“I am a rock, I am an island” bellows Paul Simon. This man is apparently the man of economics according to some traditionalists– deracinated and purely rational with absolutely no animality whatsoever. An interesting cultural critic and theologian Alastair Roberts essentially argued he’d learnt lots of economics but then read anthropology which severely undermined economic doctrine. Whilst this criticism is to some extent justified with respect to the utility maximising, mathematicised man of neo-classicism, it is not justified regarding the Austrian school. There is no ex nihilo creation of an idealised economic man in the Austrian school to explain the world but rather it works from visceral features of reality to discover underlying truths.
Let’s take a paradigmatic economic question which vexed the classical economist, “Why is water so cheap and diamonds so expensive when water is essential but diamonds are mostly decorative?” Well, the jeweller has to pay for the uncut diamonds and his overheads. The mining firm has to pay their miners and buy their digging equipment. So far so good, but who are you ultimately paying to create the equipment in the first place? It must be the labourer who initially transformed nature (land in economic terms) into a tool (a capital good), for example sharpening a stone into an axe head. This reasoning begat the Labour Theory of Value – that the market price of a product is determined by how much labour has been expended into the creation of the product. The problem is, why would anyone want to create diamonds in the first place? Either the miners themselves wanted them or they knew someone else they could sell them to. Therefore it is the demand for the product which ultimately determines costs since entrepreneurs will bid for factors of production based upon their expected future revenues.
Demand, broadly speaking, relates to being willing and also able to purchase a product at a range of prices – essentially it is a trade of one piece of property for another, but whose property? Today you have corporations who at least de jure own property, however this does not imply that these institutions demand as a complex grouping since only an individual possesses a will. When we say De Beers are investing in a new diamond mine, it is a short hand for saying the board of directors authorised this spending and the board of directors’ decision is made up of individual votes based ultimately on an individual will. In a literal sense you can only ever think for yourself.[i]
To return to the diamond water paradox, diamonds have a higher market price than water, not simply as a direct result of water’s physical properties but because the sum total of individuals’ demand is higher than that of water. Yet this still seems bizarre since most people are not stupid – why die in a diamond encrusted coffin when you can drink and live? The error here is that individuals do not choose between water or diamonds in general but rather discrete units thereof. When an individual acquires his first bottle of water he will put this means to his most highly valued end, so in most cases it will be drinking it to survive. At least in England, the superabundance of water means that whoever sells it will have achieved many of their most highly valued ends which can be realised by water so the value to him of his 1000th unit of water is rather insignificant, therefore he will accept a small price for it. In contrast, the owners of diamonds have so few that they only obtain a few of their most highly valued ends, so the price they are willing to exchange the marginal unit of diamonds for is significantly higher than that of the marginal unit of water. Thus the answer to the diamond water paradox, and the essence of economic analysis, is marginal analysis and subjective valuation realised in concrete choice – the logic of human action. Since man has to choose between any ends or means at all implies a scarcity of resources and/or time and the choice itself demonstrates preference – the marginal unit of diamonds is worth more to the subject than the marginal unit of water. Further, considering he needs to use an instrumental means[ii], toiling in the field to earn an income to purchase diamonds, implies some form of disutility. All this is to say work can be hard work.
Misesian man is the man of reality. He is not an abstract utility maximiser who cares solely about the lowest possible price. He is a breathing, feeling and fallible man– on his death bed the multimillionaire could regret his goal to be rich since the related hundred hour work weeks caused him to miss his children growing up. Less problematically, man could choose the wrong means to achieve his end – attempting to sell bacon in Bradford to make his fortune. Such a man could well be irrational in the general sense but as long as the behaviour is purposeful, it is in fact rational in the relevant sense.
Further, explanatory value subjectivism (explaining behaviour in terms of the actor’s own values) does not necessarily imply normative value subjectivism – that ethics is mere subjective, content-less preference. This is a mistake made by some traditionalists when interacting with Austrian Economics although it is understandable in some cases given the ethical relativism of thinkers such as Mises himself and in particular some online Austrian keyboard warriors – on a similar note Austrian economics does not imply egoism, individualist anarchism or general libertarianism. The traditionalist political philosopher who is also an Austrian economist is a perfect coherent possibility. Mises and Rothbard do make some ethical claims in some of their economics works but this is the voice of the political philosopher, not the economist. To abandon Austrian economics because of some political statements would be deeply unwise. Whether there is objective value, or more precisely the good, the true and the beautiful in reality itself, is outside the scope of Austrian economics. That said, such a view is in fact more complementary than a hardcore relativist position. Within a purely relativistic position you don’t value diamonds because of certain objective qualities but rather diamonds have value simply because you choose them to have value – your values are purely arbitrary.[iii] On the other hand, an objective external reality which is sifted by the individual actor to then create his value scale is more consistent with Misesian man as he can have genuine reasons for his choices (This is of course consistent with a softer relativism too). Thus economics is consistent with other avenues of investigation such as history, anthropology and sociology to understand why the individual acts as he does – contingent factors regarding geography, genetics, sex and the family matter for what the acting man chooses, it is just outside the scope of economics. Further, whilst economics studies individual action (methodological individualism) it does not necessarily preclude the existence of any social ontologies in other areas of study. Economics is perfectly consistent with families, nations and other institutions having a form beyond just the individuals who comprise them, all it will insist is that only individuals can act. Thus the complaint that economics causes you to see man as an atomised individual is simply a category mistake.
In conclusion, Austrian economics is a vital component of any social study of mankind. To neglect it in favour of sociology or anthropology is to think that since I have a bowl and soup I do not need a spoon to eat it. Economics isn’t above psychology, sociology and anthropology but an equal and necessary partner in social science. Therefore I implore everyone: learn basic Austrian economics and the scales will fall from your eyes.
[i] One could attempt to go behind the individual’s will by investigating biology, chemistry and ultimately physics. Such a view implies a grand form of determinism in which the base unit(s) of reality determine everything thereby making choice a mere illusion. This is clearly counter intuitive since we act everyday believing that our choices are genuinely our own. More substantively, genuine choice (a choice which is caused by an individual human, where the human is more than just the chemicals that constitute his body) can only be denied by choosing to declare your opposition to it. Now it is conceivable that choice is an illusion and that you just happened to declare this at the right time in a debate on the subject. Probabilistically this seems highly unlikely and secondly, if choice was an illusion you couldn’t prove it: you would use your mind to follow appropriate methodology to prove this, only to simultaneously discover that you did not follow the correct rules of inference but were rather pushed along by the irresistible forces of fate; thus your belief in determinism was justified not by reason but fate which cannot justify anything. Thus we have the bedrock foundation upon which economics is built – human choice: the choice between a myriad of ends and also the choice between various means to achieve the end(s).
[ii] A means used only for the sake of achieving a goal. This is in contrast to a constitutive means which is one where the means is in a sense part of the end – for example, playing all the notes to perform Chopin’s Prelude in C Minor is internal to the end in a way that working in the field to purchase diamonds is not.
[iii] Hulsmann makes a similar point in his masterful Realist Approach to Equilibrium Analysis (https://mises-media.s3.amazonaws.com/qjae3_4_1.pdf?file=1&type=document) although it isn’t in the context of objective ethics: it merely states that individuals choose certain means and ends for particular reasons beyond just choosing such means or ends, yet ex post their internal valuation system could recognise these choices as successful or as a failure.