Investigations concerning the money prices of goods and services constituted the historical starting point of the reflections that led to the development of economic theory. What first opened the way to success in these inquiries was the observation that money plays “merely” an intermediary role and that through its interposition goods and services are, in the last analysis, exchanged against goods and services. This discovery led to the further realization that the theory of direct exchange, which makes use of the fiction that all acts of exchange are conducted without the intervention of any medium, must be given logical priority over the theory of money and credit, i.e., the theory of indirect exchange, which is effected by means of money.

Still further possibilities were disclosed when it was realized that acts of interpersonal exchange are not essentially different from those which the individual makes within his own household without reaching beyond it into the social sphere. Hence, every allocation of goods—even those in the processes of production—is an exchange, and consequently the basic law of economic action can be comprehended also in the conduct of the isolated farmer. Thus, the foundation was laid for the first correct formulation and satisfactory solution of the problem of the delimitation of “economic” action from “noneconomic” action.

This problem had been approached previously in two different ways, each of which necessarily rendered its solution considerably more difficult. Classical economics had not succeeded in overcoming the difficulties posed by the apparent paradox of value. It had to construct its theory of value and price formation on the basis of exchange value and to start from the action of the businessman, because it was not able to base its system on the valuations of the marginal consumers. The specific conduct of the businessman is directed toward the attainment of the greatest possible monetary profit. Since the classical economists beheld in this phenomenon the essence of economic conduct, they had to distinguish accordingly between “economic” and “noneconomic” action. As soon as the transition was made to the subjective theory of value, this distinction, because it contradicts the basic thought of the whole system, could not but prove totally unserviceable and indeed nothing short of absurd. Of course, it took a long time before it was recognized as such.

If the distinction between the “economic” and the “noneconomic” proved untenable when formulated in terms of the motives and immediate goals of the actor, the attempt to base it on differences among the objects of action fared no better. Material things of the external world are exchanged not only against other things of this kind; they are exchanged also against other—”immaterial”—goods like honor, fame, and recognition. If one wishes to remove these actions from the province of the “economic,” then a new difficulty arises. For a great many of the acts in which material goods are exchanged serve one or both parties to the transaction merely as a preliminary means for the attainment of such “immaterial” satisfactions. However, every attempt to draw a sharp distinction here necessarily led to barren scholastic discussions which entangled themselves in immanent contradictions?discussions such as the successors of the classical economists devoted to the related endeavors to delimit the concepts of a “good” and “productivity.” But even if one wished to disregard this problem completely, one could not ignore the fact that human action exhibits an indissoluble homogeneity and that action involving the exchange of material goods against immaterial goods differs in no significant respect from action involving the exchange of material goods alone.

Two propositions follow from the subjective theory of value that make a precise separation between the “economic” and the “noneconomic,” such as the older economics sought, appear impracticable. First, there is the realization that the economic principle is the fundamental principle of all rational action, and not just a particular feature of a certain kind of rational action. All rational action is therefore an act of economizing. Secondly, there is the realization that every conscious, i.e., meaningful, action is rational. Only the ultimate goals—the values or ends—at which action aims are beyond rationality and, indeed, always and without exception must be. It was no longer compatible with subjectivism to equate “rational” and “irrational” with “objectively practical” and “objectively impractical.” It was no longer permissible to contrast “correct” action as “rational” to “incorrect” action, i.e., action diverted through misunderstanding ignorance, or negligence from employing the best means available to attain the ends sought. Nor was it henceforth possible to call an action irrational in which values like honor, piety, or political goals are taken into consideration. Max Weber’s attempt to separate rational action from other action on the basis of such distinctions was the last of its kind. It was necessarily doomed to failure.1

If, however, all conscious conduct is an act of rational economizing, then one must be able to exhibit the fundamental economic categories involved in every action, even in action that is called “noneconomic” in popular usage. And, in fact, it is not difficult to point out in every conceivable human—that is, conscious—action the fundamental categories of catallactics, namely, value, good, exchange, price, and costs. Not only does the science of ethics show this, but even everyday popular usage gives us ample demonstrations of it. One has only to consider, for example, how, outside the domain customarily designated as that of science, terms and phrases are used that have these categories as their specific denotation.

• 1Cf. above pp. 82 ff.

All conscious conduct on the part of men involves preferring an A to a B. It is an act of choice between two alternative possibilities that offer themselves. Only these acts of choice, these inner decisions that operate upon the external world, are our data. We comprehend their meaning by constructing the concept of importance. If an individual prefers A to B, we say that, at the moment of the act of choice, A appeared more important to him (more valuable, more desirable) than B.

We are also wont to say that the need for A was more urgent than the need for B, This is a mode of expression that, under certain circumstances, may be quite expedient. But as an hypostatization of what was to be explained, it became a source of serious misunderstandings. It was forgotten that we are able to infer the need only from the action. Hence, the idea of an action not in conformity with needs is absurd. As soon as one attempts to distinguish between the need and the action and makes the need the criterion for judging the action, one leaves the domain of theoretical science, with its neutrality in regard to value judgments. It is necessary to recall here that we are dealing with the theory of action, not with psychology, and certainly not with a system of norms, which has the task of differentiating between good and evil or between value and worthlessness. Our data are actions and conduct. It may be left undecided how far and in what way our science needs to concern itself with what lies behind them, that is, with actual valuations and volitions. For there can be no doubt that its subject matter is given action and only given action. Action that ought to be, but is not, does not come within its purview.

This best becomes clear to us if we consider the task of catallactics. Catallactics has to explain how market prices arise from the action of parties to the exchange of goods. It has to explain market prices as they are, not as they should be. If one wishes to do justice to this task, then in no way may one distinguish between “economic” and “noneconomic” grounds of price determination or limit oneself to constructing a theory that would apply only to a world that does not exist. in Böhm-Bawerk’s famous example of the planter’s five sacks of grain, there is no question of a rank order of objective correctness, but of a rank order of subjective desires.

The boundary that separates the economic from the noneconomic is not to be sought within the compass of rational action. It coincides with the line that separates action from nonaction. Action takes place only where decisions are to be made, where the necessity exists of choosing between possible goals, because all goals either cannot be achieved at all or not at the same time. Men act because they are affected by the flux of time. They are therefore not indifferent to the passage of time. They act because they are not fully satisfied and satiated and because by acting they are able to enhance the degree of their satisfaction. Where these conditions are not present?as in the case of “free” goods, for example?action does not take place.

The most troublesome misunderstandings with which the history of philosophical thought has been plagued concern the terms “pleasure” and “pain.” These misconceptions have been carried over into the literature of sociology and economics and have caused harm there too.

Before the introduction of this pair of concepts, ethics was a doctrine of what ought to be. It sought to establish the goals that man should adopt. The realization that man seeks satisfaction by acts both of commission and of omission opened the only path that can lead to a science of human action. If Epicurus sees in αταραξια the final goal of action, we can behold in it, if we wish, the state of complete satisfaction and freedom from desire at which human action aims without ever being able to attain it. Crude materialistic thinking seeks to circumscribe it in visions of Paradise and Cockaigne. Whether this construction may, in fact, be placed on Epicurus’ words remains, of course, uncertain, in view of the paucity of what has been handed down of his writings.

Doubtless it did not happen altogether without the fault of Epicurus and his school that the concepts of pleasure and pain were taken in the narrowest and coarsely materialistic sense when one wanted to misconstrue the ideas of hedonism and eudaemonism. And they were not only misconstrued; they were deliberately misrepresented, caricatured, derided, and ridiculed. Not until the seventeenth century did appreciation of the teachings of Epicurus again begin to be shown. On the foundations provided by it arose modern utilitarianism, which for its part soon had to contend anew with the same misrepresentations on the part of its opponents that had confronted its ancient forerunner. Hedonism, eudaemonism, and utilitarianism were condemned and outlawed, and whoever did not wish to run the risk of making the whole world his enemy had to be scrupulously intent upon avoiding the suspicion that he inclined toward these heretical doctrines. This must be kept in mind if one wants to understand why many economists went to great pains to deny the connection between their teachings and those of utilitarianism.

Even Böhm-Bawerk thought that he had to defend himself against the reproach of hedonism. The heart of this defense consists in his statement that he had expressly called attention already in the first exposition of his theory of value to his use of the word “well-being” in its broadest sense, in which it “embraces not only the self-centered interests of a Subject, but everything that seems to him worth aiming at.”2  Böhm-Bawerk did not see that in saying this he was adopting the same purely formal view of the character of the basic eudaemonistic concepts of pleasure and pain—treating them as indifferent to content—that all advanced utilitarians have held. One need only compare with the words quoted from Böhm-Bawerk the following dictum of Jacobi:

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

We need not go further into the fact that every ethic, no matter how strict an opponent of eudaemonism it may at first appear to be, must somehow clandestinely smuggle the idea of happiness into its system. As Böhm-Bawerk has shown, the case is no different with “ethical” economics.4 That the concepts of pleasure and pain contain no reference to the content of what is aimed at, ought, indeed, scarcely to be still open to misunderstanding.

Once this fact is established, the ground is removed from all the objections advanced by “ethical” economics and related schools. There may be men who aim at different ends from those of the men we know, but as long as there are men—that is, as long as they do not merely graze like animals or vegetate like plants, but act because they seek to attain goals—they will necessarily always be subject to the logic of action, the investigation of which is the task of our science. In this sense that science is universally human, and not limited by nationality, bound to a particular time, or contingent upon any social class. In this sense too it is logically prior to all historical and descriptive research.

• 2Cf. Böhm-Bawerk, Kapital und Kapitalzins, Part II, Vol. 1, p. 236, footnote.
• 3According to Fr. A. Schmid, quoted by Jodl, Geschichte der Ethik (2nd ed.), II, 661.
• 4Cf. Böhm-Bawerk’s comments on Schmoller, op. cit., p. 239, footnote; on Vierkandt, cf. above p. 55.

The expression “Psychological School” is frequently employed as a designation of modern subjectivist economics. Occasionally too the difference, in Method that exists between the School of Lausanne and the Austrian School is indicated by attributing to the latter the “psychological” method. It is not surprising that the idea of economics as almost a branch of psychology or applied psychology should have arisen from such a habit of speech. Today, neither these misunderstandings nor their employment in the struggle carried on over the Austrian School are of anything more than historical and literary interest.

Nevertheless, the relationship of economics to psychology is still problematical. The position due Gossen’s law of the satiation of wants yet remains to be clarified.

Perhaps it will be useful first to look at the route that had to be traversed in order to arrive at the modern treatment of the problem of price formation. In this way we shall best succeed in assigning Gossen’s first law its position in the system, which is different from the one it occupied when it was first discovered.

The earlier attempts to investigate the laws of price determination foundered on the principle of universalism, which was accepted under the controlling influence of conceptual realism. The importance of nominalistic thought in antiquity, in the Middle Ages, and at the beginning of the modern era should not, of course, be underestimated. Nevertheless, it is certain that almost all attempts to comprehend social phenomena were at first undertaken on the basis of the principle of universalism. And on this basis they could not but fail hopelessly. Whoever wanted to explain prices saw, on the one hand, mankind, the state, and the corporative unit, and, on the other, classes of goods here and money there. There were also nominalistic attempts to solve these problems, and to them we owe the beginnings of the subjective theory of value. However, they were repeatedly stifled by the prestige of the prevailing conceptual realism.

Only the disintegration of the universalistic mentality brought about by the methodological individualism of the seventeenth and eighteenth centuries cleared the way for the development of a scientific catallactics. It was seen that on the market it is not mankind, the state, or the corporative unit that acts, but individual men and groups of men, and that their valuations and their action are decisive, not those of abstract collectivities. To recognize the relationship between valuation and use value and thus cope with the paradox of value, one had to realize that not classes of goods are involved in exchange, but concrete units of goods. This discovery signalized nothing less than a Copernican revolution in social science. Yet it required more than another hundred years for the step to be taken. This is a short span of time if we view the matter from the standpoint of world history and if we adequately appreciate the difficulties involved. But in the history of our science precisely this period acquired a special importance, inasmuch as it was during this time that the marvelous structure of Ricardo’s system was first elaborated. In spite of the serious misunderstanding on which it was constructed, it became so fruitful that it rightly bears the designation “classical.”

The step that leads from classical to modern economics is the realization that classes of goods in the abstract are never exchanged and valued, but always only concrete units of a class of goods. If I want to buy or sell one loaf of bread, I do not take into consideration what “bread” is worth to mankind, or what all the bread currently available is worth, or what 10,000 loaves of bread are worth, but only the worth of the one loaf in question. This realization is not a deduction from Gossen’s first law. It is attained through reflection on the essence of our action; or, expressed differently, the experience of our action makes any other supposition impossible for our thought.

We derive the law of the satiation of wants from this proposition and from the further realization, which is obtained by reflecting upon our action, that, in our scales of importance, we order individual units of goods not according to the classes of goods to which they belong or the classes of wants which they satisfy, but according to the concrete emergence of wants; that is to say, before one class of wants is fully satisfied we already proceed to the satisfaction of individual wants of other classes that we would not satisfy if one or several wants of the first class had not previously been satisfied.

Therefore, from our standpoint, Gossen’s law has nothing to do with psychology. It is deduced by economics from reflections that are not of a psychological nature. The psychological law of satiation is independent of our law, though understandably in harmony with it, inasmuch as both refer to the same state of affairs. What distinguishes the two is the difference of method by which they have been arrived at. Psychology and economics are differentiated by their methods of viewing man.

To be sure, Bentham, who may be numbered among the greatest theorists of social science, and who stood at the peak of the economics of his time, arrived at our law by way of psychology and was unable to make any application of it to economics; and in Gossen’s exposition it appeared as a psychological law, on which economic theory was then constructed. But these facts in no way invalidate the distinction that we have drawn between the laws of economics and those of psychology. Bentham’s great intellect did not serve one science only. We do not know how Gossen arrived at his cognition, and it is a matter of indifference as far as answering our question is concerned. The investigation of the way in which this or that truth was first discovered is important only for history, not for a theoretical science. It is, of course, obvious that the position that Gossen then assigned the law in his system can have no authoritative standing in our view. And everyone knows that Menger, Jevons, and Walras did not arrive at the resolution of the paradox of value by way of Gossen’s law.

The system of economic theory is independent of all other sciences as well as of psychology. This is true also of its relationship to technology. By way of illustration we shall demonstrate this in the case of the law of returns.

Even historically the law of returns did not originate in technology, but in reflections on economics. One interpreted the fact that the farmer who wants to produce more also wants to extend the area under cultivation and that in doing so he even makes use of poorer soil. If the law of returns did not hold true, it could not be explained how there can be such a thing as “land hunger.” Land would have to be a free good. The natural sciences, in developing a theory of agriculture, were unable either to substantiate or to confute these reflections “empirically.” The experience that it took as its starting point was the fact that arable land is treated as an economic good.5  It is obvious that here too economics and the natural sciences must meet on common ground.

One could not help finally expanding the law of diminishing returns on the cultivation of land into a general law of returns. If a good of higher order is treated as an economic good, then the law of returns—increasing returns up to a certain point, and beyond that point diminishing returns—must hold true of this good. Simple reflection shows that a good of higher order of which the law of returns did not hold true could never be regarded as an economic good: it would be indifferent to us whether larger or smaller quantities of this good were available.

The law of population is a special case of the law of returns. If the increase in the number of workers were always to bring about a proportional increase in returns, then the increase in the means of support would keep pace with the increase in population.

Whoever maintains, like Henry George, Franz Oppenheimer, and others, that the law of population is without practical importance assumes that hand in hand with every increase in population beyond the optimum necessarily go changes in technology or in the social division of labor such that at least no decrease in returns takes place per capita of the total population and perhaps even an increase in returns is thereby brought about. There is no proof for this assumption.

• 5Cf. Böhm-Bawerk, Gesammelte Schriften, ed. by F. X. Weiss (Vienna, 1924), I, 193 ff.

All action aims at results and takes on meaning only in relation to results. The preferring and setting aside that are involved in action take as their standard the importance of the anticipated result for the well-being of the actor. Whatever directly serves well-being is, without difficulty, given a rank in accordance with its importance, and this provides the rank order in which the goals of action stand at any given moment. How far it is possible to bring the relatively remote prerequisites of well-being into this rank order without resorting to more complicated processes of thought depends on the intelligence of the individual. It is certain, however, that even for the most gifted person the difficulties of weighing means and ends become insurmountable as soon as one goes beyond the simplest processes of production involving only a short period of time and few intermediary steps. Capitalistic production—in Böhm-Bawerk’s sense, not in that of the Marxists—requires above all else the tool of economic calculation, through which expenditures of goods and of labor of different kinds become comparable. Those who act must be capable of recognizing which path leads to the goal aimed at with the least expenditure of means. This is the function of monetary calculation.

Money—that is, the generally used medium of exchange—thus becomes an indispensable mental prerequisite of any action that undertakes to conduct relatively long-range processes of production. Without the aid of monetary calculation, bookkeeping, and the computation of profit and loss in terms of money, technology would have had to confine itself to the simplest, and therefore the least productive, methods. If today economic calculation were again to disappear from production—as the result, for example, of the attainment of full socialization—then the whole structure of capitalistic production would be transformed within the shortest time into a desolate chaos, from which there could be no other way out than reversion to the economic condition of the most primitive cultures. Inasmuch as money prices of the means of production can be determined only in a social order in which they are privately owned, the proof of the impracticability of socialism necessarily follows.

From the standpoint of both politics arid history, this proof is certainly the most important discovery made by economic theory. Its practical significance can scarcely be overestimated. It alone gives us the basis for pronouncing a final political judgment on all kinds of socialism, communism, and planned economies; and it alone will enable future historians to understand how it came about that the victory of the socialist movement did not lead to the creation of the socialist order of society. Here we need not go into this further. We must consider tire problem of monetary calculation in another respect, namely, in its importance for the separation of action “economic in the narrower sense” from other action.

The characteristic feature of the mental tool provided by monetary calculation is responsible for the fact that the sphere in which it is employed appears to its as a special province within the wider domain of all action. In everyday, popular usage the sphere of the economic extends as far as monetary calculations are possible. Whatever goes beyond this is called the noneconomic sphere. We cannot acquiesce in this usage when it treats economic and noneconomic action as heterogeneous. We have seen that such a separation is misleading. However, the very fact that we see in economic calculation in terms of money the most important and, indeed, the indispensable mental tool of long-range production makes a terminological separation between these two spheres appear expedient to us. In the light of the comments above, we must reject the terms “economic” and “noneconomic” or “uneconomic,” but we can accept the terms “economic in the narrower sense” and “economic in the broader sense,” provided one does not want to interpret them as indicating a difference in the scope of rational and economic action.

(We may remark incidentally that monetary calculation is no more a “function” of money than astronomical navigation is a “function” of the stars.)

Economic calculation is either the calculation of future possibilities as the basis for the decisions that guide action, or the subsequent ascertainment of the results, i.e., the computation of profit and loss. In no respect can it be called “perfect.” One of the tasks of the theory of indirect exchange (the theory of money and credit) consists precisely In showing the imperfection—or, more correctly, the limits—of what this method is capable of. Nevertheless, it is the only method available to a society based on the division of labor when it wants to compare the input and the output of its production processes. All attempts on the part of the apologists of socialism to concoct a scheme for a “socialist economic calculation” must, therefore, necessarily fail.

The money prices of goods and services that we are able to ascertain are the ratios in which these goods and services were exchanged against money at a given moment of the relatively recent or remote past. These ratios are always past; they always belong to history. They correspond to a market situation that is not the market situation of today.

Economic calculation is able to utilize to a certain extent the prices of the market because, as a rule, they do not shift so rapidly that such calculation could be essentially falsified by it. Moreover, certain deviations and changes can be appraised with so close an approximation to what really takes place later that action—or “practice”—is able to manage quite well with monetary calculation notwithstanding all its deficiencies. It cannot be emphasized strongly enough, however, that this practice is always the practice of the acting individual who wants to discover the result of his particular action (as far as it does not go beyond the orbit of the economic in the narrower sense). It always occurs within the framework of a social order based on private ownership of the means of production. It is the entrepreneur’s calculation of profitability. It can never become anything more.

Therefore, it is absurd to want to apply the elements of this calculation to problems other than those confronting the individual actor. One may not extend them to res extra commercium. One may not attempt by means of them to include more than the sphere of the economic in the narrower sense. However, this is precisely what is attempted by those who undertake to ascertain the monetary value of human life, social institutions, national wealth, cultural ideals, or the like, or who enter upon highly sophisticated investigations to determine how exchange ratios of the relatively recent, not to mention the remote, past could be expressed in terms of “our money.”

It is no less absurd to fall back upon monetary calculation when one seeks to contrast the productivity of action to its profitability. In comparing the profitability and the productivity of action, one compares the result as it appears to the individual acting within the social order of capitalism with the result as it would appear to the central director of an imaginary socialist community. (We may ignore for the sake of argument the fact that he would be completely unable to carry out such calculations.)

The height of conceptual confusion is reached when one tries to bring calculation to bear upon the problem of what is called the “social maximization of profit.” Here the connection with the individual’s calculation of profitability is intentionally abandoned in order to go beyond the “individualistic” and “atomistic” and arrive at “social” findings. And again one fails to see and will not see that the system of calculation is inseparably connected with the individual’s calculation of profitability.

Monetary calculation is not the calculation, and certainly not the measurement, of value. Its basis is the comparison of the more important and the less important. It is an ordering according to rank, an act of grading (Cuhel), and not an act of measuring. It was a mistake to search for a measure of the value of goods. In the last analysis, economic calculation does not rest on the measurement of values, but on their arrangement in an order of rank.

The universally valid theory of economic action is necessarily formal. Its material content consists of the data of human circumstances, which evoke action in the individual case: the goals at which men aim and the means by which they seek to attain them.6

The equilibrium position of the market corresponds to the specific configuration of the data. If the data change, then the equilibrium position also Shifts. We grasp the effect of changes in the data by means of our theory. With its help we can also predict the quality—or, rather, the direction—of the changes that, ceteris paribus, must follow definite changes in the data. From the known extent of changes in the latter, we are unable to predetermine quantitatively what these consequent changes will be. For changes in external conditions must, in order to influence action, be translated into volitions that move men from within. We know nothing about this process. Even materialism, which professes to have solved the problem of the relation between the Psychical and the physical by means of the famous simple formula that thinking stands in the same relationship to the brain as gall does to the bladder, has not even undertaken the attempt to establish a constant relationship between definite external events, which are quantitatively and qualitatively discernible, and thoughts and volitions.

All the endeavors that have been and are being devoted to the construction of a quantitative theory of catallactics must, therefore, come to grief. All that can be accomplished in this area is economic history. It can never go beyond the unique and the nonrepeatable; it can never acquire universal validity.7

• 6Cf. the fruitful investigations of Strigl: Die ökonomischen Kategorien und die Organisation der Wirtschaft (Jena, 1923).
• 7This is also true, for example, of the attempts of Henry L. Moore in particular (Synthetic Economics, New York, 1929). Cf. the critique by Ricci, Zeitschrift für Nationalökonomie, I, 694 ff.

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

The classical economists, whose attention was directed above all to the conduct of the businessman, could not observe that time too is economized. An account for “time” does not appear in the businessman’s books. No price is paid for it on markets. That it is, nevertheless, taken into consideration in every exchange could not be seen from the standpoint of an objectivistic theory of value, nor could one be led to this realization by reflection on the popular precept contained in the saying, “Time is money.” It was one of the great achievements of Jevons and Böhm-Bawerk that, in carrying on the work of Bentham and Rae, they assigned the element of time its proper place in the system of economic theory.

The classical economists failed to recognize the essential importance of time, which manifests its effect directly or indirectly in every exchange. They did not see that action always distinguishes between the present and the future—between present goods and future goods. Yet the time differential is important for the economy in still another respect. All changes in the data can make themselves felt only over a period of time. A longer or a shorter period must elapse before the new state of equilibrium, in accordance with the emergence of the new datum, can be reached. The static—or, as the classical economists called it, the natural—price is not reached immediately, but only after some time has passed. In the interim, deviations ensue that become the source of special profits and losses. The classical economists and their epigones not only did not fail to recognize this fact; on the contrary, they occasionally overestimated its importance. The modem theory too has paid special attention to it. This is true above all of the theory of indirect exchange. The theory of changes in the purchasing power of money and of their concomitant social consequences is based entirely on this fact. A short while ago, in a spirit of remarkable terminological and scholastic conscientiousness, an attempt was made to deny to the circulation credit theory of the trade cycle its customary name, viz., the monetary theory of crises, on the ground that it is constructed on the basis of a “time lag.”8

As has been stated, economic theory has failed to see the importance of the fact that a shorter or a longer period of time must go by before the equilibrium of the market, once it has been disturbed by emergence of new data, can again be established. This assertion would never have been made if, for political reasons, repeated attempts had not been made to embarrass the discussion of economic questions with irrelevant objections. The defenders of interventionism have occasionally attempted to confront the arguments of the critics of this policy—arguments supported by the irrefutable deductions of economics—with the alleged fact that the propositions of economics hold true only in the long run. Therefore, it was maintained, the ineluctable conclusion that interventionist measures are senseless and inexpedient cannot yet be drawn. It would exceed the scope of this treatise to examine what force this argument has in the dispute over interventionism. It is sufficient here to point out that the liberal doctrine provides a direct, and not merely an indirect, demonstration of the senselessness and inexpediency of interventionism and that its arguments can be refuted only by pointing to interventionist measures that do not, in fact, bring about effects that run counter to the intentions of those who have recourse to them.

• 8Cf. Fritz Adolph Burchardt “Entwicklungsgeschichte der monetären Konjunkturtheorie,” Weltwirtschaftliches Archiv, XXVIII, 140; Löwe, “Über den Einfluss monetärer Faktoren auf den Konjunkturzylus,” Schriften des Vereins für Sozialpolitik, CLXXIII, 362.

The economist is often prone to look to mechanics as a model for his own work. Instead of treating the problems posed by his science with the means appropriate to them, he fetches a metaphor from mechanics, which he puts in place of a solution. In this way the idea arose that the laws of catallactics hold true only ideally, i.e., on the assumption that men act in a vacuum, as it were. But, of course, in life everything happens quite differently. In life there are “frictional resistances” of all kinds, which are responsible for the fact that the outcome of our action is different from what the laws would lead one to expect. From the very outset no way was seen in which these resistances could be exactly measured or, indeed, fully comprehended even qualitatively. So one had to resign oneself to admitting that economics has but slight value both for the cognition of the relationships of our life in society and for actual practice. And, of course, all those who rejected economic science for political and related reasons—all the etatists, the socialists, and the interventionists—joyfully agreed.

Once the distinction between economic and noneconomic action is abandoned, it is not difficult to see that in all cases of “resistance” what is involved is the concrete data of economizing, which the theory comprehends fully.

For example, we deduce from our theory that when the price of a commodity rises, its production will be increased. However, if the expansion of production necessitates new investment of capital, which requires considerable time, a certain period of time will elapse before the price rise brings about an increase in supply. And if the new investment required to expand production would commit capital in such a way that conversion of invested capital goods in another branch of production is altogether impossible or, if possible, is so only at the cost of heavy losses, and if one is of the opinion that the price of the commodity will soon drop again, then the expansion of production does not take place at all. In the whole process there is nothing that the theory could not immediately explain to us.

Therefore, it is also incorrect to make the assertion that the propositions of the theory hold true only in the case of perfectly free competition. This objection must appear all the more remarkable as one could sooner assert that the modern theory of price determination has devoted too much attention to the problem of monopoly price. It certainly stands to reason that the propositions of the theory should first be examined with respect to the simplest case. Hence, it is not a legitimate criticism of economic theory that, in the investigation of competitive prices, it generally starts from the assumption that all goods are indefinitely divisible, that no obstacles stand in the way of the mobility of capital and labor, that no errors are made, etc. The subsequent dropping of these elementary assumptions one by one then affords no difficulty.

It is true that the classical economists inferred from their inquiry into the problems of catallactics that, as far as practical economic policy is concerned, all the obstacles that interventionism places in the path of competition not only diminish the quantity and value of the total production, but cannot lead to the goals that one seeks to attain by such measures. The investigations that modern economics has devoted to the same problem lead to the identical conclusion. The fact that the politician must draw from the teachings of economic theory the inference that no obstacles should be placed in the way of competition unless one has the intention of lowering productivity does not imply that the theory is unable to cope with the “fettered” economy and “frictional resistances.”

By costs classical economics understood a quantity of goods and labor. From the standpoint of the modern theory, cost is the importance of the next most urgent want that can now no longer be satisfied. This conception of cost is clearly expressed outside the orbit of the economic in the narrower sense in a statement like the following, for example: The work involved in preparing for the examination cost me (i.e., prevented) the trip to Italy. Had I not had to study for the examination, I should have taken a trip to Italy.

Only if one employs this concept of cost does one realize the importance that attaches to profitability. The fact that production is discontinued beyond the point at which it ceases to be profitable means that production takes place only as far as the goods of higher order and the labor required to produce one commodity are not more urgently needed to produce other commodities. This observation shows how unwarranted is the popular practice of objecting to the limitation of production to profitable undertakings without also mentioning those enterprises that would have to be discontinued if others were maintained beyond the point of profitability.

The same observation also disposes of the assertion, made repeatedly, that the subjective theory of value does justice only to the private aspect of price formation and not to its economic implications for society as well. On the contrary, one could turn this objection around and argue that whoever traces the determination of prices to the costs of production alone does not go beyond the outlook of the individual businessman or producer. Only the reduction of the concept of cost to its ultimate basis, as carried out by the theory of marginal utility, brings the social aspect of economic action entirely into view.

Within the field of modern economics the Austrian School has shown its superiority to the School of Lausanne and the schools related to the latter, which favor mathematical formulations, by clarifying the causal relationship between value and cost, while at the same time eschewing the concept of function, which in our science is misleading. The Austrian School must also be credited with not having stopped at the concept of cost, but, on the contrary, with carrying on its investigations to the point where it is able to trace back even this concept to subjective value iudgments.

Once one has correctly grasped the position of the concept of cost within the framework of modern science, one will have no difficulty in seeing that economics exhibits a continuity of development no less definite than that presented by the history of other sciences. The popular assertion that there are various schools of economics whose theories have nothing in common and that every economist begins by destroying the work of his predecessors in order to construct his own theory on its ruins is no more true than the other legends that the proponents of historicism, socialism, and interventionism have spread about economics. In fact, a straight line leads from the system of the classical economists to the subjectivist economics of the present. The latter is erected not on the ruins, but on the foundations, of the classical system. Modern economics has taken from its predecessor the best that it was able to offer. Without the work that the classical economists accomplished, it would not have been possible to advance to the discoveries of the modern school. Indeed, it was the uncertainties of the objectivistic school itself that necessarily led to the solutions offered by subjectivism. No work that had been devoted to the problem was done in vain. Everything that appears to those who have come afterward as a blind alley or at least as a wrong turning on the way toward a solution was necessary in order to exhaust all possibilities and to explore and think through to its logical conclusion every consideration to which the problems might lead.