If you remember, the two previous entries were about the problem of economic organization under capitalism and why this system of economic organization makes an integrated and comprehensive theoretical understanding of which a particularly distinctive task. A capitalist, division-of-labor, economic system is not at all like a Robinson Crusoe economy. It even cannot be conceived as a mere summation of individual Robinsons. Precisely because of the dependence of individual motivations on the already established data brought about and supplied by the interactions of millions of individuals, a capitalist economic system must be approached as an organism, in the totality of its interactions. This circumstance has great implications for the science of economics. To be a meaningful and relevant body of knowledge, economic theory must concentrate on distinctive and unique features of that system which characterize it and without which it would lose its very identity. This is the only way the economic theory can be realistic and relevant body of knowledge. Specifically, it must reject the theoretical approach used to understand the simple logic of choice that underlies economic decisions involving one or few individuals and which has been the dominating methodology of the neoclassical school and the early generations of the Austrian economists.
Dr. Hüslmann’s choice of the title of the present chapter, A Copernican Shift, is therefore fully justified. This is because Mises’s argument was more than just a refutation of all socialistic schemes to organize extensive and further developing division of labor on a conscious, centrally planned scale. It cannot be stressed too strongly that the socialist calculation argument must be viewed as a mere application of the more general argument. The overwhelming power of Mises’s argument strikes at the very heart of economic science because it is crucial for a more comprehensive understanding and appreciation of the inherent harmony of the economic organization of capitalism. This last is of enormous importance and needs a bit of elaboration.
Let us assume for a moment that the organization of production and consumption under capitalism was indeed inherently unstable and chaotic, then this circumstance alone would make the case for economic freedom, and liberty from government interference in general, certainly much more difficult, if indeed simply impossible. All arguments that explain and emphasize the importance of individual liberty would quickly lose credibility and force if it could be shown that it is precisely the economic freedom which is ultimately responsible for chaos in economic activity, for recurring periods of booms, busts, unemployment, even wars. Based on such understanding of economic life under capitalism, a more rational policy would clearly begin to gain in prominence and support among the wider public. If it were true then we would face a paradox. How can it be that being free to think and to decide for oneself what to produce and what to consume without being subjected to coercion by others can hurt the society as a whole? And by implication, how can it be that forcing people to abandon their minds and rational judgment in favor of judgments of a handful of government officials can produce economic stability and prosperity?
Not only Marxists and other socialist critics of capitalism like to deride it as anarchic, chaotic, and operating without aim and purpose, driven somehow by its own irrationalities. The substance of Keynesianism is precisely the view that capitalism is an inherently irrational economic system, in addition to being anything but intelligent, just and virtuous. As Keynes wrote: “The decadent international but individualistic capitalism in the hands of which we found ourselves after the war is not a success. It is not intelligent. It is not beautiful. It is not just. It is not virtuous. And it doesn’t deliver the goods.â€
Despite several important differences in method and analytical specifics, they have one extremely important aspect in common; both schools failed to appreciate the centrality of monetary calculation in a division-of-labor economic system and to ground their economic analysis into it.
Mises’s calculation argument sends Marxist and Keynesian theories of inherent irrationality of capitalism to the dustbin of the history of economic thought, where they properly belong by all standards of human intelligence and decency. Precisely how it does will be the subject of my next post. Stick around!