Why Things Cost Money

God has granted me a reprieve. Seven whole days have passed without a major American state abolishing marriage, or a Catholic hero dying prematurely at 98. That frees me up to return to the happy task of unfolding a layman’s understanding of the market economy, viewed through the lens of Christian ethics and prudent political philosophy. There is no better way to sum up the life work of Wilhelm Röpke, whose encyclopedic knowledge of European history and profound commitment to human dignity made him the best expositor of economic science in the 20th century. No other theorist understood so deeply the complexity and fragility of Western civilization, which alone made possible the invention of political liberty and a free economy. No other defender of Western values had such a clear empirical and theoretical account of what recent thinkers had learned about how men pool their labor and work to steward the goods of the earth.

Too commonly, the enthusiasts for a new and useful discovery oversell its importance, to the point of elevating it from insight to ideology. From Descartes and Bacon to Darwin and Freud, the tale of modernist monomania is a long and dismal one. Having found a new and possibly useful plant in the jungle, they decide that it shall henceforth be our dietary staple, so they break out the herbicide and spray aspersions on all the old, hardy trees whose fruits have long sustained human thought. Conversely, those who rightly prize the rich, intertwined undergrowth of traditional knowledge react with alarm to the prospect of ideological monoculture, so they try to pull up the new plant, root and branch. In the tussle between innovative cranks and intellectual preservationists, the real but limited value of the new growth is alternately trumpeted and pooh-poohed.

This principle helps explain the long love/hate relationship that the Church has had with the “new” idea that was classical liberalism, and its economic component, free-market capitalism. Popes have issued a series of authoritative but non-infallible documents responding to the re-emergence of liberty in the modern age — the resurrection of the liberty treasured by the Saxons and claimed by barons in the Magna Carta, and its extension to every citizen. Perhaps the iciest answer to the libertarian impulse came in Bl. Pius IX’s Syllabus of Errors, and the closest thing to a warm embrace in Bl. John Paul II’s Centesimus Annus. The verdict of history and the effort of patient thought can sift out the edible mushrooms from the toadstools. The experience of state-worship in the blood-soaked 20th century led John Paul to enfold within his personalism a strong account of political and economic freedom — within the prudent limits implied by concern for the common good. In the work of Röpke, we find a profound analysis of history, economics, and culture that closely reflects John Paul’s sane Christian humanism.


Röpke was at once a social conservative and an Austrian economist. It’s worth taking the time to unpack the latter unfamiliar epithet. Austrian economics was born as a brave dissent against the deterministic, materialistic theories of human work that arose in the 18th and 19th centuries, with their roots in Hegel, Marx, or a number of radical nationalists. While its insightful analyses of how men work together to build wealth for their families in many ways echoed the “classical” economics of Adam Smith and Frederic Bastiat — which social Darwinists had shorn of its moral content and made into something monstrous — the new economics was a vast improvement over its ancestor in that it rejected a key intellectual error that had beguiled previous thinkers: the labor theory of value. Given that prices are the essential “data” by which consumers inform producers how much of something to make, they are at the very heart of human cooperation. It’s critical to understand why some things cost more than others. Since man’s work and thought are what transform things like inedible wheat into fettucine alfredo, it seemed only natural to thinkers like Ricardo and later Marx that we should value objects based on how much of this work and thought had gone into them — as if work were the gold content that was added to an otherwise valueless coin.

However, this theory did a poor job of explaining the actual prices that emerge in an open market; some items that required comparatively little effort (let’s say, suddenly fashionable hats) in fact command higher prices than the fruit of enormous labor (for instance, brilliant but difficult novels). To compare apples with apples, a cheaply made but well-written comedy like the brilliant Office Space may outsell a hugely expensive, carefully researched historical drama like Heaven’s Gate. While those of us on the outside may detect an apparent injustice here, in fact such outcomes are merely the fruit of adults making their own decisions about which products they really want.

In other words, economic value is subjective — it’s determined by each of us, as free and morally responsible subjects. This fact is one of many that Marx overlooked or would not accept. Because he believed that the value of a product was objective, and could be quantified by adding up the labor of those who’d helped to make it, when the real market prices didn’t match up with what the workers deserved, Marx considered this an injustice. Still worse were the profits that entrepreneurs collected on top of what it cost them to pay the workers and keep the lights on at the factory; whatever business owners gained beyond that he dubbed “exploitation.” In a socialist economy, he promised, such exploitation would end. The workers would control the means of production and reap all the profits, and prices would be set by the state to properly reward human efforts.

Dubbed “Austrian” because its key proponents were Habsburg subjects who rejected the primacy of the nation, the social class, or the Volk, the innovative economic thought that emerged under good Kaiser Franz Josef was focused squarely on the person and his nature as a rational, free adult. The pioneer of Austrian economics was theorist Carl Menger, who was followed by well-known analysts like Ludwig von Mises, Friedrich Hayek, and Röpke. Instead of looking at the economy as a vast, mysterious machine intended to build up the wealth of an abstraction (like the race or the nation), the Austrians started small — with the factors that influence each one of us in his daily decisions of how and where to work, which products to buy, how much to save or invest. Even though human behavior can often prove irrational, such decisions can be analyzed and to a large degree understood, because there is indeed (as the great philosophers taught) a stable human nature, with a hierarchy of needs and wants, and broadly predictable patterns of behavior.

For instance, the Austrians pointed out, if the state inflates the currency, then money left in the bank will quickly lose its value, and people will spend rather than save — unless the banks offer such high interest rates that savings keep up with inflation. John Maynard Keynes taught governments to exploit this economic precept, igniting short-term growth by encouraging people to spend rather than save. This economic trick, which can prove briefly useful in fighting off recessions, has become the central tactic of postwar Western governments — with the long-term result that the virtue of thrift has almost disappeared; we live more and more for the moment and assume that the future will take care of itself, or else that public assistance will bail us out of a crisis. (We learned in 2008 that this is as true for investment bankers as improvident workers.) This attitude is not what Our Lord intended when He told us to “take no thought for the morrow.”


The most important part of understanding how prices work is the idea of “marginal utility.” Before this piece of jargon sends you racing for the “Back” button, let me explain it in terms of bourbon.

Let’s say you’ve given up drinking for Lent, and a friend who’d read The Bad Catholic’s Guide to Wine, Whiskey and Song informs you that, in the Western Church, Sundays aren’t part of Lent, and you actually shouldn’t continue your penances then. Every Sunday is, in fact, a little Easter, and deserves to be marked by leisure, prayer, and some festivity. Delighted, you make your way to the nearest tavern. That first glass of Basil Hayden bourbon you bring to your lips will taste like the nectar of the gods. The second will make less of an impression, and if you unwisely kept drinking for several hours, at some point the prospect of one more glass will make your stomach turn. The utility of that first glass of bourbon was much higher to you than the second or the seventh. In theory, you might have been willing to pay $15 for the first shot, but only $5 for the last one.

However, no businessman (mercifully) can read your mind and shift the prices to match exactly what you’re willing to pay each time. Instead, he must set it low enough to match the last drink you’re willing to buy, when your craving for a drink is at its margin, or limit. So the price of any product is set by the marginal utility felt by the consumer — the amount they’re willing to pay for that very last drink. Increase the supply — for instance, by opening up an equally comfy but cheaper bar next door — and that price will fall. All this, because the value of a glass of bourbon is subject to our decisions. That is, it’s subjective.

Even using that term to describe how the price of whiskey fluctuates is likely to raise some Catholics’ hackles. We oppose subjectivism in morality and philosophy, rightly seeing it as an individualistic dodge that denies the stubborn truths of the natural law and reason. (Eric Metaxas did a brilliant job eviscerating the related error, Relativism, in his essay for Disorientation, a college students’ primer I edited.) But we should not make the crass mistake (which I did until a student set me straight) of assuming that the same word means the same thing in different disciplines. When we say that a family home has risen or fallen in value, that really has nothing to do with “family values.” Likewise, when we say that prices are created by our subjective decisions over what we value more — that last glass of bourbon or the $5 bill in our pockets — it has no bearing whatsoever on our faith in objective truth.

Indeed, in a little irony, the Austrian school tends to be rather dogmatic about insisting that its tenets are logically provable. In other words, the fact that prices reflect our subjective choices is objectively true, whether Marxists like it or not. An economic system that refuses to acknowledge how human beings express their moment-to-moment preferences will massively fail to help them achieve their goals. Applied consistently, it will yield only famines and tyranny; cobbled together piecemeal, as in the programs of European socialists and American liberals, such a system grows an ever-larger apparatus of government, hiring ever more managers to tamp down the chaos created by its irrationality and waste. The more holes you drill in the bottom of the boat, the more sailors you need to bail.

John Zmirak


John Zmirak is the author, most recently, of The Bad Catholic's Guide to the Seven Deadly Sins (Crossroad). He served from October 2011 to February 2012 as Editor of Crisis.

  • Thank you for this piece and introduction to Wilhelm Röpke. I wish I had heard of him when i studied economics under mostly communist (sic) professors. At the time I was too ignorant and too much of a wimp to challenge them. I remember one challenge though. One student asked ‘how can you justify what Stalin did?’ The response was basically: About half of the deaths were clearly justified and the other half were mistakes make by the vanguard in applying the correct marxist theory to the specific conditions in Russia at the time.

  • Bill

    I enjoyed your article and will check out your book.

    Inflation is a serious problem caused by government. Should government be allowed to tinker with the value of money?

    In looking at causes for our current economic problems I quickly discovered that government with its friend BIG BANK have worked together to destroy the value of money and move massive amounts of money out of the hands of the little people so that a few might become rich as King Mides.

    I wonder if you have ever looked at a money concept called Social Credit? A wonderful web site called Michael Journal has much material available. I hope you would investigate this idea.

  • Todd

    For the record, Centesimus Annus does not provide anything remotely close to a “warm embrace” of the libertarian impulse. Even if it is, as the author writes, the closest thing to such an embrace it continues to remain light years away from such a situation.

  • John Zmirak

    For an enlightening discussion of that encyclical see here:

  • Mitchell Button

    “if the state inflates the currency, then money left in the bank will quickly lose its value”

    Why is this the case? I would like to see some empirical data that suggests this causation. This premise is perhaps the most used, and least backed up argument in all of classical economic theory.

    Money is not exogenous but endogenous. If the central bank only printed 10 dollars a year, the markets wouldn’t have an equilibrium because the value of money would adjust to the value of economic life. The economy would be in a depression, because the whole purpose of money is to operate as a COUNTER for aggregate demand. Complaining that the Central Bank prints too much money is the same as complaining that a scoreboard’s points can go up too high. There would be many disappointed parents if upon watching there child’s basketball game they discover that the scoreboard maxes out at 14. It hardly makes for an exciting game, and the limit disincentives the players from trying to score baskets. The challenge of the Fed is to maintain sufficient liquidity in our financial markets so that aggregate demand can remain robust, thereby making real economic activity robust. The Fed CAN’T control the money supply, they can’t make players not score baskets, they can’t make businesses not build widgets. But they can reign in the fun with needless interest rate hikes and reserve requirement increases. The Fed has supposedly issued lots of currency since the Financial crash in 2007 and what inflation do we seriously have to show for it. In August of 2007, despite the Federal Reserve nearly quadrupling its balance sheet, deflation became a serious issue in some markets, not the hyperinflation that apocalyptic Austrian economists are always prophesying about. Any current inflation is more probably the result of gas price increases, because commodity markets speculators have not been reigned in by prudent monetary authorities.

    Pope Benedict XVI wisely wrote Caritas in Veritate to point out the fundamental obligation of the state in the health and welfare of economic life. The state’s function isn’t so much to give economies direction but to give it walls. The playground of economic life should be a very active place, but it needs walls so that the children stop playing with the guns and syringes, waiting outside its gates.

    MSC Economics

    • Cord Hamrick


      Perhaps it would be more precise to say that the dollars in circulation represent the sum total of the value assigned to all things currently being paid for (or “bid for”) in dollars.

      That is, there’s X amount of value of goods and services available to be purchased in dollars. If there’s Y amount of dollars in circulation, and all dollars have equal purchasing power, then it follows irrevocably that the value of any given dollar is X divided by Y…and that as Y increases, the value of a given dollar drops.

      But note that I qualified by saying “in circulation.” Dollars sitting in a bank for long periods of time, or stuffed in a mattress, are not in circulation. So the “velocity of money” plays a role: Money sitting still doesn’t represent a counter of aggregate demand, and thus doesn’t contribute to the devaluation of the currency.

      But “sitting still” is exactly what money tends to do in a depression or deep recession, such as the nice deep L-shaped funk the United States is currently experiencing.

      So I think it’s fair to assert that one can’t demonstrate a perfect inverse relationship between the number of dollars “printed” (or called into existence by central-bank book entries) and the value of each dollar. It isn’t as simple as my X divided by Y formula suggests.

      In particular, the velocity of money is affected not only by how much money one has, but the by character (advantageous? disadvantageous?) and predictability (stable? unstable?) of the environment in which one might spend or invest.

      When the entire country is scared to death of what might happen next, and none too happy about what has already happened, they don’t spend, and they invest in stable-value securities which don’t, themselves, multiply money much (e.g. gold as opposed to stocks). Velocity drops. There may be more actual dollars chasing goods and services, but they aren’t chasing them quite so hard.

      I suspect that’s one reason why we aren’t currently experiencing the high inflation one would normally expect after years of the Fed keeping rates so implausibly low. (“Implausibly,” if one assumes the duty of the Fed is to match the growth of the money supply with the growth of demand.)

      Still and all, I wouldn’t pooh-pooh the relationship between expanding money supply and currency devaluation too much. It’s not as if we haven’t seen examples of hyperinflation in the world before. Zimbabwe and Yugoslavia are recent examples; and I suppose everyone has heard about the Weimar Republic’s Papiermark in 1923.

      Remember: All those out-of-circulation notes can come back into circulation as soon as the crowd psychology changes. In the U.S. just now, everyone’s tightfisted because they think that if they hold on to their dollars, they’ll still have them for a rainy day.

      But there’s a psychological event-horizon to watch out for: If folks begin to think that their dollars are losing value, not over decades but over months or weeks, and that the best way to hold on to value is to spend those dollars right now to buy something that holds value better? Suddenly all those dollars will leap back into circulation, and their cumulative potential inflationary energy will be converted into actual inflation in a hurry. In a sense, the value of the dollar is, right now, a kind of “bubble” like the housing bubble or the tech bubble. One hopes it will be deflated gradually. It’s a terrifying thing for everyone, if it bursts.

      • Mitchell Button

        I can’t say I disagree with much you just wrote. Much of what you said is very Keynesian, e.g. a nonconstant velocity of Money, the importance of psychology in the determination of value and worth. However, I take exception to the quantity theory of money. The value of money doesn’t change by adding more money to the system, money is the measurement of value itself. It is the marker of aggregate demand. As I pointed out earlier, it operates as a counter much like a scoreboard is a counter. If I am wrong, how do you explain the lack of inflation given the central bank’s issuance of currency?

        I would also provide a caveat to your fears surrounding hyperinflation. You are saying that the hyperinflation (and political unrest) experienced in Zimbabwe, post war Germany and Yugoslavia is the RESULT of a government’s printing too much money. Whereas I would claim the exact opposite. It is the political unrest which creates the conditions of the hyperinflation.

        Every single of case of hyperinflation in history can be traced back to failing government. There is no example of countries with stable political power who have experienced hyperinflation. When a government’s power is slipping an enormous fear for the future takes hold of the populace, which makes everyone demand more paper currency as an insurance for the future. So every economic actor raises prices in anticipation for the uncertainty of future events. This situation complements with a government’s desperation in the face of declining power. Government’s typically increase wages for public sector employees and robustly increase private government contracts in an effort to solidify their political power, these of course have to be paid for in the currency of the nation, giving the illusion that the central bank is wantonly handing out money in the streets, when in reality it the central bank reacting to the demands of the treasury. These two events put enormous upward pressures on the demand for money. In addition to this, the ability for the government to collect taxes in such a political environment is damaged significantly, thereby making the necessity of using that particular currency obsolete. The reason why everyone employed person needs dollars is because the government taxes us in US dollars. If the US government’s relative power was so weakened that the people did not see the necessity of paying taxes, they would not see the necessity of holding US dollars. This was precisely what happened to the confederacy’s inflationary situation during the civil war, it happens in Africa today, and it happened in post war Germany 80 years ago.

        As much as libertarian’s scoff at taxes and government power, they serve an enormous political and economic function. Peaceful political existence struggles in its absence. Hyperinflation may very well be in America’s future, but it won’t be for the reasons attributed to Austrian economists; but rather those subversive, revolutionary, and disobedient powers that cannot be content with the obvious blessings of our age.

        • Mitchell Button

          Sorry for the grammatical errors I wrote this in a hurry.

        • Cord Hamrick


          I would consider a non-constant velocity of money fully in accord with Austrian theories as much as Keynesian. But why should you take exception to the idea that the quantity of units of money makes a difference?

          You say that money is the measure of value itself: I agree with this if by it you mean that all the units of currency, taken together, are exchangeable for all the things of value folk want to buy with them.

          But that necessarily implies a quantity theory of some kind. If you agree that:

          (a.) Units of fiat currency don’t have intrinsic value, unless they can be exchanged for something else the buyer wants;
          (b.) If there was nothing of value people wanted to buy, money would be worthless;
          (c.) All the money in the world can’t buy more than all the value in the world;
          (d.) Each unit of a given currency has the same value as each other unit of the same currency; and,
          (e.) The mere printing of currency does not, by itself, increase the amount of non-currency value in the world;

          …then a quantity theory logically follows. If you take the view that increasing the number of units of currency doesn’t affect the value of those already in circulation, then you must either think that there’s something different about those earlier units which allows them to buy more than the later-produced ones, or that more demand/value was magically created for these new currency units to represent, or that it’s possible to print so much money that you could buy everything in the world, and still have money left over, after you already owned all the value, and that the leftover money would still retain some kind of intrinsic purchasing-power, after there’s nothing left to purchase.

          All the aggregate value (=demand) can be (in theory) divided into units of value, and the amount of value represented by each unit is equal to the total value divided by the number of units. Divide it into more units, and each unit represents a smaller portion of the total aggregate value (= demand).

          I don’t think your scoreboard analogy is a good one, because money represents value or demand purchasable with that money, and the creation of new units of money does not create more non-currency value. If the central banks were to suddenly double the number of units of currency in circulation, there would not suddenly be more good books on sale, or good movies in theaters, or cars to drive or babysitters to hire!

          But on a scoreboard, the number of “points” can keep rising indefinitely, producing more aggregate points in the game. When the score is 10-to-5, there are 15 points in the game; when the score is 31 to 5, there are 36 points in the game. If money operated the way scoreboard points do, then the more money people printed, the more aggregate value there would be in the world. That clearly isn’t how it really works!

          So I think the theory is sound; it’s logically coherent and the alternatives fail by reductio ad absurdum. However, that doesn’t mean that the theory needn’t be nuanced by real-world considerations.

          These include psychological factors and the arbitrage caused by the delay in how macroeconomic changes alter the behavior of individuals. And this is why we don’t see such high inflation as one might expect given the Fed’s behavior.

          (This is assuming that inflation isn’t actually higher than the official measurements indicate. I’m a bit suspicious of them: They’re measured differently now than in the 60’s and 70’s, with the “basket” of goods constantly changing in a fashion which, unavoidably, under-reports inflation. And the current measurements do not represent a level playing field when compared to those earlier measurements. So if you rely on those earlier measurements when drawing a trend-line, they’re higher relative to our current data-points than they ought to be, and you get a flatter trend-line than you should.)

          Now, about government instability: There is a feedback loop here, and it is hard to tease the strands apart (to mix metaphors a bit). If government is responsible for the savings of the people being valueless, and simultaneously the government isn’t easily able to pay its police and military…or if it pays them the same number of dollars it always has, but those dollars no longer buy enough food and clothing and shelter to survive, then of course instability results!

          But that isn’t at all mutually exclusive with the idea that if you double the units of currency, you will eventually halve the buying-power of each unit.

          But notice that I say eventually. It takes awhile for folk to adjust their prices, and longer for some than for others. For some, it takes decades to adjust their internal sense of what something really costs “these days.” So that complicates things. (I myself remember when $5 could buy a movie I badly wanted to see. Nowadays it won’t buy even the drivel Hollywood keeps producing for foreign audiences with domestic crowds as an afterthought. So I don’t go to movies, because they’re all priced higher than they’re worth…to my 20-years-out-of-date value system.)

          I think that’s all you’re observing, Mitchell. I think your expectations are that, if a quantity theory is correct, an increase in the money supply should produce a nice, quick change in economic behavior, which would show up on a graph as a nice crisp bend in the line. No such luck: The effect of the increase will be delayed by radically different amounts in different sectors, and obfuscate the impact. The theory predicts what will happen if the market efficiently transmits information, and if all other things remain equal. Well, it doesn’t, and they won’t.

          But that doesn’t mean prices aren’t higher than they would have been had you not put more currency into circulation.

  • John Zmirak

    If the issuance of currency keeps pace with the real production of wealth, then it’s possible for inflation NOT to occur. However, that means the state must attempt to predict wealth creation–which frequently fails. For that reason, a solid currency like the gold standard has many virtues, chief among them external, real-world constraints on the increase of specie, that are not in the hands of politically sensitive managers. A solid, truly independent central bank such as Switzerland and (I believe) Germany still has is a reasonable substitute for hard money.

    • Mitchell Button

      If that premise is true, why don’t we have hyperinflation currently? Because in 2007 the US real economic activity was contracting, the federal reserve was injecting trillions of dollars in cash in the US financial system and we had Deflation or disinflation.

      How would you explain that?

  • Michael PS

    I am not a student of economics, but the first time I heard the Labour Theory of Value explained, I thought it was nonsense.

    An economist friend, a convinced Marxist, explained to me that yarn was worth more than wool, because of the labour involved in spinning it and, in the same way, cloth was worth more than the yarn and garments more than the cloth. But it is obvious to a child that the garments have value only because someone wants to wear them and is willing to pay for them and that the cloth, yarn and wool have value, only because they are garments in the making. If the garments go out of fashion, all the labour in Christendom will not give them value.

  • Clare

    I have come to the conclusion that the proper description of Catholic civil society is “libertarianism circumscribed by natural law”. CCC 1884 has “The way God acts in the world, which bears witness to such great regard for human freedom, should inspire the wisdom of those who govern human communities.” God’s way: “Man is free to do anything that isn’t a sin” = libertarianism circumscribed by natural law.

    • Mitchell Button

      The catechism speaks of philosophical libertarianism not political libertarianism. Libertarianism in philosophy is the belief in free-will.

  • Mary

    All economic values are instrumental in nature: they are not ends but means to an end. They are subjective because of their changing utility toward those ends, and the differing ends that people pursue.

  • Gian

    Is Labor theory taught in economics?
    The writer is fighting a non-existent war. Economic Marxism does not exist and in cultural matters, the Austrians ally with the Left.

    The Right pokes a lot of fun at Rand but isn’t her message same as Austrians–pursue self-interest above all.

    • Cord Hamrick


      The Austrian school of economics does not give the same message as Rand at all.

      Let me see if I can boil the difference down here, without oversimplifying….

      Rand says that, because you want something, it is morally right for you to take it by whatever non-forcible means. Since free markets offer an efficient way for people to non-forcibly trade their way to whatever they want, Rand is a free market proponent…but this is in service of a ethical system based on desire. She has no room in her system for rejecting bad desires; she thinks not only that desires are intrinsically good, but that desire-fulfillment is the intended end of all moral reasoning.

      Now the funny thing is that this would actually be true if men were unfallen, perfectly wise, and immune to temptation and concupiscence. If every time we turned our thoughts inward and asked ourselves, “Hmm, what is it I want today?” the answer was “To love and glorify God,” why then what we wanted would be exactly right. Rand is in that sense a ridiculous optimist, treating men as if already perfected.

      Okay: Rand says that because you want something, your desire is morally right. She advocates selfishness, says it is good. What do the Austrians say?

      They say that people’s behaviors in an economic sphere are driven by their individual value-systems. If they value X over Y, and they have Y, they will trade it for X if someone is willing to sell X for Y. The Austrian economists are not advocating that people act this way; they are saying that this is how people in fact do act, whether we like it or not; and that we ought to be mindful of this when crafting economic policy. We ought to be mindful of it, because it is an inflexible fact. So we ought to accommodate or take advantage of it, instead of ignoring it and finding out after the fact that it frustrates our policy.

      The Austrian economists say that people act in accord with their value-system, whether we like it or not…and whether we like it will depend on whether we agree with their value system or disagree with it. If folk buy porn and never give to the poor, then we know that they value porn more than almsgiving. If they give to the poor (that is, if they “buy” almsgiving) and skip the porn, then we know they value almsgiving more than porn.

      The Austrians do not say (as a matter of economics) what people’s value systems ought to be. They do not say, as Rand does, that if you want porn, then porn is right and you should reaffirm the goodness of porn as a tenet of your value system. They merely predict that, if you value porn highly, you’re going to buy it.

      Now, the Austrians do in fact usually say, “porn is bad, almsgiving is good; we’d be better off if people bought none of the former and did more of the latter.” But they do not say this as economists, for to opine about how things ought to be is not a matter of economics, but of ethics. While they do not deny that ethics is important, they are busy being economists, not ethicists.

      So, in the end, here’s the difference:

      Rand: Want to do it? Then you ought to. (This is an ethical opinion.)

      Austrians: Whatever people do want, or ought to want, tends to influence their behavior; policy which takes this reality into consideration will work better than policy which doesn’t. (This is an economic prediction.)

      See the difference? Rand is prescribing an ethical teaching to individuals hoping not merely to observe but influence their choices; the Austrians are expressing an economic recommendation to policymakers on the basis of merely observing the choices.

      Caveat: Of course Rand said a lot more than what I just described, on different topics. I have only here discussed the thing she said which is most easily confused with what Austrian economists said…and in wildly over-simplified form, at that. I have not here discussed her epistemology or her aesthetics or metaphysics or anything else.

      • Gian

        Austrians are busy moralizing as well. That people should be free to act on their subjective preferences. This is all they agitate for.
        Why other people’s subjective preference for coercion should be disregarded is question that they don’t answer. It is an axiom.

        So Rand says I should act on my desire. And Mises says that you should let me act on my desire.

        Tao says that not all desires should be acted upon. Some desires lead to the death of a society. And thus society has the right to regulate the acting on such desires.

        Accumulation itself is neutral but the spirit of accumulation is a vice. The trouble with capitalism is the belief that Private Vice makes for Public Good. This alone overturns wisdom-Christian, Hindu, Muslim.

        • Cord Hamrick


          You’re mistaken on a couple of points, I think:

          You say,

          Austrians are busy moralizing as well. That people should be free to act on their subjective preferences.

          Not quite right. They should not, in the Austrian view, be free to act on just any subjective preferences. For example, if your subjective preference is to rape, or murder, or violate a contract, or set the prices for goods throughout a town you’re the mayor of, the Austrians say you should not be free to act on those subjective preferences.

          You go on to say,

          Why other people’s subjective preference for coercion should be disregarded is question that they don’t answer. It is an axiom.

          Now, you’re just plain wrong about that. They distinguish between the subjective preferences you should be free to pursue (e.g. eating ice cream) and the ones you should not be free to pursue (e.g. murder) on this basis: The ones you should be free to pursue do not violate anyone’s rights; whereas the ones you should not be free to pursue do violate someone’s rights.

          Coercing a person without adequate justification is a violation of that person’s rights; therefore, this coercion is not a preference one should be free to indulge.

          After that, the debate narrows down to this question: What is adequate justification for coercion?

          And here, too, libertarian types (e.g. Austrian economists) are willing to proffer a response: Coercion is normally evil. It is a violation of the human dignity of the other person; it treats them like a thing to be kicked and shoved about (or dispensed of) instead of a person to be persuaded and loved.

          Therefore, the only time coercion is morally permissible is in a double-effect scenario: Where your intent is not so much to coerce Person A, as to save Person B from a worse coercion.

          So, for example, if Person A is about to rape or murder Person B, then Person C may step in and point a gun at Person A, forcing them to halt. This is coercion; normally it would be forbidden; but in this case Person C wasn’t motivated by a desire to injure the human dignity of Person A, but rather by a desire to save the human dignity of Person B. As this is a perfectly morally licit thing to do, the use of coercion was justified.

          So Rand says I should act on my desire. And Mises says that you should let me act on my desire.

          Not quite. Mises says I should let you act on your desire unless your desire is to rape, murder, or otherwise violate the rights of an innocent party; in which case, I should not let you act on your desire, but (assuming all other expedients have failed) should coerce you into stopping.

          Tao says that not all desires should be acted upon.

          So do Austrian economists….

          Some desires lead to the death of a society.

          Austrian economists (and libertarians in general) are in agreement with this, also (though different libertarians will dispute with one another about which desires are destructive)….

          And thus society has the right to regulate the acting on such desires.

          Ah. Here we have a potential disagreement: A libertarian will say that the degree to which the people of a society may justifiably use their government to forcibly deter a person from acting on a particular desire is proportional to the degree to which acting on that desire causes measurable, direct injury to the rights of an innocent person by provable and exclusive causality.

          So, for example, a libertarian would say that one may be justly executed for first-degree murder, but not for smoking a cigarette a few feet away from a child who might, possibly, die of lung cancer by age 50 as a result. For that, a small fine is the most which can be justified, not only because the intent to kill is presumably not present, but also because the connection to the grown-up-child’s eventual death is so very tenuous.

          So libertarians are not anarchists; they always support laws against murder and other forms of assault, and against fraud and other intellectual assaults, and against contract violation as a form of fraud.

          But a libertarian would either oppose outlawing voluntary viewing of soft-core pornography by an adult, or would limit the penalty to a small fine, because the connection to some eventual violation of a person’s rights, while it may exist, is tentative.

          Likewise, a libertarian would have a hard time sending a man to jail for having a “spirit of accumulation” (although I’m not sure what you mean by that phrase). Such a spirit (do you really mean “spirit” in the sense of an angelic or demonic being, or do you merely mean “attitude?”) may be real, but the connection between it and the violation of the rights of an innocent person is tenuous.

          You add,

          The trouble with capitalism is the belief that Private Vice makes for Public Good.

          What connection does that statement have with free-market capitalism? Which Austrian economist said that, and what did he mean by it? I don’t recognize any libertarian ideals in that statement at all.

          As normal persons with moral codes, economists of the Austrian or Chicago schools are naturally opposed to people having vices. (There’d be no point calling them “vices” if you didn’t think them bad.) But as economists, whether a particular desire is a vice or a virtue plays little role in the predictive power of their models, so in that context they’re not going to rail against vice.

          Gian, I sometimes wonder whether you have ever read Hayek or Friedman, or if you have only read leftists’ propaganda against them. You have accumulated a nearly unrecognizable caricature of them, like a man who learns about the state of Israel by exclusively reading the speeches of Mahmoud Ahmadinejad.

          • Gian

            Regarding Private Vices and Public Good, this excerpt from May 11 issue of First Things by Edward Skidelsky.
            (It is an error to think that only left has criticized Austrians).

            In his /Fable of the Bees/ of 1714, the Anglo-Dutch essayist Bernard
            Mandeville put forward an outrageous suggestion. What if the private
            vices of avarice and luxury are transformable, through skilled
            political management, into the publick benefits of wealth and
            industry With a satiric eye on contemporary England, Mandeville
            pictures a hive of vicious but prosperous bees:

            /The Root of Evil, Avarice,
            That damn’d ill-naturd baneful Vice,
            Was Slave to Prodigality,
            That Noble Sin; whilst Luxury
            Employ?d a Million of the Poor,
            And odious Pride a Million more:
            Envy itself, and Vanity,
            Were Ministers of Industry./

            Mandeville’s paradoxes were widely denounced as immoral. But he was not
            a solitary eccentric. In Naples a few years later, the philosopher
            Giambattista Vico put forward an almost identical thought in his /New

            Out of ferocity, avarice, and ambition, the three vices which lead
            all mankind astray, [society] makes national defense, commerce, and
            politics, and thereby causes the strength, the wealth, and the
            wisdom of the republics; out of these three great vices, which would
            certainly destroy man on earth, society thus causes the civil
            happiness to emerge. This principle proves the existence of divine
            providence: Through its intelligent laws the passions of men who are
            entirely occupied by the pursuit of their private utility are
            transformed into a civil order which permits men to live in human

            Here was a radical break with the ancient social vision. The public good
            was no longer an end but an /effect/, no longer something to be aimed at
            but merely engineered. /Esprit/ was superfluous. Institutional machinery
            would do the job instead. Neither Mandeville nor Vico had any clear idea
            how this machinery might work in practice?the one speaks vaguely of the
            State?s Craft while the other appeals to providence but they were both
            convinced that some such machinery must exist. Their faith in social
            causality was as little empirical as Galileo’s faith in physical causality.

          • Gian

            I have read Road to Serfdom and The Constitution of Liberty long back. Hayek’s points were perfectly illustrated in the country I was growing up. I have no problems with him but his deification. I needed to understand why the ancients and medievals had a low notion of money-making
            and what exactly was novel in Adam Smith.

          • Gian

            From the Catechism of the Catholic Church:

            2354 Pornography consists in removing real or simulated sexual acts from the intimacy of the partners, in order to display them deliberately to third parties. It offends against chastity because it perverts the conjugal act, the intimate giving of spouses to each other. It does grave injury to the dignity of its participants (actors, vendors, the public), since each one becomes an object of base pleasure and illicit profit for others. It immerses all who are involved in the illusion of a fantasy world. It is a grave offense. Civil authorities should prevent the production and distribution of pornographic materials.

            By attempting to figure out harms suffered by some person B if some person A does this or that, you are thinking as a modern American libertarian. This is not accepted by most of the people and as above, the Church also does not think in this style.
            What are probably call a victim-less crime is a ‘grave offense’ by the Church and was I believe severely punished.

          • Gian

            “The ones you should be free to pursue do not violate anyone’s rights”

            The prior question is what are these individual rights that must not be violated.

            And how do Austrians show that the rights they postulate accord with the longtime flourishing of society?

          • Michael PS


            “Most trades,” says Xenophon, “weaken the body; those who practice them must sit in the shade or by the fire; they have time neither for their friends nor for the republic.”

            Nor was this confined to the Ancients. During the French Revolution, Saint-Just’s remark that “Trade ill becomes the true citizen. The hand of man was made only to till the soil and to bear arms,” was applauded by the Assembly. This was amongst the reasons that the Revolution converted ten million landless peasants into heritable proprietors.

            Ownership, of course, was seen as a matter of pure positive law (Only those who associate together have the right to regulate the conditions of their association – Rousseau); as Robespierre observed, by nature, the fruits of the earth are common to all and the land belongs to no one. All singular rights depend on a law enacted by the people.

  • TeaPot562

    Governments cause much havoc in the private realm when they enact laws that ignore facets of human nature. E.g., when you (the govt.) subsidize something (material or behavior), you will get more of it; and when you tax something, you will get less of it.
    After the Great Experiment of Prohibition of alcohol (1918 to 1933), we learned – some of us learned – that when a sizable part of the population really wants something, that attempts by the govt to forbid that item lead to price increases, violence and disrespect for the law as the psychological need of the craving part of the population is met – by criminal enterprises if necessary.
    Unfortunately, this knowledge failed to impress those who began the “War on Drugs” in the Nixon administration. This war has been underway for about forty years. Isn’t it time to declare victory, withdraw our troops (at least as far as marijuana is concerned) and bring the soldiers home?
    Following the economic school of the Austrians (or Milton Friedman) leads to much more prosperity for most, long term, than govt selecting economic winners & losers by a Keynesian “Industrial Policy”.

  • P Groot

    We do have inflation. Gold was about $650 four years ago, now it’s $1500. Eggs used to be 99 cents a dozen, now they are $1.79. Hamburger used to be $1.99, now it’s $2.99. Gasoline is more expensive than it used to be.

    • Mitchell Button

      Don’t blame your central bankers, blame your commodity speculators.

  • Mitchell Button

    You also act as if this word “value” has some sort of intrinsic characteristic to it. Value is a word that has to be denominated in a currency, whether state mandated fiat currency or state mandated gold currency, a currency price that is either appointed through contract or arranged in a market. In either case, the “value” of that thing cannot be separated from what you charge for it. At one point you even use the term “non-currency value”, but what precisely is this? How do you have a value for something, that cannot be quantified? The entire point of value is to quantify. So I would say that value disappears all the time, it happens whenever demand for that good drops. Value also increases all the time, it happens whenever demand for that good increases. Value could be defined as the going price, denominated in currency, of a good if you were to sell it right now. There is no intrinsic value of anything, gold and beanie babies operate under equally arbitrary behavioral rules.

    You criticize my scoreboard analogy by saying that, “If the central banks were to suddenly double the number of units of currency in circulation, there would not suddenly be more good books on sale, or good movies in theaters, or cars to drive or babysitters to hire!”. I would completely agree with you because as I stated earlier, MONEY IS ENDOGENOUS (meaning coming from the nature of the system). Classical and Austrian theory claims that it is exogenous (chosen by the central bank). Your argument is precisely the criticism levied by Keynes against the classical economists of the day. They thought that interest rate manipulation was an effective tool at exciting Aggregate demand when it simply isn’t. The major factor that motivates capital investment is profit expectations. That is why only fiscal policy can drive effective demand and monetary policy can’t. The Federal Reserve can’t control the amount of money in circulation even if it wanted to, about the only thing the Fed can do is choke off economic activity by hiking interest rates. The amount of money there is, will always equal the amount of demand there is. The moment money is held in savings it ceases to be demand and becomes potential demand, and therefore potential money.

    You misunderstand my argument when you write, “your expectations are that, if a quantity theory is correct, an increase in the money supply should produce a nice, quick change in economic behavior”. My argument is the exact opposite, Changes in economic behavior will produce changes in the money supply. This is why the scoreboard analogy remains a valid one. The scoreboard operates to count the activity going on in the field, not vice-versa.

  • John Zmirak

    We did have inflation–in a very specific sector of the economy, the housing market, where values of homes were wildly inflated beyond what would prove to be their real market value. Massive and imprudent mortgages, guaranteed either directly by Fannie Mae (etc.) or indirectly by the predictability of a bail-out (too big to fail) produced those home values. When they crashed, the government stepped up to make up the difference. So instead of the whole economy getting inflated, the housing market did–and now we’re paying the price not in rising prices but in government debt.

    • Mitchell Button

      What precisely is this “real market value”? How did the decline in value of housing from 2008 to currently prove any less “real” than the rise in housing value from the 1960’s until that point in time.

      2008 is an example of home prices falling drastically. In some cases, a homes relative value was declining 30 or 40 percent in a year; this is deflationary. The Fed may have held interest rates historically low in the months leading up to the collapse, but it made them even lower subsequent to the crash. After the crash occurred, all economic data pointed to declines in economic activity, and then after the crash all monetary policy was directed to pouring liquidity into the financial markets. According to you, these conditions would have created an inflationary environment because, “If the issuance of currency keeps pace with the real production of wealth, then it’s possible for inflation NOT to occur.” But in this example the issuance of currency far outpaced the contraction of wealth in the United States, and inflation didn’t occur then, and its barely started to occur now. Despite the Fed’s efforts at “printing money” deflation became a serious threat, thankfully Congress’s fiscal intervention likely staved off a deflationary spiral which has ruined economies in the past.

      I would say, along with most post-keynesian economists that a “real market value” just happens to be the price a particular good is sold for at this moment in time. Sometimes this is relatively high and sometimes this is relatively low. But this idea of a “real market value” with some mythical objective standard of pricing smells of voodoo economics. There is no magical price of goods and services that allows the market to be perfectly in equilibrium; no such rest has ever existed in any economy, or any market for that matter. Markets don’t exist in a peaceful equilibrium, the stock market, or commodity markets, or the babysitter market ought to prove that. People get irrationally exuberant and irrationally disconsolate all the time, these changing behaviors and attitudes affect price and are perfectly normal. That is why we have business cycles. In booms consumers want more, in recessions people want less (sometimes drastically less). Hyman Minsky theorized about this phenomenon when he argued for his “financial instability hypothesis” http://en.wikipedia.org/wiki/Hyman_Minsky. He famously wrote, “stability breeds instability”.

      • Wi

        Just a quick comment, Michael: Right on!

  • G-Veg

    Thank you all for a most interesting and enlightening read.

    Economics is so poorly understood by many of us – or at least me – that a useful back and forth like this can be very illuminating.

    I will have to tune in from time to time and mull over what I’ve read between. Thanks again.

  • Tom

    Although I am not an economist, I certainly witnessed with my own eyes the stupidity of communism. The need of a “free market” is like the need to eat: it is self evident. From what I understand, Ayn Rand is not so much about “free market”, but rather about individualistic self-fulfillment for the sake of oneself. This is different, and rather selfish. Neither no food or orgies are good. As a small business owner, being part of the free market challenges one to exercise virtues (frugality, honesty, fair play, discipline, responsibility, hard work, competitiveness, resourcefulness, patience, stamina, ability to learn, humility, etc…), a bit like exercising self control over food. But virtuous behavior does not come from eating food or from the free market per say (as some seem to claim), but ones own disposition to start with, and allowing God’s Grace to operate, it seems to me. If food or “free market” were such moral drivers, why are there plenty of glutinous or greedy people out there? Also, why business oligarch driven countries like Russia or China have also highest abortion rates in the world? And who will fix roads, pick trash and make sure the right chemotherapy is available for children in need? Replacing our Madisonian democracy, with some form of business oligarch driven nebulous “civil society” (like China loving, Maciel supporting, richest man in the world, Mexican oligarch, Mr Carlos Slim implies), will not work either (just look at south of the border to see how well his idea of “civil society” works).

  • Bob G

    Any theory of economic value must point to labor as the ultimate basis, because any economy is composed of human beings. The problem in Ricardo’s version of value was that he—and implicitly Smith—falsely defined labor as strictly material. That prompted the neo-classicals (Jevons, et. al.) correctly to reject the classicals’ theory of prices (as based directly in “strictly material” labor). The neo-classicals redefined prices as determined subjectively, by personal preferences. But their theory of prices both is compatible with and even requires a labor theory of value (of the ultimate cause of production). Prices and “value” are not the same thing. Even Keynes understood that economics could not function without a theory of value, and the labor theory was (and is) the only possibility.

    But if, like Ricardo, you define labor as strictly material you will wind up with chaos. The Austrian school improved on Manchester, but still (falsely) saw economics as a strictly material science. Beneath this whole question is a question about the nature of science itself. Capitalist economics has always seen economic science as a physical science like Newton’s, and in the end so did the Austrian School. They are all wrong. If you treat the economic system (as Capitalist theory did) as strictly material, and the people in it as the same, you will arrive where we have arrived today: at chaos. We are not coming back from this “recession,” and the nature of the theory we are following is the reason why.

    • Michael PS

      Surely the principle fallacy underlying the labour theory of value is that it bases the value of any product on its past. But those who are willing to pay for these products have no interest in their past, but only in the use to which they can be put in the future.

      The second insuperable difficulty is that the theory supposes that labour of vary varying kinds are commensurate. To argue that the price paid for them constitutes a common measure is, of course, circular

    • Wi

      Amen, Bob! Preach ’em the gospel.