labor for the pyramids.

no critic of such “public-private partnerships” ever doubted
that at some time some particular project would be completed
sooner with government intervention than without it. Gingrich
is paying attention to what is seen, and ignoring what is not
The resources necessary to build the railroads had to be
diverted from other uses. Were those uses more or less valu-
able than the railroad? If what Gingrich says is true, and the
intercontinental railroad would not have been built privately
for a generation, we must conclude that entrepreneurs
thought there were many, many projects that the consumers
demanded far more urgently than the rails. No doubt, a
transcontinental railroad is a handy thing to have around, but
so are many other items. In a world of scarce resources, we
must choose among a multitude of desirable items. Some we
can have soon, but, in order to have them, other satisfactions
will have to be delayed. Gingrich simply assumes that a
transcontinental railroad ought to have come before the alter-
natives that entrepreneurs might have created with those same
Gingrich places special emphasis on the role of the Army
in “protecting” the rail line. That seems to be a polite way of
saying, “Killing lots of Indians who were in the way.” We
might be excused for having serious doubts as to whether
those Indians thought the railroad was the best use of
resources at that time.
Contemplate a situation in which Newt Gingrich comes to
American citizens and proposes that the government sponsor
a regular shuttle to the planet Pluto. When we object, he
asserts that his project would not be realized for another few
millennia if not for government intervention. He is probably

correct. But how is that a justification for undertaking this
project? Isn’t it, instead, a reason for rejecting the project from
the start?
Another way in which government “promotes industry,” in
the United States and many other countries, is to aid
exporters. (If you, dear reader, are not American, simply sub-
stitute your own country’s name for “America” in what fol-
lows. The odds are high that your government is also engaged
in similar shenanigans.) The think tank Foreign Policy in
Focus reports:
Examples of grants and subsidies for exporters
include the Market Access Program (MAP) and the
Export Enhancement Program (EEP) of the U.S.
Department of Agriculture. The MAP, established in
1990, has an annual budget of $100 million and pro-
vides partial defrayment of the costs of market
building and product promotion overseas. Some
recipients, including Sunkist Growers, Sunsweet,
Dole Foods, and Gallo Wines, have collected more
than $1 million in a single year.

Certainly Dole Foods, a multi-billion-dollar corporation,
appreciates the dough. But why should the rest of us pay for
its marketing? One reason given is that the subsidies will cre-
ate American jobs. Now, it is no doubt true that Dole can
employ some greater number of workers than it could have
without the subsidy. That is what is seen. On the other hand,
the funds for the program came from other people, who pre-
sumably would not have been burning their cash in the back-
yard. (And if they did, it would lower the price level. While
the economy would need time to adjust, as long as the adjust-
ment is allowed to proceed there is no reason to believe that

we would find ourselves in a “liquidity trap.”) We can assume
that some portion of their spending would have gone to pay
someone’s wages. We can also venture a guess that in most
cases, the jobs lost to taxes were more valuable than those
gained through the subsidies. After all, if Dole thought that
this marketing was profitable, it would have undertaken it
without the subsidy. If it didn’t think so, that is because it esti-
mated that consumers valued the resources necessary for the
marketing campaign more highly in other uses.
Another, related, justification is that America needs to “level
the playing field” its own exporters face, because many other
countries subsidize their exporters. But no country can subsi-
dize all domestic producers! The benefit to subsidized indus-
tries comes at the expense of higher taxes on those not subsi-
dized. The closing of one door to American manufactures
opens another door even wider. It is true that particular domes-
tic industries may suffer as a result of another country’s trade
policies. But to attempt to compensate for that by introducing
further distortions in the structure of production initiates a
downward spiral in the satisfaction of all consumers. It is as
though, because you have cut yourself and are now bleeding
on my shoes, I will also cut myself, in order to bleed on yours.
Who is likely to benefit from such protectionist programs?
It is not the family farmer or small business owner, who lack
the resources to lobby Congress and to conduct foreign mar-
keting efforts. Public Choice theory, common sense, and his-
tory all tell us that powerful, wealthy interests will come to
control such programs. True, a populist revolt might succeed
in limiting some programs to small concerns. However, there
is no reason to suspect that the result would be better than the
current crop of programs. In many cases, it might really be the
largest corporations that should be devoting resources to
export marketing. Again, the issue is who can best decide

how much to spend on such marketing: The owners of the
exporting companies, who have their own money on the line,
or government bureaucrats, betting other people’s money on
the outcome?


W I PUBLISHED the above section in excerpt form,
prior to publication of this book, I received a good
deal of mail about it. A few correspondents were
puzzled (or even distraught) over my use of the farm-equip-
ment example from Bastiat’s “What Is Seen and What Is Not
The complaints about that example were interesting and
worth addressing. They illustrate the difficulty in perceiving
the real economy through the “fluttering veil” of money, and
the difficulty in clearly seeing the difference between the
economy at a point in time and the progress of the economy
over time. Furthermore, they point to an important distinction
between the Austrian and neoclassical approaches to eco-
nomic analysis.
We’ll take up that difference between Austrian and neo-
classical analysis first. One correspondent wrote to ask
whether it wasn’t “simplistic” to use a model with no inven-
tory to describe this phenomenon?
There is a basic misunderstanding of the Austrian approach
at work in that remark. Many neoclassical economists try to
produce models of the economy that will “behave” as much
like the real economy as possible, in the sense that they will
produce numerical predictions that are close to the prices and

quantities that really emerge. In the attempt to create such a
model, more of the complicating factors of the real world that
can be brought into play, the more realistic the approach is
thought to be.
Austrian analysis is quite different. We employ imaginary
constructions that (hopefully) allow us to see the essence of
economic phenomena operating beneath the bewildering
complexities of the real economy, not models that attempt to
mirror that complexity. Having grasped those essences, we
use them to navigate our way back to an analysis of more
complex situations. Carl Menger set out this method in his
Principles of Economics, as noted in Chapter 2.
Bastiat, usually considered an Austrian precursor, antici-
pated Menger’s method. Commenting on his example of the
plow, Bastiat wrote:
True, I have reduced the operation to its simplest
terms, but test by the same touchstone the most com-
plicated governmental credit institutions, and you
will be convinced that they can have but one result:
to reallocate credit, not to increase it. In one country,
and in a given time, there is only a certain sum of
available capital, and it is all placed somewhere.

Bastiat’s construction is not simplistic, but simple, just as it
should be. Yes, he could have included unsold inventories of
plows in his story, just as he could have included the price of
the plow, what color it was, where the farmer lived, and how
many pigs he had. But none of these things, including inven-
tories, are relevant to understanding the essence of the phe-
nomenon in question. (I’ll address inventories more below.)
What about the example itself? Does it really capture that
essence? I’ll take up the various questions I received about
that aspect of the example one at a time:

In what sense could Bastiat contend that the essence
of the loan was the borrowing of a plow, and not the
borrowing of money?

Bastiat was able to peer through the fluttering veil of money
to see that people borrow it for the goods they can acquire
with it. (The desire to hold cash balances is a complicating fac-
tor, but it does not change the essential analysis.) He wrote:
In this question it is absolutely necessary to forget
money, coin, bank notes, and the other media by
which productions pass from hand to hand; in order
to see only the products themselves, which are the
real substance of a loan.

For when a farmer borrows fifty francs to buy a
plow, it is not actually the fifty francs that is lent to
him; it is the plow.

And when a merchant borrows twenty thousand
francs to buy a house, it is not the twenty thousand
francs he owes; it is the house.

Money makes its appearance only to facilitate the
arrangement among several parties.

Peter may not be disposed to lend his plow, but
James may be willing to lend his money. What does
William do in this case? He borrows money of James,
and with this money he buys the plow of Peter.

But actually no one borrows money for the sake of
the money itself. We borrow money to get products.

Whatever the sum of hard money [gold] and bills
that circulates, the borrowers taken together cannot

get more plows, houses, tools, provisions, or raw
materials than the total number of lenders can fur-

But can’t manufacturers just produce more plows (or
tractors) in response to increased demand, rendering
Bastiat’s analysis a moot point?

Well, certainly, over time, they can. But where did the
resources to produce more tractors come from? If the govern-
ment has been specializing in tractor loans, then all it has
done is to shift resources, against the wishes of the con-
sumers, from the manufacture of other goods to the manufac-
ture of tractors. If the government is lending money to all lines
of manufacturing, it should be clear that this does not magi-
cally call more factors of production into existence. Only real
savings from real production can create new capital goods.
The money the government is lending ultimately comes
from one of two sources: taxes or the printing press. If the
government is using tax revenues to make such loans, then all
it has done is shift resources from those taxed to those who
are receiving the loans.
But it seems as though there may be a way out of this bind.
If the government prints up the money and lends it out, it
doesn’t appear to have taken the resources from anywhere—
they just appear! That is the “magic” of Keynesian economics.
In reality, the government has taken the resources from
everyone in the economy who is holding cash. Real demand
in the economy is precisely the supply of real goods and serv-
ices viewed from the other side of every exchange. If I pro-
duce corn, that corn is my demand for tractors, seed, TV sets,
cars, and so on. What someone hopes to receive in exchange
for their production is a certain amount of real goods and

services, not a certain number of pieces of paper with presi-
dents’ faces on them. A swift, unexpected increase in the
amount of such paper in circulation may briefly fool people
into believing they will receive the real goods they are
demanding, creating a temporary boom, but the subsequent
disappointment creates the bust afterward.

Well, just why aren’t inventories relevant?

Here is the trump card in the Keynesian deck. “Ah,” the
Keynesians will claim, “the above analysis is fine when the
economy is at full employment and comprises no unused
capacity. But if the economy is in a slump, the increase in
paper money will prime the pump, prodding those idle
resources (i.e., inventories, idle factories, and unemployed
workers) back into the cycle of production.”
But why are certain resources idle? The owners of those
idle resources expect to receive more for them than they cur-
rently are being offered. They are holding out waiting for a
better price. (Or, in the case of workers, they may be legally
prevented from even offering a lower price.) When such a sit-
uation is prevalent in the economy, Austrians would contend
that it is the result of the false expectations created by the pre-
vious boom. In any case, as W.H. Hutt pointed out, what is
needed to restore full productivity is for individuals in the
economy to adjust their expectations to better align with the
real demands for their products and services. The Keynesian
solution is to try to fool producers (including workers) into
thinking that their unrealistic demands are being met.
Keynesians contend that without government stimulus the
adjustment process will be stalled—indeed, things will get
worse—due to a spiral of economic despair. Laid-off workers
will lower their demand for consumer goods. That will cause

employers to lower their expectations and lay off more work-
ers. The newly laid-off workers will now lower their demand
for consumer goods. And so on.
It is true that a general malaise may settle on people dur-
ing a downturn. But successful entrepreneurs are precisely
those people who are able to see that the general opinion of
the current situation is, in some sense, wrong. As Mises says:
[T]he entrepreneur is always a speculator. He deals
with the uncertain conditions of the future. His suc-
cess or failure depends on the correctness of his
anticipation of uncertain events. If he fails in his
understanding of things to come, he is doomed. The
only source from which an entrepreneur’s profits
stem is his ability to anticipate better than other
people the future demand of the consumers. If
everybody is correct in anticipating the future state
of the market of a certain commodity, its price and
the prices of the complementary factors of produc-
tion concerned would already today be adjusted to
this future state. Neither profit nor loss can emerge
for those embarking upon this line of business.
(Human Action)

In the downturn, certain factors of production are under-
priced and may be idled. The deeper a downturn goes, the
more underpriced they become. Those who can peer forward
past the storm, through the dark forces of time and ignorance,
and see the sun returning stand to profit from their foresight.
They are the ones who buy when there is panicked selling
and sell when there is manic buying.
To whatever extent that the Keynesian solution of stimulat-
ing demand “works,” it prevents the needed adjustments in
expectations from taking place. Certain lines of manufacture
should be shut down, since they are using resources that

consumers demand more urgently in other places. Some
workers should lower their wage demands, since they are
unemployable at the wage they currently expect. Instead of an
overall movement of the price level, what is really needed is
for certain prices to be adjusted relative to others.
The Keynesian solution to a slump attempts to prop up
prices (including wages) that are too high. When the economy
has been on a bender and wakes up with a crashing
headache, the Keynesians recommend having a few drinks,
when what is needed is for the poison to be purged from the
system. Real demand will only be restored when the structure
of prices moves back toward a configuration more closely
reflecting consumer’s wishes. Printing, then lending, money
only delays that adjustment.


Where Do We Go From Here?


W an economics for real people, one
studying real choices as they are made by you and
me. Economics does not need to regard us as
automatons, to assume we are only interested in monetary
matters, or to treat us as atomistic, pleasure-seeking narcis-
sists. It can acknowledge that we are embedded in a social
context and that we are influenced by faith, despair, hope,
fear, love, hate, superstition, and all of the other “irrational”
aspects of human nature. Economics proceeds based on the
solid foundation of the logic of choice. Many factors enter into
human choice. Psychology, genetics, history, ethics, and reli-
gion may all have something to say about the origin and
degree of influence of those factors. But economics can
accept those factors as given and study the implications of the
fact that we do choose. Those implications are significant.
The fundamental problems that human actors solve in the
moment of choice are not of the sort that a computer can
solve. That is because, unlike in the models of mathematical
economics, the ends are not given to acting man: It is ulti-
mately the ends themselves that we are creating with our


actions. We must imagine the world as it ought to be, then act
to make that imagined scenario real.
That is captured in a variety of commonsense nostrums—
“Watch what you wish for,” “Once you start down that road,
there’s no turning back,” “Choose your friends carefully,” etc.
If you are choosing between killing your neighbor and pray-
ing for his forgiveness, you are not choosing different means
toward a given end: you are choosing among ends. It is true,
as the logic of choice points out, that we can always affirm
that what you choose is regarded by you as better than what
you do not choose. But in the act of choice you are, in fact,
deciding what you value: Is it revenge or peace that you are


T politics and economics has
existed since the first hints of economic thinking arose in
human history. Policies have propelled the research of
economists just as that research has propelled the develop-
ment of policy. For many years the very name of economic
science was “political economy.”
Are there particular approaches to politics implied by the
Austrian conception of the market? To help answer that ques-
tion, I will take four great Austrian economists as representa-
tive of different political positions adopted within the Austrian
School: Ludwig Lachmann, F.A. Hayek, Ludwig von Mises,
and Murray Rothbard. These positions form a spectrum, and
it will be useful to contrast them while taking note of the rea-
soning that led them to their positions.
? 293


A LUDWIG LACHMANN’S career progressed he focused
increasingly on the uncertainty of the future. The fact that
we can’t say today what we might learn or create tomor-
row means that uncertainty is a fundamental aspect of human
action. It is the very quest for knowledge, with the surprising
results it brings, that is the prime source of economic uncer-
tainty. Because of his focus on uncertainty, Lachmann came to
doubt that, in a laissez-faire society, entrepreneurs would be
able to achieve any consistent meshing of their plans. The
economy, instead of possessing a tendency toward equilib-
rium, was instead likely to careen out of control at any time.
Lachmann thought that the government had a role to play in
stabilizing the economic system and increasing the coordina-
tion of entrepreneurial plans. We can call his position “inter-
vention for stability.”


H radical uncertainty of Lachmann,
based on his perception that the market does exhibit
regularities. As Bastiat would say, Paris does get fed.
We might account for those regularities by the actions of
entrepreneurs. Hayek found no reason to suspect that gov-
ernments could outperform profit-seeking entrepreneurs at
achieving plan coordination.
The evolution of F.A. Hayek’s thought toward a system dis-
tinct from that of his mentor, Ludwig von Mises, involved a
focus on evolutionary perspectives and the limits of reason.

Mises centered his system on the idea that every choice is
rational insofar as choice itself means conscious, purposive
behavior. Hayek turned his attention to the customs, habits,
institutions, morals, prejudices, and so on, which make up the
substratum of choice. Hayek saw them as evolving below the
radar of abstract reason, as a result of the evolutionary selec-
tion of group traits, operating on many societies across many
generations. While Hayek did not regard those traditions as
being off-limits to intellectual exploration, he felt we should
be cautious about concluding that we fully understand them.
As a corollary, we should also be cautious about tossing them
out just because we so far don’t see a good reason for their
existence. His exploration of the evolutionary aspect of soci-
ety lent his generally libertarian thought a significant strain of
conservatism. Where government interventions had existed in
society for some time—poor relief, support for education,
road building—Hayek was likely to be cautious or even neg-
ative about abandoning them. On the other hand, he was
even more skeptical about proposals for new interventions.
We could call Hayek’s position “traditionalist interventionism.”


L MISES focused on the nature of human action
itself. He took a more rationalist approach to human
institutions than did Hayek. He acknowledged that they
often arose as the unintended outcome of action directed
toward other ends. But he held that reason should be used to
examine such institutions and evaluate their efficacy. (As
we’ve mentioned, Hayek did not argue against employing rea-
son for social analysis. He was simply more cautious than
? 295

Mises was about the results it would achieve.) Stressing that
human action always involved the employment of means
toward some end, he asked whether particular interventions
were the suitable means to attain the end sought. He held
that, by destroying the price mechanism and interfering with
peaceful cooperation, all economic interventions eventually
would have repercussions that were undesirable, even to
those initially favored by the intervention. Mises concluded,
however, that the state was necessary to establish the rule of
law and the property rights that the market needed as its
foundation. Mises’s ideal state is minarchist: it is the “night-
watchman” state that acts only to prevent violence and theft.
Mises’s position might be characterized as “intervention to
create the necessary condition—the rule of law—for a market


M ROTHBARD PUSHED Mises’s rationalism a step fur-
ther. He contended that reason should be used to
evaluate not just the means of social policy, but the
ends as well. His politics arose from his marriage of Austrian
economics and a rationalist, libertarian system of ethics. Start-
ing from the basic idea of ownership and the premise that
everyone owns himself, Rothbard developed a system in
which the state was seen to have no legitimate role at all. All
necessary social institutions, Rothbard contended, including
police, courts, and military, could be established, without
coercion, through peaceful cooperation. Rothbard’s intellec-
tual heirs, including Hans-Hermann Hoppe, David Gordon,
Jörg Guido Hülsmann, Walter Block, and others, have sought

to develop the rational base of his edifice and have begun to
describe what a world without the state might look like. The
Rothbardian view is market anarchist, or, as Rothbard called
it, anarcho-capitalist: “no intervention, and no state that could
consider intervening.”
Lachmann, Hayek, Mises, and Rothbard all recognized that
the main problem facing economics is not to describe what
the market would be like in equilibrium—an impossible state
of affairs, anyway!—but to examine the interplay of forces that
generate the market process. To a great extent, their political
economy reflects their opinion about the robustness of that
process. Lachmann, the most interventionist of the four, also
was the most doubtful that the market was self-stabilizing.
Rothbard, the least interventionist, felt that the market could
provide even law and defense better than the state.
The common idea in Austrian political economy is to use
the minimum of coercion necessary to create a functioning
society. The above Austrians’ opinions on what that minimum
might be range from “not too much” through “very little” to
“none at all.” But all of them saw the value of freeing the indi-
vidual human mind to set its own course, and preferred that
freedom as far as their theoretical musings led them to believe
it was feasible. Even Lachmann, the most interventionist of the
four, recognized the tremendous power of voluntary cooper-
ation and the profound limitations of central planning.


A of economics, dating back to the mer-
cantilists and promoted by Adam Smith, is that it is the
study of how to make a society wealthier. Many economists
? 297

who are thought of as “right wing” hold to such a view, at
least implicitly. While economists from the left generally rec-
ommend state interventions to alleviate inequality, the inter-
ventions most frequently recommended from the right are
those that “promote growth” (see Chapters 12, 13, and 17).
From the Austrian perspective such views are problematic,
given the subjective nature of “wealth,” “growth,” and so on.
Who is to say if a town is wealthier located next to a pros-
perous factory or next to a beautiful forest? Am I wealthier if
I have more cash in the bank, or more time to spend with my
children? The insights of the Austrian School demonstrate that
economics can’t answer those questions for us.
Schemes where property rights are violated in the interest
of “promoting growth” are distinctly non-Austrian. Let’s imag-
ine that economists conclude that the uncertainty and loss of
savings generated by a mild inflation has historically spurred
people to work harder, resulting in higher growth. For an
economist of the “science of wealth” school, it would be clear
that we should pursue that policy. We can hear similar opin-
ions voiced by some supply-side economists, who seem to feel
that the Fed cannot set interest rates too low, nor can eco-
nomic expansion possibly be too rapid.
Instead of realizing that wealth is a subjective concept—
you’re as wealthy as you think you are—economists favoring
intervention to promote growth believe wealth can be meas-
ured by the dollar value of goods exchanged or some physi-
cal quantity of output. Instead of acknowledging that the mar-
ket is the emergent outcome of the interaction of all partici-
pants’ values, the growth economists feel they know better
than others how much we should sacrifice now to provide for
the future. They would override individuals’ decisions as to
how leisure, time with the kids, spiritual pursuits, and so on,
are valued relative to having more “stuff.” Instead of seeing

each person as an individual who is in the best position to
plan for his own happiness, people are seen as subprocesses
in a production function, to be tuned so as to maximize the
output of the function.
Here, we must acknowledge a valid criticism from the left
of many “free-market” economists. “The supporters of free
markets,” their critique runs, “fail to admit how much their
philosophy is a justification for the strong exploiting the
weak.” Professor Hans-Hermann Hoppe of the University of
Nevada, Las Vegas contends that Marxist historical literature
on exploitation is highlighting a genuine historical phenome-
non, but has misidentified its source. The term “exploitation,”
when applied to a voluntary market exchange, simply means
that the person using the term disapproved of that exchange.
But when the government uses its monopoly on legitimatized
coercion to force exchanges on people, the term takes on a
more objective meaning. Again and again, expansive govern-
ments, generated around the rallying cry of protecting the
weak, have been captured by the strong and used by them to
fortify their own positions. (Their ability to exert their power
is, after all, why we refer to them as “the strong”!)
An all-too-typical example recently occurred thirty miles
from where I live, in New Rochelle, New York. Ikea wanted
to put up a superstore. Town officials, excited by the “growth”
this would promote (and the kudos and campaign contribu-
tions they might be able to garner?), enthusiastically backed
the idea. (They eventually were forced to abandon it.) As
reported by Jacob Sullum of Reason in his article, “Parcel
The site that Ikea had in mind for its new store hap-
pened to be occupied by 34 homes, 28 businesses,
and two churches. Instead of trying to buy the land
? 299

fair and square, Ikea asked the city to force the
owners to sell, at whatever price the city considered

If Ikea did that sort of thing on its own, it would be
called extortion. But when the government does it, it’s
called exercising the power of eminent domain. . . .

“Is it right to tear people from their homes?” one res-
ident, Dominick Gataletto, asked ABC’s John Stossel
in an interview that aired on January 27. “All the
memories I’ve had all these years. . . . I’ve been here
67 years, and you just don’t wipe that away simply
because a furniture store wants to come in. This is

If the neighborhood in question was more valuable to Ikea
than to the residents, Ikea could have paid them all enough
to move out. The market allows individuals to carefully (or
carelessly!) weigh their alternatives and to find their own bal-
ance between material prosperity and other values. If you feel
the average person values his community too little, a free soci-
ety allows you to engage in an unlimited amount of persua-
sion in order to convince him to value it more highly. Politi-
cal solutions to questions of value force one set of values, typ-
ically those of some interest group, on everyone else.
A system where “government-business partnerships” run
roughshod over property rights is not the free market as
meant by Austrians. In our view, private property is essential
in rationally estimating value. Using the best system we have
of gauging such matters—market prices—we can conclude
that the “growth” such measures promote is, in fact, a reduc-
tion in the wealth of many of those affected, in their own
value judgments.


T KURAN, IN his book, Private Truths, Public Lies: The
Social Consequences of Preference Falsification, suggests
that supposedly voluntary choices are overly influenced
by the fear of disapproval and the desire for approval. Kuran’s
book is, in fact, an excellent study of the interaction between
tradition and individual autonomy. But he has chosen his pri-
mary term badly.
If I do not go to work dressed in only ostrich feathers,
despite the fact that I love wearing them, it is misleading to
call that “preference falsification.” Rather, it shows that my
preferences are influenced by my social milieu. I prefer not
looking ridiculous even more than I prefer wearing ostrich
Imagine a Moslem woman living in a society that legally
permits her to appear in public without a veil. If she chooses
to wear one anyway, due to social pressure, she has not “fal-
sified” her preferences. She has, in fact, expressed her prefer-
ence for complying with social norms instead of “letting it all
hang out.”
Of course people are influenced by their social circum-
stances. Of course they adopt fads, take on “nutty” ideas from
their environment, and are creatures of their time in history,
their social class, and so on. But a man who would replace
other individuals’ choices with his own must answer the ques-
tion of whether he isn’t also a creature of his circumstances.
Those who criticize the choices of others based on the fact
that those choices are overly influenced by social pressure
imagine themselves to be standing outside of society passing
judgment on those “trapped” inside. But man as we know him
? 301

is inherently a social creature, a fact that all of the great Aus-
trian economists have recognized. The intellectual critic of
society is no exception—he is himself embedded in his soci-
Looking at the other side of the coin, communitarians such
as John Gray contend that market behavior is inadequately
influenced by customs, manners, traditional morals, habits,
and so on. Many of those at the recent “globalization” protests
in Seattle, Washington, and Quebec City subscribe to some-
what similar views. Gray complains about the market society
as follows:
The celebration of consumer choice, as the only
undisputed value in market societies, devalues com-
mitment and stability in personal relationships and
encourages the view of marriage and the family as
vehicles of self-realization. The dynamism of market
processes dissolves social hierarchies and overturns
established expectations. Status is ephemeral, trust
frail, and contract sovereign. This dissolution of
communities promoted by market-driven labour
mobility weakens, where it does not entirely
destroy, the informal social monitoring of behaviour
which is the most effective preventive measure
against crime. (Enlightenment’s Wake: Politics and
Culture at the Close of the Modern Age)

But “consumer choice” (or freedom, as we might put it)
allows one to make one’s own decisions between “commit-
ment and stability in personal relationships” and a new
microwave. As Mises says, consumers in the market society
are not choosing only among material objects or things for
sale. The nature of free choice is that the chooser is deciding
what to value. Commitment, stability, love, status, and all
other “human values are offered for option.”

I wonder where Gray has been as governments have
forced resettlements of vast numbers of people, leveled neigh-
borhoods in the name of renewal, and seized property, forc-
ing people to move, through eminent domain?
And just what will Gray do about all of the people who
might move around hither and thither if left to their own
devices? Why, he must stop them, of course! Intellectuals like
John Gray will flit around the world to various think tanks and
conferences, while a blue-collar worker is expected to stay
put, in the place he was born. Gray cannot eliminate the fact
that life involves trade-offs and that better opportunities might
only be available far from home. He cannot eliminate tough
decisions, but he would be happy to make them for you.
Who should decide how much importance someone should
place on such traditional values, “the authorities” or the indi-
viduals whose lives are in question? Although the communitar-
ians have a point in faulting many current government-business
partnerships as disrupting prevailing ways of life, their distress
ought to lead them to reject interventionism, instead of hoping
that future interventions will be more hospitable to communi-
ties. “We” cannot decide how much to innovate and how much
to respect tradition—each of us individually decides this. As
political philosopher Paul Gottfried says in “The Communitari-
Even if the state were to carry out policies that
seemed pro-community, such as changing the
income tax so as to favor large working families, this
would not serve the long-term interest of communi-
ties. It merely provides another cover for political
management, albeit one marketable to the middle
class. But for those serious about communities, the
goal of protecting their institutional integrity is
inseparable from guarding their independence and
their property from political invasion.
? 303

Another common complaint against the market society is
that “we” have lost control of social life to “the market,” which
is now making our decisions for us. For instance, in his book,
The Illusion of Choice: How the Market Economy Shapes Our
Destiny, Andrew Bard Schmookler calls the market
a monster run amok . . . [that], because of its biases
and distortions, carries us to a destination chosen by
that system and not by us. . . . [T]o conclude . . . that
the market allows people to choose their destiny is
a widespread and enormously influential fallacy.

If Schmookler desires a system where everyone can wish
for any destiny that we desire and it will come to us, then he
is wishing for the impossible. Means are scarce, ends are not,
and acting man must somehow cope with the disparity. Those
scarce means must be allocated among competing ends. The
market society allows us to do so based on the prices that
consumers are willing to pay for various consumption goods.
On what basis would Schmookler allocate these resources?
When he says that “we” should choose our destination,
instead of “the market,” by “we” he means the political process.
But we have seen that politics is inherently controlled by spe-
cial interest groups. So, what Schmookler’s request amounts to
is that, rather than each of us making our own choices, various
lobbies and power blocs should make our choices for us.
A market society does not prevent its members from forming
a commune, going on meditation retreats, buying land and turn-
ing it into nature preserves, or any other “nonmaterialist” pur-
suit. If we do not do so, but wish we had, it is merely an attempt
to escape responsibility to blame “the market” for our choices.
If it turns out that consumers prefer “trashy” and “vulgar”
goods, it is not the fault of “the market.” As Mises says in
Human Action:

The moralists’ and sermonizers’ critique of profits
misses the point. It is not the fault of the entrepre-
neurs that the consumers—the people, the common
man—prefer liquor to Bibles and detective stories to
serious books, and that governments prefer guns to
butter. The entrepreneur does not make greater
profits in selling “bad” things than in selling “good”
things. His profits are the greater the better he suc-
ceeds in providing the consumers with those things
they ask for most intensely. People do not drink
intoxicating beverages in order to make the “alcohol
capital” happy.

It is true that we are often at the mercy of the decisions of
others. If I wish to buy an ounce of gold for two dollars, the
fact that others are willing to pay more than two hundred dol-
lars for that same ounce will doubtlessly prevent me from car-
rying out my plan. But it is not some gigantic being called “the
market” that presents me with this difficulty—it is the funda-
mental fact that human desires are unlimited, but the means
to fulfill them are scarce. “The market” is merely a name for
the emergent outcome of myriad individual choices. Other
social systems cannot get around the fact that everyone can-
not have as much gold as they’d like to have. Someone will
decide who gets how much gold, and if it is not the price sys-
tem, it will be the will of the rulers, whomever they may be.
I recall an episode of Star Trek (I think it was in The Next
Generation series) during which, somehow, a twentieth-cen-
tury businessman winds up on the Enterprise. The crew is
shocked by his interest in profit, buying, and selling. The crew
members inform him that, in their time, things are no longer
bought and sold, as there are goods aplenty to satisfy all mem-
bers of society. Now, we might imagine a future in which nan-
otechnology repairs clothes as they wear out and builds houses
? 305

essentially for free. Perhaps food will be so abundant that it is
no longer an economic good. But what about starships? Can
everyone who wants one have one for free? What about beach-
front property in California? What if you want your own planet?
As long as humans are not omnipotent and immortal, our
desires will outstrip the means available to achieve them.
Economics does not hold that the desires of the consumers
are pure or virtuous. It does illustrate that the market process
is the only way to approximately gauge those desires. All
other systems must attempt to impose the rulers’ values on the
ruled. Those who plan on doing the imposing have a very
high regard for their own judgment, and a very low regard for
that of the rest of us. To paraphrase the economist G.L.S.
Shackle, the man who would plan for others is something
more than human; the planned man, something less.
Mises describes those who would coercively replace the
value judgments of their fellow men by their own value judg-
[They] are driven by the dictatorial complex. They
want to deal with their fellow men in the way an
engineer deals with the materials out of which he
builds houses, bridges, and machines. They want to
substitute “social engineering” for the actions of
their fellow citizens and their own unique all-com-
prehensive plan for the plans of all other people.
They see themselves in the role of the dictator—the
duce, the Führer, the production tsar—in whose
hands all other specimens of mankind are merely
pawns. If they refer to society as an acting agent,
they mean themselves. If they say that conscious
action of society is to be substituted for the prevail-
ing anarchy of individualism, they mean their own
consciousness alone and not that of anybody else.
(The Ultimate Foundation of Economic Science)

A Brief History of the Austrian School

T of economics can trace its roots back
to at least the fifteenth century, when the followers of St.
Thomas Aquinas, writing and teaching at the University
of Salamanca in Spain, sought to explain how individual
human action created social order.
These Late Scholastics observed the existence of economic
laws. Over the course of several generations, they discovered
and explained the laws of supply and demand, the cause of
inflation, the operation of foreign exchange rates, and the sub-
jective nature of economic value. Those discoveries are
among the reasons that Joseph Schumpeter called them the
first real economists.
The Late Scholastics were advocates of property rights and
the freedom to contract and trade. They lauded the contribu-
tion of business to society, while opposing most taxes, price
controls, and regulations that inhibited enterprise. As moral
theologians, they urged governments to obey ethical strictures
against theft and murder.
Richard Cantillon, who had been schooled in the scholas-
tic tradition, wrote the first general treatise on economics,
Essay on the Nature of Commerce, in 1730. Born in Ireland, he


later immigrated to France. He saw economics as an inde-
pendent subject and explained the formation of prices using
the method of thought experiments. He understood the mar-
ket as an entrepreneurial process. The Austrian School would
later adopt his theory that money enters the economy in a
step-by-step fashion, disrupting relative prices along the way.
The next notable “Austrian ancestor” after Cantillon was
Anne Robert Jacques Turgot, the French aristocrat who for a
few years was finance minister of France. His economic writing
was limited but profound. His paper “Value and Money” dis-
cussed the origins of money and the reflection in economic
choice of an individual’s subjective preference rankings. Turgot
offered a solution to the famous diamond-water paradox that
baffled later classical economists, articulated the law of dimin-
ishing returns, and criticized usury laws. He favored a classical-
liberal approach to economic policy, recommending a repeal of
all special privileges granted to government-connected indus-
tries. Turgot had noticed the importance of the “particular cir-
cumstances of time and place” two centuries before Hayek:
There is no need to prove that each individual is the
only competent judge of the most advantageous use
of his lands and his labour. He alone has the par-
ticular knowledge without which the most enlight-
ened man could only argue blindly. He learns by
repeated trials, by his successes, by his losses, and
he acquires a feeling for it which is more ingenious
than the theoretical knowledge of the indifferent
observer because it is stimulated by want (Turgot as
quoted in Murray Rothbard’s Economic Thought
Before Adam Smith)

Turgot was the intellectual father of a long line of great
French economists of the eighteenth and nineteenth centuries,
most prominently Jean-Baptiste Say and Claude-Frédéric Bastiat.

Say was the first economist to think deeply about economic
method. He held that economics is not about the amassing of
data, but rather about the elucidation of universal components
of the human condition—for example, the fact that wants are
unlimited but means to aid in their satisfaction are scarce—
and the tracing of the logical implications of these principles.
Say discovered the productivity theory of resource pricing and
the role of capital in the division of labor. He formulated the
famous Say’s Law: there can never be sustained overproduc-
tion or underconsumption if the market process is not ham-
pered by artificial restrictions.
Bastiat, an influential economic journalist, argued that non-
material services are subject to the same economic laws as
material goods. In one of his many economic allegories, Bas-
tiat spelled out the “broken-window fallacy” later employed to
great effect by Henry Hazlitt. He held that there is a general
distinction between bad economists and good economists:
Bad economists look only at “what is seen,” for instance, the
fact that there is work for a repairman when a window is bro-
ken. Good economists look beyond this to “what is not seen,”
noticing that the person paying for the window repair would
have spent that money on something more useful to him, if
he hadn’t been forced to repair the window. Human action
only operates over time, and the gap between initiating an
action and the final discernible ripple of effect from that
action is often significant. If we desire to rearrange social rela-
tions, it won’t do to simply consider the immediate effect of
the reform; we must trace its influence out over time.
Despite the theoretical sophistication of this developing pre-
Austrian tradition, the British school of the late eighteenth and
early nineteenth centuries came to dominate economics. The
British tradition (based on objective-cost and labor-productivity

theories of value) ultimately led to the rise of the Marxist doc-
trine of capitalist exploitation.
The dominant British tradition received its first serious chal-
lenge in many years when Carl Menger’s Principles of Eco-
nomics was published in 1871. Menger, the founder of the
Austrian School, resurrected the Scholastic-French approach
to economics, grounding the science on the subjective valua-
tions of individuals, rather than any objective properties of
goods or labor.
Together with the contemporaneous writings of LĂ©on Wal-
ras and William Stanley Jevons, Menger explained, for the first
time, the theory of marginal utility. In addition, Menger
showed how money originates in a free market when the
most marketable commodity is desired, not for consumption,
but for use in trading for other goods.
Menger’s book was a pillar of the “marginalist revolution”
in economics. When Mises said it “made an economist” out of
him, he was not only referring to Menger’s theory of money
and prices, but also his approach to the discipline itself. Like
his predecessors in this tradition, Menger was a methodologi-
cal individualist, viewing economics as the science of individ-
ual choice. His Investigations into the Method of the Social Sci-
ences came out twelve years after Principles. It battled the Ger-
man Historical School, which had rejected theorizing and held
that the proper scope of economics was the accumulation of
historical data about the economy. To varying degrees, every
Austrian since Menger has seen himself as Menger’s student.
Menger was professor of economics at the University of
Vienna and tutor to Crown Prince Rudolf of the House of
Habs- burg. Unfortunately for the Austro-Hungarian Empire,
Prince Rudolph committed suicide in 1889, before he had an
opportunity to implement any of Menger’s advice on liberal-

izing the empire’s economy.
One of Menger’s most prominent followers was Friedrich
von Wieser, who later held the chair at the University of
Vienna that had been occupied by Menger. Wieser’s greatest
contribution to economics was the theory of opportunity cost.
He also coined the term “marginal utility” (Grenznutzen),
and, as a teacher, was the first major economic influence on
the thought of F.A. Hayek.
In Britain, Philip Wicksteed, an economist whose name is
closely linked with the Austrian School, made the concept of
opportunity cost central to his work, Common Sense of Politi-
cal Economy. He also rejected the notion of economics as the
study of wealth, and explored the process by which markets
move toward equilibrium. Later, Ludwig von Mises would
draw inspiration from Wicksteed’s insistence “on the univer-
sal application of the conclusions which flow from our under-
standing of human purposefulness and rationality in the mak-
ing of decisions” (Israel Kirzner, “Philip Wicksteed: The British
Austrian,” in 15 Great Austrian Economists).
Menger’s follower Eugen von Böhm-Bawerk took Menger’s
theories and applied them to capital and interest. His History
and Critique of Interest Theories, which appeared in 1884, is a
sweeping account of fallacies in the history of thought on
interest. It defends the idea that the interest is not an artifi-
cially imposed construct but is an inherent part of human
action. Interest is a product of the fact that time preference
runs in only one direction—that, all other things being equal,
we always prefer our satisfactions sooner rather than later.
Frank Fetter, Ludwig von Mises, Murray Rothbard, and Israel
Kirzner later expanded upon his theory.
Böhm-Bawerk’s Positive Theory of Capital demonstrated
that the normal rate of business profit is the interest rate. Cap-

italists save money, pay laborers, and wait until the final prod-
uct is sold, collecting interest for the time period involved. He
also held that capital is not homogeneous but is an intricate
and diverse structure with a time dimension. A growing econ-
omy is not just a consequence of increased capital investment,
but also of more roundabout processes of production.
Böhm-Bawerk engaged in a prolonged battle with the
Marxists over the exploitation theory of capital, and refuted
the socialist doctrine of capital and wages long before the
communists came to power in Russia. Böhm-Bawerk also con-
ducted a seminar that would later become the model for that
of Mises.
Böhm-Bawerk, in the last years of the Habsburg monarchy,
served three times as finance minister. In that role he advo-
cated a balanced budget, the gold standard, free trade, and
the repeal of export subsidies and other monopoly privileges.
It was his research and writing that solidified the status of
the Austrian School as a unified way of looking at economic
problems, and set the stage for the school to make converts
in the English-speaking world. One economist who took up
the Austrian banner was Frank Fetter, an American.
Fetter’s Principles of Economics (1904) was the best sys-
tematization of Austrian thought prior to the work of Mises in
the 1940s. Fetter developed the pure time preference theory
of interest, achieving a unified theory of value for capital, rent,
wages, and consumer goods, leaving only money outside its
scope. He taught economics at Cornell, Indiana University,
Stanford, and Princeton.
The final topic in classical economics for subjective value
theory to reformulate was money, the institutional intersection
of the microeconomic and macroeconomic approach. A

young Mises, economic advisor to the Austrian Chamber of
Commerce, took on the challenge.
The result of Mises’s research was The Theory of Money and
Credit, published in 1912. In that work, he demonstrated that
the theory of marginal utility applies to money. He laid out his
regression theorem, an elaboration of Menger’s theory of the
origin of money, showing that money not only originates in
the market, but that it could not have done so in any other
way. Drawing on the British Currency School, Swedish econ-
omist Knut Wicksell’s theory of interest rates, and Böhm-Baw-
erk’s theory of the structure of capital, Mises presented the
outline of the Austrian theory of the business cycle. A year
later, Mises was appointed to the faculty of the University of
Vienna. Böhm-Bawerk’s seminar spent a full two semesters
debating Mises’s book.
Mises’s monetary theory received attention in the United
States through the work of Benjamin M. Anderson, Jr., an
economist employed at various times by Columbia, Harvard,
Chase National Bank, UCLA, and Cornell. His major works
included The Value of Money, a critique of Irving Fisher’s
quantity theory of money, and Economics and the Public Wel-
fare, a study of the U.S. economy from World War I through
the end of World War II.
World War I interrupted Mises’s career for four years. He
spent three of those years as an artillery officer, and one as a
staff officer in economic intelligence. At the war’s end, he
published Nation, State, and Economy, arguing on behalf of
the economic and cultural freedoms of minorities in the now-
shattered empire, and theorizing on the economics of war.
In the political chaos after the war, the main theoretician of
the socialist Austrian government was a Marxist, Otto Bauer.


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