STUDY GUIDE TO MAN, ECONOMY, AND STATE A TREATISE ON ECONOMIC PRINCIPLES WITH POWER AND MARKET GOVERNMENT AND THE ECONOMY The Mises Institute dedicates this volume in deepest gratitude to Mr. Paul C. Reinhard. STUDY GUIDE TO MAN, ECONOMY, AND STATE A TREATISE ON ECONOMIC PRINCIPLES WITH POWER AND MARKET GOVERNMENT AND THE ECONOMY SCHOLAR’S EDITION MURRAY N. ROTHBARD ROBERT P. M URPHY Ludwig von Mises Institute AUBURN, ALABAMA Copyright 2006 by Ludwig von Mises Institute All rights reserved. Written permission must be secured from the publisher to use or reproduce any part of this book, except for brief quotations in critical reviews or articles. Published by the Ludwig von Mises Institute 518 West Magnolia Avenue, Auburn, Alabama 36832-4528. ISBN-13: 978-1-933550-00-8 ISBN-10: 1-933550-00-7 CONTENTS INTRODUCTION . .vii MAN, ECONOMY, AND STATE CHAPTER 1— FUNDAMENTALS OF HUMAN ACTION . .1 CHAPTER 2— DIRECT EXCHANGE . .15 CHAPTER 3— THE PATTERN OF INDIRECT EXCHANGE . .27 CHAPTER 4— PRICES AND CONSUMPTION . .39 CHAPTER 5— PRODUCTION: THE STRUCTURE . .55 CHAPTER 6— PRODUCTION: THE RATE OF INTEREST AND ITS DETERMINATION . .69 CHAPTER 7— PRODUCTION: GENERAL PRICING OF THE FACTORS . .81 CHAPTER 8— PRODUCTION: ENTREPRENEURSHIP AND CHANGE . .93 v vi Study Guide to Man, Economy, and State with Power and Market CHAPTER 9— PRODUCTION: PARTICULAR FACTOR PRICES AND PRODUCTIVE INCOMES . .107 CHAPTER 10— MONOPOLY AND COMPETITION . .121 CHAPTER 11— MONEY AND ITS PURCHASING POWER . .135 CHAPTER 12— THE ECONOMICS OF VIOLENT INTERVENTION IN THE MARKET . .155 POWER AND MARKET CHAPTER 1— DEFENSE SERVICES ON THE FREE MARKET . .175 CHAPTER 2— FUNDAMENTALS OF INTERVENTION . .181 CHAPTER 3— TRIANGULAR INTERVENTION . .189 CHAPTER 4— BINARY INTERVENTION: TAXATION . .203 CHAPTER 5— BINARY INTERVENTION: GOVERNMENT EXPENDITURES . .219 CHAPTER 6— ANTIMARKET ETHICS: A PRAXEOLOGICAL CRITIQUE . .229 CHAPTER 7— CONCLUSION: ECONOMICS AND PUBLIC POLICY . .241 INDEX . .249 INTRODUCTION In June of 2004, I became convinced of the need for a study guide to accompany what is arguably the single most important book for the student of Austrian economics and libertarian pol- icy analysis. Murray Rothbard’s Man, Economy, and State is sim- ply the most comprehensive exposition of Austrian economics that exists. Although Mises’s Human Action is itself a self-con- tained, beautiful work of sheer brilliance, it is nonetheless the case that, in his subsequent work, Rothbard teaches economics more clearly. Power and Market builds on the analysis of Man, Economy, and State to provide an exhaustive classification and critique of government intervention in all of its various forms. Originally intended as a single volume, Man, Economy, and State and Power and Market were published separately due to (alleged) space constraints and, no doubt, the radical positions contained in the latter. The Mises Institute’s lovely Scholar’s Edition has reunited these two works as Rothbard meant them to be. How- ever, I shall omit further discussion of the publication back- ground (inasmuch as a historical sketch is provided in Joseph Stromberg’s Introduction to the scholar’s edition) and explain the format of this study guide. The chapters of this guide match the twelve of Man, Econ- omy, and State and the seven of Power and Market; appendices vii viii Study Guide to Man, Economy, and State with Power and Market are handled within each chapter. A typical chapter1 begins with a one-page summary. This is then followed by a detailed outline of the chapter, which follows Rothbard’s format (Arabic numer- als, then English letters, etc.) for sections and subsections. (The length of Rothbard’s chapter consequently influences the length of the detailed outline in the study guide.) Following the detailed outline are the “contributions” of the chapter. Some- times these observations refer to techniques or doctrines that are unique to the Austrian School, while at other times they refer to innovations engineered by Rothbard himself. (This dis- tinction is always made clear.) The next section contains the technical details, intended for advanced readers (in particular graduate students). Generally, in this section I contrasted Roth- bard’s approach with mainstream economics, but I also (espe- cially for chapters from Power and Market) would sometimes consider objections that Rothbard had not, or would simply take a given discussion a little further than he had done in the text. Finally, each chapter of the study guide contains ten ques- tions. Some of the questions merely test reading comprehen- sion; they ensure that the conscientious (but perhaps intimi- dated and/or overwhelmed) reader is absorbing the important points. However, especially to challenge the more advanced readers, some of the questions take an advocatus diaboli approach and point to ostensible contradictions or problems with Roth- bard’s analysis. (Whether the reader can resolve the alleged flaws or not, he or she will undoubtedly understand Rothbard’s case much more after considering these questions.) Where 1I say “typical” because some chapters in Power and Market are so short that their corresponding treatments in this study guide contain merely the summary or the detailed outline. Introduction ix appropriate, I have included the relevant page numbers (from the scholar’s edition) after each question to save the reader time. I strongly urge all those who take Austrian economics seri- ously to read (at least large portions of) Rothbard’s treatise; I would go so far as to say that a modern academic cannot really call him or herself an Austrian economist without doing so. For those who may be intimidated or discouraged by the massive volume, I hope that this study guide will at least “chart the ter- ritory” and allow them to begin in those topics that most inter- est them. At that point, I suspect, Rothbard’s spell will overtake them and they will be compelled to read all 1,441 pages. Let me end this brief introduction by urging even older experts to reread this important book. I myself had read Man, Economy, and State cover to cover in college, and yet I was amazed at how much better it had grown over the years! In addi- tion, I hope that this study guide may provide a useful reference for such experts. (I myself have used it to refresh my memory on a particularly subtle aspect of Rothbard’s approach to capital and growth.) Enough now with the introduction. The reader must open the treatise and let the learning begin! ROBERT P. M URPHY January 2006 CHAPTER 1 FUNDAMENTALS OF HUMAN ACTION Chapter Summary Praxeology is the scientific study of human action, which is purposeful behavior. A human acts whenever he uses means to achieve an end that he or she subjectively values. Human action is thus teleological or intentional; a person acts for a reason. Therefore not all human behavior is action in the praxeological sense: purely reflexive or unconscious bodily movements (such as coughing when exposed to tear gas) are not examples of action. Praxeology starts from the undeniable axiom that human beings exist and act, and then logically deduces implica- tions of this fact. These deduced propositions are true a priori; there is no need to test them in the way that a physicist might test a proposed “law” of Nature. So long as a praxeological statement has been derived correctly, it must necessarily contain as much truth as the original axioms. All action involves an exchange, or a choice: the actor attempts to achieve a more satisfactory state of affairs than what would have occurred had the actor chosen differently. The benefit of an action is its psychic revenue, while its cost is the value the actor places on the next-best alternative. Each actor can arrange var- ious possible ends on a scale of value. This is a purely ordinal ranking, that can only show which end is first-best, second- best, and so forth. There is no sense in saying that one end is 8 1 2 Study Guide to Man, Economy, and State with Power and Market percent better than another, because there is no cardinal unit of happiness. Every action involves not only a value judgment concerning different ends, but also a belief on the part of the actor that he possesses adequate means to achieve his desired end. (A person may prefer sunshine to rain, but this preference alone will not lead to any action if the person does not believe he has the power to change the weather.) Only individuals can act, because only individuals have valu- ations and can make choices. It is thus metaphorical to say that “the people elected the president” or “Germany attacked France.” Of course, individuals may act in a particular way because of political ideas or because military generals gave cer- tain orders; nonetheless it is always individuals who act. All action takes place in time. We can define the time before a given action, the duration of the action, and the time after a given action. All action is future-oriented, in the sense that action seeks to create a more desirable future from the actor’s viewpoint. All individuals possess time preference, which means that they prefer a given satisfaction sooner rather than later. Individuals make decisions on the margin. No one ever chooses between “diamonds” and “water.” Rather, an individual must choose between a definite amount of diamonds and a def- inite amount of water. All action involves uncertainty of the future. (If the future were completely known and hence determined, there would be no scope for action.) Entrepreneurship involves coping with this uncertainty by forecasting future conditions, and hence is implicit in every action. Chapter 1: Fundamentals of Human Action 3 Chapter Outline 1.