Markets induce us to cooperate rather than plunder

Ask the Professor on Mises and Today's "The Calling" from Coordination Problem by Steven Horwitz

Over at the Fraser Institute's "Ask the Professor" feature, my essay for this month is on Mises's Human Action 

The revival of free market thinking and, at least until recently, the increasing economic freedom across the world both owe a huge debt to Mises and Human Action.  It is in this book that we find the most complete statement of the whole economic vision underlying the case for free markets, including the importance of individual choice, the centrality of entrepreneurship, the irreplaceable role played by genuinely competitive market prices in helping us solve problems of production and consumption, the ways in which capitalism has improved the well-being of all by promoting peaceful social cooperation and, finally, how government intervention can undermine all of these benefits.

Like his student Hayek, Mises saw competition in particular as a kind of “discovery process” by which producers responded to the demands of consumers by first figuring out what they wanted and then how to produce it at the lowest cost.  The answers to those questions were not simply “given” to market participants, nor were they automatically discovered by maximizing utility or profit functions.  They were the result of conscious entrepreneurship involving active appraisals of both the present and the various possible futures in a world of pervasive, but not debilitating, uncertainty.   Mises argued that in order to figure out what consumers want, entrepreneurs need to make use of prices generated by genuine free market competition.  Engaging in calculations of prospective profit and loss would guide entrepreneurs in their attempts to push back at the uncertainty of the future.  And actual profits and losses would tell them after the fact whether their choices were good ones.  In this way, Mises saw free markets as indispensible for figuring out what to produce and how to produce it.

More generally, what markets made possible was nothing less than human social cooperation and civilization as we know it.  For Mises, the division of labor and the specialization/exchange process of the market is not only the source of economic growth and the improvement of billions of human lives, it is the source of deeper human bonds.  A finer division of labor means more narrow specialization and relying more on exchange for all we want to acquire.  This means that humans become more deeply interdependent, which in turn removes the incentives to violence and war. Mises called this progressive process “the Law of Association:”   markets induce us to cooperate rather than plunder, and in so doing, help to create peaceful civilizations.  

Mises’ grand vision of economics and its place in society were very much at odds with the trends in economics of his day.  Mises was part of the “Austrian school of economics.”  The Austrians historically rejected the mechanical and overly mathematical treatments of economics that had begun to comprise the mainstream of the discipline by the 1920s and 30s. Instead, the Austrians took an evolutionary approach that built up from the subjective choices of individuals toward an understanding of the unintended order they produce.  This approach is echoed throughout Human Action and its insights.