Subjectivism and Marginal Utility Shouldn’t Be Marginalized in Economics

This entry will illustrate the subjective value theory and the theory of marginal utility, which are very important in economics. 

„Oh, you’re subjective! Be objective.“

„This is just your subjective opinion.“

These or similar statements are commonly used expressions. In this connection, the word ’subjective‘ has a negative connotation.

When we, for example, accuse a person of having a subjective opinion, we think that this person’s judgement is affected by personal views, feelings, prejudices and/or non-factual interpretations. The opposite is, of course, an objective opinion that is perceived to be based on facts or factual observations.

The term ’subjectivism‘ can be found in relation to philosophy and ethics. Among other issues, we come across the following definitions in The Cambridge Dictionary of Philosophy (1995/1999):

„‘Ethical subjectivism’ usually means the doctrine that ethical statements are simply reports on the speaker’s feelings (though, confusingly enough, such statements may be objectively true or false).“ (p. 284)

In terms of „relativism, the denial that there are certain kinds of universal truths…subjectivism…maintains that individual choices are what determine the validity of a moral principle. Its motto is, Morality lies in the eyes of the beholder.“ (p. 790).

„(S)ubjectivism, any philosophical view that attempts to understand in a subjective manner what at first glance would seem to be a class of judgments that are objectively either true or false – i.e., true or false independently of what we believe, want, or hope.“ (p. 885)

Judging from these quotations, subjectivism in philosophy and ethics emphasizes the individual’s feelings as well as his/her (subjective) perspective concerning moral principles, ethical statements and judgements. Unlike these ethical judgements, subjective, aesthetic judgements are triggered by individuals‘ responses of pleasure or displeasure.

In economics the term refers to the ’subjective theory of value‘ / ’subjective value theory‘. This theory was first developed by the Austrian economist Carl Menger, the English economist William Stanley Jevons and the French mathematical economist Léon Walras in the late 19th century.

‚It’s Up to the Consumers‘ – The Subjective Theory of Value

According to the subjective theory of value (-> here is another article about this theory), acting subjects or individuals carry out assessments, which are, in turn, expressed by their economic (trans-)actions. As consumers we are, of course, acting subjects.

We as consumers or acting subjects, thus, assess the value of a good. Correspondingly, we conceive of its utility as subjective, deciding for ourselves what is useful.

That means, determining factors for the value and the utility of goods are primarily neither any amount of labour that is required for the production of the good nor any third party observers who declare one good to be more important or useful than another. Likewise, a good’s inherent quality only plays – if at all – a subordinate role. What is crucial for the subjective value theory are the consumers‘ subjective views and demands.

Besides a variety of demands, we as consumers generally have numerous and subjective goals. In order to achieve our desired ends, we choose means and evaluate the suitability of the chosen means. Such an evaluation depends on how much we value particular aims.

‚Why Do People Dive for a Gold Treasure ?‘ – The Importance of a Market System

However, the means do not determine our goals as the following example demonstrates: a hidden gold treasure in the sea is not valuable because humans or a particular person  dive for it but because gold is valuable for many people. At this point, we need to be aware of the basic principles of a market (economy).

We can basically define a (free) market economy as the ‘collection of (voluntary) exchanges between buyers and sellers’. The famous Austrian economist Friedrich August von Hayek suggested the neologism ‘catallaxy’ as a name for ‘the order of the market which spontaneously forms itself’. It comes from the Greek verb ‘kattallattein’ and means in English ‘to exchange’, ‘to admit into community’ and ‘to change from enemy into friend’.

Accordingly, economic phenomena, in the narrower sense, emerge, when people on a market interact with each other or with strangers and, in this way, prefer exchange to violence since they recognize exchange as an activity for their mutual benefit. People, strictly speaking, expect to gain (subjective) benefits from exchanging their property and other goods with one another.

Let’s return to our example of the gold treasure. Although this person might have various different reasons to dive for the treasure, within the framework of a market or an exchange system he/she is certainly driven by an additional motivation. Because of the fact that many other people subjectively value gold, the possession of the gold treasure enables him/her to offer it in the expectation to receive an appropriate compensation or a valuable consideration.

‚It All Boils Down to the Resulting Product‘ – The Priority of Production Results and the Prior Relevance of Judgements by Acting Subjects

Moreover, within the framework of a market the utility we expect of a good or service is normally independent of production costs or efforts. On a market – where we usually encounter strangers – we rather prioritize production results. For instance, when you do not like a particular dish, your are hardly interested in how long the cook took to prepare it and how many ingredients he/she used.

Taste is subjective but not arbitrary. Despite various moods and other unpredictable/unknown factors we can frequently predict what human beings like or need since our predictions are based on experiential expectations. Nonetheless, the only primarily relevant judgement of taste is the one the acting subject makes.

This subjectivity/subjectivism makes economics difficult. We cannot look into people’s mind. Yet, we have one advantage: We can look into our own mind to see that we are not objects that are controlled from outside but subjects that are in control of our actions.

As mentioned above, the basis for each consumer’s demand is what he/she subjectively needs and subjectively considers useful. Apart from this, consumers not only make subjective judgements about goods and services as such but also about goods and services in particular situations. For the consumer a specific good or service is in some situations more useful than another good (or service), though he/she regards the latter in general as valuable.

Consequently, the subjective judgement about utility varies, even for the same consumer, whose judgement is affected, amongst other aspects, by what and how much he/she already possesses. In this context, we will now address related issues – marginalism and marginal utility. Like subjectivism, marginal utility should not be marginalized in economics.

‚Everything But Marginal‘ – The Meaning of Marginal Utility

Marginalism is an economic theory or perspective that centers around the ‚margin‘ of economic activities, changes and dynamics. The theory, roughly speaking, tries to explain the difference in the value of goods and services by pointing to their incremental or marginal utility.

With regard to this theory, the total utility does not take centre stage. Instead of comparing, for instance, entire classes of goods against one another, people rather value goods unit by unit. Hence, marginal utility represents the subjective amount of satisfaction or the subjective enjoyments you get when you possess, consume or use an additional unit of a good or a service.

Marginal utility, to put it more precisely, is actually the utility of the relevant unit of goods that is decisive for an economic action. Mostly, this relevant unit is the last one that is added to a particular volume of goods or the first one of a specific volume of goods that is given up.

Regardless of whether we place a high value on water as such or have never thought about this, the marginal utility of your first or sometimes another glass of water is higher, if you are thirsty. By contrast, after the first glass of water diminishes your thirst, the marginal utility of additional glasses of water is, needless to say, lower.

Broadly speaking, marginal utility decreases dependent on how much we have of a specific good. To clarify this with another example, imagine a farmer who harvests wheat. If he/she is not in possession of any wheat, the first sack of wheat has a high significance for the farmer because it might save him/her from starvation. Then, if the farmer’s survival is guaranteed, he/she can use the rest of the wheat for other purposes.

Whereas the first sack of wheat helps the farmer survive (or, in other words, achieve the most important aim), additional sacks of wheat give him/her the possibility to reach less important goals. For instance, by storing the other units of wheat, the farmer can make provisions for the future. Or, he/she might decide to exchange the last unit/s of wheat – which is/are added to the total amount of wheat – for a unit of a new and different good that has a higher value for him/her.

These examples of the bottles of water and the farmer’s sacks of wheat illustrate the law of diminishing marginal utility: if the total quantity of a good increases, the marginal utility of a successive unit or the last added unit of this good diminishes. As early as the 19th century the German economist Hermann Heinrich Gossen (1810-1858) summed this up in the first of his laws of economics:

Gossen’s First Law: “The amount of one and the same enjoyment diminishes continuously as we proceed with that enjoyment without interruption, until satisfaction is reached.”

After the presentation of the law of diminishing marginal utility or Gossen’s First Law, we will turn to the ‚water-diamond paradox‘ which is repeatedly brought up in relation to marginal utility.

‚Where Are Our Priorities ?‘ – The Water-Diamond Paradox

The water-diamond paradox deals with the different values of water and diamonds or a diamond. At first glance, questions regarding their value in use and questions of where our priorities are seem easy to answer. In contrast to mere luxury items like diamonds, water is vital for life.

Paradoxically, as far as their value in exchange is concerned, a bottle of water has a low price tag and water is served for free in restaurants, while diamonds are very high-priced. Simply put, the water-diamond paradox results from the difference between two ways to ‚measure‘ the value of goods and items – the distinction between value in use and value in exchange.

Economists explain this paradox by means of water’s and diamonds‘ marginal utility. That is, in normal life we do not face the tradeoff of the total utility of water versus the total utility of diamonds, or we never have to choose between all the existing water and all the existing diamonds. If this was the case, our priorities would be clear: we would undoubtedly pick the water.

The point that matters is the incremental or marginal utility of, for instance, having either another bottle of water or another carat of a diamond, irrespective of their value in use. When we look at the real world, there is a plentiful supply of water so that a bottle of water can be replaced easily.

A different situation appears in terms of diamonds since, as opposed to water, these objects are far, far more scarce. It is altogether tremendously difficult (and costly) to replace a diamond ring. Therefore, compared to another bottle of water the marginal utility of another carat of a diamond is greater. Simultaneously, the scarcity of diamonds accounts for diamonds‘ high value in exchange or their high market price.

We can also apply these principles to the ‚value‘ of products and the ‚value‘ of labour. Some people might complain about the fact that the latest gaming console is far more expensive than, say, a copy of the Holy Bible or the fact that a professional athlete often earns millions, whereas, for example, a math teacher receives a much smaller salary.

Such people might additionally ask the question of where our priorities lie. This question refers to moral values and/or the ’social value‘. Nevertheless, it leaves out the value in exchange as well as the concept of marginal utility.

All in all, it is easier to replace copies of Holy Bibles and math teachers than gaming consoles and professional athletes, who may be responsible for boosting ticket sales or increasing advertising revenue. Our choice in the real world is not between the total utility of gaming consoles and the total utility of Holy Bibles or between all the professional athletes and all the math teachers. We all should take this into account.

Sources:

I used introductory books by the American economists Robert P. Murphy and Thomas Sowell as well as books by the Austrian economist and philosopher Rahim Taghizadegan. The examples are taken from their works. Apart from these books, the above mentioned The Cambridge Dictionary of Philosophy and a book by Stephen Gaukroger about objectivity were helpful. 

 

 

Simon de Montfort – ‚The Father of Parliament‘

On the 20th of January, 753 years ago, Simon de Montfort (1208-65), 6th Earl of Leicester, summoned a parliament to meet at Westminster Hall. Historians have traditionally regarded that assembly as the first English Parliament or the first session of Parliament, even though the origins of Parliament can be traced back to the 12th century, when King’s councils were held.

However, King’s councils and previous assemblies had been, so to speak, elite gatherings between the King, barons, bishops and the King’s chosen advisors. What was particularly striking about de Montfort’s parliament was that he invited directly elected representatives (i.e. knights and burgesses) from every shire and major town in England. De Montfort’s parliament, thus, not only represented a unique event in Europe at that time but also a turning point for democracy.

We can justly claim that on the 20th of January 1265 the House of Commons was born. Correspondingly, Simon de Montfort deserves the title of ‚Father of Parliament‘. Although this event constituted a milestone for British democracy, it is not well-known. The same is true for the key character.

A Controversial Figure – A Few Notes on Simon de Montfort

Ever since the Frenchman Simon de Montfort has been a controversial figure. Some have praised him as a hero, or more than a hero. For instance, he has sometimes been treated as a ‚political saint‘ and a ‚martyr for justice‘.

Others have viewed him in a more negative light. According to the English medieval historian F.M. Powicke (1879-1963), for example, he was a stubborn fanatic and a political crusader. The Dictionary of British History closes the entry about Simon de Montfort with the following lines:

„What does seem clear is that Simon was no great radical or social reformer. Rather, he accepted the social order of his day and took support from whatever quarter he could.“ (p. 444)

‚Doing God’s Work‘

Simon de Montfort, nevertheless, remains an important historical figure. At the battle of Lewes between the armies of de Montfort and King Henry III in 1264, his forces, though outnumbered, defeated the royal army. Afterwards, both King Henry and his heir, the Prince of Wales (the future King Edward I), were taken prisoner. Therefore, Earl Simon de facto became the most powerful man in England, calling the extraordinary January Parliament in 1265.

In the same year, he was eventually beaten by royalist forces at the battle of Evesham. Here the victorious royalists killed him and dismembered his body. Despite the fact that he was trapped, he did not flee since he had a rigid discipline.

Generally speaking, he was convinced that he was doing God’s work. Apart from this, a BBC article states as follows:

„He was strongly influenced by churchmen who taught that great men should be concerned with the poor and that a ruler should benefit wider society. In his will of 1259, he admitted to having concerns that he may have oppressed peasants on his lands.“

The site of his death, appropriately enough, turned into a place of pilgrimage for ordinary people.

In addition to the ‚Dictionary of British History‘ and the BBC article ‚Simon de Montfort: The turning point for democracy that gets overlooked‘, Daniel Hannan’s excellent book ‚How We Invented Freedom & Why It Matters‘ (2013) and the 2nd episode of the BBC documentary ‚Michael Wood’s The Story of England‚ (2010; approx. 34:00-47:30) were very helpful. 

Die (Un-)Möglichkeit von Wirtschaftsrechnungen: Warum der Sozialismus – im Vergleich zur freien Marktwirtschaft – scheitern muss, oder warum Preise wichtig sind

Die freie Marktwirtschaft ist sicherlich für den hohen Lebensstandard im Westen verantwortlich. Aber der Kapitalismus hat immer viele Debatten ausgelöst. Besonders in Wirtschaftskrisen ist die kapitalistische oder freie Marktwirtschaft häufig das Ziel von Angriffen.

Mitglieder von extrem linken Parteien oder Gruppierungen kritisieren beispielsweise nicht nur Banker, Manager oder Spekulanten, sondern lehnen auch unser kapitalistisches System gänzlich ab, welches sie vorschlagen, mit einem sozialistischen System zu ersetzen. Dieser Vorschlag ist allerdings geradezu absurd, weil aus ökonomischer Sicht Sozialismus zum Scheitern verurteilt ist.

Bereits 1920 verdeutlichte der Ökonom Ludwig von Mises die Defizite eines sozialistischen Systems in seinem Artikel „Wirtschaftsrechnung im sozialistischen Gemeinwesen“. Für ihn bietet die sozialistische Wirtschaft – im Gegensatz zu einem kapitalistischen System – keine geeignete Basis für ‚Wirtschaftsrechnungen’.

Die sozialistische Wirtschaft und ihre ernsthaften Probleme

In Bezug auf den Sozialismus müssen wir gewisse Merkmale sowie Bedingungen voraussetzen. So würde in einem (reinen) sozialistischen System das „Gemeinwesen“ (z. B. in Form des Staates) alle Produktionsfaktoren besitzen. Es würde sozusagen die Kontrolle über alle Faktoren haben (d.h. Arbeitskräfte, natürliche Ressourcen, Kapital usw.), die für die Produktion von Waren und Dienstleistungen notwendig sind. Unter diesen Bedingungen würden sozialistische Unternehmen ernsthaften Problemen gegenüberstehen.

Generell würde im sozialistischen System kein Markt für Produktionsmittel/Ressourcen existieren, die wiederum nicht zu Austauschobjekten werden. Unternehmen oder die Menschen allgemein könnten mit anderen Worten nicht Geld gegen Kapitalgüter, Fahrzeuge, Grundstücke oder andere Dinge eintauschen. Dementsprechend würde es in der sozialistischen Wirtschaft keine Preisbildung in Zusammenhang mit Kapitalgütern oder Ressourcen geben, obwohl Preise von grundlegender Wichtigkeit in einer Wirtschaft sind.

Die ‚tragende’ Rolle von Preisen

Um die Bedeutung von Preisen anschaulich aufzuzeigen, ist es ratsam, deren Eigenschaften in einer freien Marktwirtschaft zu beschreiben, da sie sich in diesem System frei bilden können. Eine freie Marktwirtschaft gleicht in gewisser Weise ‚der Gesamtheit der freiwilligen Tauschaktivitäten von Käufern und Verkäufern’. Hier herrschen die Gesetze von Angebot und Nachfrage. Als Tauschmedium für wirtschaftliche Transaktionen verwenden die Menschen selbstverständlich Geld in verschiedenen Formen (Bargeld, Kreditkarten usw.).

Preise in der freien Marktwirtschaft stellen eigentlich Signale oder Botschaften dar. Sie übermitteln die relative Knappheit von Gütern und Dienstleistungen. Wenn zum Beispiel ein Produkt einen hohen Preis hat, ist es knapp, wohingegen eine Ware mit einem geringen Preis üppig vorhanden ist. Preise sind daher nicht willkürlich oder chaotisch. Jedoch schwanken sie natürlich in einer Marktwirtschaft, indem sie auf Angebot und Nachfrage reagieren. Zusätzlich passen sie sich verändernden Bedürfnissen und Knappheitsbedingungen an.

Eine weitere äußerst wichtige Funktion in diesem Zusammenhang bezieht sich auf die Verteilung oder Allokation von Ressourcen. Dies bedeutet, dass Preise – durch deren Reagieren auf Angebot und Nachfrage und/oder Knappheitsbedingungen – eine ‚tragende’ Rolle dabei spielen, Ressourcen ihrem produktivsten Gebrauch zuzuführen. Zum Beispiel ‚bestimmen’ Preise wo eine bestimmte Ressource benötigt wird, wie viel von jeder Ressource gebraucht wird und wie fertige Produkte ihre Abnehmer finden.

Die Auswirkungen von Preisen auf Konsumenten und Produzenten

Daneben lohnt sich ein Blick auf die Konsumenten sowie Produzenten. Märkte, die durch Preise koordiniert werden, geben generell Konsumenten die Möglichkeit, anderen Menschen zu ‚kommunizieren’, was und wie viel sie wovon verlangen, und wie viel sie bereit sind, für ein bzw. mehrere Produkte zu bezahlen oder zu bieten.

Gleichzeitig signalisieren Produzenten, was sie im Tausch gegen Geld (oder gegen andere Kompensationsmittel) anbieten oder verkaufen. Somit leiten die durch Preise bestimmten Märkte Konsumenten und Produzenten, deren Verhalten auch beeinflusst wird.

Ein von Preisen beherrschtes System ermöglicht Konsumenten wie Produzenten verantwortliche ökonomische Entscheidungen zu treffen. Stellen Sie sich vor, Sie als Konsument beabsichtigen, einen teuren Luxusartikel zu kaufen. Bevor sie für diesen hochpreisigen Artikel viel Geld ausgeben, würden Sie gewiss sicherstellen, dass für ihre anderen Bedürfnisse gesorgt ist.

Versetzen Sie sich nun in einen Produzenten. (Oder vielleicht sind Sie sogar einer.) Wieder dienen Preise als Orientierungspunkte. Obwohl Produzenten, realistisch gesehen, überhaupt nicht wissen können, was sich zahlreiche Konsumenten wünschen, deuten Preise an, was produziert werden muss oder wo Ressourcen eingesetzt werden sollen. Dies bringt uns zu anderen, aber gleichzeitig damit verbundenen, Sachverhalten – Gewinne und Verluste.

Die Bedeutung von Gewinnen und Verlusten

Denken Sie nun an folgendes Szenario: Sie sind Autohersteller, der Fahrzeuge aus einer bestimmten Kombination von Komponenten produziert (Model a). Genau genommen kauft Ihr Unternehmen während des Produktionsprozesses besondere Teile oder Ressourcen von anderen Unternehmen (z. B. Zulieferern), gebraucht eigene, selbstgefertigte Komponenten und lässt die Autos des Models a von den von Ihnen angestellten Arbeitern zusammensetzen. Folglich fallen Produktionskosten an.

Sie verkaufen schließlich die Autos für einen Preis, der nicht nur die Produktionskosten abdeckt, sondern es Ihnen potenziell auch gestattet, einen Gewinn zu erzielen. Nehmen wir an, die Fahrzeuge verkaufen sich gut. Stellen Sie sich aber außerdem vor, Sie produzieren andere Typen von Autos mit einer unterschiedlichen Kombination von Ressourcen (Model b) in einem Produktionsprozess, der komplizierter und teurer ist. Sie bieten dann die Autos des Models b zu einem höheren Preis an. Doch die Autos finden keinen Absatz.

Infolgedessen müssen Sie die Preise für das Model b soweit wie möglich senken, um den Verkauf anzukurbeln, selbst wenn Sie dabei einen Verlust hinnehmen sollten. Falls Sie nämlich die Autos nicht verkaufen würden und damit die hohen Produktionskosten nicht abdecken könnten, würde Ihnen ein noch größerer Verlust drohen. Zukünftig würden Sie sicherlich das Gewinn abwerfende Model a weiterhin herstellen, während Sie damit aufhören würden, wertvolle Ressourcen in die Produktion des unprofitablen Models b zu stecken.

Zusammenfassend zeigen diese Szenarien die Bedeutung der Gewinne und Verluste, weil Anreize dadurch generiert werden. Darüber hinaus haben wir etwas über die große Wichtigkeit von Preisen im Produktionsprozess sowie bei der Verwendung von Ressourcen erfahren. Insgesamt bilden Preise zusammen mit der Aussicht auf Gewinne und der Gefahr vor Verlusten, Ludwig von Mises zufolge, die Grundlage für eine ‚Wirtschaftsrechnung’. Allerdings sind solche Wirtschaftsrechnungen in einem (reinen) sozialistischen System unmöglich.

‚Tappen im Dunklen’ vs. vernünftiges Wirtschaften, oder das Schicksal des sozialistischen „Gemeinwesens“ vs. die Möglichkeiten des freien Marktes

Wie von Mises herausstellt, würde es in einer sozialistischen (d.h. von einem „Gemeinwesen“ kontrollierten) Wirtschaft völlig an einer freien Preisbildung mangeln. Das Fehlen von Marktwirtschaftspreisen für Kapitalgüter oder Ressourcen bedeutet zugleich das Fehlen von Orientierungspunkten (bezüglich der Verwendung von Ressourcen) und Anreizen, die durch die Hoffnung auf Gewinne und die Gefahr vor Verlusten entstehen. Folglich würde ein sozialistisches System keine Basis für eine Wirtschaftsrechnung bieten. Dies würde, um von Mises’ Worte zu zitieren, zum ‚Tappen im Dunklen’ führen.

Sozialistischen Systeme wie das der Sowjetunion waren tatsächlich vom Staat kontrolliert. In ihnen wurden auch Preise durch zentrale Planer festgelegt. Aufgrund des Fehlens von Preisbildungen im Zusammenhang mit Angebot und Nachfrage konnten weder sozialistische Planer noch sowjetische Unternehmen die Produktionskosten abschätzen. Außerdem konnten sie nicht auf Grundlage einer Gewinn-Verlust-Rechnung kalkulieren, ob Ressourcen oder eine Kombination aus diesen effizient eingesetzt wurden.

Dagegen eröffnet eine freie Marktwirtschaft eine Vielzahl an Möglichkeiten. So sind hier die Produktionsmittel nicht in der Hand eines Gemeinwesens oder des Staates, sondern in den Händen privater Unternehmer. Sie und ihre Unternehmen erleiden nicht das Schicksal von sozialistischen Planern, da es Marktwirtschaftspreise sowie einen Markt für Kapitalgüter oder Produktionsmittel gibt, welche daher zu Austauschobjekten werden.

Durch das Vorhandensein eines Marktes und von Preisen für Ressourcen wird eine Wirtschaftsrechnung durchführbar. Laut von Mises gestattet die Möglichkeit einer solchen Rechnung ein vernünftiges Wirtschaften.

Neben diesen Wirtschaftsrechnungen ist ein weiteres bedeutendes Merkmal von freien Märkten das Vorhandensein von Konkurrenz. Da Unternehmer oder Unternehmen auf einem freien Markt miteinander konkurrieren, ist es für private Unternehmer erforderlich, aus verschiedenen Kombinationen von Ressourcen zu wählen, um sie am produktivsten zu verwerten und Kosten zu sparen. Gewinne und Verluste signalisieren ihnen schließlich, ob sie die Ressourcen auf effiziente Weise eingesetzt haben.

Anmerkungen zur Literatur: Neben dem Artikel „Wirtschaftsrechnung im sozialistischen Gemeinwesen“ habe ich beim Verfassen dieses Textes Einführungsbücher von den amerikanischen Ökonomen Thomas Sowell und Robert P. Murphy zu Hilfe genommen.

The (Im-)Possibility of Economic Calculations: Why Socialism Must Fail in Contrast to a Free Market Economy, or Why Prices Are Important

The free market economy has undeniably succeeded in raising the standards of living in the West. But capitalism has always generated numerous debates. Especially during economic crises, the capitalist or free market economy is frequently the target of attacks.

Members of extreme left-wing parties or organisations in Western countries, for instance, not only criticise bankers, managers and speculators but also reject our capitalist system altogether, which they suggest to replace with a socialist system. Such a suggestion is well-nigh absurd because, in economic terms, socialism is doomed to failure.

As early as 1920 the economist Ludwig von Mises gave a good explanation for the deficiencies of a socialist system in his article “Economic Calculation in the Socialist Commonwealth”. For him a socialist economy, in contrast to a capitalist system, does not provide an appropriate basis for ‘economic calculations’.

A Socialist Economy and Its Serious Problems

With regard to socialism, we have to take certain features as well as conditions for granted. In a (pure) socialist system the “commonwealth” (e.g. in the form of the state) would own all of the resources and/or means of production. It would be, so to speak, in control of all the factors (i.e. labour, natural resources, real capital etc.) for the production of goods and services. Under these conditions, socialist enterprises would face serious problems.

Generally speaking, a socialist system would not have a market for resources, which, in turn, would not become objects of exchange. Enterprises or people, in other word, could not trade money for capital goods, vehicles, plots of land and/or other items. Correspondingly, in a (pure) socialist economy there would be no price formation in connection with capital goods or resources, even though prices are vitally important in an economy.

The Vital Role of Prices

To illustrate the importance of prices, it is useful to depict their characteristics in a free market economy because of the fact that in this economic system they can float freely. A free market system represents, so to speak, ‘the collection of voluntary exchanges of buyers and sellers’. What prevails are the laws of supply and demand. As a medium of exchange for their economic transactions people, of course, use money in different forms (cash, credit cards etc.).

Within a free market system prices basically constitute signals or messages. They convey the relative scarcity of goods and services. Simply put, if a product has a high price tag, it is scarce, whereas a product with a low price tag is plentiful. Prices are, therefore, not arbitrary, random or chaotic. Nevertheless, they, needless to say, fluctuate in a market economy by responding to supply and demand in addition to adapting to changing needs and conditions of scarcity.

Another crucial function, in this context, refers to the allocation of resources. That is, through their responses to supply and demand or conditions of scarcity prices play a vital role in allocating resources to the most productive uses. They determine, for example, where a particular resource is needed, how much of each resource is used and how resulting products are supplied to millions of consumers.

The Impact of Prices on Consumers and Producers

Apart from this, it is worth looking at consumers as well as producers. In general, price-coordinated markets give consumers the opportunity to ‘communicate’ to other people what and how much they desire and, additionally, how much they are willing to pay or offer for a particular product or commodities.

Producers, at the same time, signal to consumers what they want to supply or sell in exchange for money or another form of compensation. Consequently, price-coordinated markets guide both consumers and producers, whose behaviour is also affected.

A price-coordinated system enables consumers and producers to make responsible economic decisions. Imagine you, as a consumer, intend to purchase an expensive luxury article. Before spending a lot of money on this high-priced item, you would certainly ensure that your other needs are satisfied or taken care of.

Now try to empathize with a producer. (Or, perhaps, you are one.) Again prices serve as points of orientation. Although producers cannot realistically know what numerous different consumers desire, prices indicate what needs to be produced or where resources should be employed. This brings us to other but related issues – profits and losses.

The Significance of Profits and Losses

Consider the following scenario: You are a car manufacturer, producing cars with a particular combination of features (model a). More precisely, during the production process your enterprise purchases specific parts or resources from other companies, utilizes self-made components and has the cars of model a assembled by your employed workers. Hence, production costs incur.

You, eventually, sell the cars for a price that not only covers the production costs but also allows you to turn a profit. Let’s assume they sell well. Also imagine you produce other types of cars with a different combination of features (model b) in a production process that is more complicated and expensive. You, then, offer the cars of model b for a higher price, but they sell badly.

As a result, you would have to reduce the prices for model b to whatever level was necessary to stimulate sales, even if you took a loss because by not selling the unsold cars and, thus, not covering the high production costs, you would be in danger of incurring a bigger loss. In the future, you would surely continue to manufacture the profit-yielding model a, while you would stop putting your resources into the production of the unprofitable model b.

These scenarios, in sum, show the significance of the prospect of profits and threat of losses since they create incentives. Furthermore, we learned about the vital importance of prices in the production process as well as in the use of resources. Prices together with profits and losses form the foundations for what Ludwig von Mises calls an “economic calculation”. However, such a calculation would be impossible in a (pure) socialist economic system.

Groping in the Dark vs. Reasonable Economic Management, or the Fate of Socialist “Commonwealths” vs. the Opportunities of a Free Market Economy

A “commonwealth”-controlled socialist economy, as von Mises points out, would completely lack free price formation. The absence of free market prices for capital goods or resources entails the absence of points of orientation (regarding the use of these resources) and incentives, which are provided by the hope for profits and the threat of losses. Accordingly, a socialist system would have no basis for an economic calculation. This would result in –  to quote von Mises’s words – ‘groping in the dark’.

Socialist systems like the one in the former Soviet Union were, in fact, state-controlled. In these economies prices were also set by central planners. Due to the absence of price formation in response to supply and demand, neither socialist planners nor Soviet enterprises could estimate the production costs. Moreover, they could not calculate on the basis of a profit-and-loss account whether resources or a certain combination of them had been used efficiently.

By contrast, the free market economy opens up various possibilities. Here the means of productions are not owned by “a commonwealth” (e.g. in the form of the state) but are in the hands of private entrepreneurs. These people and their enterprises do not befall the fate of socialist planners because there are free market prices for resources and a market for capital goods or means of production, which become objects of exchange.

Through the existence of a market and prices for resources, an economic calculation is feasible. According to von Mises, the possibility of these calculations allows for reasonable economic management.

Alongside these economic calculations, another important feature concerning free market economies is the existence of competition. The fact that they compete against other entrepreneurs or enterprises requires private entrepreneurs to choose among different combinations of resources to use them productively and to save costs. Profits and losses signal them whether they employed the resources in an efficient way.

 

Parts of this text are only loosely based on von Mises’s article. In addition to this, I used introductory books by the American economists Thomas Sowell and Robert P. Murphy. 

Introduction / Einführung

„There are few words which are used more loosely than the word „Civilization.“ What does it mean? It means a society based upon the opinion of civilians. It means that violence, the rule of warriors and despotic chiefs, the conditions of camps and warfare, of riot and tyranny, give place to parliaments where laws are made, and independent courts of justice in which over long periods those laws are maintained. That is Civilization – and in its soil grow continually freedom, comfort, and culture. When Civilization reigns, in any country, a wider and less harassed life is afforded to the masses of the people. The traditions of the past are cherished, and the inheritance bequeathed to us by former wise or valiant men becomes a rich estate to be enjoyed and used by all.“    Winston Churchill, 1938

Hello and welcome to my bilingual blog. My name is Nils Zumbansen, Ph.D.

The above quote by the famous British statesman Winston Churchill indicates what my blog is about. It is about civilization. To put it more precisely, it is about Western civilization. So topics will range from historical issues to current affairs. In this context, emphasis will be placed on ‚the Anglosphere‘, even though I’m German. 😉

James C. Bennett defines the Anglosphere as follows:

„To be part of the Anglosphere requires adherence to the fundamental customs and values that form the core of English-speaking cultures. These include individualism, the rule of law, honoring contracts and covenants, and the elevation of freedom to the first rank of political and cultural values.“

I’m especially interested in British history, the British legal system, the concept of liberty and American politics. Moreover, my blog will deal with narratives and stories (i.e. literature, films as well as TV shows).

However, I will not only focus on these issues, but also on topics that are related to Western civilization (and, of course, other civilizations) – church history, Christianity, economic principles and the history and philosophy of science…And, occasionally, I will write about my own country.

I hope, I can do this, if you know what I mean. :/

First of all, I will publish my articles in English and, then, I will translate them into German.

——

Hallo,

ich begrüße Sie/euch ganz herzlich. Mein Name ist Nils Zumbansen.

Dies ist ein bilinguales Blog. (Sehr viele Leute schreiben, „bilingualer Blog“.) Hier werden üblicherweise zuerst englische Texte veröffentlicht, die ich dann aber meistens ins Deutsche übersetzen werde.

Ich habe meine Doktorarbeit über die Bürgerkriege in Britannien (im 17. Jh.) geschrieben. Aus diesem Grund bin ich sehr an britischen Themen interessiert.

Ferner beabsichtige ich aber, über viele verschiedene Themen zu schreiben, die sich mit der westlichen Welt – und ganz besonders mit der englischsprachigen Welt –  beschäftigen. Sie beziehen sich auf die Vergangenheit und die Gegenwart.

…Und ich werde auch über Deutschland schreiben.