(Originally posted on Mises.org)
In the past few weeks, I have been discussing a number of points in Human Action, and today I propose to concentrate on a fundamental insight that is a main theme of the book. There are, Mises says, only two ways to organize production in a complex modern economy that produces a great many goods and services. One is by centralized decision-making and the other is through the free market.
A closer look, though, shows that only one of these alternatives is genuine. In a complex economy, producers’ goods can usually be used to make a number of different consumers’ goods. If so, the question arises: How can choices to use producers’ goods be made in a way that best satisfies the wishes of consumers?
Mises’s fundamental insight is that centralized decision-making cannot answer this question. Only an economic system with monetary calculation can do so, and monetary calculation can only take place in a free market. Without a market, socialist planners could only guess at the best way to make production decisions. Monetary calculation cannot be bypassed; there is no measure of value without money.
If this is true, it is evident that central planning must be erased from our set of options. It would, Mises says, collapse into chaos. Only the free market is left.
It might be objected that even though our options are limited in this way, that is not much of a limit. Few people today favor a completely centralized economy. But does this not leave open various mixes of a centrally directed and a market economy? Mises denies this. There is, he says, no third system intermediate between central planning and the market. So long as most prices are market prices, the economy still counts as a market economy, even if it is hampered by government regulations.
It turns out, though, that this limits our options in a drastic way, in a fashion that is not immediately apparent. Many people criticize the free market for what they regard as its undue emphasis on making money. Even if Mises is correct that the free market will lead to prosperity, aren’t there nonmonetary values that must be considered as well?
There are indeed nonmonetary values, but the critics who point this out ignore Mises’s key insight. In order to avoid chaos, a complex modern economy must use monetary calculation. And in order to use monetary calculation, entrepreneurs must be guided by the endeavor to make a profit. The efficacy of monetary calculation to answer the question of the best use of producers’ goods depends on entrepreneurs’ being able to shift resources to businesses that earn profits and away from businesses that make losses. If entrepreneurs are not guided by efforts to maximize profits, they are just guessing at what should be produced and are in no better position than central planners.
As Mises puts it,
The only reason why the market economy can operate without government orders telling everybody precisely what he should do and how he should do it is that it does not ask anybody to deviate from those lines of conduct which best serve his own interests. What integrates the individual’s actions into the whole of the social system of production is the pursuit of his own purposes. In indulging in his “acquisitiveness” each actor contributes his share to the best possible arrangement of production activities. Thus, within the sphere of private property and the laws protecting it against encroachments on the part of violent or fraudulent action, there is no antagonism between the interests of the individual and those of society.
The market economy becomes a chaotic muddle if this predominance of private property which the reformers disparage as selfishness is eliminated. In urging people to listen to the voice of their conscience and to substitute considerations of public welfare for those of private profit, one does not create a working and satisfactory social order. It is not enough to tell a man not to buy on the cheapest market and not to sell on the dearest market. It is not enough to tell him not to strive after profit and not to avoid losses. One must establish unambiguous rules for the guidance of conduct in each concrete situation. (Human Action, pp. 720–21)
It does not follow from this that there is no place for charity in a free market economy. Entrepreneurs are perfectly at liberty to donate their personal income to the poor, if they so decide; and, though one may question whether this will be the course of action in fact best able in the long run to alleviate the condition of the poor, doing this does not impede market calculation. The key issue, once more, is that, in their production decisions, entrepreneurs must aim to maximize their profit.
In this connection, a significant modern movement, “effective altruism,” accepts the logic of Mises’s argument, though it is doubtful that most members of this group got their point from him. According to the effective altruists, many people should try to make as much money as they can, and then use their income to benefit the poor. Will MacAskill, a leading effective altruist, says,
Many people should seriously consider “earning to give,” which is deliberately taking a lucrative career in order to do good by your donations rather than deliberately working somewhere where you could have a direct, immediate impact. A number of people have gone on to do that as a career path…. Obviously there’s some worry that you’re disconnected and lose your values, but I’m coming around to the idea that the rate of doing that via earning to give is no worse than the rate of doing that through direct impact…. By contrast, if you’re earning to give, you’re in a cushy lifestyle—you’re giving away 50 percent, but you’re still on a nice salary—working with very smart people, and you know that the impact you’re having is absolutely huge because you’re able to donate to these very well-evidenced charities. I was worried about burnout and sustainability to begin with, and it’s certainly still a concern I’ll keep an eye out for. But it’s become less pressing over time as people have actually been pursuing this path.
As so often happens, Mises anticipated a line of thought that others arrived at decades afterward.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
David Gordon is Senior Fellow at the Mises Institute and editor of the Mises Review.