Principles of Economics E-Book

Saifedean Ammous

• Herausgeber: WS
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2023

Seitenzahl: 646

Beschreibung

Principles of Economics is a university-level textbook offering a comprehensive, engaging, and easy-to-read overview of the field of economics that is valuable to the university student, the general reader, and the professional economist.

Saifedean Ammous’ first book, The Bitcoin Standard, is an international best-seller that has been translated into 36 languages. The book garnered praise from respected scholars, successful entrepreneurs, professional athletes, and countless readers worldwide for its engaging and enlightening presentation of sophisticated economic and technical concepts, delivered in a style accessible to the general reader. With its sequel, The Fiat Standard, Ammous established himself as one of the world’s most effective communicators of economic ideas, whose writing resonates with a growing global readership.

In Principles of Economics, his most ambitious and elaborate work to date, Ammous offers readers a potent antidote to the modern economics textbook. After two decades of learning and teaching economics at university level, Ammous became aware that most economic textbooks confuse more than they illuminate and most university students tasked with reading them learn very little that is useful and actionable. The culmination of four years' work, this book uses the underappreciated approach of the Austrian school of economics to introduce the principles, methods, and concepts of economics in a readable, engaging, and informative manner. Rather than relying on mathematical analysis of aggregates and arcane theoretical models, the book uses the clear written word to effectively illustrate key economic concepts.

The book first presents the Austrian school method and the foundational concepts of value and time. With these foundations laid, the second part of the book explores how humans act individually to achieve their ends under scarcity—in other words, how humans economize. A chapter is dedicated to detailed overviews of labor, property, capital, technology, and energy, and each topic is accompanied by vivid examples explaining its relevance to the reader. The third part of the book examines economizing in the social context, with chapters examining trade, money, the market order, and capitalism—important concepts that are often shrouded by misconceptions in most modern treatments. The fourth part of the book presents the Austrian perspective on monetary economics, laying the groundwork through a detailed discussion of time preference, followed by a discussion of banking and credit, and the business cycle and its monetary origins. The final section of the book explains why respect for property rights in an extended market order is the basis for human civilization, how the market order protects against aggression, and the failures of monopoly provision of defense.

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copyright © 2023 saifedean ammous All rights reserved.

Principles of Economics

ISBN     979-8-9879755-1-0  Hardcover              979-8-9879755-4-1  Paperback              979-8-9879755-7-2  Ebook              979-8-9879755-0-3  Audiobook

To my father, who taught me the most important lesson of this book before I could read, and to my son, so he too may learn it.

Table of Contents

About the Author

Introduction

PART I. FUNDAMENTALS

Chapter 1     Human Action

Action, Purpose, and Reason

Economic Analysis

Quantitative Analysis

A Contrast of Approaches

Chapter 2     Value

Utility and Value

Valuation: Ordinal and Cardinal

Value and Price

Free Exchange

Determinants of Value

Marginalism

Marginal Utility

Law of Diminishing Marginal Utility

Valuation by the Least Valuable Use

Water-Diamond Paradox

Chapter 3     Time

The Ultimate Resource

Opportunity Cost

Material Abundance

Simon’s Bet

Time Preference

Economizing Time

Economizing Action

PART II. ECONOMY

Chapter 4     Labor

Labor and Leisure

Production

Productivity of Labor

Unemployment

Will Work Ever End?

Is Labor Exploitation?

Chapter 5     Property

Scarcity and Property

Types of Property

Self-Ownership

Importance of Property Rights

Chapter 6     Capital

Lengthening Structure of Production

Saving

Higher Productivity

The High Cost of Capital

Capital and Time Preference

Saving Fallacies

Limits to Capital

Chapter 7     Technology

Technology and Labor

Technology and Productivity

Technological Innovation and Entrepreneurship

Software

Property in Ideas

Chapter 8     Energy and Power

Energy in Human History

Energy Abundance

Power Scarcity

Power of Hydrocarbon Alternatives

Energy and Freedom

PART III. THE MARKET ORDER

Chapter 9     Trade

Subjective Valuation

Absolute Advantage

Comparative Advantage

Specialization and the Division of Labor

Extent of the Market

Chapter 10   Money

The Problem Money Solves

Salability

Salability across Time

Why One Money?

Money and the State

Value of Money

Money’s Uniqueness

How Much Money Should There Be?

Chapter 11   Markets

Consumer Good Markets

Equilibrium

Producer Good Markets

Economizing in the Market Order

Consumer Sovereignty

A Contrast of Approaches

Chapter 12   Capitalism

Capital Markets

Capitalism Is Entrepreneurial, Not Managerial

Profit and Loss

The Economic Calculation Problem

Modern Economics and Calculation

The Effects of Entrepreneurial Investment

PART IV. MONETARY ECONOMICS

Chapter 13   Time Preference

Time Preference and Money

Time Preference and Saving

Time Preference and Civilization

Time Preference and Bitcoin

Chapter 14   Credit and Banking

Banking

Credit

Commodity Credit

Interest Rates

Can Interest Be Eliminated?

Chapter 15   Monetary Expansion

Circulation Credit

Mises’ Typology of Money

Business Cycles

The Business Cycle Graphically

Capital Market Central Planning

PART V. CIVILIZATION

Chapter 16   Violence

Non-Aggression Principle

Government Coercion

Rationales for Government Violence

Rationality in Economics

Chapter 17   Defense

The Market for Defense

The Market for Law and Order

State Monopoly of Defense and Law

State Monopoly Failure Modes

A Free Market in Defense

Chapter 18   Civilization

The Cost of Civilization

The Case for Civilization

The Fiat Slavery Alternative to Civilization

The Triumph of Reason

Appendix 1

Bibliography

About the Author

Saifedean Ammous is an internationally best-selling economist and author. In 2018, Ammous authored The Bitcoin Standard: The Decentralized Alternative to Central Banking, the best-selling book on bitcoin, published in 36 languages. In 2021, he published The Fiat Standard: The Debt Slavery Alternative to Human Civilization, available in 12 languages. Saifedean teaches courses on the economics of bitcoin, and economics in the Austrian school tradition, on his online learning platform Saifedean.com, and also hosts The Bitcoin Standard Podcast.

Saifedean was a professor of Economics at the Lebanese American University from 2009 to 2019. He holds a PhD in Sustainable Development from Columbia University, a Masters in Development Management from the London School of Economics, and a Bachelor in Mechanical Engineering from the American University of Beirut.

Introduction

The vast majority of textbooks taught in universities today are in the mainstream Keynesian-Samuelsonian economic tradition, which confuses students more than it informs them. I have taught these university textbooks for years and witnessed droves of intelligent students leave class with more questions than they entered it with, struggling to understand the significance of the obscure equations they studied, or to see any convincing reason to believe their outputs. Over the years, I have spoken to dozens of highly intelligent students and graduates who report a similar experience: They did what they had to do to get the grade they wanted, but none of the material made sense to them. They incredulously try to convince themselves to undertake the astounding leaps of logic necessary to make sense out of the irrelevant equations in order to pass exams, never to consider the ideas of the course again. If students learn from the mainstream textbook, they learn to understand theoretical models with only a tenuous link to reality. Success in the courses consists of understanding the models, not reality.

While teaching economics, I would include insights from the Austrian school of economics. Students invariably found these to be the most practically and intellectually interesting parts of the course, and the one that provided them lasting value beyond securing a degree. Austrian ideas are almost entirely ignored in most of today’s universities. Modern textbooks rarely ever mention the Austrian school, let alone elaborate their ideas. I had to constantly resort to a variety of readings on various topics. The most prominent Austrian textbooks and treatises, such as Mises’ Human Action and Rothbard’s Man, Economy, and State, are difficult for most modern readers to digest, and, sadly, they spend far too much time attempting to argue with mainstream thinking, which after a point impedes clarifying the Austrian perspective.

I always wanted a clear, concise, and readable treatment of the main economic ideas in the Austrian tradition, culminating in an understanding of the civilizational importance of the extended monetary market order. I began developing the outlines of such a textbook for graduate and senior courses I taught at the Lebanese American University. After publishing The Bitcoin Standard and finding a receptive readership that appreciated my writing on economics, I decided to turn my attention extensively to writing the textbook that I had always wanted to teach. In 2019, I decided to leave my university job and start teaching and publishing independently, on my website saifedean.com. In 2019 and 2020, I developed two Principles of Economics courses, ECO11 and ECO12, which further developed the ideas that would grow into this book.

Teaching and interacting with hundreds of students from around the world, and being liberated from the academic publication mill’s increasingly arcane and esoteric journals and publishers, I could now focus on writing for the reader, not committees of academics. After two decades of studying and learning economics at university level, this book represents the knowledge of economics I would like to have had when I was 17. It is what I hope my children will read when they become curious about economics.

This book forms an introduction to the principles of economics, and the economic way of thinking—a powerful tool of mental planning useful for everyone to understand. In a university, I would teach this book over two semesters, to introduce students to a broad view of the topic of economics and the economic way of thinking. More than just a university textbook, this is a book written for a general audience of anyone interested in economic ideas. Even if you are not studying economics at a university, you are making economic decisions every day of your life. For this reader, I hope this book offers a concise and actionable summary of the most useful insights of the economic way of thinking, which would be helpful in personal and business decision-making.

This book is unapologetically Austrian in its approach. It uses the plain written word to explain what many economists throughout history have found to be the most powerful methods of understanding economic phenomena. It applies the human action approach to explaining the most important concepts and topics in economics, building on the work of the economists of the Austrian school. It tackles major economic concepts and topics independently, but in a logical sequence aimed at delivering the reader an understanding of economics at an individual and societal level, and the widespread implications of economics as a topic. The first part of the book introduces the foundational concepts in economics and the Austrian method of this book. The second part of the book, Economy, introduces the actions that individual humans perform to economize. Part III, The Market Order, examines economizing in the social context, why the capitalist economy develops, and the role of money. Part IV, Monetary Economics, examines time, interest, and monetary and financial economics. Part V, Civilization, examines the economics of violence and security, and what they imply for the possibility of advancing human civilization.

Each chapter of this book discusses an important economic concept, and can be read as a standalone essay on the topic. But the book is also structured as a monograph narrative, laying out these concepts in a logical sequence. The first chapter introduces the Austrian methodological approach to economics, and provides an example, as well as a comparison with the methodological approach of the natural sciences. Chapter 2 introduces the foundational concept of value, and explains its subjective nature, as well as the concepts of utility and marginal analysis, based on the work of Carl Menger, father of the Austrian school. Chapter 3 introduces the importance of time in economics, the unique nature of economizing time, and how all economizing acts can be understood as attempts to increase the quantity and subjective value of our time on earth. This chapter also introduces the pivotal concepts of opportunity cost and time preference.

The second section of the book introduces the main actions humans carry out to economize individually. In each of the chapters of this section, a key concept is introduced and analyzed in terms of the reasons humans engage in it, the problem it solves, and how it helps them economize on time. The first and most basic concept is labor, the topic of Chapter 4. Chapter 5 explains the economics of property, why it emerges and the problem it solves, and the concept of self-ownership. Chapter 6 introduces a particular type of property, capital, which consists of goods used for the production of other goods, and discusses the cost of capital, its productivity, and its connection to time preference.

Chapter 7 discusses technology as an economic concept, why it increases labor productivity, and its unique status as a non-material economic good that is non-scarce. The chapter concludes with a discussion of the concept of intellectual property, and how the non-scarce nature of information makes it differ from other productive goods.

Energy, the topic of Chapter 8, is not a conventional topic in most economic textbooks. However, I believe that understanding the economics of energy is essential to understanding economics, particularly as the modern capital-intensive and technologically advanced market economy would not be possible without substantial increases in modern humans’ power—the ability to wield large amounts of energy in short periods of time. Moreover, approaching economics through the Austrian method, through marginal analysis, is essential to understanding the realities of energy production in the world today.

Whereas the second section of the book examines individual economizing acts, the third part of the book looks at economizing in a social context, introducing other people into the analysis and exploring the implications. As soon as another person is present, trade becomes possible, and both parties have an incentive to engage in it, as it benefits them both. Chapter 9 explains the rationale of trade, its benefits, and the implications of the growth of the market in which the division of labor takes place.

Chapter 10 introduces the concept of money, explaining the problems it solves, how these problems shape the characteristics that are desirable in money, and how money helps humans economize and increase the value and productivity of their time. The chapter explains how money is a product of the market, and not the state, as is commonly but erroneously taught in economic textbooks. While this chapter introduces money, the broader discussion of monetary economics will be left to Part IV, so it can follow the discussion of capital markets, an essential topic in monetary economics.

The social order in which individuals peacefully engage in all the aforementioned economizing acts is called a market order. Chapter 11 examines how individual preferences and economizing acts result in the formation of prices, whose essential significance to the market process is explained. Chapter 12 explains the term capitalism in the Misesean tradition, and how it is an entrepreneurial system inseparable from private property and economic calculation. We examine Mises’ litmus test for determining whether a society has a market economy, and how it can help us understand economic history.

Part IV, Monetary Economics, approaches the topic of money from an Austrian perspective, and so Chapter 13 begins with time preference, and its relationship with saving, money, and capital accumulation, which is what makes credit and banking possible, the topics of Chapter 14, which also explains interest rates and whether they can be eliminated. Chapter 15 examines the Austrian understanding of the business cycle by examining its underlying cause, monetary expansion via circulation credit issuance.

As the earlier parts illustrate the function and form of a capitalist market economy, and how it can only work in a system of respect for private property, the fifth and final part of the book, Civilization, examines the viability of capitalist civilization against the threat of violent aggression. Chapter 16 examines the economics of violence, in both its private and governmental forms, while Chapter 17 examines the economics of defense, and shows how this is just another market good, which today is predominantly provided on the market.

The book’s final chapter discusses the concept of civilization from an economic perspective. Civilization is viewed as an order that emerges when a society can remain peaceful, productive, low time preference, cooperative, and innovative enough to sustain intergenerational improvements in living standards. The costs of this monumental enterprise are discussed, as well as the chances for the continuation of capitalist civilization in the face of the formidable threats it faces.

This book is supplemented by its webpage, saifedean.com/poe, where you can find a full bibliography with live links to the readings listed in this book. Since the internet has become so pervasive, I decided it would make sense to optimize the paper copy of this book for the reader experience by eliminating urls from references, and keeping a live full bibliography on saifedean.com/poe. After concluding this book, I will be offering another online course on saifedean.com to study this material in more depth.

This book benefitted and improved immensely as a result of the feedback of Ross Stevens, Jeff Deist, Per Bylund, Conza, Allen Farrington, Jonathan Newman, Peter Young, and Thomas Semaan. The last two also provided extremely valuable research assistance throughout the writing of this book. I also profusely thank the excellent editors whose thorough and meticulous editing improved this manuscript immensely: Alex McShane, Steve Robinson, Chay Allen, Renata Sielecki, Magda Wojcik, Evan Manning, and Elizabeth Newton. I also thank Tamara Mikler for producing the graphics, and Max DeMarco for editing the audiobook. I am also very grateful for the saifedean.com team of Pavao Pahljina, Marko Pahljina, Dorian Antešić, Flora Fontes, and Valentino Cnappi for all the effort they put into running the website and arranging the publication.

This book would not have been possible without the support, encouragement, and feedback of members of my online learning platform saifedean.com. I am most grateful to them for allowing me to work productively on finalizing my work. In particular my sincere gratitude goes to my readers who supported the publication of this book by buying the pre-ordering signed copies. Thank you A Patel, Aaron Macy, Abdulla Al Abbas, Abdullah Almoaiqel, Adam Higgs, Ágúst ragnar Pétursson, Aidan Campbell, Aleksi Meldo, AJ Garnerin, Alex, Alex Bowe, Alex Vanya, Alex Voss, Alistair Milne, Amit Barkan, Anderson Thees, Andrea Bortolameazzi, Andrew Brasuell, Andrew Rosener, Andrew Stanger, Anthony Clavero, Antonio Caccese, Arnaud Cart, Ashok Atluri, Avery, Ben Johnson, Bertrand Marlier, BitcoinTina, Björn Tisjö, BK, Blake Canfield, BowserKingKoopa, Brian Daucher, Brian Kim, Brian Lockhart, Bronson Moyen, Browning Hi-Power 9mm, Bryan Matthieu, Bryan Renero, Bryan Wilson, Burcu Kocak, Carlo Barbara, Carlos Chida, Caspar Veltheim, Cedric Youngelman, Charles Smith, Chase Oleson, Chen YH, Chris Cowlbeck, Christian Amadasun, Christof Mathys, Christopher Lamia, Christopher P Valle, Christopher Pogorzelski, Christopher To, Cletus Reynolds, Dale Williams, Dan Skeen, Dane Bunch, Daniel Ostermayer, Daniel Schneider, Dave Hudson, David Heller, David Lawant, Dirk Seeber, Domingo Ochotorena, Donald Johnson, Dylan Parker, Ed Becker, Eduardo Lima, Edward Cosgrove, Elio Fattorini, Ernest Huttel, Fabian von Schilcher, Federico Quintela, Francisco Reyes, Frank Acklin, Gary Lau, Gary Speed, Gen Shin, Glenn Thomas, Greg Doyle, Götz Rößner, Haris M, Harlan Robinson, Hayden Houser, Hugh Starr, Hunter Hastings, Jaap Willems, Jackson Forelli, Jaeger Hamilton, James Seibel, James Weaver, Jason DiLuzio, Jawad Barlas, Jeffery Lee Degner, Jerrold Randall, Jesse Powell, Jim Patterson, Joachim Boudet, John A. Krpan, John Brier, John Dixon, Jon E, Jonas Karlberg, Jonas Konstandin, Jonathan Camphin, Jonathas Carrijo, Jordan Wilby, Jose Areitio Arberas, José Niño, Jules, Julio Neira, Justin Schwartz, Keith G, Kelly Lannan, Kenneth Gestal, Kevin Coffin, Kim Butler, Lachie McWilliam, Larry Salibra, Luis Alonso, Luke and Henley, Maksymilian Korzuchowski, Manuel Tomasi, Marco Daescher, Marco Mouta, Marcus Dent, Marius Kjærstad, Marius Reeder, Martin Brochhaus, Matija Grlj, Matt, Matt Unks, Matthew Robin, Matthew Sellitto, Max Cash, Maximiliano Guimarães, Michael Atwood, Michael Culhane, Michael Felch, Mike Clear, Mitch Soboleski, Mitchell Vanya, Nate Kershner, Nathan Smith, Neal Nagely, Nelson Minier, Nicholas Sheahan, Nick Giambruno, Nicolás Ahumada, Niko Laamanen, Nikolai Maevskii, Noah Amadasun, Noded, Odi Kosmatos, Oleg Mikhalsky, Paola Frapolli, Paweł Sławniak, Per-Olof Vallin, Petar Sutalo, Petr Zalud, Philip Karageorgevitch, Pierre Porthaux, Rasmus Berg, Raycheslav Karagyozov, Rene Bos, Richard Duke, Robert Koonce, Robin Dea, Ron M Dewberry, Ronald Zandstra, Rosie Featherby, Ross Stevens, Rowais Hanna, Ryan Nadeau, Ryan Sandford, Saagar Singh Sachdev, Sam Dib, Sam Shams, Samuel Douglass, Scott Manhart, Scott Schneider, Scott Shell, Seb Walker, Shakti Chauhan, Shaun McFarlane, Simonna Pencev, Stefano D'Amiano, Stephen Labb, Subhan Tariq, Tami Uitto, Tanner Dowdy, Théo Mogenet, Thierry Thierry, Thomas Jenichen, Timo Oinonen, Tom Karadza, Tomas Hrncir, Travis Tripodi, Trevor Smith, Vik, Viktor Geller, Wendy Hiam, William Azzoli, Wilfred Tannr Allard, Will Phillips, William Green, William Johnston, Winfred Nadeau, Wityanant Thongsawai, Yani Eberding, Yoism, Yorick de Mombynes, Zachary Hollinshead, Zarak Ortega, Zsuzsanna Glasz

PART I

Fundamentals

Chapter 1

Human Action

Economics is not about things and tangible material objects; it is about men, their meanings, and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.1

—Ludwig von Mises

Ludwig von Mises’ magnum opus, Human Action, offered an explicit redefinition of the field of economics as the study of human action and choice under scarcity. Mises believed proper economic reasoning and analysis of economic phenomena must be based on analyzing human action, rather than analyzing material objects and their properties, or analyzing aggregate and abstract units. While Mises’ perspective might initially seem pedantic and unproductive, this chapter will explain how it is a very powerful tool for understanding economic reality.

Mises argues that philosophers had long attempted to analyze humanity’s evolution and destiny based on an understanding of what history, God, or nature had intended for humans. Such analyses dealt with humanity as a whole or analyzed collectivist concepts like nation, race, or church, and sought to find laws to explain the behavior of such entities and their consequences, as if history had ironclad laws to be discovered, akin to the natural sciences.

In writing Principles of Economics in 1871, Carl Menger pioneered marginal analysis of economic questions. This “marginal revolution” provided a starkly different alternative to the previous methods of analyzing humans. Rather than analyzing history based on the will of God, nature, or through nation, race, or church, marginal analysis showed that human society is better understood by analyzing its prime driving forces: individual human choice and action. The Austrian school of economics emerged around Menger in Vienna. A few years after him, Léon Walras would develop his own conception of marginalism couched in a concept of general equilibrium. The Walrasian general equilibrium would become the dominant tradition in modern economics, relying on mathematization and relationships between aggregates.

Action, Purpose, and Reason

Mises defines human action as “purposeful behavior,”2 so as to distinguish it from instinctive, impulsive, or emotional acts. “Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego’s meaningful response to stimuli and to the conditions of its environment, is a person’s conscious adjustment to the state of the universe that determines his life.”

Mises’ student, Murray Rothbard, defines human action as “purposeful behavior toward the attainment of ends in some future period which will involve the fulfillment of wants otherwise remaining unsatisfied.”3 Mises posits that for action to take place, it requires a human to have a current state, to imagine a more satisfactory state, and the expectation that purposeful behavior can alleviate uneasiness.4

Rational action is a quintessentially human quality that distinguishes humans from other animals. Humans act purposefully because we are endowed with reason and are able to direct it to the meeting of our ends. Humans are capable of recognizing causal relations in the world around us, and acting upon this understanding to bring about a more favorable state of affairs. We are also able to understand that others have reason and are able to act to their end. As Mises puts it:

Man is not a being who cannot help yielding to the impulse that most urgently asks for satisfaction. Man is a being capable of subduing his instincts, emotions, and impulses; he can rationalize his behavior. He renounces the satisfaction of a burning impulse in order to satisfy other desires. He is not a puppet of his appetites. A man does not ravish every female that stirs his senses; he does not devour every piece of food that entices him; he does not knock down every fellow he would like to kill. He arranges his wishes and desires into a scale, he chooses; in short, he acts. What distinguishes man from beasts is precisely that he adjusts his behavior deliberatively. Man is the being that has inhibitions, that can master his impulses and desires, that has the power to suppress instinctive desires and impulses.5

A useful mental image to explain the primacy of human action is to think of the physical world around us as inert playdough we can mold with our hands into different shapes and objects based on our reasoning and imagination. Inanimate objects are dead matter, and it is human reason shaping human actions that rearranges this matter and gives it value, meaning, and purpose. One understands the material world far better if one studies it as the product of human reason and action. Attempts to explain social phenomena through reference to physical objects, abstract nouns, or collectivist entities are ultimately futile and decidedly inferior to thinking in terms of human choice and action. It is not the stars, nor abstract nouns and entities that act, but individuals. If you want to understand the conditions of the material world, it is most useful to study the actions of the humans who mold it.

In the Misesean and Austrian tradition, human action is understood and defined as being rational. The word “rational” in this context does not refer to the correctness of the action according to some objective criteria, nor does it refer to the suitability of the action in achieving the ends of the acting man, nor does it pass other moral judgments on the action. Rather, rational here is defined as the product of deliberative reason. Whenever man reasons and acts, he acts rationally. Whether such an action is conducive to achieving his goal or not, and whether such an action meets the approval of another party assessing it are irrelevant to “rationality” as understood and defined by Mises. A person may regret an action and realize it was counterproductive to achieving his ends, but that does not change the rationality of the act, in the sense that it was the product of deliberative reason, correct or faulty. Other individuals may pass judgment on this individual’s actions. No matter how wrong they find it, that would also not detract from the rational nature of the act. The Austrian conception of rationality becomes clearer with Mises’ explanation that “the opposite of action is not irrational behavior, but a reactive response to stimuli on the part of the bodily organs and instincts which cannot be controlled by the volition of the person concerned.” Further, “An action unsuited to the end sought falls short of expectation. It is contrary to purpose, but it is rational, i.e., the outcome of a reasonable—although faulty—deliberation and an attempt—although an ineffectual attempt—to attain a definite goal.”6

Economic Analysis

Thinking of economics as the study of human action under scarcity allows us to define the most important terms in economics based on their relation to human needs, how human reason treats them, and how humans shape them. When explained, defined, and understood through the lens of human action, economic terminology becomes clearer and economic analysis more fruitful.

Hans-Hermann Hoppe explains:

All true economic theorems consist of (a) an understanding of the meaning of action, (b) a situation or situational change—assumed to be given or identified as being given—and described in terms of action-categories, and (c) a logical deduction of the consequences—again in terms of such categories—which are to result for an actor from this situation or situational change.7

At the heart of the Austrian approach to economics is the goal of understanding the causal processes of economic activity and their consequences. Logical deduction, thought experiments, and common sense familiarity with reality are employed to understand the implications of economic processes. Initially, this approach might appear banal and fruitless compared to the dominant approaches of mainstream economics today, which rely on mathematical analysis. But a closer look shows us why quantitative analysis is unsuited for building an economic theoretical framework. It will also show us why quantitative analysis is meaningless and mute without logical deduction and conclusions to motivate it and understand its results. In keeping with the Austrian critique of quantitative approaches to economic analysis, this book will present and analyze economic acts in plain language, not with mathematical equations. Human action will be understood through logical deduction and thought experiments, not equations and quantitative analysis.

Quantitative Analysis

The Austrian critique of quantitative analysis is summed up in Mises’ critique of the application of quantitative methods to economics in Human Action:

The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its methods unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.8

This is a profound criticism of the methods of modern economics. As discussed in detail in Appendix 1, there is no standard unit with which economic measurements of value can be made and compared. As discussed in Chapter 2, value is subjective. The utility that individuals get from goods is also subjective and constantly changing based on the individual, the time at which they are making their valuation, and the relative abundance of the good. There is no possibility for aggregated interpersonal utility comparison, and therefore the mathematization of utility will always be hypothetical and theoretical and never precise and replicable.

Without a common unit with which to measure and compare utility, it is impossible to formulate a quantitative law around, for example, changes in demand and supply based on changes in price, such as a law positing that a 1% increase in price corresponds to a certain percentage decrease in quantity demanded. The impact of a specific change in price on an individual’s demand for a good happens through the causal mechanism of changes in individually assessed utility. That factor is not measurable or quantifiable.

Replicable experimentation on economic questions is also impossible. The objects of study of the natural sciences are the structure and behavior of the physical world. It is assumed at the outset that these are regular, that their properties can be isolated and observed by repeatable experimentation, and that they can be appropriately and fully modeled with mathematics. It is fundamental to the intellectual enterprise that the sole and entire purpose of this methodology is to rigorously pin down causation. In the physical world, what causes what else? Why do things happen exactly and only the way they do? But the objects of study of the social sciences are the ideas and actions of humans, which are immeasurable and non-quantifiable. Experimentation with ill-­defined units of irregular phenomena cannot yield comparable and reproducible results, and so experimentation will fail to produce quantitative laws because there are no units in which these laws can be expressed. Without measurement and repeatable experimentation, it is not possible to find regularities, derive constants, and formulate mathematical relationships and scientific laws. Accurate experiments in economics are also not possible because the subject of economics is the action of humans in the real world, and conditions in testing laboratories cannot replicate the real-world consequences of economic decisions. The real world is the only laboratory that can approximate the real conditions shaping economic decision-making, but it is impossible to experiment on the real world using scientific methods such as those employed in the natural sciences.

Beyond the issues of measurement and experimentation, a deeper logical problem with quantitative approaches to economics is that they conflate the factors we can measure with the causative factors that shape the world around us. The quantitative methods which establish relationships between aggregate measures place the aggregates as the driving causal forces for no reason more well founded or coherent than the fact that they can be measured. Whereas in the natural sciences, regularities and constants are discovered through repeated open experimentation, empirical economists simply make the assumption that their data is regular and deduce laws based on it. In the natural sciences, the complexity of the atoms that make up a gas, for example, can be reduced to basic aggregate measures of pressure, temperature, and volume without any loss in analytical accuracy. The atoms have no will of their own, they have no mind, they cannot reason, and they cannot act in response to surrounding conditions, like human beings can. Because they lack reason, the behavior of physical objects can be studied and accurately predicted.

When examining economic questions, however, we are confronted with the reality that human beings and their actions are the causative factors shaping economic reality, motivated by their subjective considerations and personal preferences. Far from being inanimate objects reacting in mathematically predictable ways, humans react in irreducibly complex ways. Attempting to paper over the complexity of the actions of millions of humans by examining only superficial aggregate measures of some economic phenomenon is the core mistake of failed modern pseudosciences like macroeconomics and epidemiology. These fields ignore the actual causative factors of the phenomena they study and instead attempt to hypothesize based on whatever aggregates can be measured. As Hayek explains:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.9

Just because we are able to construct measures of unemployment, gross domestic production, consumption, investment, and other economic quantities does not mean that these factors are causally related to one another in scientifically preordained relationships based on quantifiable and testable magnitudes. In fact, since the actual drivers of these measures are the actions of individuals, there is no reason to suppose that they are any more than superficial epiphenomena unrelated to the causal mechanisms driving the relationships examined.

Attempting to formulate meaning from the relationships between these aggregates is akin to scientists studying gases and attempting to formulate laws based on the color of different containers, the number of containers used, the brand of the manufacturer, the first letter in the name of the experimenter, and various epiphenomena with no causative effect on the experiment. A scientist can indeed formulate relationships between these (irrelevant) parameters, but it will be impossible for any such relationship to hold after repeated testing by independent parties because they have no connection to the causal process being studied. Repeating the same experiment with an experimenter with a different name or a container of a different color will still yield the same results, making the original experimenter’s theorizing pointless. It is the inanimate gas particles whose temperature, pressure, and volume are the control knobs for the system being studied; the container’s color and experimenter’s name are irrelevant. Similarly, it is the action of humans that shapes economic outcomes, not the aggregate measures constructed in government statistics offices.

This is not to say that all statistical measures are worthless noise, as one can find subjective value when examining these aggregates as close approximations of economic phenomena. The Austrian objection is not to economic statistics per se, but to attempting to build scientific-seeming theories out of statistical aggregates. The most egregious and harmful attempts to ape the methodology of the natural sciences in economics happen in macroeconomics. The physics envy of macroeconomists has, for a century, fueled the search for a system of equations that can explain the dynamics of an economy in the same way equations can explain and predict the movement of objects. Friedrich von Hayek calls this “scientism”: the slavish imitation of the method and language of science where it is inapplicable.10 The hope is that, with an accurate scientific system of equations for understanding the working process of an economy, it would become possible to manage economic activity to achieve desirable goals. In the same way that chemists’ equations have helped engineers perfect and optimize the working of engines and pumps, scientism searches for economic equations that can help economists improve the state of “an economy.”

In macroeconomics, aggregates are constructed from national accounts, and mathematical relationships are sought between them. Such relationships are established theoretically, based on some economist’s authority to declare how the causal mechanisms function, not on experimentation. English economist John Maynard Keynes’ macroeconomic system is the most prominent example. For decades, economists have formulated equations based on Keynes’ theoretical hypothesizing. The state of the economy is primarily a reflection of the amount of spending. If spending is too high compared to output, then inflation and growth are the outcome, but if spending is too low compared to the output, then unemployment and recession are the outcome. Should unemployment be too high, modern macroeconomic equations suggest this can be fixed by increasing aggregate spending through increased government spending or expansionary credit policies. High inflation, on the other hand, can be fixed by reducing aggregate spending through increased taxes or contractionary credit policies.

But accounting identities do not denote real-world causality. There are no mechanisms in macroeconomics to experimentally establish causality as is possible in the natural sciences. Keynes’ equations attempting to predict the impact of one aggregate metric on another bear no relation to real-world cause and effect, because there is no way of measuring, testing, and verifying any of it.

No studies can test Keynes’ hypothesis, because one cannot experiment on entire economies comprising millions of people who have individual life plans. Nor can one run a suitable control on those same people under different circumstances. But even by observing government statistics collected by adherents of the theory, real-world experience has contradicted the theory for decades. The Keynesian system necessarily implies a trade-off between the unemployment rate and the inflation rate, a relationship termed the Phillips curve, which is supposed to be a downward-sloping curve to illustrate the trade-off. But real-world experience does not show this, as Figure 1, with data from sixty years of U.S. government statistics, shows no such trade-off.

Figure 1.

Unemployment and inflation

11

However, this theory persists to this day, in spite of decades of accumulated evidence that it is not an accurate explanation of how the world works. In the 1970s, as inflation and unemployment both increased at the same time worldwide, the Keynesian trade-off was comprehensively refuted beyond a shadow of a doubt. But the advantage of economics having no systematic and replicable method of experimentation and testing is that theories can always be adjusted after their failure in a way that can justify non-compliant real-world observations. That is the essence of pseudoscience.

Hilariously, Keynesians simply revised their theory to include a new term, “supply shock.” Supply shock is an incoherent term, made as an after-the-fact justification to explain how increases in unemployment and inflation can happen simultaneously. Since then, the world’s economies have witnessed every imaginable combination of inflation and unemployment rates, and the Keynesians have successfully maintained the delusion that such a trade-off between unemployment and inflation exists. Any diversion away from this relationship can be explained by invoking a supply shock or various other thought substitutes, and so there can be no observation that falsifies it. It explains everything and therefore explains nothing. The illusion of economics as a precise, quantitative, and empirical science is only maintained through the exemption of its theories from empirical real-world examination.

After a century of aping physics and abandoning classical methodological foundations, economics has failed to produce one quantitative law or formula that can be independently tested and replicated. Macroeconomic equations come and go with the fashions of modern schools of thought, but none of them has been measured objectively and replicated in a way that can allow it to be called a scientific law. That macroeconomics empowers central governments and enriches academics may help explain why it has endured.

A Contrast of Approaches

To illustrate the human action approach to economics, and to compare it with modern quantitative economic methodology, we can use as an example the question of government-mandated minimum wages, which impose a lower limit on what employers can pay their employees. A popular policy intervention in most of the world, the opposing perspectives on it serve as an object lesson in the two different frameworks for thinking about economics: human action and aggregates.

Imagine a politician looking to win an election in a country with no minimum wage laws. As in all times and places in human history, there is a natural variation in the wages earned by workers. The politician decides to center her campaign around improving the living standards of the poorest members of society by mandating a minimum wage, which she imagines guarantees its recipients a decent living. Based on her aggregate-focused macroeconomic framework, the aspiring leader decides to mandate a minimum wage of $10 per hour. The economist concludes that 20% of all workers, supporting 35% of all the population, currently earn less than $10 per hour. The aggregate effect of imposing the minimum wage would lead to a rise in wages equal to $10 billion per year. Based on sophisticated historical and theoretical models, the fiat economist further estimates that the $10 billion increase in payrolls would translate to an $8 billion increase in consumer spending, which models estimate would result in the creation of 40,000 new jobs, a 12% increase in industrial output, a 4% rise in exports, and a $16 billion increase in gross domestic product.

According to this collectivist approach to economic analysis, the aggregates are the causal agents in economic phenomena, and they act according to the theoretical relationships established by fiat economists, in a similar way to how physicists and chemists establish scientific rules. These conclusions were arrived at using scientific-looking equations not very different from those used in the ideal gas law. Using the framework of aggregate economic analysis, the minimum wage law sounds like a great boon to society. The poorest workers will increase their living standards significantly, some unemployed workers will find work as a result of the extra spending, and all of society becomes more productive. What is more, exports rise, helping the economy obtain foreign currency.

If this sounds too good to be true, that is because it is not true. Things look different through the lens of the sound economist’s Mises-tinted glasses. Knowing that human action is the real driver of human affairs, the sound economist does not analyze the world through aggregate quantities. Instead, he analyzes the decisions of the real humans affected by this new law. Employment is an agreement between two individuals, the employer and the employee. The sound economist understands that a business owner’s choice to hire someone is based on a simple calculus: She will hire him if his contribution to the firm’s revenue exceeds his wage. If the minimum legal wage exceeds the marginal revenue he brings, then hiring him costs the business money and is akin to a donation from the business to the worker. Employers know that making such a hire is a costly mistake, and employers who do not know that will soon witness their business fail as it continues to hemorrhage money on wages it cannot afford. Only employers who understand this economic reality will remain employers, and those who do not will lose their businesses. Emotional blackmail by politicians can change nothing about this reality.

Wages, like all prices in a market, are not just arbitrary numbers chosen by greedy employers. They are a reflection of the marginal productivity of the worker. As the law now stipulates that a worker must be paid $10 per hour, the employer now has to reconsider whether it is worth hiring this worker. When the government mandates a minimum wage, it does not magically alter the calculus of the employer, nor does it magically increase the worker’s productivity. The employer will still only hire workers whose productivity is higher than their wage. Thus, the minimum wage law makes it illegal for employers to hire anyone whose marginal productivity is less than $10 per hour. Any worker whose productivity is less than that will now become a drain on any business that hires him and pays him that amount. Either he gets fired, or the business that hires him loses money and goes bankrupt. In all cases, these jobs are eliminated, and everyone whose productivity is less than $10 per hour is now legally unemployable; either unemployed or employed illegally.

Viewed through the lens of human action, the effect of a minimum wage law is to make it illegal for workers with low productivity to get jobs, and many of these workers will lose their jobs. Continuing to look through the lens of human action, one would find that the workers who lose their jobs are those with the lowest productivity in society, and these are usually the poorest, youngest, and least experienced workers. Making it illegal for them to work is effectively making it illegal for them to raise their productivity by learning on the job and acquiring valuable on-site work experience. Minimum wage laws are thus particularly pernicious to the people who need to work the most, and they are a causal factor in the emergence of wide-scale unemployment, as well as unemployability. Another possible implication is that some businesses, particularly those that depend on these low-wage laborers for their operation, would pay higher wages but also raise the prices of their goods to finance the higher wages. Consumers would then pay the price through higher prices and lower quantities of goods available. In this scenario, any potential increase in a low-wage worker’s income would be counteracted by a corresponding increase in the cost of the goods he must consume.

All these consequences of minimum wage laws are deducible by sound economists who analyze the wage law and evaluate the implications it will have on rationally acting individuals. This turns out to be a far more useful and accurate assessment of the situation than anything that can be conjured from examining mathematical metrics. Prices are a reflection of underlying market reality driven by human action. Attempting to alter the underlying market reality by altering its reflection is unworkable. Every attempt at passing price controls has backfired because this kind of central planning ignores the role of human action. Price controls treat economics as if it were about material objects, rather than human action. Schuettinger and Butler have written a depressingly entertaining history of price controls in Forty Centuries of Price Controls, illustrating how this exact dynamic has repeated itself across cultures and nations throughout history.12 The kings, emperors, politicians, and bureaucrats look at the world of economic transactions as an inhuman process they can alter to suit their needs. They mandate that the observable epiphenomena associated with markets fall within acceptable ranges. They assume humans will just adjust their actions to ensure these laws are upheld. However, in reality, humans adjust their actions to optimize for their own well-being, not to satisfy bureaucrats. The merchant would rather not sell at all than sell at a loss. You will either see the free-market price or you will see no market price at all. In the latter economy, real prices are expressed in underground markets.

Actual economists understand that observable economic phenomena and metrics are but manifestations of the underlying actions of the humans involved. Humans are constantly seeking to improve their own situation in life, and it is futile to mandate that they act against their interests. Mandating laws against humans’ self-interested nature does not change human nature; it reduces the incentive to behave legally and so destroys society’s respect for laws. This essential realization is why the sound economist is in favor of individual economic freedom and against its restriction by governments. The human spirit is indomitable, and it will not act in a way that is harmful to itself.

The sound economist understands humans are constantly acting to improve their lot in life. Imposing legal punishments on any peaceful economic activity they might choose cannot lead to an improvement in their lives, as it will simply restrict and reduce the choice of actions available to them. Aggregate analysis blinds the fiat economist to the implications of these laws for the humans whose freedoms it restricts. After formulating mathematical measures of social phenomena, the collectivist economist then assumes that these measures are causal factors in the determination of human affairs.

The world already has far too many economics textbooks written in the pseudoscientific quantitative tradition. This book will definitely not be one of them. It will not try to explain economics in the language of the natural sciences, and it will contain no sophisticated aggregate equations. Such approaches promise much but deliver little in terms of reliable, useful, and actionable insights.

1 Mises, Ludwig von. Human Action: The Scholar’s Edition. Ludwig von Mises Institute, 1998, p. 92.

2 Ibid. 11.

3 Rothbard, Murray. Man, Economy, and State, with Power and Market. Scholar’s ed., 2nd ed., Ludwig von Mises Institute, 2009, p. 7.

4 Mises, Ludwig von. Human Action: The Scholar’s Edition. Ludwig von Mises Institute, 1998, pp. 13-4.

5 Ibid. 16.

6 Ibid. 20.

7 Hoppe, Hans-Hermann. Economic Science and the Austrian Method. Ludwig von Mises Institute, 2007, p. 63.

8 Mises, Ludwig von. Human Action: The Scholar’s Edition. Ludwig von Mises Institute, 1998, p. 118.

9 Hayek, Friedrich von. “The Pretence of Knowledge.” The Swedish Journal of Economics, vol. 77, no. 4, Dec 1975, pp. 433-42.

10 Hayek, Friedrich von. “Scientism and the study of society [Part 1].” Economica, vol. 9, no. 35, 1942, pp. 267-91.

11 Source: FRED, Federal Reserve Bank of St. Louis.

12 Schuettinger, Robert, and Eamonn Butler. Forty Centuries of Wage and Price Controls: How Not to Fight Inflation. Heritage Foundation, 1978.

Chapter 2

Value

Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.13

—Carl Menger

The first chapter was a methodological introduction to the topic of economics, illustrating the Austrian approach centered around human action. In this chapter, we turn to the substance of the field of economics, its foundational concepts, and the main questions the field seeks to address.

The foundations of modern economics were laid by Austrian economist Carl Menger in the late nineteenth century. While economics as a field of inquiry had been around since the time of Aristotle, Menger’s explanation of the subjective nature of value and economic decisions, and his introduction of marginal analysis, revolutionized the field and gave it a solid theoretical and methodological foundation, allowing for a systematic analysis of how humans economize and act. Menger’s groundbreaking work provided a richer understanding of the nature of the consequences for humans of their economic actions. Menger’s Principles of Economics textbook, written in 1871, is possibly the oldest economics textbook still relevant and readable. This chapter begins by summarizing some of the main concepts from Menger’s book, using his definitions to set the foundation for the analysis of the topics addressed in later chapters. It then discusses the foundational Mengerian concepts on which economic analysis is built: subjective value and marginal analysis.

Utility and Value

Goods

Menger defines a good as something useful that we can direct to the satisfaction of human needs. For something to become a good, it first requires that a human need exists; second, that the properties of the good can cause the satisfaction of that need; third, that humans have knowledge of this causal connection; and, finally, that commanding the good would be sufficient to direct it to the satisfaction of the human need.

Utility

Utility is the capacity of a good to satisfy human needs. Utility depends on our ability to understand the connection between a good and the need it fulfills. Utility is a general prerequisite for an object being a good. Only if something can offer utility can it be viewed as a good by humans.

Scarcity

Goods can be divided into two categories, economic and non-economic. The distinction between the two is scarcity: Demand for economic goods is always greater than the quantity supplied, whereas for non-economic goods, their supply exceeds the quantities demanded by humans.

A non-economic good is a good available in quantities exceeding the demand for it, which precludes rivalry or competition for securing the good. The best example is air, which is essential for human survival, but is nonetheless plentiful everywhere humans live.14 Air is, therefore, not an economic good. An economic good, being scarce, will have a greater demand than its supply, and this creates rivalry around access to it, forcing humans to make choices between it and other goods.

The scarcity of economic goods forces humans to economize, making choices between scarce alternatives. To “economize,” according to Menger, refers to humans’ tendency to want to maintain quantities as large as possible of the goods that can satisfy their needs, to conserve the useful functions of these goods, to prioritize their most pressing needs over less pressing ones, and to obtain the greatest satisfaction from the good’s quantity.

Economics

Economics, as a field, is the study of human choices under scarcity. It focuses on analyzing how humans attempt to find solutions to the problem of disparity between what they have and what they want and the consequences of their choices.

As scarcity is a permanent condition of existence, humans are constantly making choices between different courses of action, different goods, and different needs to satisfy. The need to make these choices forces us to juxtapose the utility we derive from different goods against each other, so we are able to make informed choices.

Value

Value is our subjective assessment of the satisfaction we derive, or expect to derive, from goods, and what allows us to make economic decisions. Menger defines value as “the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.”15 Value, according to Menger, is also “the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence, carry over to economic goods as the exclusive causes of the satisfaction of our needs.”16

Subjective Value

The foundation of economic analysis, and one of the groundbreaking insights from Menger’s work, is that value is subjective. It exists only in the mind of the person making the valuation. As Menger put it: “Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being.”17

It is not the inherent nature of goods that makes them valuable to us, but only our assessment of their suitability for meeting our needs. As their ability to satisfy our needs changes, so does their value to us. Value, then, is not a physical or chemical property of economic goods; it is a psychic property they attain only when humans assess them. In Menger’s famous words, “Value does not exist outside the consciousness of men.”18

My favorite example to illustrate the subjective nature of value is oil. Up until the nineteenth century, the presence of oil in a plot of land would decrease its value, as it required costly removal before the land could be utilized for agricultural, commercial, or residential use. For as long as human consciousness saw oil as a dirty nuisance, oil had negative economic value. Once humans realized that refined oil could be burned in an internal combustion engine to power machines that satisfy their needs for transportation, electricity, and heat generation, oil went from being a costly nuisance to an enormously valuable and essential commodity, which nobody in the modern world can now live without. Oil in the year 2020 is no different chemically and physically from oil in the year 1620, and yet its value has changed from negative to positive. While our conscious assessment of our needs cannot change the physical and chemical properties of oil, it can change its economic value. Oil went from having a negative to a positive value once human consciousness recognized it as useful. As Menger puts it, “The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves. With changes in this relationship, value arises and disappears.”19

To further illustrate this point, as this book is being written in 2020, a sizable proportion of the world’s population is subjected to governments worldwide imposing significant and throttling suspensions of movement and economic production. Oil is produced for immediate consumption, and there is very little spare capacity for its storage, relative to the enormous quantities consumed. As industry and transportation ground to a virtual halt, excess oil production had nowhere to go, and the price of oil plummeted and even became negative for a few days. Given the large surplus of supply over demand, and the lack of storage capacity, owning oil reverted to being a liability, as it was in the preindustrial age, and its owners again had to pay to be relieved of it. The oil price soon recovered to positive territory and continued its rise upward. Nothing changed in the inherent properties of oil as its price went from negative to positive to negative to positive again; the conditions of people making the valuation changed, and so did their subjective valuations.

As the example of oil illustrates, value cannot exist outside human valuation and choice, reflecting their preferences. Value cannot be a constant property of objects; it is a conscious phenomenon in our minds. This does not mean value is not real. Value is real and meaningful, and it shapes our actions and decisions, which direct the production, consumption, and utilization of the real material objects in our world. Menger’s recognition of the subjective nature of value was a very important turning point in economic thinking. Previous economists had struggled to explain how goods were valued and why certain goods were more valuable than others. All of these mysteries and paradoxes surrounding valuation were only resolved with the Mengerian insight of subjective valuation and marginal analysis.

Valuation: Ordinal and Cardinal

The first important implication of the subjective nature of value is that it cannot be measured and expressed objectively. Since valuation is subjective to the human making it, and since this valuation is constantly shifting based on the changes in our needs and in our understanding of goods’ abilities to satisfy our needs, valuations differ from one person to another, and individual valuations are constantly shifting depending on individuals’ conditions. To express any measurement objectively, a scientific unit is needed as the standard measuring rod against which different objects are assessed, as discussed in Appendix 1. Weight, length, temperature, and other scientific measures are expressed in objectively definable units that allow for a precise comparison between different objects. But no such unit can exist for human valuation, since the value of a good is not an inherent objective property of the good, but a subjective psychic property dependent on the person making the valuation, dependent on the ever-changing conditions that determine the usefulness of that good for meeting needs. There is no objective standard by which satisfactions of humans can be compared, as the individuals themselves are the arbiters of value. In other words, there is no way of objectively measuring the satisfaction one person gets from a good in terms of the satisfaction any other person gets from the same good.

Without a standard objective unit, measurement is not possible, and valuation cannot be expressed in objective numerical cardinal