Subjective Economics

Richard D. Fuerle

[Reprinted from Nomos, Spring 1984]

Richard Fuerle recieved his Ph.D. degree in economics from the International College, and a J.D. degree from the University of Pittsburgh School of Law. He is the author of the book, The Pure Logic of Choice.

Recently, there has been a resurgence of interest in subjective (also known as Austrian) economics. Eclipsed by the Keynesian Revolution in the 1930s, subjective economics is unique among all the schools of economics in that, like Euclidean geometry, it is a self-contained system.

The basic premise of subjective economics is that humans can act using "free will," which means that there is no physical cause to the action. The cause is a mental desire or purpose called a "value." Changing (or not changing, i.e., preserving) physical things by acting (or not acting) is only the means to the end, which is the achievement of values. Physical things have value only because, and only to the extent that, a person believes they will enable him to achieve a mental value -- no physical thing has any inherent value.

The implications of this premise are interesting and, depending upon one's politics, gratifying or disturbing. First, since a person cannot both act and not act, in whatever choice he makes the value associated with the obverse choice is sacrificed and becomes the cost of that choice. Not only are all costs subjective, but so is every other economic quantity. For example, whether a physical thing is or is not "money" depends upon whether someone believes it will be accepted in exchange, not on its physical characteristics. Similarly, the value of a capital good depends upon how much income a person thinks it will generate, not on how efficiently it can make things.

A direct consequence of the subjective premise is the impossibility of measuring the importance of values, since measurement is a physical comparison which cannot be applied to non-physical values. If a person chooses value A instead of value B, he has demonstrated that value A was more important, but there is no way to know how much more important. And even more strongly, there is no way to know if value A is more important to one person than value B is to another.

Only those physical things that a person believes will achieve a value (i.e., "goods") have any value, and the value that they have is created by the person who imputed value to them. Suppose a second person also imputes value to the same good but wishes to change it in such a way that it no longer will achieve the value of the first valuer. This conflict can be resolved only by might or by right. If the second person changes the good by might, i.e., without claiming a right to do so, then he is merely saying that the value he achieves is more important to him than the value of letting the first person achieve his value. But if he claims a right to change the good, then he is saying that his value is more important than the first person's value. That, of course, he can never establish because the importance of values cannot be measured. Subjective economists would concur with John Locke that the first valuer gets the right.

Another implication of the subjective premise is that there can be only two types of interactions between people. In the first, both parties consent, so that changes to goods should achieve the values of both. In the second, one party does not consent, so that the changed good achieves the values of one of the parties but destroys or prevents the achievement of the values of the other party. This latter "coercive" interaction must be broken down into offensive, or right-violating, coercion, and defensive, or right-preserving, coercion. While all coercion imposes an unconsented-to cost on the victim, defensive coercion preserves or restores rightfully held goods, while offensive coercion changes rightfully held goods without the consent of the right holder. This implies that a libertarian society (i.e., a society without legally sanctioned offensive coercion) is necessary to maximize the achievement of values.

Another Important implication is that since the goal of all action is the achievement of values, whether an action is or is not "productive" depends upon whether or not it achieves, preserves, or restores rightfully held goods. Thus, offensive coercion is always unproductive. A demolition derby is productive because no rightfully held goods are changed without the consent of the right holder, even though cars are destroyed. Mugging and building a taxation-subsidized school are unproductive because they require offensive coercion. To the extent that government people use offensive coercion, government is unproductive. Their actions simply impose unconsented to costs on others, raising their costs of achieving their values.

The subjective premises also implies "methodological individualism," that only those entities who have free will can act to achieve values. One cannot regard any organization, whether it Is a corporation, a labor union, or a government, as an acting entity -- they are only collections of individuals, each acting according to the rules that have been established for that organization. Since each individual, whether or not he is in an organization, acts to achieve his values, no one acting in the name of an organization can act in the "public interest." Indeed, since the values of different individuals will commonly conflict and their aggregation is impossible because their importance cannot be measured, there is no "public interest."

Also implied in the subjective premise is the principle that knowledge of whether particular changes in goods will achieve a particular value may be very uncertain, especially if the desired changes depend upon the future actions of other individuals. It is the function of the entrepreneur to reduce the adverse consequences of these errors in knowledge by correctly anticipating future events and choices. Also, central planning will not be possible because the knowledge of which changes will achieve the values of millions of people will not be in the mind of any central planner, but will be dispersed in millions of minds in forms which may be fragmentary, contradictory, and ineffable.

The person who tends to look favorably on government is likely to be uncomfortable with subjective economics. He can then take one or more of three postures. First, he can argue that people do not have free will. Second, he can argue that the conclusions I have drawn do not logically follow from that premise. And third, he can adopt the position of the economic establishment for the last half-century and ignore subjective economics altogether.