Mises Daily : Mises Institute on Austrian Economics and Libertarianism

Libertarian Centralizers

Wed, 15 Feb 2012 01:38:00 -0600

In his defense of the constitutionality of Lochner v. New York against the critics in the last issue of Claremont Review of Books, professor Richard Epstein invokes the Privileges and Immunities Clause of the 14th Amendment. He claims that this clause, "properly read,"

places a huge limitation on what the states can do to citizens … the state may retain huge powers to initiate legislation, but all that legislation (and its enforcement) remain subject to a judicial override on constitutional grounds.

It is not immediately clear what professor Epstein means by the "proper reading" of the clause, but that obviously is not the "reading" of the framers of the 14th Amendment, because they thought this clause placed a very slight, and not a "huge," limitation on the state police power. As Raoul Berger has demonstrated, the framers adopted a very narrow, common-law meaning of the Privileges and Immunities Clause, as pertaining to "life, liberty, and property." The meaning of those guaranties was just to prevent the states from arbitrarily denying to the newly freed blacks their elementary rights to jury trial, due process of law, right of settlement, and freedom of movement, as well as the right to acquire property. In other words, to prevent the discrimination against them in elementary civil-rights issues, protected by the Civil Rights Act of 1866. It is very important that all social and political rights, including suffrage, were explicitly excluded from the privileges-and-immunities guaranties (at least by the understanding of the framers of the amendment).

Epstein seems to completely ignore this, attributing to the named clause a very broad — actually a sweeping — meaning, which was given to it not by the framers but by the activist judges many decades after the 14th Amendment was (supposedly) ratified. Professor Epstein goes even so far as to assert that the Supreme Court could strike down any state law it finds unconstitutional, just on the basis of the Privileges and Immunities Clause. Both Epstein and David Bernstein (whose views from the book Rehabilitating Lochner he is defending) seem to accept the so-called doctrine of incorporation, invented in 1897 and later exploited abundantly by progressive lawyers to undermine the strict constitutionalism. According to this doctrine, the 14th Amendment was meant to apply all (or most of) the restrictions from the Bill of Rights to the states. It puts the federal institutions, primarily the Congress and the Supreme Court, in charge of policing and supervising the states in regard to their laws and regulations. This is obviously a very attractive doctrine for anyone who wants to advance centralization of power, because it gives a blank check to the federal government. Astonishingly, libertarians have been marching in lockstep with the progressives in advertising the beauties of this doctrine throughout the 20th century. Another libertarian devotee of the incorporation doctrine, Randy Barnett, even castigated Congress for not using its alleged 14th Amendment powers vigorously enough to reign in the intolerable anarchy created at the state level.

But, this is not the end: it seems that Epstein believes not only that the 14th Amendment "incorporated" the Bill of Rights, but also classical liberalism to boot, by giving to the federal Supreme Court a right, moreover — a solemn duty — to police the states and enforce libertarian "individual rights" against them. For example, he thinks that the 14th Amendment gives to the federal government a right to block any state law that infringes on "free competition"! Where is this "constitutional" protection of free competition coming from? Obviously, not from the 14th Amendment. It can only come from reading a particular and historically unjustified libertarian meaning into the amendment.

This reading of libertarian ideological idiosyncrasies into the constitutional text is not an exception — it is quite widespread in Epstein's works. In his book How Progressives Rewrote the Constitution he argues, for instance, that the Social Security Act was unconstitutional, not because the federal government was not given by the Constitution the right to do such things, but because the theoretical concept behind the act was inconsistent with Hayek's political philosophy!

However, the 14th Amendment did not "incorporate" the Bill of Rights, let alone classical liberalism; it just constitutionalized the Civil Rights Act of 1866, with its very limited purpose of protecting blacks against discrimination in the matters of the most basic civil rights, as unequivocally and repeatedly stated by the framers. And that's all. Epstein and Bernstein, of course, do not like this limitation and propose instead to accept a peculiar libertarian version of the living-Constitution doctrine by which we could short-circuit the cumbersome rigidity of the text and actually read our own philosophical preferences for "liberty" and "contractual freedom" into it (nowhere to be found in the original context), in order to justify judicial policy making along preferred libertarian lines.

For example, Bernstein defends Lochner by claiming that it cannot be compared with Roe v. Wade, because it allegedly did not invent any new right; it just applied the "liberty of contract" that was, according to him, already contained in the 14th Amendment. However, this "liberty of contract" is again a judicial fabrication, invented in 1897 by the Supreme Court in the case Allgeyer v. Louisiana. The definition of "liberty" that the framers of the 14th Amendment adopted was a very narrow common-law notion of "security of person," or as Blackstone memorably said it "power of locomotion, of changing situation … without imprisonment or restraint of the person." Not a word about "liberty of contract," which is, as a "constitutional" category, no less phony than its famous progressive counterpart, the "right to privacy," used to justify Roe v. Wade (or for that matter, Epstein's "free competition").

However, it gets even more peculiar than this. Namely, Epstein's libertarian zeal appears to abate significantly when it comes to the federal government. For example, he considers the Sherman Act and the entire complex of federal economic regulations known as "antitrust laws" to be perfectly constitutional, although those laws apparently infringe on liberty of contract no less than the famous New York labor law. The antitrust laws ban, among other things, voluntary price discrimination and give the authority to the courts and federal agencies to stop contractually agreed-on mergers and consolidations they consider "anticompetitive." So, when the state of New York legally invalidates the freely agreed-on contracts that allow workers a longer-than-ten-hour workday — that's an awful infringement on individual liberty of contract; however, when the federal government punishes Standard Oil for receiving freely agreed-on price discounts from its large customers, the railroad companies, that's just an innocent (and perfectly constitutional) exercising of authority to regulate commerce.

An especially worrying sign is that both Epstein and Bernstein agree that the proper role of the Supreme Court should be not only to impose classical liberalism from the bench but also to arbitrate in the disputes over whether any particular law was in the "public interest," or instead motivated by selfish rent-seeking. To qualify as "constitutional" before this new libertarian Supreme Court, not only would a law have to be in harmony with "economic liberty" and "freedom of contract"; it could not be a product of rent seeking and lobbying for private benefit. How is this supposed to be decided by the courts? What special knowledge or comparative advantage the nine unelected and politically well-connected lawyers in Washington DC have in deciding ethical and economic issues like this? However, our authors think that the Supreme Court justices do have such an advantage, and they seriously argue that the New York state labor law struck down by the Court in Lochner was unconstitutional because it was a form of labor-union rent seeking!

Moreover, Epstein even asserts that "courts have recourse to a wide variety of techniques to isolate those actions that are intended to advance the interest of Madison's factions from those which seek to generate common improvements shared by all." Thus, the Court is given — apart from the "standard" task of protecting libertarian values, "freedom of contract," "free-market competition," Hayekian insights into the superiority of individual versus government knowledge, and similar philosophical tenets — the right to determine what is and what is not in the "public interest," to boot.

One wonders why we need politicians, elections, and legislatures at all if the judges can replace them so nicely with their "wide variety of techniques" for detecting the "true" public interest. If judges really do have such a comparative advantage over politicians in deciding these matters, why not change the name from "Supreme Court" to "Supreme Ethical Council," as Antonin Scalia once suggested? Or perhaps the "Central Planning Board"?

Both Epstein and Bernstein try to brush aside the critiques of their paradigm as just a matter of their critics' "excessive devotion to democratic institutions" (sic). But this conceals the main problem: their own acceptance of the Leviathan state and growing centralization of power. The "libertarians of the 14th Amendment" accept the most basic premise of the progressive political philosophy — the idea that politics is about who is going to control the central government and impose his own values on the rest. They are prominent expositors of a very curious theoretical synthesis that Gene Healy called "libertarian centralism": the idea of bringing about libertarian revolution by taking over central government from the progressives and using it for "good," instead for "bad" purposes — for example for imposing judicial laissez-faire instead of judicial abortion and gun control.

The main issue, therefore, is not "excessive" versus "proper" democracy, as the authors imply, but "who should govern" — the nine unelected philosopher-kings, who can strike down any state law they don't like (but not the federal laws, which they usually just rubber-stamp) or elected representatives of the people? It's as simple as that. Libertarian centralism, dreaming about the great laissez-faire revolution by the judiciary, is in its philosophical implications just another form of "enlightened" despotism.

$36.00 $30.00

And contrary to what Epstein and Bernstein say, the Founding Fathers were not concerned so much about the tyranny of the majority as the tyranny of the minority. After all, their main worry, which eventually prompted them to adopt the Bill of Rights, was how to limit and keep in check the minority in central government and protect the sovereignty of the several states. Most of the Founders were devoted to democracy no less than the people our professors criticize. They went even so far as to assert that state legislatures have a right to nullify unconstitutional federal laws. Jefferson and Madison in their Kentucky and Virginia resolutions of 1798 developed the doctrine of nullification as a "rightful remedy" (Jefferson) for the cases "when even the Supreme Court betrays us" (Madison). They knew that the only way to protect liberty was not to strengthen the central government and convert the rulers into "enlightened despots" who believe in libertarianism but to divide power, to decentralize it as much as possible. As Gene Healy said, "Jefferson understood what the followers of the new libertarian orthodoxy ignore: that who makes the decision is often as important as what is ultimately decided."

Ivan Jankovic is a PhD student in political science at Simon Fraser University in Canada and a Mises Summer Fellow 2011. He has published in Journal des Economistes et des Etudes Humaines and New Perspective on Political Economy. He is currently working on a dissertation analyzing the relationship between the compact theory of American union and classical liberalism. His blog is Man of Little Faith. Send him mail. See Ivan Jankovic's article archives.

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Barter in Prehistoric Times

Wed, 15 Feb 2012 01:39:00 -0600

[The State (1908)]

The psychological explanation of barter has brought forth the theory of the marginal utility, its greatest merit. According to this theory, the subjective valuation of any economic good decreases in proportion to the number of objects of the same kind possessed by the same owner. When even two proprietors meet, each having a number of similar articles, they will gladly barter, provided political means are barred, i.e., if both parts are apparently equally strong and well-armed, or in the very early stage, are within the sacred circle of relationship. By barter, each one receives property of very high subjective value, in place of property of very low subjective value, so that both parties are gainers in the transaction. The desire of primitive people for bartering must be stronger than that of cultured ones. For at this stage man does not value his own goods, but covets the things belonging to strangers, and is hardly affected by calculated economic considerations.

On the other hand, we must not forget that there are primitive peoples for whom barter has no attraction whatever,

Cook tells of tribes in Polynesia, with whom no intercourse was possible, since presents made absolutely no impression on them, and were afterward thrown away; everything shown them they regarded with indifference, and with no desire to own it, while with their own things they would not part; in fact, they had no conception of either trade or barter.

So Westermarck is of the opinion that "barter and traffic are comparatively late inventions." In this he stands in opposition to Peschel, who, would have it that man in the earliest known stage of development engaged in barter. Westermarck states that there is no proof

that the cave-dwellers of Perigord from the reindeer period obtained their rock-crystals, their shells from the Atlantic, and the horns of the Saiga antelope from (modern) Poland by way of barter.

In spite of these exceptions, which admit other explanations — perhaps the natives feared sorcery — the history of primitive peoples shows that the desire to trade and barter is a universal human characteristic. It can, however, take effect only when these primitive men on meeting with strangers are offered new enticing objects, since in the immediate circle of their own blood kinsmen everyone has the same kinds of property, and in their natural communism, on the average about the same amount.

Yet even then, barter, the beginning of all regular trading, can take place only when the meeting with foreigners is a peaceable one. But is there any possibility for peaceable meeting with foreigners? Is not primitive man, through his entire life, and especially at the period when barter begins, still under the apprehension that everyone of a different horde is an enemy to be feared as the wolf?

After trade is developed, it is, as a rule, strongly influenced by the "political means," "trade generally follows robbery." But its first beginnings are chiefly the result of the economic means, the outcome of pacific, not warlike, intercourse.

The international relations of primitive huntsmen with one another must not be confused with those existing either between the huntsmen or herdsmen and their peasants, or amongst the herdsmen themselves. There are, undoubtedly, blood feuds, or feuds because of looted women, or possibly because of violation of the districts set aside for hunting grounds; but these lack that strong incentive, which is the consequence of avarice alone, of the desire to despoil other men of the products of their labor. Therefore, the "wars" of primitive huntsmen are scarcely real wars, but rather scuffles and single combats, carried on frequently — as are the German student duels — according to an established ceremonial, and prolonged only up to the point of incapacity to fight, as one might say, "until claret has been drawn." These tribes, numerically very weak, wisely limit bloodshed to the indispensable amount — e. g., in case of a blood vendetta feud — and thus avoid starting new vendetta blood feuds.

For this reason, pacific relations with their neighbors on an equal economic scale are much stronger, and also freer from the incentive to use political means, both among huntsmen and among primitive peasants, than among herdsmen. There are numerous examples where the former meet peaceably to exploit natural resources in common.

While yet in primitive stages of civilization, great masses of people gather together, from time to time, at places where useful objects may be found. The Indians of a large part of America made regular pilgrimages to the flint grounds; others assembled annually at harvest time at the Zizania swamps of the lakes of the Northwest. The Australians, living scattered in the Barku district, assemble from all directions for the harvest festivals at the swamp beds of the corn bearing Marsiliacae. When the bonga-bonga trees in Queensland produce a superabundant crop, and a greater store is on hand than the tribe can consume, foreign tribes are permitted to share therein.

"Various tribes agree on the common ownership of definite strips of territory, and likewise of the quarries of phonolite for hatchets." Numerous Australian tribes have common consultations and sessions of the elders for judgment. In these, the remainder of the population form the bystanders, a custom similar to the Germanic Umstand in the primitive folk-moot.

It is but natural that such meetings should bring about barter. Perhaps this explains the origin of those "weekly fairs held by the Negroes of Central Africa in the midst of the primaeval forest wider special arrangements for the peace" and likewise the great fairs, said to be very ancient, of the fur hunters of the extreme north of the Tschuktsche.

All these things presuppose the development of pacific forms of intercourse between neighboring groups. These forms are to be found almost universally. They could very easily be developed at this period, since the discovery had not yet been made that men can be utilized as labor motors. At this stage, the stranger is treated as an enemy only in doubtful cases. If he comes with apparently peaceable intent, he is treated as a friend. Therefore, a whole code of public law ceremonies grew up, intended to demonstrate the pacific intent of the newcomer. One puts aside one's arms and shows one's unarmed hand, or one sends heralds in advance, who are always inviolable.

It is clear that these forms represent some kind of claim to hospitality, and in fact it is by this guest-right that peaceful trade is first made possible. The exchange of guest-gifts precedes, and appears to introduce, barter proper. It becomes, therefore, important to investigate the source of hospitality.

Westermarck, in his recent monumental work (1907), Origin and Development of Moral Concepts, states that the custom of hospitality results from two causes: curiosity for news from the stranger from afar, and still more from the fear that the stranger may be endowed with powers of sorcery, imputed to him just because he is a stranger. In the Bible, hospitality is recommended for the reason that one cannot know that the stranger may not be an angel. The superstitious race fears his curse (the Erinys of the Greeks) and hastens to propitiate the stranger. Having been accepted as a guest he is inviolable and enjoys the sacred right of the blood-related group, and is regarded as belonging to it during his stay. Therefore he partakes of the benefits of the aboriginal communism reigning in the group, and shares its property. The host demands and receives whatever he claims, the stranger obtains in turn what he asks for. When the peaceable intercourse becomes more frequent, the mutual giving of guest-presents may develop into a trading arrangement, because the trader gladly returns to the spot where he found good entertainment and a profitable exchange and where he is protected by the laws of hospitality, instead of seeking new places, where, often with danger to his life, he would first have to acquire the right to hospitality.

The existence of an "international" division of labor is, of course, presupposed before the development of a regular trade relation can begin. Such a division of labor exists much earlier and to a greater extent than is generally believed.

It is quite erroneous to suppose that the division of labor takes place only on a high scale of economic development. There are in the interior of Africa villages of iron-smiths, nay, of such as only turn out dart-knives; New Guinea has its villages of potters, North America its arrow-head makers.

From such specialties there develops trade, whether through roving merchants, or by gifts to one's hosts, or by peace-gifts from tribe to tribe. In North America, the Kaddu trade in bows.

Obsidian was universally employed for arrow heads and knives; on the Yellowstone, on the Snake River, in New Mexico, but especially in Mexico. Thence the precious article was distributed all over the entire country as far as Ohio and Tennessee, a distance of nearly two thousand miles.

According to Vierkandt,

From the purely home-made products of primitive peoples, there results a system of trade totally distinct from that prevailing under modern conditions.… Each separate tribe has developed special aptitudes, leading to interexchange. Even among the comparatively uncivilized Indian tribes of South America, we find such differentiations.… By such a trade, products may be distributed over extraordinary distances, not in any direct way through professional traders, but through a gradual passing along from tribe to tribe. The origin of such a trade, as Bueeher has shown, is to be traced back to the exchange of guest-gifts.

Besides this exchange of guest-gifts, a trade may grow from the peace offerings which adversaries after a fight exchange as a sign of reconciliation. Sartorius reports on Polynesia:

After a war between different islands, the peace offerings for each group were something novel; and if the present and return present pleased both parties, a repetition took place, and thus again the way for exchange of products was opened. But, these, in contrast to guest-gifts, were the bases of continuing intercourse. Here, in place of the contact of individuals, tribes and peoples met. Women are the first object of barter; they form the connecting link between strange tribes, and according to evidence from many sources, women are exchanged for cattle.

We meet here an object of trade, exchangeable even without "international division of labor." And it appears as though the exchange of women had, in many ways, smoothed the way for the traffic in merchandise, as though it had been the first step toward the peaceable integration of tribes, which accompanied the warlike integration of the formation of the State. Lippert, however, believes that the peaceful exchange of fire antedates this barter. Conceding that this custom is very ancient, he can nevertheless trace it only from rudiments of observances and of law; and since proof is no longer accessible, we shall not pursue the question further in this place.

On the other hand, the exchange of women is observed universally, and doubtless exerts an extraordinarily strong influence in the development of peaceable intercourse between neighboring tribes, and in the preparation for barter of merchandise. The story of the Sabine women, who threw themselves between their brothers and their husbands, as these were about to engage in battle, must have been an actuality in a thousand instances in the course of the development of the human race. All over the world, the marriage of near relatives is considered an outrage, as "incest," for reasons not within the scope of this book. This directs the sexual longing toward the women of neighboring tribes, and thus makes the loot of women a part of the primary intertribal relations; and in nearly all cases, unless strong feelings of race counteract it, the violent carrying off of women is gradually commuted to barter and purchase, the custom resulting from the relative undesirability of the women of one's own blood in comparison to the wives to be had from other tribes.

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Where division of labor made at all possible the exchange of goods, the relations among the various tribes would thereafter be made serviceable to it; the exogamic groups gradually become accustomed regularly to meet on a peaceful basis. The peace, originally protecting the horde of blood relations, thereafter comes to be extended over a wider circle. One example from numberless instances:

Each of the two Camerún tribes has its own "bush countries," places where its own tribesmen trade, and where, by intermarriage, they have relatives. Here also exogamy shows its tribe-linking power.

These are the principal lines of growth of peaceful barter and traffic; from the right to hospitality and the exchange of women, perhaps also from the exchange of fire, to the trade in commodities. In addition to this, markets and fairs, and perhaps also traders, were almost uniformly regarded as being under the protection of a god who preserved peace and avenged its violation. Thus we have brought the fundamentals of this most important sociological factor to the point where the political means enters as a cause to disturb, rearrange, and then to develop and affect the creations of the economic means.

Franz Oppenheimer (1864–1943) was a German-Jewish sociologist and political economist, best known for his work on the fundamental sociology of the state. His book The State: Its History and Development Viewed Sociologically was the prototype for Albert Jay Nock's writing, for Frank Chodorov's work, and even for the theoretical edifice that later became Rothbardianism. See Franz Oppenheimer's article archives.

This article is excerpted from The State: Its History and Development Viewed Sociologically (1908), chapter 4, section a, "Traffic in Prehistoric Times." Notes and citations have not been included. They may be found in the original.

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USPS: The Cursed Carriers

Tue, 14 Feb 2012 01:38:00 -0600

"The United States has a long and healthy history of entrepreneurial disobedience."

From the original conception of the United States Postal Service in the 1700s to the technologically advanced market of today, the words that enumerated to Congress the power to "establish Post Offices and post Roads" have never been more than a waste of ink.

In Uncle Sam, the Monopoly Man, William C. Wooldridge explains well the historical patterns of failure within the United States Postal Service (USPS):

More than a decade before Parson Weems immortalized the cherry tree, the United States Post Office was losing money. For most of the years since Postmaster General Thomas Osborne reported the first deficit to President George Washington, it has continued to lose money, receiving all the while less critical attention than the cherry tree it antedates. Yet the stars in their courses do not ineluctably dictate a government postal monopoly.

Early Americans saw these failures each day, so they became actors working for a change.

The United States has a long and healthy history of entrepreneurial disobedience. You can easily say that the individualistic rejection of force in the marketplace was one of the only real mechanisms of "checks and balances" that actually worked against government.

So opposed were people to these government-run postal services in the 1800s that a natural order kicked in where no jury would even think of convicting the private agencies — an "underground nullification," if you will. One of the first private American express firms was founded by William F. Harnden in 1839.

His business became very successful in the public eye, and the postmaster general, realizing that the competition hurt government revenue, began an investigation into its workings. Harnden wrote, in a letter to a Philadelphian business partner,

Receive nothing mailable. You will have no small number of Post Office spies at your heels. They will watch you very close. See that they have their trouble for their pains.

Since the service provided by Harnden's firm was classified more as "package protection" and less as "package shipment," however, there wasn't too much the government could do.

Eventually Harnden contacted Henry Wells, whose connection with Daniel Drew, a well-known steamboat magnate and competitor to Cornelius Vanderbilt, allowed for a network expansion between shippers. Henry Wells — with George E. Pomeroy and Crawford Livingston — hoped to be acknowledged as a legal alternative to the USPS, and offered to carry mail for a mere 20 percent of the government's then-current rate. The bureaucrats rejected the proposal but were subsequently forced to lower their own prices in fear of backlash from the general population in response to the detrimental protectionism.

Three years after the meeting between Harnden and Wells, individualist anarchist Lysander Spooner came up with his own plan to compete against the USPS through the creation of the American Letter Mail Company. Unlike his predecessors, Spooner didn't pretend to be in compliance with the government's postal monopoly. He made two arguments:

the Constitution didn't openly ban private carriers from voluntarily serving customers, and
he'd keep delivering the mail even if it was deemed illegal.

Spooner elaborated on the first point through his fervent pamphlet entitled The Unconstitutionality of the Laws of Congress, Prohibiting Private Mails. He writes,

If Congress cannot carry the letters of individuals as cheaply as individuals would do it, there is no propriety in their carrying them at all.…

By the old articles of Confederation, it was declared that "the United States, in Congress assembled, shall have the sole and exclusive right and power of establishing and regulating post-offices from one State to another throughout all the United States."

When the constitution came to be adopted, this phraseology was altered, and the words "sole and exclusive" were omitted. This alteration … must certainly have been intentional — and it clearly indicates that the framers of the constitution did not intend to give to Congress, under the constitution, the same "exclusive" power, that had been possessed by the Congress of the Confederation.

But this obviously purposeful alteration in wording didn't work well enough to convince the court system that his voluntary, high-quality business provided a legitimate service in the economy. In the words of Peter Schiff, "The government's going to do what it wants to do, and the courts are going to support that. The courts don't care."

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Luckily for us, Spooner continued to successfully and cheaply deliver mail for seven years before the US government shut down his operation. The 12¢ stamps sold by the USPS were no match for Spooner's 3¢ stamps, so the US government, in order to oppose the inevitable, officially declared that all city streets were to be deemed post roads, available only to the USPS in letter delivery. (The disobedience led to Spooner's more radical work 23 years later, No Treason: the Constitution of No Authority, which argued for the Constitution's invalidity as a legal contract.)

Skip ahead to the 1900s and we see that the price of a first-class stamp increased 633 percent in only 27 years, and this number is supplemented by a 10 percent speed decrease in 15 years. One would assume that, with the invention of basic email in the late 20th century, carriers would feel a stronger need to reflect the quick pace allowed by technology; the government didn't. In a policy analysis for the Cato Institute, James Bovard finds,

In 1969 it required 1.5 days on average to deliver a first-class letter. By 1982 the average first-class letter required 1.65 days for delivery, and by 1987, 1.72 days. In the quarter of 1990 before the new standards were implemented, the average had increased to l.80 days. In the quarter after the new standards began to be implemented, the average rose to l.83 days — a 1.7 percent increase that makes current average delivery 22 percent slower than 1969 delivery.

And now we see the USPS in its saddest state yet. The 2000s have wrecked its only recognizable foundations. Nearly universal access is available to various kinds of communication, so it isn't surprising that letter carrying is becoming obsolete. I don't expect many carriers to continue business as usual, but it seems to me as if the government hasn't even realized that we're living in a new age.

For the past five years in a row, the USPS has had a negative net income in the billions with a record loss of $8.5 billion in 2010, up an entire $4.7 billion from the 2009 alone. These failings easily led to the organization's recent placement on the Government Accountability Office's list of high-risk institutions. Meanwhile, private agencies like FedEx and United Parcel Service are growing fantastically each year, even with the current restrictions set against them.

Earlier last year the USPS announced the closure of nearly 3,700 post offices across the United States in one last attempt to salvage its reputation, but the $200 million it will save stands insignificant next to its deficits. Not surprisingly, the postal-workers union isn't making it easy. While labor costs represent only 32 percent and 53 percent of expenses for FedEx and United Parcel Service, respectively, they represent an astounding 80 percent for the USPS. So why isn't this negative mechanism taken into consideration?

Murray Rothbard writes in Man, Economy, and State:

The inefficiencies of government operation are compounded by several other factors. As we have seen, a government enterprise competing in an industry can usually drive out private owners, since the government can subsidize itself in many ways and supply itself with unlimited funds when desired. Thus, it has little incentive to be efficient. In cases where it cannot compete even under these conditions, it can arrogate to itself a compulsory monopoly, driving out competitors by force.

And we clearly see this phenomenon in the case of the post office. Instead of facing the real issue at hand, executives at the USPS are focusing on $50 million in "stolen items" (a mere 0.5 percent of the 2010 annual deficit) that they'd like thieves to please return. We can only hope that the post office's decision to eliminate next-day delivery for first-class mail will infuriate people to the point of paying attention to the root conflict.

It's pathetic that a government-enforced monopoly continues to lose money.

$25.00 $22.00

In every facet of its business, the USPS has either been a failure from the get-go or its value has now been swept under the rug by newer and quicker streamlines in communication. In either case, to echo Spooner, it is unfit to exist. Congressional action needs to strip down and cease the enforcement of every last private-express statute in the legal code.

Neither snow nor rain nor heat nor gloom, only privatization can keep these couriers from being replaced by real choices in the free market.

Brian Anderson is an undergraduate majoring in the biological sciences. He lives in the southeastern United States. Send him mail. See Brian Anderson's article archives.

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Further Implications of Human Action

Tue, 14 Feb 2012 01:38:00 -0600

[Man, Economy, and State (1962)]

1. The Concept of Action

The distinctive and crucial feature in the study of man is the concept of action.[1] Human action is defined simply as purposeful behavior. It is therefore sharply distinguishable from those observed movements which, from the point of view of man, are not purposeful. These include all the observed movements of inorganic matter and those types of human behavior that are purely reflex, that are simply involuntary responses to certain stimuli. Human action, on the other hand, can be meaningfully interpreted by other men, for it is governed by a certain purpose that the actor has in view.[2] The purpose of a man's act is his end; the desire to achieve this end is the man's motive for instituting the action.

All human beings act by virtue of their existence and their nature as human beings.[3] We could not conceive of human beings who do not act purposefully, who have no ends in view that they desire and attempt to attain. Things that did not act, that did not behave purposefully, would no longer be classified as human.

It is this fundamental truth — this axiom of human action — that forms the key to our study. The entire realm of praxeology and its best developed subdivision, economics, is based on an analysis of the necessary logical implications of this concept.[4] The fact that men act by virtue of their being human is indisputable and incontrovertible. To assume the contrary would be an absurdity. The contrary — the absence of motivated behavior — would apply only to plants and inorganic matter.[5]

2. First Implications of the Concept

The first truth to be discovered about human action is that it can be undertaken only by individual "actors." Only individuals have ends and can act to attain them. There are no such things as ends of or actions by "groups," "collectives," or "States," which do not take place as actions by various specific individuals. "Societies" or "groups" have no independent existence aside from the actions of their individual members. Thus, to say that "governments" act is merely a metaphor; actually, certain individuals are in a certain relationship with other individuals and act in a way that they and the other individuals recognize as "governmental."[6] The metaphor must not be taken to mean that the collective institution itself has any reality apart from the acts of various individuals. Similarly, an individual may contract to act as an agent in representing another individual or on behalf of his family. Still, only individuals can desire and act. The existence of an institution such as government becomes meaningful only through influencing the actions of those individuals who are and those who are not considered as members.[7]

In order to institute action, it is not sufficient that the individual man have unachieved ends that he would like to fulfill. He must also expect that certain modes of behavior will enable him to attain his ends. A man may have a desire for sunshine, but if he realizes that he can do nothing to achieve it, he does not act on this desire. He must have certain ideas about how to achieve his ends. Action thus consists of the behavior of individuals directed towards ends in ways that they believe will accomplish their purpose. Action requires an image of a desired end and "technological ideas" or plans on how to arrive at this end.

Men find themselves in a certain environment, or situation. It is this situation that the individual decides to change in some way in order to achieve his ends. But man can work only with the numerous elements that he finds in his environment, by rearranging them in order to bring about the satisfaction of his ends. With reference to any given act, the environment external to the individual may be divided into two parts: those elements which he believes he cannot control and must leave unchanged, and those which he can alter (or rather, thinks he can alter) to arrive at his ends. The former may be termed the general conditions of the action; the latter, the means used. Thus, the individual actor is faced with an environment that he would like to change in order to attain his ends. To act, he must have technological ideas about how to use some of the elements of the environment as means, as pathways, to arrive at his ends. Every act must therefore involve the employment of means by individual actors to attempt to arrive at certain desired ends. In the external environment, the general conditions cannot be the objects of any human action; only the means can be employed in action.[8]

All human life must take place in time. Human reason cannot even conceive of an existence or of action that does not take place through time. At a time when a human being decides to act in order to attain an end, his goal, or end, can be finally and completely attained only at some point in the future. If the desired ends could all be attained instantaneously in the present, then man's ends would all be attained and there would be no reason for him to act; and we have seen that action is necessary to the nature of man. Therefore, an actor chooses means from his environment, in accordance with his ideas, to arrive at an expected end, completely attainable only at some point in the future. For any given action, we can distinguish among three periods of time involved: the period before the action, the time absorbed by the action, and the period after the action has been completed. All action aims at rendering conditions at some time in the future more satisfactory for the actor than they would have been without the intervention of the action.

A man's time is always scarce. He is not immortal; his time on earth is limited. Each day of his life has only 24 hours in which he can attain his ends. Furthermore, all actions must take place through time. Therefore time is a means that man must use to arrive at his ends. It is a means that is omnipresent in all human action.

Action takes place by choosing which ends shall be satisfied by the employment of means. Time is scarce for man only because whichever ends he chooses to satisfy, there are others that must remain unsatisfied. When we must use a means so that some ends remain unsatisfied, the necessity for a choice among ends arises. For example, Jones is engaged in watching a baseball game on television. He is faced with the choice of spending the next hour in: (a) continuing to watch the baseball game, (b) playing bridge, or (c) going for a drive. He would like to do all three of these things, but his means (time) is insufficient. As a result, he must choose; one end can be satisfied, but the others must go unfulfilled. Suppose that he decides on course A. This is a clear indication that he has ranked the satisfaction of end A higher than the satisfaction of ends B or C.

From this example of action, many implications can be deduced. In the first place, all means are scarce, i.e., limited with respect to the ends that they could possibly serve. If the means are in unlimited abundance, then they need not serve as the object of attention of any human action. For example, air in most situations is in unlimited abundance. It is therefore not a means and is not employed as a means to the fulfillment of ends. It need not be allocated, as time is, to the satisfaction of the more important ends, since it is sufficiently abundant for all human requirements. Air, then, though indispensable, is not a means, but a general condition of human action and human welfare.

Secondly, these scarce means must be allocated by the actor to serve certain ends and leave other ends unsatisfied. This act of choice may be called economizing the means to serve the most desired ends. Time, for example, must be economized by the actor to serve the most desired ends. The actor may be interpreted as ranking his alternative ends in accordance with their value to him. This scaling of ends may be described as assigning ranks of value to the ends by the actor, or as a process of valuation. Thus, suppose that Jones ranked his alternative ends for the use of an hour of time as follows:

(First)	1. Continuing to watch the baseball game
(Second)	2. Going for a drive
(Third)	3. Playing bridge

This was his scale of values or scale of preferences. The supply of means (time) available was sufficient for the attainment of only one of these ends, and the fact that he chose the baseball game shows that he ranked that highest (or first). Suppose now that he is allocating two hours of his time and can spend an hour on each pursuit. If he spends one hour on the game and then a second hour on the drive, this indicates that his ranking of preferences is as above. The lowest-ranking end — playing bridge — goes unfulfilled. Thus, the larger the supply of means available, the more ends can be satisfied and the lower the rank of the ends that must remain unsatisfied.

Another lesson to be derived is that action does not necessarily mean that the individual is "active" as opposed to "passive," in the colloquial sense. Action does not necessarily mean that an individual must stop doing what he has been doing and do something else. He also acts, as in the above case, who chooses to continue in his previous course, even though the opportunity to change was open to him. Continuing to watch the game is just as much action as going for a drive.

Furthermore, action does not at all mean that the individual must take a great deal of time in deliberating on a decision to act. The individual may make a decision to act hastily, or after great deliberation, according to his desired choice. He may decide on an action coolly or heatedly; none of these courses affects the fact that action is being taken.[9]

Another fundamental implication derived from the existence of human action is the uncertainty of the future. This must be true because the contrary would completely negate the possibility of action. If man knew future events completely, he would never act, since no act of his could change the situation. Thus, the fact of action signifies that the future is uncertain to the actors. This uncertainty about future events stems from two basic sources: the unpredictability of human acts of choice, and insufficient knowledge about natural phenomena. Man does not know enough about natural phenomena to predict all their future developments, and he cannot know the content of future human choices. All human choices are continually changing as a result of changing valuations and changing ideas about the most appropriate means of arriving at ends. This does not mean, of course, that people do not try their best to estimate future developments. Indeed, any actor, when employing means, estimates that he will thus arrive at his desired goal. But he never has certain knowledge of the future. All his actions are of necessity speculations based on his judgment of the course of future events. The omnipresence of uncertainty introduces the ever-present possibility of error in human action. The actor may find, after he has completed his action, that the means have been inappropriate to the attainment of his end.

To sum up what we have learned thus far about human action: The distinguishing characteristic of human beings is that all humans act. Action is purposeful behavior directed toward the attainment of ends in some future period which will involve the fulfillment of wants otherwise remaining unsatisfied. Action involves the expectation of a less imperfectly satisfied state as a result of the action. The individual actor chooses to employ elements in his environment as means to the expected achievement of his ends, economizing them by directing them toward his most valued ends (leaving his least valued ones unsatisfied), and in the ways that his reason tells him are most appropriate to attain these ends. His method — his chosen means — may or may not turn out to be inappropriate.

3. Further Implications: The Means

The means to satisfy man's wants are called goods. These goods are all the objects of economizing action.[10] Such goods may all be classified in either of two categories: (a) they are immediately and directly serviceable in the satisfaction of the actor's wants, or (b) they may be transformable into directly serviceable goods only at some point in the future — i.e., are indirectly serviceable means. The former are called consumption goods or consumers' goods or goods of the first order. The latter are called producers' goods or factors of production or goods of higher order.

Let us trace the relations among these goods by considering a typical human end: the eating of a ham sandwich. Having a desire for a ham sandwich, a man decides that this is a want that should be satisfied and proceeds to act upon his judgment of the methods by which a ham sandwich can be assembled. The consumers' good is the ham sandwich at the point of being eaten. It is obvious that there is a scarcity of this consumers' good as there is for all direct means; otherwise it would always be available, like air, and would not be the object of action. But if the consumers' good is scarce and not obviously available, how can it be made available? The answer is that man must rearrange various elements of his environment in order to produce the ham sandwich at the desired place — the consumers' good. In other words, man must use various indirect means as cooperating factors of production to arrive at the direct means. This necessary process involved in all action is called production; it is the use by man of available elements of his environment as indirect means — as cooperating factors — to arrive eventually at a consumers' good that he can use directly to arrive at his end.

Let us consider the pattern of some of the numerous cooperating factors that are involved in a modern developed economy to produce one ham sandwich as a consumers' good for the use of one consumer. Typically, in order to produce a ham sandwich for Jones in his armchair, it is necessary for his wife to expend energy in unwrapping the bread, slicing the ham, placing the ham between bread slices, and carrying it to Jones. All this work may be called the labor of the housewife. The cooperating factors that are directly necessary to arrive at the consumers' good are, then: the housewife's labor, bread in the kitchen, ham in the kitchen, and a knife to slice the ham. Also needed is the land on which to have room to live and carry on these activities. Furthermore, this process must, of course, take time, which is another indispensable cooperating factor. The above factors may be called first-order producers' goods, since, in this case, these cooperate in the production of the consumers' good. Many of the first-order producers' goods, however, are also unavailable in nature and must be produced themselves, with the help of other producers' goods. Thus, bread in the kitchen must be produced with the cooperation of the following factors: bread-in-retail-shop and housewife's labor in carrying it (plus the ever-present land-as-standing-room, and time). In this procedure, these factors are second-order producers' goods, since they cooperate in producing first-order goods. Higher-order factors are those cooperating in the production of factors of lower order.

Thus, any process (or structure) of production may be analyzed as occurring in different stages. In the earlier or "higher" stages, producers' goods must be produced that will later cooperate in producing other producers' goods that will finally cooperate in producing the desired consumers' good. Hence, in a developed economy, the structure of production of a given consumers' good might be a very complex one and involve numerous stages.

Important general conclusions can, however, be drawn that apply to all processes of production. In the first place, each stage of production takes time. Secondly, the factors of production may all be divided into two classes: those that are themselves produced, and those that are found already available in nature — in man's environment. The latter may be used as indirect means without having been previously produced; the former must first be produced with the aid of factors in order to aid in the later (or "lower") stages of production. The former are the produced factors of production; the latter are the original factors of production. The original factors may, in turn, be divided into two classes: the expenditure of human energy, and the use of nonhuman elements provided by nature. The first is called labor; the latter is nature or land.[11] Thus, the classes of factors of production are labor, land, and the produced factors, which are termed capital goods.

Labor and land, in one form or another, enter into each stage of production. Labor helps to transform seeds into wheat, wheat into flour, pigs into ham, flour into bread, etc. Not only is labor present at every stage of production, but so also is nature. Land must be available to provide room at every stage of the process, and time, as has been stated above, is required for each stage. Furthermore, if we wish to trace each stage of production far enough back to original sources, we must arrive at a point where only labor and nature existed and there were no capital goods. This must be true by logical implication, since all capital goods must have been produced at earlier stages with the aid of labor. If we could trace each production process far enough back in time, we must be able to arrive at the point — the earliest stage — where man combined his forces with nature unaided by produced factors of production. Fortunately, it is not necessary for human actors to perform this task, since action uses materials available in the present to arrive at desired goals in the future, and there is no need to be concerned with development in the past.

There is another unique type of factor of production that is indispensable in every stage of every production process. This is the "technological idea" of how to proceed from one stage to another and finally to arrive at the desired consumers' good. This is but an application of the analysis above, namely, that for any action, there must be some plan or idea of the actor about how to use things as means, as definite pathways, to desired ends. Without such plans or ideas, there would be no action. These plans may be called recipes; they are ideas of recipes that the actor uses to arrive at his goal. A recipe must be present at each stage of each production process from which the actor proceeds to a later stage. The actor must have a recipe for transforming iron into steel, wheat into flour, bread and ham into sandwiches, etc.

The distinguishing feature of a recipe is that, once learned, it generally does not have to be learned again. It can be noted and remembered. Remembered, it no longer has to be produced; it remains with the actor as an unlimited factor of production that never wears out or needs to be economized by human action. It becomes a general condition of human welfare in the same way as air.[12]

It should be clear that the end of the production process — the consumers' good — is valued because it is a direct means of satisfying man's ends. The consumers' good is consumed, and this act of consumption constitutes the satisfying of human wants. This consumers' good may be a material object like bread or an immaterial one like friendship. Its important quality is not whether it is material or not, but whether it is valued by man as a means of satisfying his wants. This function of a consumers' good is called its service in ministering to human wants. Thus, the material bread is valued not for itself, but for its service in satisfying wants; just as an immaterial thing, such as music or medical care, is obviously valued for such service. All these services are "consumed" to satisfy wants. "Economic" is by no means equivalent to "material."

It is also clear that the factors of production — the various higher-order producers' goods — are valued solely because of their anticipated usefulness in helping to produce future consumers' goods or to produce lower-order producers' goods that will help to bring about consumers' goods. The valuation of factors of production is derived from actors' evaluation of their products (lower stages), all of which eventually derive their valuation from the end result — the consumers' good.[13]

Furthermore, the omnipresent fact of the scarcity of consumers' goods must be reflected back in the sphere of the factors of production. The scarcity of consumers' goods must imply a scarcity of their factors. If the factors were unlimited, then the consumers' goods would also be unlimited, which cannot be the case. This does not exclude the possibility that some factors, such as recipes, may be unlimited and therefore general conditions of welfare rather than scarce indirect means. But other factors at each stage of production must be in scarce supply, and this must account for the scarcity of the end product. Man's endless search for ways to satisfy his wants — i.e., to increase his production of consumers' goods — takes two forms: increasing his available supply of factors of production and improving his recipes.

Although it has seemed evident that there are several cooperating factors at each stage of production, it is important to realize that for each consumers' good there must always be more than one scarce factor of production. This is implied in the very existence of human action. It is impossible to conceive of a situation where only one factor of production produces a consumers' good or even advances a consumers' good from its previous stage of production. Thus, if the sandwich in the armchair did not require the cooperating factors at the previous stage (labor of preparation, carrying, bread, ham, time, etc.), then it would always be in the status of a consumers' good — sandwich-in-the-armchair. To simplify the example, let us suppose the sandwich already is prepared and in the kitchen. Then, to produce a consumers' good from this stage forward requires the following factors: (1) the sandwich; (2) carrying it to the armchair; (3) time; (4) the land available. If we assume that it required only one factor — the sandwich — then we would have to assume that the sandwich was magically and instantaneously moved from kitchen to armchair without effort. But in this case, the consumers' good would not have to be produced at all, and we would be in the impossible assumption of paradise. Similarly, at each stage of the productive process, the good must have been produced by at least more than one (higher-order) scarce cooperating factor; otherwise this stage of production could not exist at all.

4. Further Implications: Time

Time is omnipresent in human action as a means that must be economized. Every action is related to time as follows:

Figure 1

… A is the period before the beginning of the action; A is the point in time at which the action begins; AB is the period during which the action occurs; B is the point at which the action ends; and B … is the period after the end of the action.

AB is defined as the period of production — the period from the beginning of the action to the time when the consumers' good is available. This period may be divided into various stages, each itself taking a period of time. The time expended during the period of production consists of the time during which labor energy is expended (or working time) and maturing time, i.e., time required without the necessity of concurrent expenditure of labor. An obvious example is the case of agriculture. There might be six months between the time the soil is tilled and the time the harvest is reaped. The total time during which labor must be expended may be three weeks, while the remaining time of over five months consists of the time during which the crop must mature and ripen by the processes of nature. Another example of a lengthy maturing time is the aging of wine to improve its quality.

Clearly, each consumers' good has its own period of production. The differences between the time involved in the periods of production of the various goods may be, and are, innumerable.

One important point that must be emphasized when considering action and the period of production is that acting man does not trace back past production processes to their original sources. In the previous section, we traced back consumers' goods and producers' goods to their original sources, demonstrating that all capital goods were originally produced solely by labor and nature. Acting man, however, is not interested in past processes, but only in using presently available means to achieve anticipated future ends. At any point in time, when he begins the action (say A), he has available to him: labor, nature-given elements, and previously produced capital goods. He begins the action at A expecting to reach his end at B. For him, the period of production is AB, since he is not concerned with the amount of time spent in past production of his capital goods or in the methods by which they were produced.[14] Thus, the farmer about to use his soil to grow crops for the coming season does not worry about whether or to what extent his soil is an original, nature-given factor or is the result of the improvements of previous land-clearers and farmers. He is not concerned about the previous time spent by these past improvers. He is concerned only with the capital (and other) goods in the present and the future. This is the necessary result of the fact that action occurs in the present and is aimed at the future. Thus, acting man considers and values the factors of production available in the present in accordance with their anticipated services in the future production of consumers' goods, and never in accordance with what has happened to the factors in the past.

A fundamental and constant truth about human action is that man prefers his end to be achieved in the shortest possible time. Given the specific satisfaction, the sooner it arrives, the better. This results from the fact that time is always scarce, and a means to be economized. The sooner any end is attained, the better. Thus, with any given end to be attained, the shorter the period of action, i.e., production, the more preferable for the actor. This is the universal fact of time preference. At any point of time, and for any action, the actor most prefers to have his end attained in the immediate present. Next best for him is the immediate future, and the further in the future the attainment of the end appears to be, the less preferable it is. The less waiting time, the more preferable it is for him.[15]

Time enters into human action not only in relation to the waiting time in production, but also in the length of time in which the consumers' good will satisfy the wants of the consumer. Some consumers' goods will satisfy his wants, i.e., attain his ends, for a short period of time, others for a longer period. They can be consumed for shorter or longer periods. This may be included in the diagram of any action, as shown in figure 2. This length of time, BC, is the duration of serviceableness of the consumers' good. It is the length of the time the end served by the consumers' good continues to be attained. This duration of serviceableness differs for each consumers' good. It may be four hours for the ham sandwich, after which period of time the actor desires other food or another sandwich. The builder of a house may expect to use it to serve his wants for ten years. Obviously, the expected durative power of the consumers' good to serve his end will enter into the actor's plans.[16]

Figure 2

Period of Production and Consumption

Clearly, all other things being equal, the actor will prefer a consumers' good of greater durability to one of lesser, since the former will render more total service. On the other hand, if the actor values the total service rendered by two consumers' goods equally, he will, because of time preference, choose the less durable good since he will acquire its total services sooner than the other. He will have to wait less for the total services of the less durable good.

$29.00 $25.00

The concepts of period of production and duration of serviceableness are present in all human action. There is also a third time period that enters into action. Each person has a general time horizon, stretching from the present into the future, for which he plans various types of action. Whereas period of production and duration of serviceableness refer to specific consumers' goods and differ with each consumers' good, the period of provision (the time horizon) is the length of future time for which each actor plans to satisfy his wants. The period of provision, therefore, includes planned action for a considerable variety of consumers' goods, each with its own period of production and duration. This period of provision differs from actor to actor in accordance with his choice. Some people live from day to day, taking no heed of later periods of time; others plan not only for the duration of their own lives, but for their children as well.

Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher. See Murray N. Rothbard's article archives.

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Notes

[1] For further reading on this topic, the best source is the epochal work of Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949), pp. 1–143, and passim.

[2] Cf. ibid., p. 11; F.A. Hayek, "The Facts of the Social Sciences," in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 57–76; Hayek, The Counter-Revolution of Science (Glencoe, Ill.: The Free Press, 1952), pp. 25–35; and Edith T. Penrose, "Biological Analogies in the Theory of the Firm," American Economic Review, December, 1952, pp. 804–19, especially 818–19.

[3] Cf. Aristotle, Ethica Nicomachea, Bk. I, especially ch. vii.

[4] This chapter consists solely of a development of the logical implications of the existence of human action. Future chapters — the further parts of the structure — are developed with the help of a very small number of subsidiary assumptions. Cf. Appendix below and Murray N. Rothbard, "Praxeology: Reply to Mr. Schuller," American Economic Review, December, 1951, pp. 943–46; and "In Defense of 'Extreme Apriorism,'" Southern Economic Journal, January, 1957, pp. 314–20.

[5] There is no need to enter here into the difficult problem of animal behavior, from the lower organisms to the higher primates, which might be considered as on a borderline between purely reflexive and motivated behavior. At any rate, men can understand (as distinguished from merely observe) such behavior only in so far as they can impute to the animals motives that they can understand.

[6] To say that only individuals act is not to deny that they are influenced in their desires and actions by the acts of other individuals, who might be fellow members of various societies or groups. We do not at all assume, as some critics of economics have charged, that individuals are "atoms" isolated from one another.

[7] Cf. Hayek, Counter-Revolution of Science, p. 34. Also cf. Mises, Human Action, p. 42.

[8] Cf. Talcott Parsons, The Structure of Social Action (Glencoe, Ill.: The Free Press, 1949), pp. 44 ff.

[9] Some writers have unfoundedly believed that praxeology and economics assume that all action is cool, calculating, and deliberate.

[10] The common distinction between "economic goods" and "free goods" (such as air) is erroneous. As explained above, air is not a means, but a general condition of human welfare, and is not the object of action.

[11] The term "land" is likely to be misleading in this connection because it is not used in the popular sense of the word. It includes such natural resources as water, oil, and minerals.

[12] We shall not deal at this point with the complications involved in the original learning of any recipe by the actor, which is the object of human action.

[13] Cf. Carl Menger, Principles of Economics (Glencoe, Ill.: The Free Press, 1950), pp. 51–67.

[14] For each actor, then, the period of production is equivalent to his waiting time — the time that he must expect to wait for his end after the commencement of his action.

[15] Time preference may be called the preference for present satisfaction over future satisfaction or present good over future good, provided it is remembered that it is the same satisfaction (or "good") that is being compared over the periods of time. Thus, a common type of objection to the assertion of universal time preference is that, in the wintertime, a man will prefer the delivery of ice the next summer (future) to delivery of ice in the present. This, however, confuses the concept "good" with the material properties of a thing, whereas it actually refers to subjective satisfactions. Since ice-in-the-summer provides different (and greater) satisfactions than ice-in-the-winter, they are not the same, but different goods. In this case, it is different satisfactions that are being compared, despite the fact that the physical property of the thing may be the same.

[16] It has become the custom to designate consumer goods with a longer duration of serviceableness as durable goods, and those of shorter duration as nondurable goods. Obviously, however, there are innumerable degrees of durability, and such a separation can only be unscientific and arbitrary.

Street Freak

Mon, 13 Feb 2012 01:39:00 -0600

[Street Freak: Money and Madness at Lehman Brothers • By Jared Dillian • Simon and Schuster, 2011 • 368 pages]

Wall Street traders, like high-stakes poker players, are a different breed. The constant pressure, the appetite for risk, the ability to think and react in split seconds, all the while calculating odds in their heads that most can't do with an HP12C.

"These guys are a pretty weird bunch," Dr. Paul Zak says. "They're very rational and very competitive." Zak is a neuroeconomist at Claremont Graduate University who is studying the brains of traders to find out if this personality type has a certain genetic signature.

In his "Head Case" column in the Wall Street Journal, Jonah Lehrer writes that Dr. Zak and fellow Claremont neuroeconomist Steve Sapra have analyzed the genes of 60 professional traders working at five major Wall Street firms. Zak and Sapra focused on the genes known to affect the activity of dopamine.

Dopamine is a neurotransmitter in the brain that "helps to regulate decisions involving risk and reward," Lehrer writes, "allowing us to experience both the thrill of getting what we want and the pain of losing it all."

Traders who manage to last on Wall Street for a long time, "tended to hit a sweet spot of dopamine activity: their genes kept them from experiencing either very high or very low levels of the molecule," explains Lehrer. "These prosperous professionals were much more likely to have so-called Goldilocks genes, placing them solidly in the middle of the dopamine distribution."

Goldilocks is not what comes to mind as we watch the frantic activity on any trading floor. In fact, it's just the opposite, with people yelling, screaming and gesturing wildly. As Jared Dillian says in this video clip promoting his book Street Freak: Money and Madness at Lehman Brothers, "For someone who has bipolar disorder, being on the trading floor is the absolute worst place to be, because no one's going to notice that anything's wrong, because everybody is crazy." If Dillian had been working at Starbucks, his mercurial behavior might have called attention to his disorder. As is was, at Lehman, being manic, yelling and screaming, was "considered functional behavior on the trading floor."

Dillian tells his story in a fast-paced style that sweeps the reader up into the author's two worlds: the bare-knuckle world of price discovery on the trading floor, along with his descent into depression and the constant coping with his nearly debilitating obsessive-compulsive behavior. All of this makes the book hard to put down.

Street Freak is a great American success story — with a twist. A young man gets out of the Coast Guard and dreams of having a Wall Street career, working in the center of capitalism — the World Trade Center. But he doesn't have the top-tier college pedigree that paves the way to the brass ring. The competition is fierce in the Lehman Brothers training class. He has a slim chance of earning a position.

His training is rudely interrupted by 9/11 and the author must live with the memory of watching the second plane ram into the second tower right above him. Training resumes across the Hudson and would eventually include performing security-guard duties. But while his classmates don't take the menial job seriously, Dillian does, and it serves him well.

He's granted an interview and tells of reading Burton Malkiel's A Random Walk Down Wall Street, a book extolling the virtues of efficient-market theory. "I read the book," Dillian tells the interviewer, "decided it was loathsome, nihilistic, academic bullshit, and set out to spend the rest of my career proving it wrong."

Dillian gets his start in index arbitrage, only watching at first, then calculating his mentor's P&L, and finally was allowed to trade. When the firm moves back to New York, and the head man Dick Fuld abolishes business casual, the author goes on a cheap suit shopping spree at Men's Warehouse, spending for five suits what his coworkers pay for one. But his frugality put him on the wrong side of the "Lehman Handshake." (You'll have to read the book.)

The author has a gift for math, while knowing little about finance when he began. As he writes, "I just wanted to create money out of speed and pure intimidation." He says he had no idea what the market was doing, but tick by tick Dillian developed an extraordinary sense for the direction of the beast that is the futures market.

Street Freak is chalk full of market jargon and trading lingo and, occasionally, Dillian stops to explain a trade that tells you all you need to know about modern finance.

I was expressing a view, not just on interest rates but also on forward interest rates, through a cash-settled future. Furthermore, I was doing so in a nonlinear fashion, using options on futures. I'd used a derivative of a derivative to express a view on an imaginary concept. It was downright magical.

While Dr. Zak calls traders very rational, Dillian writes that to get anything done on Wall Street you have to not only act irrationally but also be insane: "Only insane people do exactly the opposite of what common sense tells you to do."

Very little of Dillian's recount of trading resembles deliberate rational thought. But perhaps there is no distinction between rational and otherwise. Ludwig von Mises wrote that there is only purposeful behavior or human action. "Praxeology does not employ the term rational," Mises wrote in Money, Method, and the Market Process, explaining that the "opposite of action is not irrational behavior, but a reactive response to stimuli on the part of the bodily organs and of instincts, which cannot be controlled by volition."

In Mises's view, economics doesn't deal with homo economicus at all, but with homo agens: man "as he really is, often weak, stupid, inconsiderate, and badly instructed."

Dillian's weaknesses overtake him. He attempts suicide unsuccessfully and later on exits the trading floor suddenly, checking himself into a psychiatric hospital. He emerges medicated but healthier, bolstered by the insight that he can write.

However, the Lithium wrecks his concentration (and sex drive) and the patterns and flows that he once saw so naturally are fuzzy and incomprehensible. He must learn to trade all over again.

$15.00 $10.00

As impregnable as its employees thought it was, Lehman Brothers was allowed to fail for its overexposure to real estate. While its trading floor was making millions, Lehman brothers amassed a real-estate portfolio that was, in Dillian's words "absolutely pornographic."

According to rumor, Dick Fuld refused an offer of $40 a share for Lehman from Korean Development Bank in its dying days. But unlike his traders, Fuld allowed his pride to get in the way of making the best trade possible.

When capitalism is allowed to work, liquidation creates new beginnings. This was the case for Lehman. The New York trading operation was bought by Barclays, and Nomura Securities purchased the overseas operations. Most everyone kept their jobs.

As for Jared Dillian, he's created the financial newsletter the Daily Dirtnap and is doing what he enjoys most.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply and Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master's degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. French teaches in the Mises Academy. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives.

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