In his
Introduction, Mises argues that economics emerged as a science when a regularity in the sequence and interdependence of market phenomena was discovered. He notes the challenges faced by economics as a new science, particularly in being accepted as a legitimate branch of knowledge, and discusses various schools of thought that rejected the achievements of economic thought. Mises refutes common criticisms against economics, stating that the ideas of classical economists have improved the general standard of living by promoting liberal policies and technological improvement. He also argues that economic problems cannot be isolated as they are just a segment of a general science of human action.
Part One: Human Action Chapter 1, "Acting Man", explains the concept of
human action, which is defined as"purposeful behavior" and distinguished from reflexive behavior in that an observer imputes a goal to the actor.
Praxeology is the science of action as such, which studies the results deduced from the fact that people have goals and adopt means to achieve them. The text addresses the concept of happiness and instinct, where
happiness is defined entirely by the subjective goals of the individual actor, and humans can suppress their biological urges. Praxeology is subjective, as it takes actors' subjective ends as they exist in the minds of each person, but by refraining from passing judgment on these ends, it remains objective. Causality is necessary for action, and the
Heisenberg uncertainty principle does not alter this. Finally, the text introduces the concept of the alter ego, where all events must fall in the realm of
teleology or causality.
Chapter 2, "The
Epistemological Problems of the Sciences of Human Action", is about the sciences of human action, praxeology, and history. "History is the collection and systematic arrangement of all the data of experience concerning human action." The text emphasizes that praxeology concerns the actions of individuals and deals with individual actions, not vague action in general. The historian can rely on other disciplines but must use his prior value judgments and theories to determine what is relevant and then present the facts accordingly. The limitations on praxeological concepts are also discussed.
Chapter 3, "Economics and the Revolt Against Reason", discusses the topic of
polylogism, which is the belief that different groups of people, such as different races or social classes, have fundamentally different ways of thinking and reasoning. Mises argues that this idea is not supported by evidence and is instead used as a way to discredit opponents' arguments without actually addressing them.
Chapter 4, "A First Analysis of the Category of Action", discusses the concept of ends and means, where the
end is the result sought by an actor and the
means are used to attain the end. Praxeology analyzes an actor's goals and beliefs to explain market phenomena. Economics can be built on the subjective scale of values possessed by actual individuals.
Chapter 5, "Time", discusses the temporal character of praxeology, the study of human action. While praxeology is a logical system, it is intimately related to time, The
present is not defined as a unit of duration but rather as the presence of a ripe opportunity to take potential action. and must be economized even in a hypothetical paradise where all material needs are met. It is pointless to judge the actions of individuals with reference to their value scales. Action implies uncertainty because if the future were known, there would be no impetus to act. There are two fields of probability, class and case probability, with the former applicable to natural sciences and the latter applicable to social sciences.
Case probability is applicable when we know some factors that will affect a particular event, but we are ignorant of other factors that will also influence the outcome.
Betting is when a man risks money on an outcome where he knows some of the factors involved, while
gambling is when he risks money on an outcome where he knows only the frequencies of the various elements of the class. Praxeology can make certain qualitative predictions about the future, but quantitative forecasts are not certain.
Chapter 7, "Action Within the World", covers several topics related to economics and human action, including the law of marginal utility, the law of returns, human labor as a means, and production. The
law of marginal utility refers to the fact that the utility of successive units of a given good decreases, as the actor will apply the additional units to less and less urgent ends. Marginal utility is always defined according to the subjective framework of the actor in question. The
law of returns describes the quantitative causal relations of the world, specifically in relation to producer goods. A given unit of a producer good must always act in combination with at least one other producer good to yield a definite quantity of a consumer good. meaning that actors will not devote the physiological-maximum amount of labor to achieve attainable ends. The creative genius is an exception to this, as they do not labor for immediate or mediate gratification. including the benefits of the
division of labor, the superiority of
social cooperation, and the
Ricardian Law of Association. The text also talks about the effects of the division of labor on society, the emergence of man as a social being, and the
Great Society. Finally, the text addresses the instinct of aggression and destruction and how it has been overcome by social cooperation. Firstly, human action is distinguished by reasoning, and while reasoning may be faulty, it is always the individual who thinks, and tradition and language allow present actors to incorporate their ancestors' reasoning into their own thinking. Secondly, a
worldview serves as both an interpretation of all things and a guide to action, while
ideology is more restricted to human interaction over earthly concerns. Lastly, the notions of progress and retrogression only make sense in the context of an actor's plan, and the fatal flaw of 18th- and 19th-century rationalists and (classical) liberals was their faith in the decency and wisdom of the common man.
Chapter 10, "Exchange Within Society", discusses the concepts of
autistic exchange, which concerns only one actor, and
interpersonal exchange, which involves cooperation between two or more individuals. People can cooperate in either a contractual or hegemonic relationship, with contractual societies being more peaceful than hegemonic ones. All action involves the use of ordinal numbers to rank possible outcomes, but the use of cardinal numbers requires special conditions and developed in the context of a contractual society. The ability to apply
arithmetic to various fields is crucial for modern civilization, and economics itself can be described as a theory of human action that relies on calculation. and how actors value means based on the ends they can achieve. Historically, economists believed that money was neutral and served only to facilitate "real" transactions, and that items exchanged in a market were of equal value. explaining that technology alone cannot solve the problem because each means of production is more or less suitable for a wide range of ends, and thus each means is
substitutable for others but to varying degrees, depending on the task. explaining that money prices established in a market are not measurements of value, but rather historical facts that provide a guide to future action. Economic calculation is used to make decisions based on monetary values, but it cannot account for things that do not exchange for money. Attempts to stabilize the purchasing power of money suffer from difficulties such as the fact that prices consist of money and there is no immutable unit of value. The popularity of the idea of
stabilization comes from the desire for a secure arena outside the uncertainty of the market. Historically, moneys that originated on the market, such as
gold and silver, were adequate for economic calculation, but government inflations changed this.
Monetary calculation evaluates potential actions based on expected costs and revenues and past actions with the accounting of profit and loss.
Part Four: Catallactics or Economics of the Market Society Chapter 14, "The Scope and Method of Catallactics", focuses on the science of human action or praxeology, which studies goal-seeking, rational behavior. The chapter describes the delimitation of catallactic problems, which involve analyzing the formation of money prices for all goods and services exchanged on a market. Other topics covered in the chapter include the autistic economy, the state of rest, and the evenly rotating economy.
Chapter 15, "The Market", focuses on the characteristics of the market economy, capital, capitalism, the sovereignty of consumers, competition, freedom, and
inequality of wealth and
income. In the market economy, individuals specialize in their occupations, and the means of production are privately owned. Competition entrusts control of scarce resources to those who are most likely to satisfy the wants of consumers, Freedom and liberty are the most precious goods to many thinkers in the Western tradition, valuation and appraisement, the prices of goods of higher orders,
cost accounting, and logical catallactics versus mathematical catallactics. The
pricing process in an organized market is determined by the subjective valuations of consumers and entrepreneurs, who appraise goods to make buying decisions that cause price formation. A
monopolist violates consumer sovereignty when they restrict output below the competitive level.
Monopolistic buyers can restrict demand, but they cannot earn a specific gain like monopolistic sellers can.
Monopoly prices generally impair consumer happiness, except when a product would not be produced without monopoly prices for an essential input.
Price discrimination can occur on the part of both sellers and buyers, but it can only happen under certain conditions and may not persist on a free market. The prices of goods are related because they compete for the money of buyers, and labor is required for every good, making them interrelated on both the consumption and production side. The market process directs the factors of production into those lines that best satisfy the desires of the consumers. It is nonsense to speak of non-market prices because market prices take into account all relevant facts. Any attempt to alter prices would ignore these real considerations, which would ultimately make consumers poorer. and the errors associated with it.
Indirect exchange requires a medium of exchange, where a good or commodity is used to facilitate a more ultimate exchange. The "
equation of exchange" is a
faulty method of
analyzing money because it assumes that the
level of prices and
total output are meaningful concepts, leading to the flawed notion of the
neutrality of money. and the
demand for money depends on its exchange value. Changes originating from the money side can only redistribute wealth and cannot make the community richer. If people expect the purchasing power of money to change, they will adjust their cash holdings accordingly and speed up the process, which may result in the abandonment of the currency causing the "crackup boom" (Katastrophenhausse). Money substitutes perform all the services of money and become a money substitute if there is a claim to a definite amount of money, payable and redeemable on demand, such that no one doubts the solvency of the debtor. If the debtor has issued more money substitutes than it can redeem with money proper, then the "unbacked" portion of the claims become fiduciary media. Mises discusses various topics related to money, trade, and inflation. People decide on the appropriate size of cash holdings based on subjective
marginal utility, and it is possible to hold too much cash.
Credit transactions carried out in the same currency tend to yield the same interest rates for comparable credit risks, and
secondary media of exchange are goods that are still quite marketable but not as much as the money good. In a market economy free from government expansion of the money supply,
prices would generally fall over time, and its role in human action. It explains how all actions are directed towards the improvement of future conditions, but people do not value fractions of time equally. It emphasizes that
time preference is essential to action and implies that present goods are more valuable than future goods, if the only difference is their date of availability. and how lengthening the period of production requires savings. and even cash is not a completely free form of capital.
Maintaining or increasing capital, for Mises, means maintaining or increasing the
productivity of future efforts at
want satisfaction, which can only be accomplished through saving.
Capital consumption occurs when the consumption takes such a large portion of current output that the remainder devoted to new capital goods is insufficient to replace the depreciation of the capital stock. He explains that entrepreneurs hold cash balances, and
saving and investment are necessary for
accumulating additional capital.
Chapter 19, "The Rate of Interest", explains the
phenomenon of interest.
Originary interest is the discount applied to future goods versus present goods, and is ultimately due to the universal phenomenon of time preference. It explains the higher market price for present goods versus future goods. The supply of capital goods bears no necessary relationship with the
rate of interest.
Chapter 20, "Interest, Credit Expansion, and the Trade Cycle", discusses the
neutral rate of interest and the problems associated with it. It explains that the neutral rate of interest is the hypothetical, single rate of originary interest that would prevail in an imaginary, perfectly competitive economy. The chapter also discusses the credit expansion, which is responsible for the business cycle. It explains that the actual gross rate of interest quoted in a loan contract reflects not only the pure rate of originary interest, but also an entrepreneurial component bringing them all into conformity with the originary rate of interest. The crucial function of the market interest rate is to coordinate the duration of production processes. Then, there is a discussion on credit expansion as well as the
monetary theory of the
trade cycle. In
credit expansion, the
government artificially increases the money supply by lowering interest rates, which leads to a boom period with
malinvestments, and ultimately to a bust phase. Finally, the
depression is the necessary readjustment phase to correct the malinvestments that occurred during the boom. and identifies four reasons why people undertake labor, which may include building strength, religious duty, and avoiding mischief. and how these experiences do not affect the
disutility of labor. The text also explores the determination of
wages through competition in the
labor market, where wage rates are determined by the
marginal productivity of labor. Then, Mises discusses various topics related to wages, subsistence, and the labor market. The classical economists explained wage rates and land use. The
classical trichotomy of land, labor, and capital is shown to be untenable, and some land must be withdrawn from agricultural or other "productive" uses to be used as the foundation for homes,
office buildings, factories, etc. The price of a piece of land is equal to the sum of its future rents, discounted by the rate of interest. The romanticized notion of land as a noble source of livelihood is discredited, as actual
peasants view land as a means for the satisfaction of wants. Economics does not assume that man is free, but rather deals with the fact of scarcity and the role of coercion in people's behavior in the marketplace.
Theorems of catallactics apply to private ownership of the means of production, and division of labor. The real man and his actions are the focus of economics, not economic man or a statistically average man. The market adjusts to changes in data, but entrepreneurs must anticipate the rate of adjustment. Cases of external costs reflect loopholes in the legal system rather than flaws in private property.
Legal restrictions on the market may lead to monopoly gains or differential rents. Mises also discusses how the
limitation of offspring is necessary for maintaining higher
standards of living and that private property is essential to the market economy. He emphasizes that there is a harmony of interests among all people and that conflicts only arise due to
government interference in the market. and that respecting
private property is the liberal solution to these issues. which emerged from classical liberal writers' depiction of an all-powerful and benevolent king who could achieve socially beneficial outcomes similar to those of a market economy. but contributed to it with the idea of polylogism and the inevitability of socialism. The praxeological critique of socialism is not over the choice of ends, but whether socialism can
effectively allocate resources to achieve the most desirable outcome from the dictator's point of view. The lack of economic calculation in socialism means that planners cannot compare the benefits and costs of different uses of scarce resources, making planning impossible. The failure to conceive of this problem is attributed to the focus of mathematical economists on
static-equilibrium states in their formal models, which do not require
entrepreneurship and can be achieved without the use of money. The absence of a market test of profit and loss in socialism means that the planner cannot resort to trial and error. The recent proposals for "
market socialism," which suggest that planners give instructions to plant managers to behave "as if" they were in a market economy, are also argued to be untenable. The differential equations of
mathematical economics do not provide guidance for how the planner should move toward the desired end state while maintaining a satisfactory condition during the transition phase.
Part Six: The Hampered Market Economy Chapter 27, "The Government and the Market", discusses the idea of a third economic system that is neither pure capitalism nor pure socialism. He explains that there are two patterns for the realization of socialism, the
Lenin/
Russian pattern where all enterprises are nationalized, and the Hindenburg/German pattern where the appearance of a market is retained but
all activity is directed by the central authority. Mises argues that the purpose of government is to ensure the smooth operation of the market economy by enforcing
property rights and that direct government interference with consumption choices can be analyzed by economics. He also explains that the concept of "
laissez-faire" does not mean doing nothing in the face of unsatisfactory social conditions, but rather it is about allowing individuals the
freedom to plan their own lives versus granting all power to the government. Finally, Mises suggests that a voluntary system based on ethical or religious ideals could be a possible
social arrangement, but specific guidelines would be needed to ensure its success.
Chapter 28, "Interference by
Taxation", discusses taxation and its
effects on the market. Mises argues that the goal of
neutral taxation, where prices are not disturbed by the system of taxation, is unachievable as every system of taxation will affect market prices to a greater or lesser extent. The chapter also explores the concept of a total tax, where the government confiscates all income or wealth and redistributes it back to its subjects, and the fiscal and nonfiscal objectives of taxation, which can sometimes be in conflict. Finally, the various methods of taxation are classified into three groups, with the third class being a vehicle for the achievement of socialism, and will be discussed in later chapters.
Chapter 29, "Restriction of Production", discusses government restrictions on the free market and their impact on production and consumption. Such restrictions inevitably make people poorer and alter the pattern of production. While it is possible that some restrictions may be justified if their benefits outweigh their costs, typically government restrictions fail to achieve their stated purpose, and are unjustified. Despite making the entire nation poorer, each restriction can bestow benefits on a subset of the population, which makes it politically difficult to remove them. Restrictions can also be used to shield domestic industries from the immediate consequences of regulations. Measures like maximum workweeks and other "prolabor" laws are part of a quasi-consumption program and do not raise standards of living. They also alter the structure of production, leading to the opposite effect of what was intended.
Minimum wage rates and labor union violence also affect the market, as they raise wages for some workers, but reduce wages in other sectors. Ultimately, the only way to raise wages is to increase capital per worker, which labor unions have historically opposed. including
legal tender laws and
currency manipulation. Governments historically certified the weight and fineness of coins used as money, but many abused this privilege by
debasing the coins and forcing people to accept them as legitimate. Mises discusses credit expansion, which can occur even on an
unhampered market. A government may decree a maximum price for units of a foreign currency, which leads to a shortage of the foreign currency, blamed on speculators and an unfavorable
trade balance. The government can resort to makeshifts to ease the problem, but it cannot help the trade balance in the long run. Mises argues that
production and distribution are integrated under capitalism, and confiscation can lead to capital consumption and discourage producers from investing. Finally, it argues against the claim that confiscatory taxation reduces entrepreneurs' appetite for risk-taking, arguing that the harm lies in reducing incentives for capital accumulation and consumption.
Chapter 33, "
Syndicalism and
Corporativism", discusses syndicalism,
guild socialism, and corporatism. Syndicalism can refer to
revolutionary tactics to achieve socialism or a method of economic organization that aims to
give workers ownership over their plants and equipment. However, the root of the syndicalist idea is the mistaken belief that entrepreneurs and capitalists are
analogous to kings and aristocrats. Syndicalist policies grant
privileges to a minority of workers that result in a
lower standard of living for the immense majority.
Guild socialism and corporatism aim to form
monopolistic bodies where each branch of business has full autonomy to determine internal affairs. However, the essential flaw in this scheme is that entire branches of production cannot be "autonomous" under the division of labor. In
practice, guild socialism will revert to outright socialism. Before the
French Revolution, wars in Europe were generally limited and waged by professional soldiers, but modern states engage in
total war due to
interventionism and
central planning. However, the government's attempt to maintain workers' real take-home pay during
World War II led to market intervention, including
rationing schemes and
price controls. Ultimately, Mises believes that interventionism generates economic nationalism and bellicosity, and only laissez-faire policies can lead to durable peace.
Chapter 35, "The Welfare Principle Versus the Market Principle", provides a response to three
criticisms against the
market economy: poverty,
inequality, and
insecurity. Regarding poverty, Mises argues that capitalism and the rise of industry have allowed for more people to work and support themselves, while interventionism has hindered private charitable efforts.
Chapter 36, "The Crisis of Interventionism", argues that interventionism has led to negative consequences such as world wars, depressions, famines, and civil wars, but these have been wrongly blamed on capitalism. Interventionism has now reached its end as it has exhausted its potentialities. The three reasons why interventionism must come to an end are that restrictive measures cannot constitute a system of production, intervention in the market fails to achieve its ends and aims at seizing the surplus from one group and giving it to another, and once the surplus is gone, interventionism must end. Even though most European countries have adopted socialism, they can still rely on the market prices generated in capitalist countries. It is also noted that convincing the majority of the public is necessary for the insights of
economic theorists to improve civilization. The chapter concludes by criticizing the old liberals for assuming that the majority would support capitalism based on its benefits and their ability to
reason correctly, without anticipating the success of
anticapitalist propaganda.
Chapter 38, "The Place of Economics in Learning", explains, firstly, that the establishment of an institute for business-cycle research is not sufficient to find cures for business cycles. Clear thinking and sound
economic theory are needed. Thirdly, economists can only
predict the general timing of
boom-bust cycles, and successful entrepreneurs need to have better
forecasts than their
rivals. Fourthly, although economics is a unified whole, university professors engage in
compartmentalized analyses, and the fallacies of
interventionism preached by professors may lead some students to support
socialism. Fifthly, the conflict between different
interpretations of history and economics exists in
schools, but most students are too
immature to
choose among them, and teachers cannot present them
neutrally. Lastly, modern
governments
suppress freedom of economic thought, but citizens have a
duty to familiarize themselves with basic economic theory, as modern
political controversies revolve around the
conflict between socialism and the market economy.
Chapter 39, "Economics and the Essential Problems of
Human Existence", explores the
relationship between science and life, economics and
judgments of value, and economic
cognition and
human action. Critics argue that science is sterile because it is
value-free, but Mises argues that science provides humans with the information they need to properly form their valuations and choose the proper means to achieve their desired ends. He also addresses criticisms that economics smuggles value judgments into its analyses, and that it assumes
people are only concerned with material well-being, stating that economics deals with action as such and does not make assumptions about the objectives of action. Finally, Mises discusses the three restrictions on human freedom to act and choose, with the third restriction – the regularity of phenomena due to the connection between means and ends – being the subject of
praxeology. If people ignore praxeology's teachings, "they will not annul economics", but "they will
stamp out society and the human race." ==Publishing history==