The Ultimate Foundation of Economic Science

In the political sphere the violent overthrow of the precapitalistic methods of government resulted in the complete abandonment of the feudal concepts of public law and the development of a new constitutional doctrine with legal concepts and terms unknown before. (Only in England, where the transformation of the system of royal supremacy first into that of the supremacy of a caste of privileged landowners and then into that of representative government with adult franchise was effected by a succession of peaceful changes,6  was the terminology of the ancien régime for the most part preserved while its original meaning had long since become devoid of any practical applicability.) In the sphere of civil law the transition from precapitalistic to capitalistic conditions was brought about by a long series of small changes through the actions of people who lacked the power to alter formally the traditional legal institutions and concepts. The new methods of doing business generated new branches of law that were developed out of older business customs and practices. But however radically these new methods transformed the essence and the meaning of the traditional legal institutions, it was assumed that those terms and concepts of the old law that remained in use continued to signify the same social and economic conditions they had signified in ages gone by. The retention of the traditional terms prevents superficial observers from noticing the full significance of the fundamental changes effected. The outstanding example is provided by the use of the concept of property.

Where there by and large prevails economic self-sufficiency of every household, and consequently there is for the much greater part of all products no regular exchange, the meaning of property in producers’ goods does not differ from the meaning of property in consumers’ goods. In each case property serves the owner exclusively. To own something, whether a producers’ good or a consumers’ good, means to have it for oneself alone and to deal with it for one’s own satisfaction.

But it is quite a different thing in the frame of a market economy. The owner of producers’ goods is forced to employ them for the best possible satisfaction of the wants of the consumers. He forfeits his property if other people eclipse him by better serving the consumers. In the market economy property is acquired and preserved by serving the public and is lost when the public becomes dissatisfied with the way in which it is served. Private property in the factors of production is a public mandate, as it were, which is withdrawn as soon as the consumers think that other people would employ it more efficiently. By the instrumentality of the profit-and-loss system, the owners are forced to deal with “their” property as if it were other peoples’ property entrusted to them under the obligation to utilize it for the best possible satisfaction of the virtual beneficiaries, the consumers. All factors of production, including also the human factor, viz., labor, serve the totality of the members of the market economy. Such is the real meaning and character of private property in the material factors of production under capitalism. It could be ignored and misinterpreted only because people—economists and lawyers as well as laymen—had been led astray by the fact that the legal concept of property as developed by the juridical practices and doctrines of precapitalistic ages has been retained unchanged or only slightly altered after its effective meaning had been radically altered.7

It is necessary to deal with this issue in an analysis of the epistemological problems of the sciences of human action because it shows how radically the approach of modern praxeology differs from that of the traditional older ways of studying social conditions. Blinded by the uncritical acceptance of the legalistic doctrines of precapitalistic ages, generations of authors entirely failed to see the characteristic features of the market economy and of private ownership of the means of production within the market economy. In their view, the capitalists and entrepreneurs appear as irresponsible autocrats administering economic affairs for their own benefit without any regard for the concerns of the rest of the people. They depict profit as unfair lucre derived from the “exploitation” of the employees and the consumers. Their passionate denunciation of profit prevented them from realizing that it is precisely the necessity to make profits and to avoid losses that forces the “exploiters” to satisfy the consumers to the best of their abilities by supplying them with those commodities and services they are most urgently asking for. The consumers are sovereign because they ultimately determine what has to be produced, in what quantity, and of what quality.

• 6 It was not the revolutions of the seventeenth century that transformed the British system of government. The effects of the first revoluton were annulled by the Restoration, and in the Glorious Revolution of 1688 the royal office was merely transferred from the “legitimate” king to other members of his family. The struggle between dynastic absolutism and the parliamentary regime of the landed aristocracy continued during the greater part of the eighteenth century. It came to an end only when the attempts of the third Hanoverian king to revive the personal regime of the Tudors and the Stuarts were frustrated. The substitution of popular rule for that of the aristocracy was—in the nineteenth century—brought about by a succession of franchise reforms.
• 7See Mises, Die Gemeinwirtschaft (2nd ed.; Jena, 1932), pp. 15 f. (English-language translation Socialism [Yale University Press, 1951], pp. 40 ff.)