Friday, July 27, 2012

Different Individuals’ Preferences Can’t Be Combined



If preferences are subjective to each individual, and cannot even be measured or quantified for each individual, then obviously it would make no sense at all to try to combine or aggregate individual preferences into “social” preferences. Unfortunately, even professional economists often engage in just this type of reasoning. Many people (try to) justify progressive income taxation, for example, by claiming that “a dollar means more to a poor man than to a rich man.” The idea is that taking $1 million from Bill Gates won’t lower his utility very much, whereas handing out $1,000 to a thousand different homeless people will greatly boost each of their utilities. Therefore, the typical argument goes, total or “social” utility has been increased by the redistribution of some of Bill Gates’s wealth.
In Lesson 18 we will examine the consequences of progressive income taxation. For now, we point out that the typical justification for it is absurd. You can’t add up different amounts of utility from various people. In fact, if you use the alternate term preferences it will be more apparent why combining them from different people is an impossible task. It makes sense to ask, “What is the total weight of the population?” or “What is the average age of the population?” It does not make sense to ask, “What is the total preferences of the population?” or “What is the average amount of utility per person?”
To make sure you understand just how nonsensical it is to (attempt to) perform arithmetical operations on different people’s preference rankings, once again let’s switch to the analogy of friendship. Suppose that Sally and Larry have the following “friendship rankings”:
Friendship Rankings

Before continuing, make sure you understand the table: Sally has five friends total. Her best friend is Bill, her second-best friend is Mary, and so on. Larry, on the other hand, only has two friends. His best friend is Joe, and Bill is his second-best friend. Notice that even among their shared friends, Sally and Larry don’t have the same ranking order. Sally thinks Bill is a better friend than Joe, while Larry thinks that Joe is a better friend than Bill. There is nothing strange about this, because preferences are subjective.4
Now suppose a busybody school administrator comes along and says, “This is terrible! Poor Larry doesn’t have as many friends as popular Sally! I have a great idea to make things fairer. I’ll write a note in Sally’s handwriting that says, ‘You smell!’ and put it in Adrian’s lunch bag. This will cause a big fight between Adrian and Sally, so he won’t be her friend anymore. Then I’ll arrange it so that Adrian sits near Larry on the school bus. They will eventually become friends. I can’t predict whether Adrian will become Larry’s 1st, 2nd, or 3rd-best friend, but no matter what, he will be ranked higher as a friend of Larry than he was as a friend of Sally. Through my benevolent intervention, I will have increased the total amount of friendship among the children.”
Obviously the above story is quite silly. But we have used a silly story to demonstrate the silliness of trying to add up subjective, individual preferences. Hopefully you can now see that trying to increase “social utility” by taking money from a rich man and giving it to a poor man, is simply nonsensical. Perhaps proponents of progressive taxation can justify it on other grounds, but appealing to the economic concept of preferences (or utility) doesn’t get the job done.

Lesson Recap...
Once we decide to classify certain events as purposeful actions, we can make further logical deductions. For example, for every action there must be an actor, an intelligent person who performed the action. Although people can act in combination with each other, any particular action is performed only by one person.
We interpret someone’s action by saying he or she has preferences. These are the goals that a person tries to achieve through actions.
Economists say that preferences are subjective, meaning that they are unique to each person. To call preferences subjective doesn’t condone or applaud them, it simply recognizes that people have different tastes.

NEW TERMS
Preferences: An individual’s goals or desires. Economists interpret a person’s actions as attempts to satisfy his or her preferences.
Goods: Scarce physical items that an individual values because they can help to satisfy his preferences.
Service: A person’s performance of a task that another person values because it helps to satisfy preferences. Services are the “goods” that people create through their labor power.
Subjective: Unique to each individual; “in the eye of the beholder.”
Utility: A term common in economics textbooks to describe how much value a person gets from a good or service.
Progressive income taxation: A system that taxes individuals or corporations at higher rates based on the level of income

Why is it questionable to say, “Germany attacked France”?
Why do statements about a man’s actions (implicitly) involve his beliefs as well?
Can purposeful action be based on a faulty belief? Give examples.
What does it mean when economists say preferences are subjective?
Does economics say you shouldn’t give money to charity?

Lessons for the Young Economist

Thursday, July 26, 2012

Preferences Are a Ranking, Not a Measurement Using Numbers - Robert P. Murphy


Because preferences are tied to a person’s exchanges, the preferences can only reveal a ranking of goals. When Mary chooses vanilla over chocolate ice cream, this purposeful action only indicates that she prefers vanilla. We can’t determine “how much” Mary prefers vanilla over chocolate; indeed, that statement doesn’t even make sense in terms of strict economic logic.
In everyday conversation, we all know what it means to say that “Mary really prefers vanilla over chocolate but her sister Jane only slightly prefers vanilla to chocolate.” But it’s important for you to see that this type of talk makes no sense in terms of the preferences that we use in economic reasoning.
After all, what does it really mean—from the standpoint of pure economic logic—to say that Mary has a preference for vanilla over chocolate? All it means is that, faced with a choice between the two flavors, Mary would pick vanilla. But that is the same thing we can say about her sister Jane, whose friends would testify that she has only a “slight” preference for vanilla. Jane too, when faced with a choice, would pick vanilla over chocolate. So in terms of logical deductions that we can make based on a person’s purposeful actions, all we can say as economists is that both girls exhibit a preference for vanilla over chocolate.
We can take this train of thought further to drive home the lesson. Even if Jane announces, “I just barely prefer vanilla to chocolate!” that wouldn’t give an economist the ability to conclude that her preference for vanilla is “less intense” than Mary’s. No, it would merely allow the economist to conclude that Jane preferred to yell that particular sentence, versus yelling something else or keeping her mouth shut. Remember, we are using the notion of a person’s subjective preferences to explain the concrete actions that the person takes. If someone utters a statement, that informs economists about the person’s preferences all right, but only because the utterance itself is a purposeful action!3
To help you remember the points of this lesson, consider the analogy of friendship. For example, Sally might have three friends, and so we could say that in her mind she holds feelings of friendship for each of them. We can push it further and ask Sally to rank her friends. She might say that Bill is her best friend, that Mary is her second-best friend, and that Joe is her third-best friend. Such talk is perfectly meaningful.
But what if we then asked Sally how much better a friend Bill was than Mary? Now things start to sound a little strange. And if we asked her, “Does Bill possess at least 30% more friendship than Joe?” we would have entered the realm of the absurd. The moral of this story is that it makes sense to rank friends, but even so there’s still no such thing as an objective “unit of friendship” behind the scenes, driving our ranking.
The same is true with preferences in general, at least as we use them in economics. As you will learn in upcoming lessons, to understand and describe exchanges, we need to assume that people have a ranking of goals or ends. People take actions to satisfy their most important preferences, or to achieve their highest goals. We do not have to say that people have a mathematical “utility function” that they seek to maximize, even though such talk is commonplace in other economics textbooks. This alternate approach is only useful in coming up with specific answers to contrived numerical problems; it doesn’t actually shed more understanding on the process of exchange. In fact, the use of mathematical utility functions is very harmful when learning basic economic principles, because it often causes the student to forget where the notion of preference comes from in the first place.

An Alternate View
Even professional economists do not always heed the principle that preferences are a ranking, not a measurement. For example, economists often use the term utility to describe how much pleasure or satisfaction a person gets from a particular situation. Therefore they might describe our scenario by saying, “Mary chose vanilla ice cream because it gave her more utility than the chocolate ice cream would have given her.”
So far, so good. But then many economics textbooks push it further and start assigning numbers to measure how much utility, so that (say) Mary gets “55 utils” from vanilla but only “34 utils” from chocolate, and so in order to “maximize utility” she obviously chooses the vanilla. If you are taking a Ph.D-level class, the textbook will explain that “utils” don’t really exist, the way “kilograms” are an objective unit of weight and “meters” are an objective unit of height. Instead, the Ph.D.-level textbook will explain, economists can use mathematical utility functions just as a convenient shortcut to describing preference rankings. So when the function assigns “55 utils” to a bowl of vanilla ice cream but only “34 utils” to the chocolate, all that really means is that Mary would choose the former over the latter. The utility function could just as well have assigned “18.7 utils” to the vanilla and “2.3 utils” to the chocolate; the important thing is that Mary acts “as if” she is maximizing this arbitrary mathematical function.
In this book, we will not be using the confusing terminology of “utils,” and we won’t be performing calculus on “utility functions” the way other economics textbooks do. These practices, though common, are dangerous because they can mislead you into thinking that we are measuring the amount of psychic satisfaction an individual derives from particular actions.
It may be that one day neuroscientists come up with an objective way to quantify various degrees of happiness, such that they can coherently talk about Mary being “three times more satisfied” than Bill. But even if this happens, our point here remains the same: In the field of economics, such talk is meaningless. In economics, we use terms like “preferences” as a way to explain or describe the purposeful actions of individuals. When someone chooses one thing over another, all we can conclude is that the person preferred the chosen item over the discarded item. Psychologists or neuroscientists (or even common sense) might shed more light on the event, but economic logic per se can go no further. The economist isn’t claiming to have all the answers; far from it! The economist is actually being humble here by admitting the limits of what economic reasoning can say about a given event. In Lesson 6, we will see how subjective preference rankings interact to yield objective market prices. At that time, you will understand better why we are stressing these points in this lesson.

Lessons for the Young Economist

Wednesday, July 25, 2012

Preferences Are Subjective - Robert P. Murphy




Because preferences are tied to specific individuals, we say that preferences are subjective. Loosely speaking, the difference between a subjective versus an objective statement, is akin to the difference between an opinion versus a fact. It makes sense to say, “Mary prefers vanilla ice cream to chocolate, but John prefers chocolate ice cream to vanilla.” These two statements are perfectly compatible, because preferences (in this case, preferences for ice cream flavors) are subjective and can differ from person to person.
In contrast, it does not make sense to say, “The ice cream has 300 calories for Mary, but 280 calories for John.” The number of calories in a serving of ice cream is an objective fact; it can’t differ from person to person. Mary and John might disagree with each other about how many calories the ice cream has, but in that case at least one of them is simply mistaken. Yet both of them could be simultaneously “correct” when Mary says, “Vanilla tastes better than chocolate,” while John says the opposite. To repeat, Mary and John can disagree with each other about which flavor of ice cream tastes better—with neither one nor the other being wrong—because preferences are subjective. There is no “fact of the matter” concerning which ice cream tastes better, the way there definitely is an objective way to demonstrate how many calories are in a serving.
Warning! Many critics of economics—both from the progressive “left wing” as well as the religious “right wing”—totally misunderstand what economists mean by saying that preferences are subjective. These critics think that economists are somehow endorsing moral relativism, or that they are saying no one can judge the actions of anyone else. But these complaints are without merit, because economists aren’t saying those things at all!
Remember, we are simply tracing out the logical implications of our decision to classify observed behavior as purposeful action. If we see Mary go up to the counter and choose vanilla ice cream, while we see John go up to the counter and order chocolate, we won’t get anywhere in our understanding unless we realize that Mary and John have different tastes when it comes to ice cream flavors. As we will see more clearly in Lesson 6, the only satisfactory way to explain market prices is to first recognize that preferences are subjective. This recognition in no way condones the preferences of particular individuals.
For example, an economist can’t possibly explain the price of tobacco without acknowledging that some people prefer to spend their money on cigarettes, rather than on other products. After the economist states this fact, he can—with perfect consistency—then ground his teenage son when he catches him smoking in the garage with his hooligan friends. If you’re still not seeing the distinction between professional analysis versus personal beliefs, forget about economics and consider an FBI profiler. To track down a serial killer, the profiler needs to “think like the killer,” and try to understand what desires are causing the killer to act the way he is. Obviously this analysis doesn’t mean that the profiler is neutral with regard to the actions the killer takes, or that murder “is a personal choice.”
To sum up: When people engage in purposeful actions, they are motivated by desires that are not necessarily identical from person to person. In order to explain exchanges, economists must recognize that preferences are subjective.




Lessons for the Young Economist

Tuesday, July 24, 2012

Individuals Have Preferences - Robert P. Murphy



Besides the (obvious) point that an action requires an actor, we can draw further deductions. When we say that an individual performs a purposeful action, we mean that he has a purpose or a goal in mind. Remember, we don’t say that the baseball “wants to fall back to the ground.” But we would say, “The pilot landed the helicopter because he wanted to use the bathroom.”
So we see that when we discuss purposeful, intentional actions by others, we are implicitly saying that they have opinions or desires about how the world should unfold. In economics, we use the word preferences to describe these feelings; people act the way they do because they prefer the world to unfold one way, rather than another. For example, when we say, “Bill drank the soda because he was thirsty,” we are automatically also saying (even if we don’t speak the words), “... and Bill prefers to not be thirsty.” After all, it wouldn’t make much sense to say, “Bill drank the soda because 2+2=4.” The reason it does make sense to say, “Bill drank the soda because he was thirsty,” is that we can read between the lines, as it were, and fill in the unspoken claim that Bill is unhappy with his condition of being thirsty.
As you may have noticed, there is another unspoken truth that is packed into our simple statement about Bill’s chugging of the soda. When we decide to classify his behavior as a purposeful action, we are also deciding that Bill himself must believe that drinking soda can relieve thirst. After all, if a case of soda fell out of an airplane into a primitive village, the people who discovered it might have no idea that puncturing the hard shells and pouring the dark liquid into their mouths would relieve the unpleasant feelings of thirst. (And they certainly wouldn’t realize how much it would rot their teeth.) Instead, they might consider the cans sacred (since they fell from a giant flying object that they had never seen before), or their musicians might incorporate them into other forms of purposeful action, having nothing to do with thirst.
It’s important to realize that a person’s beliefs can be wrong, and yet still motivate a purposeful action. For example, if we went back in time and observed doctors in the 1800s placing leeches on patients, we would say, “They are doing that on purpose, because they prefer the patients to be healthy rather than sick, and because they believe that blood-letting is an effective treatment.” (On the other hand, someone armed with more accurate medical knowledge might place leeches on his enemy because he prefers him to be weak and he believes that drawing away blood will achieve this goal.)1
We will develop the point more fully in the next lesson, but here we mention that people use parts of the world in order to achieve their goals. Philosophers describe this by saying people use means to achieve their ends. Economists describe this by saying people use goods and services to satisfy their preferences.


Lessons for the Young Economist

Monday, July 23, 2012

Only Individuals Act - Robert P. Murphy




If we as economists are going to explain an event by referring to a purposeful action, this obviously implies that there is some individual performing the action. After all, to say that a conscious intelligence influenced events, implies that there must be some intelligent being to whom the consciousness belongs.
Now we don’t have to actually know the precise identity of the individual, in order to conclude that an individual has taken a purposeful action. A detective can look at a blood-soaked kitchen and say, “Somebody killed this poor woman—that butcher knife didn’t stab her through some freak accident.” The detective can thus explain the physical arrangement of the kitchen, by supposing that some other, intelligent individual consciously chose to act to kill the victim. This is a perfectly good hypothesis, even though the detective (as yet) doesn’t know anything else about the actual killer. But he does know that the killer had a goal in mind—no matter what the extenuating circumstances may be, nobody is going to believe him if he says, “Sure I was holding the knife when this happened, but believe me it was an accident.”
Just to make sure you really understand the concept, we note that the “individual” behind an action doesn’t necessarily need to be a human being. There are plenty of people who claim that their best explanation for what happened to them was that they were abducted by aliens and subjected to all sorts of unpleasant sensory experiences. Again, our rule holds: These people aren’t blaming “nature” for what happened, they are instead saying that intelligent beings influenced events. For whatever reason, the aliens had the goal of probing Billy Bob as he drove his pickup truck home one dark night, and the aliens acted on that desire. For a different example, a religious person might interpret the sudden remission of her cancer as due to the intervention of God. In this case, she too is explaining events in the physical world by reference to the purposeful action of an intelligent individual—one who in this case doesn’t possess a physical body.
When we decide to interpret an event as a purposeful action, we are necessarily supposing that there must be an intelligent individual carrying out the action. (There can’t be an action without an actor.) So the connection between an action and an actor is a logical one, flowing out of the very concept of “purposeful action” itself. Now in practice, our attempt to link up a specific action with a specific actor is based on more than simple logic. For example, when the detective decides “this is a homicide,” he is logically implying that there must have been (at least one) killer. But he might use faulty DNA tests to end up arresting the wrong guy. So we see, there is more than a logical deduction involved, when trying to arrest the actual killer. But the important point for our purposes is that the detective’s decision to classify a bloody kitchen as a crime scene necessarily means that there must be a killer (or killers). But going from this logical conclusion to the next step of identifying a particular person as the killer, requires more than mere logic.
To drive home the subtle interconnections of logical and empirical reasoning, we can consider a more fanciful example. Suppose a psychiatrist can see the left hand belonging to one of his patients as it grabs a pen and begins spreading ink onto a check. The psychiatrist classifies this as a purposeful action, and thus logically he must also believe that there is some conscious individual performing this action. However, the psychiatrist might think, “That’s my sweet patient Sally paying me for this week’s services as I help her with her split personality syndrome,” when in reality it is Sally’s alter-ego, Snippy, who isn’t filling out the check at all but instead is writing “YOU ARE TOO NOSY!!” on the paper before handing it over to him. In this example, we again have to keep in mind the limits of logical deduction. Once the psychiatrist decides to interpret the movements of the hand and pen as purposeful action—as opposed to a mere reflex—then he logically must conclude that there is an intelligent being with a motive who is moving the pen in order to achieve some goal. However, if the psychiatrist jumps to the conclusion that the intelligent being is the personality he knows as “Sally,” and that she is moving the pen in order to give him payment for his services, then the psychiatrist is going beyond the range of logical deduction, and he might be wrong.
As these examples illustrate, in everyday life we do a lot more than simply rely on logical deductions once we decide to interpret an event as a purposeful action. We use all sorts of empirical evidence to refine our understanding of what we observed. But economic theory focuses on the knowledge we can deduce merely from the fact of purposeful action itself, without the other empirical evidence in a given case that may or may not lead us to a fuller explanation.
Barring odd cases such as multiple personalities or hypnotic control, generally speaking we associate each human body with one specific mind (and vice versa). So when we see the physical body associated with “Bill” pouring a can of soda down its throat, we naturally describe this by saying, “Bill was thirsty so he decided to drink something.” Although we don’t usually stop to think about it, when we talk like this we are referring to an intangible, conscious will called “Bill” that tries to get its way by influencing the components of the glob of cells that we label, “Bill’s body.”
We are brushing up against deep philosophical issues once again, which go far beyond the scope of a book on economics principles. In this section, we only need to make one more point: Because a purposeful action is associated with a single individual (namely, the actor), it means that when an economist tries to explain an event by reference to purposeful actions, he ultimately must break it down into the motivations or goals of the individuals involved. This statement sounds obvious, but it is surprising how casually people—even respected social scientists—ignore the rule.
For example, an historian might write, “In 1941 Japan attacked the United States.” Strictly speaking, this is nonsense. “Japan” isn’t an individual and so can’t take purposeful actions (such as bombing Pearl Harbor). Individual Japanese pilots flew planes and attacked ships belonging to the U.S. Navy. The statement “Stalin occupied East Germany” is at least sensible (since Stalin is an individual), but it’s nonetheless misleading if interpreted literally. Really what happened is that Joseph Stalin gave orders to his subordinates, who in turn relayed them to their subordinates and so on, such that many many soldiers chose to obey those orders and carried out purposeful actions that resulted in a new (and scary) political situation for the people living in East Germany.
In many cases this sloppy use of language is fine; there is no danger of confusion when a sports fan yells out from his office cubicle, “Chicago just kicked a field goal to tie the game!” Everyone knows what he means by that statement; no one will be misled into believing that somehow a lifeless geographical location managed to block burly men long enough to propel a pigskin between two posts.

Only Individuals Act
The first truth to be discovered about human action is that it can be undertaken only by individual “actors.” Only individuals have ends and can act to attain them. There are no such things as ends of or actions by “groups,” “collectives,” or “States,” which do not take place as actions by various specific individuals. “Societies” or “groups” have no independent existence aside from the actions of their individual members. Thus, to say that “governments” act is merely a metaphor; actually, certain individuals are in a certain relationship with other individuals and act in a way that they and the other individuals recognize as “governmental.”
—Murray Rothbard, Man, Economy and State (Auburn, Ala.: Ludwig von Mises Institute, 2004), pp. 2–3

However, in many cases this sloppy use of language is very dangerous, leading people to reach the wrong conclusions about the world. For example, many people would endorse the following statement: “Man our government is so incompetent and dumb! On the one hand it pays farmers to grow tobacco, while on the other hand it pays ad agencies to develop anti-smoking campaigns. Make up your mind!”
In reality, there is no such thing as “the government” that has a mind of its own and can perform purposeful actions. Instead, there are individuals—politicians, judges, bureaucrats, etc.—belonging to the government who enjoy special privileges because of their status. Different combinations of (some of) these individuals make conscious decisions to steer tax dollars toward tobacco farmers and anti-smoking campaigns. The simplistic approach to viewing these programs as actions taken by “the government” is not only technically inaccurate, but it is actually dangerously misleading. After reading the lessons in this book, you will realize that there are perfectly sensible reasons for the actions of government officials. Their actions often don’t make any sense when compared to the official justifications given for the actions, but there’s a simple explanation for that too: government officials routinely lie. (Notice that lying is itself a purposeful action.)








Lessons for the Young Economist

Sunday, July 22, 2012

How We Develop Basic Economics - Robert P. Murphy

As we discussed above, economic theorists face two huge problems: the objects of their study have minds of their own and it is much harder to perform a controlled experiment in economics than in a natural science such as chemistry. These differences partly explain why the so-called hard sciences enjoy a much better reputation for objectivity and success than the soft sciences, including economics.
However, the economist does have one enormous advantage over the natural scientist: the economic theorist is himself a thinking being, with conscious goals. Because he has an insider’s view of acting in the economy, the economist can more easily understand the motivations and constraints faced by other actors in the economy. In contrast, the particle physicist doesn’t have any idea “what it’s like to be a quark,” and so the physicist must rely exclusively on the familiar empirical techniques to gain insight into the behavior of quarks.
Earlier in this lesson we focused on the important distinction between purposeful action versus mindless behavior, because this difference is key to developing useful economic principles. The economic principles we will develop in this book are all logical implications of the fact that there are other people with minds who try to achieve their own goals. In other words, if we as social scientists decide to commit to the “theory” that there are other minds operating in the world—just as each of us can directly experience his or her own mental awareness—then that “theory” starts spitting out other pieces of knowledge that are consequences of it. You will probably be surprised in Lesson 3 when we show just how much of economics is packed into the simple observation that, “John Doe is acting with a purpose in mind.” Right now we won’t list any of these results, because you should first understand exactly what it is you’ll be doing as you work through Lesson 3.
Rather than looking to physics or chemistry for guidance on how to develop good economic principles, a much better role model is geometry. In standard (i.e., “Euclidean”) geometry, we start with some basic definitions and assumptions that seem reasonable enough. For example, we define what we mean by a point and a line, we explain what we mean by the angle formed at the intersection of two lines, and so forth.
Once we have our starting definitions and assumptions in hand, we can use them to start building “theorems,” which is a fancy word for the logical deduction of the consequences of our original definitions and assumptions. A geometry textbook will start with the most basic theorems, and then use each new result to deduce something even more complicated. For example, early on a simple theorem may run like this: “If we start out with four lines that form a rectangle, then we can draw a new, fifth line that divides the rectangle into two identical triangles.” Once that (very simple) theorem is proved, it can be added to the toolbox, and subsequent, more difficult theorems can invoke this earlier theorem in one of their steps.
The procedure or method of geometry is quite similar to what we’ll do in this book to build up basic economic principles. In the next lesson we’ll define some concepts (such as profit and cost) and show their relation to our basic assumption that events in the social world are driven by purposeful actions. As we go through the lessons, we will continue to add new insights, by building on the previous lessons and by introducing new scenarios where we can apply our earlier results.
At this stage, there are two important observations you should make about the example of geometry First, notice that it doesn’t make sense to ask a mathematician to go out and “test” the theorems in a geometry textbook. For example, consider the Pythagorean Theorem, which is probably the most famous of all geometrical results. The Pythagorean Theorem says that if you have a triangle with a 90-degree angle, and you label each side with a letter, then the following equation will hold:

Once you have seen an actual proof of the Pythagorean Theorem, you understand that it must be true. To amuse yourself, you can take a ruler and a compass (used to measure angles) and “test” the theorem out on triangles that you draw on a piece of paper. However, you’ll find that in practice the theorem won’t appear to be exactly true; you might find that the left-hand side of the equation adds up to 10.2 inches while the right-hand side comes out at 10.1 inches. Yet if you get such “falsifications” of the theorem, and point them out to a mathematician, he will explain that the triangle you were measuring did not really have an exactly 90-degree angle after all (maybe it was 89.9 degrees), and the ruler you used to measure the lines was an imprecise tool, since it only has so many notches on it and in practice you were “eyeballing” how long each line was to some extent. The important point is that the mathematician knows that the Pythagorean Theorem is true, because he can prove it using indisputable, step-by-step, logical deductions from the initial assumptions.
This is a good analogy for how we derive economic principles or laws. We start with some definitions and the assumption that there is a mind at work, and then we begin logically deducing further results. Once we have proved a particular economic principle or law, we can put it in our back pocket and use it in the future to help in proving a more difficult result. And if someone asks us whether the data “confirm or reject” our economic principle, we can respond that the question is nonsense. An apparent “falsification” of the economic law would really just mean that the initial assumptions weren’t satisfied. For example, we will learn in Lesson 11 the Law of Demand, which states that “other things equal, a rise in price will lead to a drop in the quantity demanded of a product or service.” Now if we try to “test” the Law of Demand, we will certainly be able to come up with historical episodes where the price of something rose, even though people bought more units of the good. This finding doesn’t blow up the Law of Demand; the economist simply concludes, “Well, ‘other things’ must not have been equal.”
We now move on to the second important observation you should take away from our discussion of geometry: Just because something is logically deduced from earlier definitions and assumptions (sometimes called axioms), the resulting proposition might still contain important and useful information about the real world. We stress this point because many people think that a field of study can be “scientific” and provide “information about the real world” only if its propositions can, at least in principle, be refuted by experiments or measurements. This requirement is obviously not fulfilled in the case of geometry, and yet everyone would agree that studying geometry is certainly useful. An engineer who sets out to build a bridge will have a much better shot if he has previously studied the logical, deductive proofs in a geometry class, even though (in a sense) all the theorems in the textbook are “merely” transformations of the information that was already contained in the initial assumptions.
The same is true (we hope!) for the economic principles and laws contained in this book. You will not need to go out and test the propositions to see if they’re true, because any apparent falsification would simply mean that the particular assumptions used in the proof were lacking at the time of the “test.” However, you will find that gaining this “armchair knowledge” through careful introspection and logical reasoning, will actually allow you to make sense of the real world in all its complexity. You will do much better navigating the economy, and making sense of its outcomes, once you have mastered the logical (yet un-testable) lessons in this book.


Lesson Recap...

A purposeful action is performed by a conscious being with a mind, who is trying to achieve a goal. Mindless behavior refers to motions in the physical world that are the result of “mere nature” and not the intentions of another thinking being.
The natural sciences include fields such as physics, chemistry, and meteorology. They study the natural world and try to deduce the “laws of nature.” The social sciences include such fields as sociology, psychology, and economics. They study different aspects of human behavior, including our interactions with each other in society.
The natural sciences develop theories that try to predict the behavior of mindless objects with better and better accuracy. They enjoy success because these objects seem to obey a constant set of fairly simple rules, and because in many settings they can perform controlled experiments. In the social sciences, including economics, the objects of study have minds of their own, and controlled experiments are much more difficult to perform. To develop economic principles, the economist relies on his own experience of purposeful action, and deduces the logical implications from it. In this respect economics is closer to geometry than to physics.



NEW TERMS
Purposeful action: An activity undertaken for a conscious reason; behavior that has a goal.
Keynesian economics: A school of thought (inspired by John Maynard Keynes) that prescribes government budget deficits as a way to lift the economy out of recession and restore full employment.
Budget deficit: The amount the government must borrow when it spends more than it collects in taxes and other sources of revenue.
Austrian economics: A school of thought (inspired by Carl Menger and others who happened to be Austrian) that blames recessions on government interference with the economy, and recommends tax and spending cuts to help the economy during a recession.
Logical deduction: A form of reasoning that starts from one or more axioms and moves step-by-step to reach a conclusion.
Axioms: The starting assumptions or foundations in a deductive system. For example, the method of constructing a straight line between two points could be an axiom in a geometry textbook. Axioms are not proved, but are assumed to be true in order to prove other, less obvious, statements.



If someone sneezes when pepper is thrown in his face, is that a purposeful action?
Does “purposeful action” include mistakes?
Are brain and mind interchangeable terms?
Can we perform controlled experiments to test economic theories?
Would you classify Intelligent Design theory as a natural or social science?







Lessons for the Young Economist

Saturday, July 21, 2012

The Success of the Natural Sciences versus the Social Sciences - Robert P. Murphy



There is a sharp difference between sciences such as physics, chemistry, and biology on the one hand, versus sciences such as psychology, sociology, and anthropology on the other. People refer to the former as “hard” and the latter as “soft,” and—especially among the hard scientists!—there is a general feeling that the so-called hard sciences are more rigorous and indeed “scientific” than the so-called soft sciences. Generally speaking, the smartest and most celebrated scientists in the world are found in the hard sciences; besides the obvious icon of Einstein, the physicists Richard Feynman and Stephen Hawking have also captured the popular imagination. In contrast, it is not nearly as prestigious to win awards in psychology, and few people could even name the top sociologists of the last century. While some people might condemn the particular physicists who helped create atomic weapons, even so the overwhelming majority support physics itself. Yet in another sharp contrast, many people are skeptical and even hostile to some of the social sciences, particularly economics and psychiatry.
What is going on here? If we hadn’t known the answer already, we might have expected things to be the reverse, where public opinion revered the scientists who studied people and not mindless particles.
One possible answer is that the social sciences have justified some pretty awful things, such as electroshock therapy for people incarcerated against their will, and the government-sponsored slaughter of millions of pigs during the Great Depression while Americans starved. So maybe these types of episodes are the reason many people distrust psychiatrists and economists. But again, why don’t people also tend to blame physicists for Hiroshima, or the chemists for gunpowder?
We suggest the reason is that the physics and chemistry behind powerful weapons are right. The physicists said to the military, “If you drop this object from an airplane, it will induce a fission reaction that will release an incredible amount of heat.” And the physicists were perfectly accurate in their predictions. In sharp contrast, the psychiatrists told the courts, “Give us authority to imprison people we think are mentally ill, and allow us to inject them with drugs and perform other experiments on them. This will make them well, and yield a society with adjusted people who do not exhibit aberrant, anti-social behavior.” Many of the supposedly top-notch economists too told governments during the 20th and 21st centuries: “Give us control of the printing press, and we will spare the world any more ravaging depressions and rampant price inflation.” Obviously, the track record of the psychiatrists and most influential economists is not nearly as laudable as that of the natural scientists.
For some reason, it seems that even the most accomplished geniuses in the social sciences can lead their disciplines down dead-ends, where more and more of the experts in the field (as well as the general public) begin to suspect that the “state of the art” is a waste of time. Many people would agree that “psychiatry was doing all right... until Sigmund Freud,” or that, “Economics took a major wrong turn when John Maynard Keynes came on the scene.” Yet almost nobody would say, “Isaac Newton did a lot of great work in physics, until that nutjob Einstein came along and ruined it.”
One important reason for this gulf between the success and prestige of the natural sciences on the one hand, versus the mediocre results and hostility to the social sciences on the other, is that the objects of study in the natural sciences are fairly simple, and their behavior seems to be governed by a concise set of rules. Consequently, the hard sciences can (typically) rely on controlled experiments to evaluate their theories. This is why it’s much less likely that physics will go down a cul-de-sac the way many people think Freudian psychology or Keynesian economics did. Physical theories make predictions about objects in the material world. It would be very difficult for a newfangled yet ultimately inferior theory to sweep the profession in a hard science (such as physics), because its inferiority would be demonstrated repeatedly in experiments. Einstein famously resisted some of the philosophical implications of quantum theory but no physicist (including him) could argue with the accuracy of the theory’s predictions about experimental measurements made on subatomic particles.
Since subatomic particles don’t (as far as we know) have minds, in order to understand their behavior—in order to “explain” subatomic particles—a theory in physics can’t be asked to do anything more than to predict, with greater and greater precision and accuracy, what these particles will do in various circumstances. Now we should point out that in actual practice, things are not so simple in day-to-day physics. One theory may yield better predictions in a few experiments, while another theory may be simpler and more elegant. Some physicists may “believe in” the more elegant theory, and search for possible flaws in the experiments that cast doubts on their preferred theory. Even so, in the long run a theory in the hard sciences that systematically and unambiguously yields better predictions will eventually displace its rivals.
Most professionals in the social sciences think that the same method—the “scientific method”—should be used in their fields as well. However, the problem is that, quite literally, the objects of their study have minds of their own. It has proved fiendishly difficult to come up with a set of concise laws that accurately predict the behavior of people in various circumstances. In the social sciences, especially economics, things are so much more complicated that in many cases it is simply impossible to perform a truly controlled experiment.
To illustrate this important difference between the natural sciences and economics, first suppose two groups of physicists are arguing about the strength of the electric charge on a certain particle. After conducting an experiment using a clever new technique, one group in Australia announces that the previous estimate needs to be revised. However, the rival group of physicists argues that the Australian experiment is flawed, because the laboratory’s proximity to the South Pole distorted the measurements. They settle the dispute by conducting the same experiment at several different latitudes, to see if the measured results move closer to the previous estimate as the laboratory gets closer to the equator. The crucial assumptions behind all of this research are that the underlying laws governing the particles are the same, and that the experimenters can hold every other (relevant) factor constant while isolating the effects of the magnetic charge emanating from the earth’s poles. The story we just told gives an idea of why physics seems to “work” so well; there really is good reason to suppose that over the years, the physicists will develop theories with greater and greater accuracy in predicting how the physical world works.
Things are not nearly as straightforward when two groups of economists argue over rival theories. For example, one group of economists—the Keynesians—believe that the Great Depression was caused by a collapse in “aggregate demand,” and that President Herbert Hoover and then Franklin D. Roosevelt should have pushed through massive government deficits—spending borrowed money—to counteract the slump. A different group of economists—the Austrians—disagree strongly, and instead think that the initial crash in 1929 was caused by a preceding “boom” engineered by the Federal Reserve, which is the U.S. central bank established by the government. According to the Austrians, Hoover and Roosevelt made the Depression drag on for more than a decade with their misguided interventionist policies. The Austrians dispute the Keynesian deficit theory, pointing out that Hoover and FDR ran what were at the time record high (peacetime) budget deficits during their administrations, which coincided with the slowest and most agonizing recovery in U.S. economic history. The Keynesians counter that, large as the deficits were, the government “obviously” didn’t borrow and spend enough, as proved by the lingering unemployment.
At this early stage of the book, we have not yet mastered the concepts to proceed further with this actual dispute. (In subsequent lessons, you will learn the tools you need to better appreciate the two sides of the argument.) For now, the point is that the dispute remains unresolved, even though professional economists have been arguing about the causes of the Great Depression for more than seventy years. The controversy won’t die, because the exact conditions of the world economy in the late 1920s were unique. Economists can’t test the Keynesian theory by, say, holding everything else constant except doubling the U.S. federal budget deficit in 1932, in order to observe the effect on the unemployment rate.

Economists Can’t Agree on the Right Medicine
[T]he proper injunction to government in a depression is cut the budget and leave the economy strictly alone.
–Austrian School economist Murray Rothbard
Just as we saved our way into depression, we must squander our way out of it.
–Business Week economist Virgil Jordan, writing in 1932
Quoted in Robert P. Murphy, The Politically Incorrect Guide to the Great Depression and the New Deal (Washington, D.C.: Regnery, 2009), pp. 52, 57

It is no doubt true that economists who, for moral or political reasons, endorse larger government spending, will tend to subscribe to the Keynesian arguments about the causes of the Great Depression. It is also true that opponents of “Big Government” will tend to be attracted to economic doctrines that stress the benefits of low taxation and slim government budgets. But it is the inability to perform controlled experiments that allows the persistence of such diametrically opposed economic theories, with both camps firmly convinced that they are right and their opponents are either dishonest or sloppy. These passions are on a much tighter leash in the hard natural sciences, because in those disciplines the facts “speak for themselves” to a much greater degree than in the social sciences.
Fortunately, all is not lost. Even though the methods of the natural sciences are of limited use in economics, there are other ways of discovering economic principles or laws, relying on techniques that are not available to the physicist or chemist. As you master the lessons in this book, you will gradually develop a new framework for interpreting the world. Things that seemed incoherent before will make perfect sense to you. And as you will see, the lessons in this book will not appeal to experimental or even historical results to prove their validity. Once you have grasped the essential points of each lesson, they will be yours forever. You may decide that the concepts are more or less useful to you, but you will never need worry that newly published economic research will render them false. How is this possible? We explain in the next section.


Lessons for the Young Economist

Friday, July 20, 2012

The Social versus the Natural Sciences - Robert P. Murphy


Economics is a “social science,” meaning that it studies people and aspects of society. Other social sciences include psychology, sociology, and anthropology. The natural sciences, on the other hand, study aspects of the natural world. The natural sciences include physics, chemistry, biology, astronomy, and meteorology.
Because of their different subject matter, the social sciences focus on purposeful action, as described in the preceding section, while the natural sciences focus on mindless behavior. Even though he might not even be aware that he is doing it, the social scientist’s explanations and theories at least implicitly rely on the hypothesis that there are other minds at work, influencing events. In sharp contrast, with the notable exception of biology, the natural scientist typically doesn’t refer to a conscious intelligence when explaining events in his field of expertise.
This awareness of other minds, and the fact that other thinking humans have their individual motivations, pervades the social sciences. It’s not confined to the formation of theories to explain events, either: Even the raw “facts” of the social sciences are themselves mental things, and not purely natural or physical. For example, a sociologist might come up with a theory relating an increase in the crime rate with the increase in the rate of divorce. But in order for the sociologist to even collect data to test this theory, she needs to “get inside other people’s minds” in order to know which events should be classified as crimes and divorces in the first place; these are not mere brute facts of nature.

Even the “Facts” of the Social Sciences Are Related to the Mind
Take such things as tools, food, medicine, weapons, words, sentences, communications, and acts of production.... I believe these to be fair samples of the kind of objects of human activity which constantly occur in the social sciences. It is easily seen that all these concepts... refer not to some objective properties possessed by the things, or which the observer can find out about them, but to views which some other person holds about the things. These objects cannot even be defined in physical terms, because there is no single physical property which any one member of a class must possess.... [T]hey can be defined only by indicating relations between three terms: a purpose, somebody who holds that purpose, and an object which that person thinks to be a suitable means for that purpose.
—Friedrich A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 59–60

For example, if Sally runs her car over Joe and he dies, this may or may not count as a homicide. If Sally had a heart attack five seconds before the crash, it was probably not a crime, but rather just an accident. On the other hand, if the cops arrive at the scene to hear Sally yelling, “That’s the last time you’ll cheat on me!” then it’s time to read Sally her rights. Notice that ultimately it is Sally’s mind that makes the difference; the sociologist needs to make guesses about what Sally consciously intended in order to know if a crime occurred. No amount of physical description per se can decide the matter, except insofar as the description sheds light on what Sally was thinking when the car struck Joe. Her mental will has the power to transform a regular car into a murder weapon. To stress the point one last time: Nothing physical changes in the composition of the car during this transformation; the physicist and chemist wouldn’t notice anything happening to the molecules forming the car. On the contrary, when we say that Sally “turned the vehicle into a murder weapon,” we are rendering a judgment concerning the intangible, directly unobservable state of Sally’s mind. The physical movements of Sally’s hands and feet as she controlled the car are not the crucial issue; it is her conscious intentions that determine whether we need to add one more homicide to the running total.
As the example of Sally hitting Joe with her car illustrates, even the “raw facts” of the social sciences are tinged with our understanding of other people’s minds. In contrast, typically in the natural sciences neither the raw facts, nor the theories developed to explain them, rely on an appreciation of the intentions of other thinking beings. The natural scientist can look out upon the physical world and try to come up with explanations of its “mindless” behavior.

Lessons for the Young Economist

Thursday, July 19, 2012

Purposeful Action versus Mindless Behavior - Robert P. Murphy

When we look at the world and try to make some sense of it, one of the most basic and crucial distinctions we all make—usually without even realizing it—is the difference between purposeful action versus mindless behavior. When describing the trajectory of a baseball, we might mention things like mass, velocity, and air friction. We don’t say that the baseball “wants to move in a parabola,” or that the ball “gets bored with flying and eventually decides to land.” This would be nonsense talk to modern ears, and would strike us as very unscientific. But suppose that instead of a baseball, we are describing the motions of a jet aircraft. In that case, we would have no problem saying that the pilot “wants to avoid the turbulence” or that he “is running low on fuel and decides to land.”
This difference in how we describe the two events reflects a fundamental decision we make when interpreting the world around us. When we observe events, we can either attribute them to natural laws, or we can explain them (at least in part) by reference to the intentions of a conscious being. In short, we can choose whether to believe that another mind is at work.
We are here touching on some very deep philosophical questions, and obviously we are not going to give you “the final word” in this short lesson. But in order to make sense of economic theory, to give it a solid foundation, we need to be aware of the distinction between purposeful action versus mindless behavior. The laws of economics apply to the former, not to the latter. As we will see in Lesson 3, economics always involves the operation of at least one mind, meaning an intelligence that has conscious goals and will take steps to influence the material world in order to achieve those goals.
The difference between purposeful action versus mindless behavior is not simply the difference between human beings and “inanimate” matter. Various movements of a human being’s physical body can be examples of mindless behavior, too. For example, if I tell you, “I’ll give you $20 if you raise your right leg,” then we would interpret your subsequent behavior as an intentional response, where you purposely moved your leg because you wanted the money. But if your doctor whacks your right knee with a hammer to test your reflexes, the resulting movement in your leg would not be an example of purposeful action. Although your nervous system and brain were involved, we wouldn’t really say that your mind was involved. (Note that brain and mind are very different things, and that difference is crucial to this lesson.)
The lessons in this book apply to purposeful actions performed by conscious people who have goals in mind. Sometimes the boundary line between what is “conscious action” and “reflexive behavior” can be blurry, but that won’t really detract from the principles in this book. It’s true, a baseball outfielder might not be fully aware of the mental operations he performs when throwing the ball to second base. But he is very definitely trying to throw out the runner, because he wants his team to win the game. Even if he “miscalculates” and overthrows the base, all the lessons in this book apply to his intentional action, because he is a conscious being trying to exchange one situation for a different one that he thinks will be more desirable.
The economic principles in this book are not confined to “perfectly rational people.” The lessons in these pages apply to real people who use their minds to make exchanges in the real world every day.

Lessons for the Young Economist

Wednesday, July 18, 2012

Why Study Economics? - Robert P. Murphy

One reason to study economics is that it’s simply interesting. When you stop and think about what happens every day in a modern economy it should take your breath away. Consider the bustling metropolis of Manhattan: Millions of people work on this tiny island that is less than 23 square miles in land area. Obviously there is not enough food produced on the island itself, to feed these hordes. At first some readers may not understand this claim—some of the finest restaurants in the world are in Manhattan! But these exquisite restaurants rely on vendors to give them the raw materials to produce their very expensive dishes. If invading Martians placed an impenetrable plastic bubble around Manhattan (with small holes in the plastic to allow for ventilation), within two months hundreds of thousands of New Yorkers would be dead from starvation.
Yet in the real world—where no Martian bubble obstructs trade—farm produce, refined gasoline, and other items are shipped into Manhattan on a daily basis, allowing the inhabitants to not only eke out a bare survival, but actually to thrive. The workers on the tiny island of Manhattan transform the materials at their disposal into some of the most highly valued goods and services on the planet—think of the expensive jewelry, clothing, financial services, legal work, and Broadway performances “produced” in Manhattan. When you consider the incredible complexity of these processes, it is a wonder that its operation is normally so flawless that we take it for granted. The lessons in this book will shed some light on how the market economy achieves such feats, day in and day out.
Another reason to study economics is that it will help you make decisions in your personal and professional life. Of course, the lessons in this book will not by themselves make you rich. Rather, they will give you a framework to help analyze your plans so that you are more likely to achieve your objectives. For an analogy, studying geometry alone will not allow you to become a professional engineer, designing four-lane bridges. But nobody would want to drive on a bridge designed by someone who is ignorant of geometry.
Beyond its intrinsic beauty and practical applications to your own life, economics is a crucial topic because we live in a society plagued by an activist government. Unlike other scientific disciplines, the basic truths of economics must be taught to enough people in order to preserve society itself. It really doesn’t matter if the man on the street thinks quantum mechanics is a hoax; the physicists can go on with their research without the approval of the average Joe. But if most people believe that minimum wage laws help the poor, or that low interest rates cure a recession, then the trained economists are helpless to avert the damage that these policies will inflict on society.
For this reason, it is the young adult’s duty to learn basic economics. The lessons in this book will show you how.


Lesson Recap...
This book will teach you to think like an economist. Different subjects (chemistry, biology, etc.) offer different perspectives on the world. Some perspectives are more useful in certain situations than others. Economics is a distinct field, or science, and it has important insights on how the social world works.
Economics is the study of exchanges. In a modern economy, the most familiar exchanges involve money, but economic principles apply to any type of exchange.
Every citizen should understand basic economics because of the danger of destructive government policies that ignore the lessons in this book.



Barter: A situation where people exchange goods and services directly, rather than using money in an intermediary transaction.
Scarcity: The condition of desires exceeding the available resources to satisfy them. Scarcity is a universal fact requiring people to make exchanges.
Tradeoffs: The unfortunate fact (caused by scarcity) that making one choice means that other choices become unavailable.



Can economics make you rich?
Is economics a science? Why or why not?
Does scarcity affect everyone?
Do the laws of economics still work inside a maximum security prison?
*Isn’t it just as important for the average person to understand particle physics, since much of the funding for this research comes from government grants.



Lessons for the Young Economist

Tuesday, July 17, 2012

Is Economics a Science? - Robert P. Murphy

In this book, we adopt the view that economics constitutes an independent science, just as surely as chemistry and biology are distinct fields of study As we go through the lessons in this book, we will do so scientifically, meaning that we will use an objective set of “tools” for our analysis, that do not rely on particular ethical or cultural assumptions. The principles or laws of economics are the same, whether the economist is a Republican or a communist, and whether he lives in New Zealand or Somalia.
Warning! When we say economics is a science, we do not mean that we conduct experiments to test economic laws, the way a nuclear physicist studies the results of smashing atoms in a particle accelerator. There are important differences between a social science such as economics, versus a natural science such as physics. We will explain this in more detail in Lesson 2, but for now we simply want to caution you that basic economic principles can be discovered through mental reasoning. It wouldn’t make sense to go out and “test” the laws of economics, just as it doesn’t make sense to use a ruler to go out and “test” the various proofs that you might learn in a geometry class. The upshot of all this is that the lessons in this book will stand the test of time—there is no danger that a new experimental finding will overturn them tomorrow. In practice, professional economists make all sorts of conjectures, many of which turn out to be wrong. But the core body of economic theory—the types of laws and concepts contained in this book—is not testable; it’s simply a way of viewing the world.
Despite the possible confusion of economic science with a natural science, nonetheless we use the term science because it’s important to stress that there really are objective laws of economics. When politicians ignore the teachings of economics, their programs run into disaster—imagine the chaos if NASA ignored the laws of physics!
The Scope and Boundaries of Economic Science
It’s a common misconception for people to think, “Economics is the study of money.” Yes, economics obviously has a lot to say about money, and in fact one of the basic purposes of economics is to explain the different prices—which are quoted in units of money—of various goods and services being sold in the market place.
Contrary to this popular misconception, economics is broader than the mere study of money. In its widest scope, economics can be defined as the study of exchanges. This would include all of the exchanges in a normal market setting, where the seller hands over a physical object or provides a service, and in return the buyer hands over the appropriate amount of money. But economics also studies cases of barter, where the traders exchange goods or services directly with each other, without using money at all.
Pushing it to the extreme, economics even has a lot to say about cases where a single, isolated person takes actions to improve his or her situation. This is often called “Crusoe economics,” after the fictional character Robinson Crusoe who was shipwrecked on an (apparently) deserted island. We will study Crusoe economics in Lesson 4. It will be clear that even an isolated person behaves “economically” because he takes what nature has given him and exchanges the status quo for an environment that he hopes will be more pleasant.
The common theme running throughout all of the examples of exchanges is the concept of scarcity. Scarcity can be succinctly explained by the observation that there are limited resources and unlimited desires. Even Bill Gates faces tradeoffs; he cannot literally do whatever he wants. If he takes his wife out to a fancy restaurant, he has reduced his options (ever so slightly) and has diminished his ability to buy other things in the future. We can describe the situation by saying, “Bill Gates needs to economize on his resources, because they are finite.”
It is the universal fact of scarcity that gives rise to what people have termed the “economic problem”: As a society, how should we decide which goods and services to produce, with the limited resources at our disposal? In Lesson 5, we will see how the institution of private property solves this problem. But it is scarcity that causes the problem in the first place.
Warning! Economics does not study a hypothetical “economic man,” who cares only about acquiring material possessions or earning money. This is another common misunderstanding of what economics is all about. Unfortunately, there is some truth to this stereotype because many economists actually do build models of the economy that are filled with fictitious people who are very selfish and will only act altruistically if they are forced to do so. But in this book, you will not be learning any theories of that flavor. Instead, the lessons in this book do not depend on people being penny-pinchers; the laws we will develop in these pages apply to Mother Teresa as much as they apply to Donald Trump.
Economic science, as taught in this book, does not tell workers that they should take whatever job pays the most money, nor does it tell business owners that they must consider only financial issues when running their operations. These points will be made clearer during the subsequent lessons themselves, but we must stress up front that there is no “economic man” in the following pages; we are always discussing the principles that explain the choices of real people in the face of scarcity. The principles involve the fact that people have desires in the face of limited resources, but the principles are broad enough to cover people with any desires.


Economics deals with the real actions of real men. Its [laws] refer neither to ideal nor to perfect men, neither to the phantom of a fabulous economic man (homo oeconomicus) nor to the statistical notion of an average man Man with all his weaknesses and limitations, every man as he lives and acts, is the subject matter of [economics].
—Ludwig von Mises, Human Action (Auburn, Ala.: Ludwig von Mises Institute, 1998), pp. 646–47

Economics studies and tries to explain how people make exchanges. A shipwrecked sailor wants to “exchange” some sticks and two rocks for a crackling fire, while a missionary wants to “exchange” his leisure time for a grueling trip to a remote jungle where the residents have never seen a Bible. A complete theory of exchanges must cover these types of cases too, not just the more familiar example of a broker exchanging 100 stock shares for $2,000.
Lessons for the Young Economist

Monday, July 16, 2012

The Ethical Justification of Capitalism and Why Socialism Is Morally Indefensible



The last four chapters have provided systematic reasons and empirical evidence for the thesis that socialism as a social system that is not thoroughly based on the “natural theory of property” (the first-use-first-own rule) which characterizes capitalism must necessarily be, and in fact is, an inferior system with respect to the production of wealth and the average standard of living. This may satisfy the person who believes that economic wealth and living standards are the most important criteria in judging a society—and there can be no doubt that for many, one’s standard of living is a matter of utmost importance—and because of this it is certainly necessary to keep all of the above economic reasoning in mind. Yet there are people who do not attach much importance to economic wealth and who rank other values even higher—happily, one might say, for socialism, because it can thus quietly forget its original claim of being able to bring more prosperity to mankind, and instead resort to the altogether different but even more inspiring claim that whereas socialism might not be the key to prosperity, it would mean justice, fairness, and morality (all terms used synonymously here). And it can argue that a tradeoff between efficiency and justice, an exchange of “less wealth” for “more justice” is justified, since justice and fairness, are fundamentally more valuable than economic wealth.
This claim will be examined in some detail in this chapter. In so doing, two separate but related claims will be analyzed: (1) the claim made in particular by socialists of the Marxist and the social-democratic camp, and to a lesser degree also by the conservatives, that a principled case in favor of socialism can be made because of the moral value of its principles and, mutatis mutandis, that capitalism cannot be defended morally; and (2) the claim of empiricist socialism that normative statements (“should” or “ought” statements)—since they neither solely relate to facts, nor simply state a verbal definition, and thus are neither empirical nor analytical statements—are not really statements at all, at least not statements that one could call “cognitive” in the widest of all senses, but rather mere “verbal expressions” used to express or arouse feelings (such as ‘Wow” or “grrrrr”).112
The second, empiricist or, as its position applied to the field of morals is called, “emotivist” claim will be dealt with first, as in a way it is more far-reaching.113 The emotivist position is derived by accepting the central empiricist-positivist claim that the dichotomous distinction between empirical and analytical statements is of an all-inclusive nature; that is, that any statement whatsoever must be empirical or analytical and never can be both. This position, it will be seen, turns out to be self-defeating on closer inspection, just as empiricism in general turned out to be self-defeating.114 If emotivism is a valid position, then its basic proposition regarding normative statements must itself be analytical or empirical, or else it must be an expression of emotions. If it is taken to be analytical, then it is mere verbal quibble, saying nothing about anything real, but rather only defining one sound by another, and emotivism would thus be a void doctrine. If, instead, it is empirical, then the doctrine would not carry any weight, as its central proposition could well be wrong. In any case, right or wrong, it would only be a proposition stating a historical fact, i.e., how certain expressions have been used in the past, which in itself would not provide any reason whatsoever why this would have to be the case in the future, too, and hence why one should or rather should not look for normative statements that are more than expressions of emotions in that they are meant to be justifiable. And the emotivist doctrine would also lose all its weight if it adopted the third alternative and declared its central tenet itself a “wow” statement, too. For if this were the case, then it would not contain any reason why one should relate to and interpret certain statements in certain ways, and so if one’s own instincts or feelings did not happen to coincide with somebody else’s “wowing,” there would be nothing that could stop one from following one’s own feelings instead. Just as a normative statement would be no more than the barking of a dog, so the emotivist position then is no more than a barking comment on barking.
On the other hand, if the central statement of empiricism-emotivism, i.e., that normative statements have no cognitive meaning but are simply expressions of feelings, is itself regarded as a meaningful statement communicating that one should conceive of all statements that are not analytical or empirical as mere expressive symbols, then the emotivist position becomes outrightly contradictory. This position must then assume, at least implicitly, that certain insights, i.e., those relating to normative statements, cannot simply be understood and meaningful, but can also be given justification as statements with specific meanings. Hence, one must conclude that emotivism falters, because if it were true, then it could not even say and mean what it says—it simply would not exist as a position that could be discussed and evaluated with regard to its validity. But if it is a meaningful position which can be discussed, then this fact belies its very own basic premise. Moreover, the fact that it is indeed such a meaningful position, it should be noted, cannot even be disputed, as one cannot communicate and argue that one cannot communicate and argue. Rather, it must be presupposed of any intellectual position, that it is meaningful and can be argued with regard to its cognitive value, simply because it is presented in a language and communicated. To argue otherwise would already implicitly admit its validity. One is forced, then, to accept a rationalist approach towards ethics for the very same reason that one was forced to adopt a rationalist instead of an empiricist epistemology.115 Yet with emotivism so rebuffed, I am still far away, or so it seems, from my set goal, which I share with the Marxist and conservative socialists, of demonstrating that a principled case in favor of or against socialism or capitalism can be made. What I have reached so far is the conclusion that the question of whether or not normative statements are cognitive ones is itself a cognitive problem. However, it still seems to be a far cry from there to the proof that actual norm proposals can indeed be shown to be either valid or invalid.
Fortunately, this impression is wrong and there is already much more won here than might be suspected. The above argument shows us that any truth claim—the claim connected with any proposition that it is true, objective, or valid (all terms used synonymously here)—is and must be raised and decided upon in the course of an argumentation. And since it cannot be disputed that this is so (one cannot communicate and argue that one cannot communicate and argue), and it must be assumed that everyone knows what it means to claim something to be true (one cannot deny this statement without claiming its negation to be true), this has been aptly called “the a priori of communication and argumentation.”116
Now, arguing never just consists of free-floating propositions claiming to be true. Rather, argumentation is always an activity, too. But given that truth claims are raised and decided upon in argumentation and that argumentation, aside from whatever is said in its course, is a practical affair, it follows that intersubjectively meaningful norms must exist—precisely those which make some action an argumentation—which have special cognitive status in that they are the practical preconditions of objectivity and truth.
Hence, one reaches the conclusion that norms must indeed be assumed to be justifiable as valid. It is simply impossible to argue otherwise, because the ability to argue so would in fact presuppose the validity of those norms which underlie any argumentation whatsoever.117 The answer, then, to the question of which ends can or cannot be justified is to be derived from the concept of argumentation. And with this, the peculiar role of reason in determining the contents of ethics is given a precise description, too. In contrast to the role of reason in establishing empirical laws of nature, reason can claim to yield results in determining moral laws which can be shown to be valid a priori. It only makes explicit what is already implied in the concept of argumentation itself; and in analyzing any actual norm proposal, its task is merely confined to analyzing whether or not it is logically consistent with the very ethics which the proponent must presuppose as valid insofar as he is able to make his proposal at all.118
But what is the ethics implied in argumentation whose validity cannot be disputed, as disputing it would implicitly have to presuppose it? Quite commonly it has been observed that argumentation implies that a proposition claims universal acceptability, or, should it be a norm proposal, that it is “universalizable.” Applied to norm proposals, this is the idea, as formulated in the Golden Rule of ethics or in the Kantian Categorical Imperative, that only those norms can be justified that can be formulated as general principles which are valid for everyone without exception.119 Indeed, as argumentation implies that everyone who can understand an argument must in principle be able to be convinced of it simply because of its argumentative force, the universalization principle of ethics can now be understood and explained as grounded in the wider “a priori of communication and argumentation.” Yet the universalization principle only provides a purely formal criterion for morality. To be sure, checked against this criterion all proposals for valid norms which would specify different rules for different classes of people could be shown to have no legitimate claim of being universally acceptable as fair norms, unless the distinction between different classes of people were such that it implied no discrimination, but could instead be accepted as founded in the nature of things again by everyone. But while some norms might not pass the test of universalization, if enough attention were paid to their formulation, the most ridiculous norms, and what is of course even more relevant, even openly incompatible norms could easily and equally well pass it. For example, “everybody must get drunk on Sundays or be fined” or “anyone who drinks alcohol will be punished” are both rules that do not allow discrimination among groups of people and thus could both claim to satisfy the condition of universalization.
Clearly then, the universalization principle alone would not provide one with any positive set of norms that could be demonstrated to be justified. However, there are other positive norms implied in argumentation aside from the universalization principle. In order to recognize them, it is only necessary to call three interrelated facts to attention. First, that argumentation is not only a cognitive but also a practical affair. Second, that argumentation, as a form of action, implies the use of the scarce resource of one’s body. And third, that argumentation is a conflict-free way of interacting. Not in the sense that there is always agreement on the things said, but in the sense that as long as argumentation is in progress it is always possible to agree at least on the fact that there is disagreement about the validity of what has been said. And this is to say nothing else than that a mutual recognition of each person's exclusive control over his own body must be presupposed as long as there is argumentation (note again, that it is impossible to deny this and claim this denial to be true without implicitly having to admit its truth).
Hence, one would have to conclude that the norm implied in argumentation is that everybody has the right of exclusive control over his own body as his instrument of action and cognition. Only if there is at least an implicit recognition of each individual's property right in his own body can argumentation take place.120 Only as long as this right is recognized is it possible for someone to agree to what has been said in an argument and hence can what has been said be validated, or is it possible to say “no” and to agree only on the fact that there is disagreement. Indeed, anyone who would try to justify any norm would already have to presuppose the property right in his body as a valid norm, simply in order to say, “This is what I claim to be true and objective.” Any person who would try to dispute the property right in his own body would become caught up in a contradiction, as arguing in this way and claiming his argument to be true, would already implicitly accept precisely this norm as being valid.
Thus it can be stated that whenever a person claims that some statement can be justified, he at least implicitly assumes the following norm to be justified: “Nobody has the right to uninvitedly aggress against the body of any other person and thus delimit or restrict anyone’s control over his own body.” This rule is implied in the concept of justification as argumentative justification. JustifyingThe last four chapters have provided systematic reasons and empirical evidence for the thesis that socialism as a social system that is not thoroughly based on the “natural theory of property” (the first-use-first-own rule) which characterizes capitalism must necessarily be, and in fact is, an inferior system with respect to the production of wealth and the average standard of living. This may satisfy the person who believes that economic wealth and living standards are the most important criteria in judging a society—and there can be no doubt that for many, one’s standard of living is a matter of utmost importance—and because of this it is certainly necessary to keep all of the above economic reasoning in mind. Yet there are people who do not attach much importance to economic wealth and who rank other values even higher—happily, one might say, for socialism, because it can thus quietly forget its original claim of being able to bring more prosperity to mankind, and instead resort to the altogether different but even more inspiring claim that whereas socialism might not be the key to prosperity, it would mean justice, fairness, and morality (all terms used synonymously here). And it can argue that a tradeoff between efficiency and justice, an exchange of “less wealth” for “more justice” is justified, since justice and fairness, are fundamentally more valuable than economic wealth.
This claim will be examined in some detail in this chapter. In so doing, two separate but related claims will be analyzed: (1) the claim made in particular by socialists of the Marxist and the social-democratic camp, and to a lesser degree also by the conservatives, that a principled case in favor of socialism can be made because of the moral value of its principles and, mutatis mutandis, that capitalism cannot be defended morally; and (2) the claim of empiricist socialism that normative statements (“should” or “ought” statements)—since they neither solely relate to facts, nor simply state a verbal definition, and thus are neither empirical nor analytical statements—are not really statements at all, at least not statements that one could call “cognitive” in the widest of all senses, but rather mere “verbal expressions” used to express or arouse feelings (such as ‘Wow” or “grrrrr”).112
The second, empiricist or, as its position applied to the field of morals is called, “emotivist” claim will be dealt with first, as in a way it is more far-reaching.113 The emotivist position is derived by accepting the central empiricist-positivist claim that the dichotomous distinction between empirical and analytical statements is of an all-inclusive nature; that is, that any statement whatsoever must be empirical or analytical and never can be both. This position, it will be seen, turns out to be self-defeating on closer inspection, just as empiricism in general turned out to be self-defeating.114 If emotivism is a valid position, then its basic proposition regarding normative statements must itself be analytical or empirical, or else it must be an expression of emotions. If it is taken to be analytical, then it is mere verbal quibble, saying nothing about anything real, but rather only defining one sound by another, and emotivism would thus be a void doctrine. If, instead, it is empirical, then the doctrine would not carry any weight, as its central proposition could well be wrong. In any case, right or wrong, it would only be a proposition stating a historical fact, i.e., how certain expressions have been used in the past, which in itself would not provide any reason whatsoever why this would have to be the case in the future, too, and hence why one should or rather should not look for normative statements that are more than expressions of emotions in that they are meant to be justifiable. And the emotivist doctrine would also lose all its weight if it adopted the third alternative and declared its central tenet itself a “wow” statement, too. For if this were the case, then it would not contain any reason why one should relate to and interpret certain statements in certain ways, and so if one’s own instincts or feelings did not happen to coincide with somebody else’s “wowing,” there would be nothing that could stop one from following one’s own feelings instead. Just as a normative statement would be no more than the barking of a dog, so the emotivist position then is no more than a barking comment on barking.
On the other hand, if the central statement of empiricism-emotivism, i.e., that normative statements have no cognitive meaning but are simply expressions of feelings, is itself regarded as a meaningful statement communicating that one should conceive of all statements that are not analytical or empirical as mere expressive symbols, then the emotivist position becomes outrightly contradictory. This position must then assume, at least implicitly, that certain insights, i.e., those relating to normative statements, cannot simply be understood and meaningful, but can also be given justification as statements with specific meanings. Hence, one must conclude that emotivism falters, because if it were true, then it could not even say and mean what it says—it simply would not exist as a position that could be discussed and evaluated with regard to its validity. But if it is a meaningful position which can be discussed, then this fact belies its very own basic premise. Moreover, the fact that it is indeed such a meaningful position, it should be noted, cannot even be disputed, as one cannot communicate and argue that one cannot communicate and argue. Rather, it must be presupposed of any intellectual position, that it is meaningful and can be argued with regard to its cognitive value, simply because it is presented in a language and communicated. To argue otherwise would already implicitly admit its validity. One is forced, then, to accept a rationalist approach towards ethics for the very same reason that one was forced to adopt a rationalist instead of an empiricist epistemology.115 Yet with emotivism so rebuffed, I am still far away, or so it seems, from my set goal, which I share with the Marxist and conservative socialists, of demonstrating that a principled case in favor of or against socialism or capitalism can be made. What I have reached so far is the conclusion that the question of whether or not normative statements are cognitive ones is itself a cognitive problem. However, it still seems to be a far cry from there to the proof that actual norm proposals can indeed be shown to be either valid or invalid.
Fortunately, this impression is wrong and there is already much more won here than might be suspected. The above argument shows us that any truth claim—the claim connected with any proposition that it is true, objective, or valid (all terms used synonymously here)—is and must be raised and decided upon in the course of an argumentation. And since it cannot be disputed that this is so (one cannot communicate and argue that one cannot communicate and argue), and it must be assumed that everyone knows what it means to claim something to be true (one cannot deny this statement without claiming its negation to be true), this has been aptly called “the a priori of communication and argumentation.”116
Now, arguing never just consists of free-floating propositions claiming to be true. Rather, argumentation is always an activity, too. But given that truth claims are raised and decided upon in argumentation and that argumentation, aside from whatever is said in its course, is a practical affair, it follows that intersubjectively meaningful norms must exist—precisely those which make some action an argumentation—which have special cognitive status in that they are the practical preconditions of objectivity and truth.
Hence, one reaches the conclusion that norms must indeed be assumed to be justifiable as valid. It is simply impossible to argue otherwise, because the ability to argue so would in fact presuppose the validity of those norms which underlie any argumentation whatsoever.117 The answer, then, to the question of which ends can or cannot be justified is to be derived from the concept of argumentation. And with this, the peculiar role of reason in determining the contents of ethics is given a precise description, too. In contrast to the role of reason in establishing empirical laws of nature, reason can claim to yield results in determining moral laws which can be shown to be valid a priori. It only makes explicit what is already implied in the concept of argumentation itself; and in analyzing any actual norm proposal, its task is merely confined to analyzing whether or not it is logically consistent with the very ethics which the proponent must presuppose as valid insofar as he is able to make his proposal at all.118
But what is the ethics implied in argumentation whose validity cannot be disputed, as disputing it would implicitly have to presuppose it? Quite commonly it has been observed that argumentation implies that a proposition claims universal acceptability, or, should it be a norm proposal, that it is “universalizable.” Applied to norm proposals, this is the idea, as formulated in the Golden Rule of ethics or in the Kantian Categorical Imperative, that only those norms can be justified that can be formulated as general principles which are valid for everyone without exception.119 Indeed, as argumentation implies that everyone who can understand an argument must in principle be able to be convinced of it simply because of its argumentative force, the universalization principle of ethics can now be understood and explained as grounded in the wider “a priori of communication and argumentation.” Yet the universalization principle only provides a purely formal criterion for morality. To be sure, checked against this criterion all proposals for valid norms which would specify different rules for different classes of people could be shown to have no legitimate claim of being universally acceptable as fair norms, unless the distinction between different classes of people were such that it implied no discrimination, but could instead be accepted as founded in the nature of things again by everyone. But while some norms might not pass the test of universalization, if enough attention were paid to their formulation, the most ridiculous norms, and what is of course even more relevant, even openly incompatible norms could easily and equally well pass it. For example, “everybody must get drunk on Sundays or be fined” or “anyone who drinks alcohol will be punished” are both rules that do not allow discrimination among groups of people and thus could both claim to satisfy the condition of universalization.
Clearly then, the universalization principle alone would not provide one with any positive set of norms that could be demonstrated to be justified. However, there are other positive norms implied in argumentation aside from the universalization principle. In order to recognize them, it is only necessary to call three interrelated facts to attention. First, that argumentation is not only a cognitive but also a practical affair. Second, that argumentation, as a form of action, implies the use of the scarce resource of one’s body. And third, that argumentation is a conflict-free way of interacting. Not in the sense that there is always agreement on the things said, but in the sense that as long as argumentation is in progress it is always possible to agree at least on the fact that there is disagreement about the validity of what has been said. And this is to say nothing else than that a mutual recognition of each person's exclusive control over his own body must be presupposed as long as there is argumentation (note again, that it is impossible to deny this and claim this denial to be true without implicitly having to admit its truth).
Hence, one would have to conclude that the norm implied in argumentation is that everybody has the right of exclusive control over his own body as his instrument of action and cognition. Only if there is at least an implicit recognition of each individual's property right in his own body can argumentation take place.120 Only as long as this right is recognized is it possible for someone to agree to what has been said in an argument and hence can what has been said be validated, or is it possible to say “no” and to agree only on the fact that there is disagreement. Indeed, anyone who would try to justify any norm would already have to presuppose the property right in his body as a valid norm, simply in order to say, “This is what I claim to be true and objective.” Any person who would try to dispute the property right in his own body would become caught up in a contradiction, as arguing in this way and claiming his argument to be true, would already implicitly accept precisely this norm as being valid.
Thus it can be stated that whenever a person claims that some statement can be justified, he at least implicitly assumes the following norm to be justified: “Nobody has the right to uninvitedly aggress against the body of any other person and thus delimit or restrict anyone’s control over his own body.” This rule is implied in the concept of justification as argumentative justification. Justifying actions are justifiable, control over whether or not one’s actions affect the value of someone else’s property does not rest with the acting person, but rather with other people and their subjective evaluations. Thus no one could determine ex ante if his actions would be classified as justifiable or unjustifiable. One would first have to interrogate the whole population to make sure that one’s planned actions would not change another person’s evaluations regarding his own property. And even then nobody could act until universal agreement was reached on who is supposed to do what with what, and at which point in time. Clearly, for all the practical problems involved, one would be long dead and nobody would argue anything any longer long before this was ever accomplished.129 But more decisively still, the socialist position regarding property and aggression could not even be effectively argued, because arguing in favor of any norm, socialist or not, implies that there is conflict over the use of some scarce resource, otherwise there would simply be no need for discussion. However, in order to argue that there is a way out of such conflicts, it must be presupposed that actions must be allowed to be performed prior to any actual agreement or disagreement, because if they were not, one could not even argue so. Yet if one can do this—and socialism too must assume that one can, insofar as it exists as an argued intellectual position—then this is only possible because the existence of objective borders of property i.e., borders which every person can recognize as such on his own, without having to agree first with anyone else with respect to one’s system of values and evaluations. Socialism, too, then, in spite of what it says, must in fact presuppose the existence of objective property borders, rather than of borders determined by subjective evaluations, if only in order to have any surviving socialist who can make his moral proposals.
The socialist idea of protecting value instead of physical integrity also fails for a second, related reason. Evidently, the value of a person, for example, on the labor or marriage market, can be and indeed is affected by other people’s physical integrity or degree of physical integrity. Thus, if one wanted property values to be protected, one would have to allow physical aggression against people. However, it is only because of the very fact that a person’s borders—that is, the borders of a person’s property in his body as his domain of exclusive control with which another person is not allowed to interfere unless he wishes to become an aggressor—are physical borders (intersubjectively ascertainable, and not just subjectively fancied borders) that everyone can agree on anything independently (and, of course, agreement means agreement of independent decision-making units!). Only because the protected borders of property are objective then, i.e., fixed and recognizable as fixed prior to any conventional agreement, can there at all be argumentation, and possibly agreement, between independent decision-making units. There simply could not be anyone arguing anything unless his existence as an independent physical unit was first recognized. No one could argue in favor of a property system defining borders of property in subjective, evaluative terms—as does socialism—because simply to be able to say so presupposes that, contrary to what the theory says, one must in fact be a physically independent unit saying it.
The situation is no less dire for socialism when one turns to the second essential specification of the rulings of the natural theory of property. The basic norms of capitalism were characterized not only by the fact that property and aggression were defined in physical terms; it was of no less importance that in addition property was defined as private, individualized property and that the meaning of original appropriation, which evidently implies making a distinction between prior and later, had been specified. It is with this additional specification as well that socialism comes into conflict. Instead of recognizing the vital importance of the prior-later distinction in deciding between conflicting property claims, socialism proposes norms which in effect state that priority is irrelevant in making such a decision and that late-comers have as much of a right to ownership as first-comers. Clearly, this idea is involved when social-democratic socialism, for instance, makes the natural owners of wealth and/or their heirs pay a tax so that the unfortunate latecomers might be able to participate in its consumption. And this idea is also involved, for instance, when the owner of a natural resource is forced to reduce (or increase) its present exploitation in the interest of posterity. Both times it only makes sense to do so when it is assumed that the person accumulating wealth first, or using the natural resource first, thereby commits an aggression against some late-comers. If they have done nothing wrong, then the late-comers could have no such claim against them.130
What is wrong with this idea of dropping the prior-later distinction as morally irrelevant? First, if the late-comers, i.e., those who did not in fact do something with some scarce goods, had indeed as much of a right to them as the first-comers, i.e., those who did do something with the scarce goods, then literally no one would be allowed to do anything with anything, as one would have to have all of the late-comers’ consent prior to doing whatever one wanted to do. Indeed, as posterity would include one’s children’s children—people, that is, who come so late that one could never possibly ask them—advocating a legal system that does not make use of the prior-later distinction as part of its underlying property theory is simply absurd in that it implies advocating death but must presuppose life to advocate anything. Neither we, our forefathers, nor our progeny could, do, or will survive and say or argue anything if one were to follow this rule. In order for any person—past, present, or future—to argue anything it must be possible to survive now. Nobody can wait and suspend acting until everyone of an indeterminate class of late-comers happens to appear and agree to what one wants to do. Rather, insofar as a person finds himself alone, he must be able to act, to use, produce, consume goods straightaway, prior to any agreement with people who are simply not around yet (and perhaps never will be). And insofar as a person finds himself in the company of others and there is conflict over how to use a given scarce resource, he must be able to resolve the problem at a definite point in time with a definite number of people instead of having to wait unspecified periods of time for unspecified numbers of people. Simply in order to survive, then, which is a prerequisite to arguing in favor of or against anything, property rights cannot be conceived of as being timeless and nonspecific regarding the number of people concerned. Rather, they must necessarily be thought of as originating through acting at definite points in time for definite acting individuals.131
Furthermore, the idea of abandoning the prior-later distinction, which socialism finds so attractive, would again simply be incompatible with the nonaggression principle as the practical foundation of argumentation. To argue and possibly agree with someone (if only on the fact that there is disagreement) means to recognize each other's prior right of exclusive control over his own body. Otherwise, it would be impossible for anyone to first say anything at a definite point in time and for someone else to then be able to reply, or vice versa, as neither the first nor the second speaker would be independent physical decision-making units anymore, at any time. Eliminating the prior-later distinction then, as socialism attempts to do, is tantamount to eliminating the possibility of arguing and reaching agreement. However, as one cannot argue that there is no possibility for discussion without the prior control of every person over his own body being recognized and accepted as fair, a late-comer ethic that does not wish to make this difference could never be agreed upon by anyone. Simply saying that it could implies a contradiction, as one’s being able to say so would presuppose one’s existence as an independent decision-making unit at a definite point in time.
Hence, one is forced to conclude that the socialist ethic is a complete failure. In all of its practical versions, it is no better than a rule such as “I can hit you, but you cannot hit me,” which even fails to pass the universalization test. And if it did adopt universalizable rules, which would basically amount to saying “everybody can hit everybody else,” such rulings could not conceivably be said to be universally acceptable on account of their very material specification. Simply to say and argue so must presuppose a person’s property right over his own body. Thus, only the first-come-first-own ethic of capitalism can be defended effectively as it is implied in argumentation. And no other ethic could be so justified, as justifying something in the course of argumentation implies presupposing the validity of precisely this ethic of the natural theory of property.
Theory of Socialism and Capitalism, A