Power and Market: Government and the Economy

Read the Scholars' Edition which combines both books at mises.org in pdf or html format: http://mises.org/rothbard/mes.asp

I began reading this book before, but after reading Ethics of Liberty and Libertarian Manifesto, I am eager to read this all the way through now. This edition is a combination of what used to be two books: Man, Economy and State and Power and Market, because originally they were supposed to be one combined work.

The dedication to "Power and Market": to "Libertarians of the Past who Blazed the Trail and to Libertarians of the Future, who Shall Overcome".

Man, Economy and State: A Treatise on Economic Principles

My comments will include quotations and notes to help me understand the economic ideas better, and to emphasize some points that are important to understand about freedom.

Introduction to Man, Economy and State with Power and Market by Joseph Stromberg

Stromberg describes Rothbard's work as possessing "... uncompromising consistency and radicalism in pursuing the logic of human action in the economic realm". I just want to note that these virtues will appeal to those who will move the libertarian movement forward in Canada.

Quote from Rothbard on p. xxviii that Rothbard would apply Mises' "methodological principles, which demonstrate that historical facts cannot "prove" any theory; the theory must be used as an explanation of historical facts."

P. xxxv, xxxvi shows how Rothbard transitioned to a conclusion about ethics during the planning of his book. "I have come to believe that there can be a science of rational ethics based on human nature and what is good for human nature."

On p. xxxviii, he is quoted in a letter as saying,

"Mises, despite his bitter criticism (and correct ones) against the positivists, has accepted a crucial point of their position - that values are only subjective and a matter of taste or "emotion" that cannot be decided on rational grounds. What I have done is go back to the "classical" ethical position that, aiming as we must at individual man's happiness, there is a "science" of ethics, which can formulate the rules for such "virtuous" action."

On p. xl, he is quoted criticizing the philosophical view that human beings are constantly in a state of dissatisfaction until they are in some kind of idealized inactive rest. He says,

Such a philosophic view is contrary to the natural state of man, which is at its happiest precisely when it is engaged in productive activity. This revised part eliminates the philosophic pessimism from praxeology.

Noted that the direct effect of government intervention was to prevent people from doing what they would like.

p. lxxxviii

Rothbard on Mises's Human Action infers his own point of view:

It is economics made whole, based on the methodology of praxeology ... and grounded in the ineluctable and fundamental axiom that human beings exist, and that they act in the world, using means to achieve their most valued goals.

Preface to Revised Edition

p. xcvii - Rothbard describes the three Austrian Economics paradigms. He subscribes to the Misesian paradigm of praxeological "action" and "choice".

Fundamentals of Human Action [p. 1 - Ch. 1]

Human action is purposeful behavior.

"Only individuals have ends and can act to attain them."

"groups have no independent existence aside from the actions of their individual members." True of governments and other groups. And this is a good point to remember about political parties too. Groups define the relationship among individuals. In a marginal note, he emphasizes that he does not at all assume that individuals are like atoms, uninfluenced by others.

[p.12] "Economic is by no means equivalent to material." Services that people want can be immaterial.

Human action, purpose = end, desire = motive

Humans act

means, technological ideas

time is scarce, a means, all means are scarce

choosing which ends shall be satisfied by employment of means, ranking, economizing, scale of value, scale of preferences, uncertainty of the future - speculations - judgment, error

means to satisfy man's wants are goods, either directly serviceable = consumers' goods/goods of the first order OR indirectly serviceable = producers' goods/factors of production/good of higher order

structure of production occurs in stages - higher to lower

produced factors of production (Capital Goods) vs. original factors of production (Labor and Land)

recipe = plan, an unlimited factor of production

[p. 13] Time
period of production
labor energy (working time) + maturing time

p. 15

Man prefers his end to be achieved in the shortest possible time.

Time preference.
i.e. End achieved ASAP - as soon as possible.
Period of production
Duration of serviceableness
Period of provision

p. 18
value judgement
preferences

p.19
Values of preference/happiness can only be ranked, not measured. Ordinal numbers rather than cardinal
"All action is an attempt to exchange a less satisfactory state of affairs for a more satisfactory one."
net gain, net loss
"the process of imputing values to goods takes place in the opposite direction to that of the process of production"
Imputing value to particular goods "in accordance with their expected ability to contribute toward serving the various ends"
The source of value

The Law of Marginal Utility

Value Paradox
"How can men value bread less than platinum?"
It should be phrased in units rather than classes
A loaf of bread is less valuable to him than an ounce of platinum

Supply of a good - available in specific homogenous units equally capable of rendering the same service to the actor

"action uses scarce means to satisfy the most urgent of the not yet satisfied wants"

"the relation between the unit to be acquired or given up and the quanity of supply (stock) already available to the actor"

p. 25 The first unit will be used to supply more urgent wants and the second unit will supply less urgent wants and is therefore less valuable

"for all human actions, as the quantity of the supply (stock) of a good increases, the utility (value) of each additional unit decreases"

utility of X units is greater than the utility of X-1 units
When giving up one unit, the actor gives up the "least urgent of the wants which the larger stock would have satisfied".

If the supply of something is not scarce, then it is "not a good, but a general condition of human welfare". One less unit makes no difference in that case (e.g. air). A good (a means) on the other hand is subject to the economizing of human action.

the utility of each successive unit "is less as the quantity of the supply increases"

p. 26 Q. I notice that the assumption is that 6 units represents 6 ends. Is the assumption ok?

The past doesn't matter to the actor in terms of the ends he wishes to achieve

The one unit that the actor is considering giving up is the marginal unit, or the "unit at the margin"
He has to give up the least important end fulfilled by the stock, which is the satisfaction provided by the marginal unit, or the marginal satisfaction, or marginal utility

The marginal utility of the supply is the end that must be given up as the result of the loss of the unit

Supply of 4 units -> giving up one unit -> then the value of the marginal utility (value of the marginal unit) would have a rank of four, the value of the 4th ranking end

Q. Again, why is the ranking of the ends the same as the number of units? Is this assumption ok? Try to find an explanation for this.

"The greater the supply of a good, the lower the marginal utility; the smaller the supply, the higher the marginal utility"

Fundamental law of economics derived from the axiom of human action: The law of marginal utility (or the law of diminishing marginal utility)

In other words, the more units you have, the least important is the end that you are giving up when you give up one unit. With a smaller supply, the end you are giving up by giving up one unit ranks higher.

Same with adding one unit - marginal unit - its value is the same as the value of the next ranking end, e.g. adding 6th horse to supply of 5 horses is the value of the 6th ranking end - whatever end can be added to the higher ranking ends already served

"the marginal product is the product foregone by a loss of the marginal unit". Value "determined either by its marginal product in the next stage of production, or if it is a consumers' good, by the utility of the end it satisfies"

"value assigned to a unit of a factor of production" = value of its marginal product = its marginal productivity

strives for maximum product at each stage

law of returns: with the quantity of complementary factors held constant, there always exists some optimum amount of the varying factor

a of factor X + b of Y +c of Z yields p of product P
b & c unchanged, a varies. The value of a yielding the maximum p/a, the max avg return of product to the facto, is the *optimum* amount of X
p/a = avg unit product, p/a declines as a decreases or increases from the optimum
p/a, p/b, p/c - each must have some optimum/maximum value
p/a increases with a until it reaches the optimum point for the varying factor
marginal product (delta a / delta p) = increase in total product provided by the marginal unit

At any given supply of a (units of factor X), a loss of one unit will entail a loss of total product provided by the marginal unit

Often the marginal product reaches its peak before the avg product

As the average product increases (increasing returns), the marginal product is greater than the average product. As the average product declines (diminish returns), the marginal product is less than the avg product. When the avg product is at a maximum, it equals the marginal product.

7. Factors of Production: Convertibility and Valuation

The less specific a factor is, the more convertible it is from one use to another. Wood and iron are convertible to different consumers' goods.

If there was suddenly no demand for cigars, cigar machines (specific) would become valueless. Cigarettes produced instead. If no demand for tobacco at all, then land for growing tobacco (more non-specific) could be changed to growing cotton.

A change in the value of the product causes a greater change in the value of the specific factors than in that of the relatively nonspecific factors.

2 factors completely specific -> e.g. two shoes in one pair. If lose one shoe, the other factor (shoe) becomes valueless.

8. Factors of Production: Labor versus Leisure

Everyone tries to maximize his production of consumers' goods per unit of time.

Leisure is a desirable consumers' good
(proposition not deduced from the action axiom)
The more labor, the less leisure
Labor-satisfaction is a good, therefore its marginal utility declines with an increase in its quantity.

Leisure (amount of time spent abstaining from labor - p. 47 indicates this includes sleep) is also subject to the law of marginal utility - decreases as the supply increases.

Those activities engaged in purely for their own sake are play (one of the forms leisure may take)

9. The Formation of Capital

To increase production, produce capital goods. To do this, necessary to restrict consumption (e.g. leisure) = saving and transfer labor and land to production of capital good (= investment) rather than consumer good. Sacrificing present good to acquire consumers' goods in the future.

Disutility of waiting is balanced against the utility potentially gained by the capital good and longer period of production.

The role of capital (factors of production) is to advance men in time toward their objective in producing consumers' goods.

satisfaction of wants is consumption

saving involves the restriction of consumption compared to the amount that could be consumed, does not always involve an actual reduction in the amount consumed.

All capital goods are perishable. Those few products that are not are for all intents and purposes part of the land

Each capital good has a useful life and a depreciation or rate of being used up

Any actor has the choice of a) adding to his capital structure, b) maintaining his capital intact, or c) consuming his capital. Saving is necessary for both a) and b).
Repair or replacement.

Once the disutility of waiting - utility of present consumers' goods foregone - becomes greater than the utility of obtaining more goods in the future through saving, the actor will cease to save

p. 59. Capital goods have no independent productive power of their own - completely reducible to labor and land which produced them, and time

p. 61 - Along with time preference, an uncertainty factor affects decision to make an investment - either to the advantage or disadvantage of the investment

present value of the future good

rate of time preference

higher rate of discount -> the lower the present value of the future good -> more likely to make the investment

He will cease saving and investing at the point at which the value of goods foregone exceeds the present value of the future utilities to be derived. This will determine an actor's rate of saving and investing at any time.

the act of entrepreneurship - guessing situation of uncertainty

accumulated stock of capital goods imposes a conservative force on present-day action

existence of capital good not in use reveals a past error, but indicates that the actor expects to acquire a greater utility from other uses of his labor

present goods / future goods
Saving goods for later -> they become capital goods until they are used -> then they're consumers' goods

10. Action as an Exchange

Action involves choice, exchange of one state for what might be a more satisfactory one

Man must always act, even "doing nothing"

attaining a value higher than what he is giving up: making a psychic profit

what he is giving up may be called his costs

maximize his psychic income or psychic revenue, ie. attain the greatest height on his value scale

Appendix A

praxeological analysis - deal with any given ends and means - rules of logic determine economic truths that follow from the action axiom

Not the same as ethics or psychology, which deal with the content of human ends

Each unit of the supply of a good has to be equally serviceable

• why: psychology;
  
• what ends should be: ethics, aesthetics;
  
• how to use means to arrive at ends: technology;
  
• what and how: history;
  
• formal implication of using means to achieve ends: praxeology

catallactics = analysis of interpersonal exchange

praxeology outside of economics (subdivision) is less explored

defends use of verbal logic rather than symbolic logic. Fine but I wonder if anyone has tried to convert Austrian economics into symbolic logic

Appendix B - On Means and Ends

ends (e.g. money) can become means to other ends - but there is a logical distinction between ends and means

Ch. 2 Direct Exchange