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The invention of bitcoin has kindled interest in monetary history while offering people a historically unparalleled opportunity to experience first-hand the transformative potential of upgrading monetary technology. In 2018, I published The Bitcoin Standard, a book that focused on monetary history and monetary economics, explaining the problem of money over millennia in order to illustrate bitcoin’s true potential and historical significance.
In 2021, I published The Fiat Standard, which also focused on monetary history and economics to explain the functioning of fiat money and its far-reaching implications. In 2023, I published Principles of Economics, a book that explained the economics of human action and detailed how civilization emerges out of the cooperation of individuals. All three books offered readers a departure from the usual approach of modern economics books, in that they challenged the inevitability and desirability of government-controlled money and illustrated its many devastating impacts to individuals and society.
A central theme through all three books is that human civilizational progress is inextricably linked with the hardness of our money: the harder the money is to make, the less its supply will increase over time, the better it will hold its value, and the more it will allow its holder to provide for the future more effectively, decreasing the uncertainty surrounding the future, and causing us to discount the future less.
In other words, hard money makes us more future-oriented, lowering our time preference, which is what initiates the process of civilization. As we increasingly value the future
more, we defer immediate gratification in favor of long-term rewards. We save our resources for the future, and invest them to increase our productivity.
We control our base instincts and passions and subdue them to our reason, which calculates what is in our long-term interest. We cooperate and resolve differences peacefully because we are able to appreciate that the long-term
fruits of peaceful cooperation far outweigh the short-term benefits of aggression. We engage in trade, and build a highly sophisticated division of labor.
If practiced over generations, this process of civilization manifests as a continuous increase in the material well-being of a society, with each generation living better than the previous generation.
The obverse is also true, unfortunately. The easier money is to produce, the more its supply increases and its value declines over time, the less it will allow us to provide for our future selves, increasing the uncertainty surrounding the future, and causing us to discount the future more. In other words, easy
money makes us more present-oriented, raising our time preference, which is what destroys the process of civilization. As we discount the future more, we consume our resources with little regard for the future. Saving and capital
investment decline. We are more likely to act to satisfy our present urges at the expense of our future well-being, since it matters increasingly less.
We are less likely to cooperate and resolve differences peacefully, so our division of labor is compromised and with it our productivity. Much of the history of the past century has reflected this civilizational decline. The collapse of society
witnessed under hyperinflation is just a faster and more noticeable version of the same process slow fiat inflation brings about.
A contentious thesis for many, yet one that has found support among a growing worldwide readership with more than a million copies sold across 38 languages. I believe much of the books’ success is due to their ability to explain to readers many of the phenomena they experience as they use differ-
ent forms of money. The more I wrote and spoke about the impacts of money on time preference, the more stories I would hear from readers and listeners about their own countries’ experiences with inflation and hyperinflation
through the century of fiat money.
Everywhere has countless stories to tell of the destruction of money bringing about the destruction of economic security and the destruction of civilization. Pervading all three of my books is a deep sense of historical regret over a world that could have been—a world where money escaped the grip of
the state, was chosen freely on the market, and constantly increased in market value, allowing savings, protecting from government and central bank debasement, and limiting government power by restricting its funding to transparent taxation.
Countless times when examining one particular aspect of fiat’s devastation of humanity, I would find myself wondering how different things could have been, how much prosperity was lost, and how much human suffering could have been averted. For years, I have found myself drifting off into long thought experiments around the question: What would the
twentieth century have looked like on a hard money standard? We can see how consequential the reduction in the value of money is in episodes of hyperinflation, high inflation, and even low inflation. We can see the impact
upgrading from an easy money to a harder money has on individuals, as the stories of bitcoiners attest. And we can see how hard money is already showing signs of transforming President Nayib Bukele’s El Salvador.
Every time I observe one of these phenomena, I wonder how different the world would have been in the past century had it used hard money. In many interviews I would be asked such questions and I would find myself overflowing with ideas for answers, my mouth unable to articulate them at the rate at which my mind produces them. That feeling is what puts fire in my fingers and gets them itching to start writing these ideas, systematically exploring them and elaborating on them, culminating in the production of a book.
It would have been a natural continuation of my first two books on bitcoin and fiat to complete the series by writing a new book stretching back further in time to study the gold standard, its workings and implications to society, and examining questions of time preference, individual freedom, government power, prices, poverty, economic growth, and capital markets in the context of the gold standard of the nineteenth century. But that book was already written in 2001 by the late Swiss banker Ferdinand Lips, under the
title of Gold Wars. This was one of the most influential books I’ve read in my life. It explained the history of the gold standard and its almost mystical positive influence over human society in a remarkably clear manner. That book,
more than any other, was the driving influence behind me writing The Bitcoin Standard and it inspired many of the critical ideas in it.
If I were to apply the ideas of The Bitcoin Standard to the historical gold standard, I could scarcely improve upon Lips’ masterpiece, which I very strongly recommend reading.
I would also recommend Edwin Walter Kemmerer’s Gold and the Gold Standard: The Story of Gold Money, Past, Present and Future for a more practical and mechanical perspective on how the Gold Standard worked. Lips, Kemmerer, and many others have already dug through mountains of old data and
books to explain to us how the classical gold standard actually worked, but there were many imperfections in the gold standard in the nineteenth century.
Even at its best it fell short of the ideal form of a gold standard in which all financial instruments are backed by 100% of their face value in gold in the vaults of the issuer. The classical gold standard still allowed for the creation of
money and credit far above the amount of gold held in reserve. What would happen if we had a perfect gold standard? What would the world look like when no entity is capable of making money without opportunity cost? This
question, along with the question of what the twentieth century would have looked like on hard money, inspired the writing of The Gold Standard.
This book takes my three previous books’ ideas on the importance of monetary soundness and applies them to a list of elaborate questions: What would the world look like if we had a gold standard in the twentieth century? What if, instead of downgrading from an imperfect gold standard to the catastrophic fiat standard at the beginning of the twentieth century, the world had upgraded to a better gold standard? Given everything we know about the
impact of hard money, just how different would a hard money twentieth century have been? What would life be like with constantly appreciating money and declining prices? What would have happened if governments could not
have financed themselves with inflation in the last century, without accountability? How much less blood would have been shed had governments had to fight their wars with their own treasuries without having recourse to inflation to rob all their citizens?
How would living standards and wages change? How would the state have evolved? What would have happened to education, technology, politics, and our production of energy? The Gold Standard attempts to answer these questions with a fictional economic history of an alternative twentieth century in which the fiat money experiment fails in 1915. Since money is pervasive to all aspects of life, I endeavoured to make this as realistic as possible. Rather than simply assuming the monetary system I want and shaping the world around it, I chose to construct a history which could have conceivably led to this monetary transition
taking place, in order to produce realistic historical developments through the century.
In considering scenarios for an alternative history, there are
many historical junctures where an author could take the liberty of choosing a different outcome from reality, and hence change history. Franz Ferdinand’s assassin’s gun could have jammed and the conflict between Serbia and
Austria would have been averted, preventing the snowball of war that was to consume the planet. Austria’s old Emperor Franz Joseph could have easily died a week before his crown prince nephew Franz Ferdinand traveled to Bosnia, making him emperor and potentially causing his modernizing influence to prevent conflict with Serbia and Russia altogether. But such simple changes do not address the underlying historical and economic factors that led to the war, and would thus not offer a convincing rationale for history fundamentally changing.
The same governments and central banks that went to war in 1914 could have gone to war a few years later with similar consequences. It was important for me to change something fundamental with the monetary technology of the time to make this story interesting and realistic.
Economists of the Austrian school have long emphasized the importance of entrepreneurship in changing history, so this is an Austrian economists’ work of entrepreneurial fiction. The fork of reality from which this book comes begins in October 1910, with an imaginary letter that was to advance development of the aviation industry in the following years. A few entrepreneurs establish an airplane-based international gold clearance service in 1911, but it would not change anything drastic in the world until 1915.
Outside of the aviation industry, all of the world’s major events remain the same in this story until September 1915,
when the fiat money experiment fails irreversibly, and our alternative history truly begins. The years 1914-15 were of extraordinary historical importance, as they gave birth to the monetary system and world order in which we live today. By introducing developments that are not entirely outlandish to the aviation industry, this book derails the fiat money experiment in its infancy and strangles the fiat century in its crib. This book invites you, dear reader, to teleport yourself via the power of imagination to this alternative world, and think deeply of what it would have looked like.
Part I of this book is based on our real world’s history, and it covers the period leading up to 1915. All the historical facts mentioned there are correct, to the best of my knowledge. The alternative history begins in Part II, which details an alternative ending of the Great War and the emerging new world order. Part III discusses the workings of the modern gold standard, and the evolution of the state and banks in the alternative world. Part IV outlines the evolution of living standard, energy, technology, society, and education
throughout the century. Finally, Part V of the book provides a comparative study between the economics of our real fiat world and the imagined golden world of this book.
In this pre-release preview sample, the first two chapters are from Part I, the historically accurate part based on our world’s real history. Chapters 3 and 4 are from the fictional history of Part II. Quotes that have references are real quotes, whereas quotes without references are imaginary.
The relative stability of the monetary order from 1873 coincided with the stability of the political order. As the world traded one money, it also approached an ideal of one economic unit, with declining restrictions on trade and reductions in military conflicts. Relations between the major powers continued to improve over time and the prospect of war seemed less and less likely. Britain and France, bitter rivals for centuries, signed the Entente Cordiale in 1904, an agreement delineating British and French colonies in North Africa, preventing conflict between the countries, and leading to growing cooperation between the two empires.
Anglo-Russian relationships had also improved with the signing of the Anglo-Russian Convention in 1907, in which Britain and Russia delineated their Asian colonies to avoid conflict.
Britain’s relationship with Germany was also improving. Through royal marriages of her children to European monarchs, Britain’s Queen Victoria was the grandmother of many royals across the continent, most notably the German Kaiser Wihelm II, whose coronation in 1888 marked an auspicious moment for British-German relations, as he was the eldest of the forty-two grandchildren of Queen Victoria through her eldest daughter Princess Victoria. At his birth, Wilhelm II was third in line for succession of the Prussian
throne and sixth in line for succession of the British throne. When Queen Victoria was on her death bed in 1901, Wilhelm II, who loved her dearly, traveled to be by her side. It is said that she passed away in his arms. He carried her coffin at her funeral.
After its victory in the Franco-Prussian war, Germany focused on consolidating its empire in the European mainland, and Britain and Germany approached the twentieth century with their interests harmonized and the threat of war subsiding. Germany could dominate the European mainland while Britain expanded its empire everywhere else. An alliance between the two great powers was even seriously considered, with Germany eventually rejecting it because they worried Britain’s imperial entanglements could drag them to an unwanted war with Britain’s historic rivals Russia and France, or the unthinkable horror: both.
From 1890 to 1902, three potential problems emerged in British-German relations. Kaiser Wilhelm II removed Bismarck as chancellor and ignored his advice to avoid pursuing a foreign empire, which inevitably aroused the distrust and discontent of the British, who had the world’s biggest empire and did not want Germany competing with them for territories. Wilhelm II also became obsessed with building a navy to support the empire, provoking more animosity from Britain, who had the world’s largest and most powerful navy, which controlled the entrance to the North Sea, Germany’s naval gateway to the world.
The death of Queen Victoria in 1901 and the ascension of her son Edward VII to the throne added to the friction in British-German relations. Kaiser Wilhelm had a jealous rivalry with his uncle Edward, who had always looked down on him as a young man and his nephew, rather than treating him as an equal ruling monarch of a superpower. Known as “the possessor of the least inhibited tongue in Europe,” Wilhelm had suffered brain damage during birth which caused him to be erratic, impulsive, and emotional, and his behavior created needless tension between Germany and Britain that threatened to sour the increasingly cordial and cooperative international order. In an infamous interview with The Daily Telegraph in October 1908, Kaiser Wilhelm’s attempts at winning over British public opinion backfired as his outbursts caused increased tension not just with Britain, but also with France, Russia, and Japan. Wilhelm’s naval and imperial ambitions alarmed the British, and he grew increasingly concerned that Britain’s rapprochement with France and Russia was meant to encircle and suffocate Germany.
But these fears were alleviated in the second decade of the twentieth century. After King Edward VII died, Kaiser Wilhelm II attended his funeral on May 20, 1910, which helped mend relations with British people and royalty. A popular king at the zenith of his empire, his funeral procession drew an estimated three to five million people, with 35,000 soldiers lining the funeral’s route. From across Europe and the world, monarchs packed the palace in the largest gathering of monarchs to date. The astonishing spectacle and sense of cordial solidarity and togetherness suggested the superpowers were entering a period of extended peace and cooperation. Barbara Tuchman immortalized the occasion in a famous passage of her book, The Guns of August:
So gorgeous was the spectacle on the May morning of 1910 when nine kings rode in the funeral of Edward VII of England that the crowd, waiting in hushed and black-clad awe, could not keep back gasps of admiration. In scarlet and blue and green and purple, three by three the
sovereigns rode through the palace gates, with plumed helmets, gold braid, crimson sashes, and jeweled orders flashing in the sun. After them came five heirs apparent, forty more imperial or royal highnesses, seven queens—four dowager and three regnant—and a scattering of special ambassadors from uncrowned countries.
Together they represented seventy nations in the greatest assemblage of royalty and rank ever gathered in one place and, of its kind, the last. The muffled tongue of Big Ben tolled nine by the clock as the cortege left the palace, but on history's clock it was sunset, and the sun of the old world was setting in a dying blaze of splendor never to be seen again.
The new king, George V, ascended to the throne in 1910 with his first cousin ruling Germany, and his first cousins ruling Russia as Emperor Nicholas II and Empress Alexandra. In 1913, the naval rivalry between Britain and Germany seemed to be over as Germany agreed to keep its fleet inferior to Britain’s at a ratio of 10:16. Tensions over the Middle East had also been
alleviated in June 1914 when Britain and Germany resolved their differences over the Baghdad Railway.
Tensions were ever-present in the heartland of Europe, where ethnic and religious diversity created many small conflicts that threatened to embroil larger powers. Yet it was not easy to imagine this snowballing into something large enough to draw Britain in. Britain, after all, had no vital interests in the European mainland, as all its interests lay in its overseas empire. “We are fish” Lord Salisbury had famously said to explain his government’s indifference to inter-European territorial squabbles and its keen interest in the empire its magnificent navy made possible.
In 1913, Kaiser Wilhelm’s daughter Princess Victoria Louise married. Her wedding was also a great gathering of European monarchs, suggesting further dissipation of tensions. Any semblance of Anglo-German tension looked to have disappeared in the fateful final week of June 1914. The German Kaiser had joined the festivities of the annual Kiel Week Regatta, where he inaugurated the new Kiel Canal locks. That year’s regatta was a historical occasion, for it saw the invitation of Britain’s Royal Navy’s Second Battle Squadron, which comprised the four newest and most powerful dreadnaughts in the world. As the German Navy had grown to become the second biggest navy in the world, the invitation of the biggest navy to this occasion signaled that the two navies had found a way to peacefully coexist, and the naval rivalry between them was over. Kaiser Wilhelm, who was bestowed the rank of admiral in the British Navy by his grandmother, wore his British admiralty uniform to inspect the British warships. The evening of Saturday, June 27, saw boisterous parties as British and German sailors visited each other’s boats, drank together, engaged in friendly boxing matches, and partied into the morning of the fateful day of June 28. At 6 p.m. on that day, with sailors still nursing their hangovers, news would arrive of the assassination of Archduke Franz Ferdinand, heir to the throne of the Austro-Hungarian Empire.
The news would take the joy out of the events of the week and cause Kaiser Wilhelm to cut his visit short. He left Kiel the next day. King George then sent a message delivered by the commander of the British squadron leaving Kiel on June 30:
Friends Today
Friends in Future
Friends Forever
It was almost completely inconceivable for anyone involved that these two navies would be at war in a mere five weeks, but that is exactly what happened. It was an astonishing turn of events. Within the space of one week between July and August, Europe went from optimism that Austria and Serbia were going to find a diplomatic solution to their quarrel to an all out war with five major powers in conflict: Austria-Hungary, Russia, Germany, France, and Britain, and thee more powers to follow over the coming months: Japan, the Ottoman Empire, and Italy. To get a sense of just how unlikely this was at the time, note that the Serbian-Austrian crisis had not been mentioned in the British parliament for four weeks after it happened. Hardly anybody had even thought this affair carried any significance for the British. On July 24, British Prime Minister Herbert Asquith wrote to his lover Venetia “"We are within measurable, or imaginable, distance of a real Armageddon. Happily there seems to be no reason why we should be anything more than spectators." On July 27, a day before Austria-Hungary declared war on Serbia, Chancellor of the Exchequer David Lloyd George said there could be no question of taking part in any war, and he knew of no minister who was in favor.
On August 4, Germany entered Belgium, and on August 5, the first battle of The Great War began: The Battle of Liège, which pitted the German army against the Belgian army. Liège fell on August 16, and the German army continued its march through Belgium on its way to France, where one of the most brutal warfronts in history awaited them against the French and British armies.
On August 12, 1914, the Austro-Hungarian military under the command of General Oskar Potiorek launched its first offensive into Serbia. Hundreds of thousands of soldiers were killed and injured on both sides as Serbia succeeded in fending off the Austro-Hungarian attack. It was one of the greatest upsets in military history. Soon after, on August 17, Russia invaded the East Prussian province of Galicia and suffered large losses in a successful German counter-attack. At the Battle of Tannenberg, which took place the following week, Germany achieved a crushing defeat of Russia, setting Russia on the wrong foot from the start of the war. On May 23, 1915, Italy declared war on Austria-Hungary and opened a new front.
Perhaps no better testament to the senselessness of this war existed than the Christmas truce of 1914, when German and English soldiers on the western front both decided to stop fighting over the Christmas holidays (without having received orders to do so) and crossed enemy lines to socialize and exchange gifts. They even played a game of football together before going back to their trenches and resuming the senseless slaughter. The absurdity of the war was palpable: German soldiers, many of whom had worked in England and liked the country and learned to play football there, were in France to fight the British army of King George V, Kaiser Wilhelm’s cousin. Germany had no plans to take over Britain, and Britain had no plans to take over Germany, so neither of these sets of soldiers felt a serious threat from one another. None of the soldiers could quite understand how things spiraled so quickly into large-scale war, nor could the diplomats and intellectuals in the respective countries quite explain that either. The Christmas truce laid bare the truth that these soldiers had nothing against each other, had nothing to gain from fighting this war, and could see no reason to continue it. Whatever rivalry exists between these nations could very well be acted out peacefully on the football pitch at the cost of disciplined training rather than the blood of an entire generation.
In the aftermath of the war, virtually nobody could explain how the major powers had gone to war against each other. There was a sense that this was a disaster into which the major powers inadvertently sleepwalked. After the assassination of the Austrian crown prince in Sarajevo by Serbian nationalists, Austria seemed overconfident in its ability to bring Serbia to heel. Russians seemed extremely cavalier about smashing the Austrians in defense of Serbia. The Germans, in turn, seemed gripped by paranoia, with Kaiser Wilhelm’s demons awakened that the British, French, and Russians were aiming to destroy Germany. Rather than work to avoid a confrontation with the three powers, the Germans seemed to think they could take on France, then Russia, all while Britain kept to itself. The French seemed to have vastly overestimated their ability to fight the Germans and regain Alsace-Lorraine, and the British imagined their entry would decisively and quickly settle the war.
They were all unfathomably wrong.
There is a compelling case to be made that all of the parties deserve part of the blame for their overreaction and instigation. It is easy for the historian to simply cast blame everywhere and virtue signal about peace being good and war bad. Yet there was also a very real historical context in which this tragedy was born, one that has its roots in nineteenth century military conflicts and alliances and in the imperial ambitions of monarchs who had grown callous to the true cost of their ambitions in men and treasure.
As the war headed to a brutal stalemate and the belligerents seemed hell-bent on pursuing war at all costs, financing was to prove the decisive factor in determining the war’s outcome. All the major powers of the day were on a classical gold standard. Their central banks held large amounts of gold reserves and issued paper notes and bank credit to their citizens. As war intensified, pressure on these reserves increased across the world because citizens preferred to trust in the immutable laws of chemistry represented in gold over the promises of governments that would do whatever it took to secure what looked like inconsequential victories.
Thinking of economics as the study of human action allows us to define the most important terms in economics based on their relation to human needs, how human reason treats them, and how humans shape them. When explained, defined, and understood through the lens of human action, economic terminology becomes clearer and economic analysis more fruitful.
Hans-Hermann Hoppe explains:
“All true economic theorems consist of (a) an understanding of the meaning of action, (b) a situation or situational change – assumed to be given or identified as being given – and described in terms of action – categories, and (c) a logical deduction of the consequences – again in terms of such categories – which are to result for an actor from this situation or situational change.”
At the heart of the Austrian approach to economics is the goal of understanding the causal processes of economic activity, and their consequences. Logical deduction and thought experiments are employed to understand the logical implications of economic processes. Initially, this approach might appear banal and fruitless compared to the dominant approaches of mainstream economics today, which rely on mathematical analysis. But a closer look shows us why quantitative analysis is unsuited for building an economic theoretical framework, and that quantitative analysis is meaningless and mute without logical deduction and conclusions to motivate it and understand its results. In keeping with the Austrian critique of quantitative approaches to economic analysis, this book will present and analyze economic acts in plain language, not with mathematical equations. Human action will be understood through logical deduction and thought experiments, not equations and quantitative analysis.
The Austrian critique of quantitative analysis was summed up in Mises’ critique of the application of quantitative methods to economics in Human Action:
“The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its methods unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.”
This is a profound criticism of the methods of modern economics. To illustrate this, let us examine how a natural science utilizes quantitative relationships, using the example of the ideal gas law in thermodynamics, which states:
PV = nRT
Where P is pressure in bars, V is volume in liters, n is the number of moles (where each mole is 6.022 x 10e23 atoms), T is temperature in Kelvin degrees, and R is the Regnault constant of 0.083145 L.bar/mol.K
Establishing such a relationship is possible in the natural sciences due to several factors which are not present in the study of human action. Most importantly, measurements are made in units that are constant, and clearly defined by the International System of Units, which has defined seven base units on which all scientific measurements are based: the second, meter, kilogram, ampere, kelvin, mole, and candela. From these seven units, many other units can be derived.
The liter, for instance, is simply the volume of a cube with 10cm sides. In the modern world, there are many measurement devices that can be used to reliably measure length and volume consistently. The bar is defined as the atmospheric pressure on earth at an altitude of 111 meters and a temperature of 288.15 degrees Kelvin, and it is divided into 100,000 Pascals of pressure. Barometers are produced and sold worldwide to reliable and consistent standards for measurement of pressure using this unit.
In the past, the kilogram and meter, and indirectly, the Kelvin, were defined in terms of specific artifacts kept in Paris. Each degree on the Kelvin scale corresponds to a change in thermal energy by 1.380649x10e-23 Joules. The Joule is in turn defined as the energy transferred to an object when a force of one newton acts on that object in the direction of the force’s motion through a distance of one meter. The newton is defined as the force needed to accelerate one kilogram of mass at the rate of one meter per second squared in the direction of the applied force.
The second itself was defined as one 86400th of a day, but in 1967, a new and more precise definition was adopted by the International System of Units, relying on the Caesium standard, the most accurate and precise time and frequency standard to be discovered so far. According to this standard, the second is defined as the duration of 9,192,631,779 periods of the radiation corresponding to the transition between the two hyperfine levels of the ground state of the caesium-133 atom at a temperature of 0 Kelvin. Since 1983, the meter has been defined as the length of the path traveled by light in vacuum during a time interval of one 299,792,458th of a second. This measurement can be determined, demonstrated, and verified through experimentation.
By 2019, with the redefinition of the kilogram, all of these units have been redefined in terms of fixed fundamental constants of nature. The kilogram itself is now defined in terms of the meter, second, and the Planck constant, which is defined as the quotient of a photon’s energy divided by its frequency, and has a value of 6.62607015x10e-34 Joule*second.
These clearly defined and inter-personally and internationally agreed-upon units for measuring physical phenomena have no equivalent in the economic sciences. There are no clearly defined units to measure economic value or utility, and any assessment of these metrics is done by the individual, subjectively, and ordinally, not cardinally, because the raw material of economics, value, is not a physically defined quantity, but a psychologically experienced judgment, as will be discussed in the second chapter of this book. Prices cannot be considered scientific units because they themselves are expressed in terms of units of currencies whose value, supply, and demand is oscillating and not constant.
Beyond just the units, scientific relationships can uncover constants of nature. The International System of Units also lists seven SI defining constants, whose values are used to derive all units: hyperfine transition frequency of caesium, speed of light, Planck constant, elementary charge, Boltzmann constant, Avogadro constant, and luminous efficacy.
In the ideal gas law, we also find the Regnault constant, which is measured at 0.083145 L.bar/mol.K. This relationship and this constant is repeatable and demonstrable. What this law shows is that any person can put any gas in a container, and measure its pressure, volume, temperature, and mole number, and from that, determine the Reginault constant and verify that the relationship holds. Should any person find a different relationship, with a different value for the constant, the ideal gas law would be disproved and it would stop being a scientific law.
All of these units and constants are defined in terms that are acceptable and comparable across the world, verifiable and testable by any skeptics. Thanks to this uniformity, it becomes possible for people from all over the world to engage in the division of labor and the undertaking of sophisticated engineering projects. The reliability of these units is reflected in the number of workers and technicians from all over the world who use the same tools and equipment with commonly agreed upon standards. When an Argentine purchases a German-designed refrigerator manufactured in China, a very large number of people all over the world had to have agreed on the definition of all of these units in order to communicate their preferences to one another and ensure the satisfactory production and delivery of the fridge.
The existence of these reliable physical units for measurement makes it possible to engage in systematic, reproducible, and quantifiable scientific experimentation. With these constants and measurements, it is possible to conduct systematic experimentation with gases at different volumes, temperatures, and degrees of pressure. From these observed measurements, the relationships between these physically defined categories are established. In the case of the ideal gas law, a mathematical relationship is found between the pressure, volume, and temperature. This relationship is scientific not based on the word of anyone, but because anyone can replicate it and test it. It has achieved the status of a scientific law only because a large and growing number of people have tested it and found it to hold. Since it was first stated by Benoît Paul Émile Clapeyron in 1834, nobody ever tested this relationship and found it not holding.
Based on scientific laws similar to the ideal gas law, economists have spent the last century running down the blind alley of trying to find similarly precise and reliable scientific laws that govern economic relationships. The obstacles facing such a quest are insurmountable. First, there is no standard unit with which economic measurements of value can be made and compared. As discussed in Chapter 2, value is subjective. The utility that individuals get from goods is subjective and constantly changing based on the individual and the time at which they are making their valuation, as well as the relative abundance of the good. There is no possibility for interpersonal utility comparison, and therefore mathematization of utility will always be hypothetical and theoretical, never precise and replicable.
Without a common unit for measurement and comparison of utilities, it is not possible to formulate a quantitative law around, for example, changes in demand and supply based on changes in price. It won’t be possible to quantify the impact of a specific change in price on an individual’s demand for a good because that happens through the causal mechanism of changes in utility, and that is a factor that is not measurable or quantifiable.
The second reason we cannot formulate quantitative laws in economics is the impossibility of conducting replicable experimentation on economic questions. The subjects of the natural sciences are the material objects which can be isolated and tested repeatedly until regularities are found and laws established. But the subjects of the social sciences are the ideas and actions of humans, immeasurable and non-quantifiable. Experimentation with ill-defined units cannot yield comparable and reproducible results, and so experimentation will fail to turn up quantitative regularities and laws, because there are no units in which these laws can be expressed. Without measurement and repeated experimentation, it is not possible to find regularities, derive constants, and formulate scientific relationships and laws.
It is also not possible to create accurate experiments in economics as we can in the natural sciences because the subject of economics is the action of humans in the real world, and conditions in testing laboratories do not replicate the real world consequences of economic decisions. The real world is the only laboratory that can approximate the real conditions shaping economic decision-making, but experimenting on the real world is not possible.
A century after economics left classical methodological foundations to attempt to ape physics, and it has still failed to produce one quantitative law or formula that can be independently tested and replicated. Macroeconomic equations come and go with the fashions of modern schools of thought, but none of them has been measured and replicated in a way that can allow it to be called a law.
Beyond the issues of measurement and experimentation, a deeper logical problem with quantitative approaches to economics is that they conflate the factors we can measure and observe with the causative factors that shape the world around us. The quantitative methods which establish relationships between aggregate measures place the aggregates as the driving causal forces. In natural science, this is workable, because the complexity of the atoms that make up the gas can be reduced to basic aggregate measures of pressure, temperature, and volume without any loss in analytical prowess. The atoms have no will of their own, they have no mind, they cannot reason, and cannot act in response to surrounding conditions, like human beings. Lacking reason and will, physical objects’ behavior can be studied and accurately predicted. If you heat a gas container, then all other variables in the ideal gas law will change to keep the equation in balance, and the equation will continue to hold.
When examining economic questions, however, we are confronted with the unfortunate reality that the causative factors shaping economic reality are human beings and their actions, motivated by their own subjective considerations and personal preferences. Far from being inanimate objects reacting in mathematically predictable ways, humans react in irreducibly complex ways. Attempting to paper over all of the complexity of the actions of millions of humans by examining only superficial aggregate measures of some economic phenomenon is the core mistake of failed modern pseudosciences like macroeconomics and epidemiology, which ignore the real actual causative factors in the phenomena they study, and instead attempt to hypothesize based on whatever aggregates can be measured.
Just because we are able to construct measures of unemployment, gross domestic production, consumption, investment, and other economic parameters does not mean that these factors have to be causally related to one another in scientifically ordained relationships based on quantifiable and testable magnitudes. In fact, since the actual drivers of this relationship are the actions of the individuals, there is no reason to suppose that the aggregate measures are any more than superficial epiphenomena unrelated to the causal mechanisms driving the relationships examined. Attempting to formulate such relationships is akin to scientists studying gases and attempting to formulate laws based on the color of different containers, the number of containers used, brand of manufacturer, first letter in the name of the experimenter, and various epiphenomena with no causative effect on the experiment. A scientist can indeed formulate relationships between these parameters, but it will be impossible for any meaningful such relationships to hold after repeated testing by independent parties. Repeating the same experiment with an experimenter with a different name, or a container of a different color will still yield the same results, making the original experimenter’s theorizing pointless. It is the gas inanimate gas particles whose temperature, pressure, and volume are the control knobs for the gas system being studied, and the container’s color and experimenter’s name are irrelevant. Similarly, it is the action of humans which shapes economic outcomes, not the aggregate measures constructed in government statistical offices.
This is not to say that all statistical measures are worthless noise, as there can be value to be had from examining these aggregates as close approximations of economic phenomena. The Austrian objection is in treating these statistical artifacts as causal factors and assuming the relationships can be extrapolated to the future predictively.
The most egregious and harmful attempts to ape the methodology of the natural sciences in economics happen in macroeconomics, where physics envy has for a century made economists attempt to find a system of equations that can explain the dynamics of an economy in the same way equations can explain and predict the movement of objects, an example of what Friedrich von Hayek called “scientism”. With an accurate scientific system of equations to understand the working process of the economy, it becomes possible to manage economic activity to achieve desirable social goals. In the same way that chemists’ equations have helped engineers perfect and optimize the working of engines and pumps, economic equations can help economists improve the economic situation of an economy.
Macroeconomic aggregates are constructed from national accounts, and mathematical relationships are sought between them. To the extent that such relationships are established, they are established theoretically, based on some economist’s authority to declare how the causal mechanisms function, not based on experimentation. Keynes’ macroeconomic system is the most prominent example. For decades, economists have formulated equations based on Keynes’ theoretical hypothesizing. The state of the economy is primarily a reflection of the quantity of spending; if spending is too high compared to the quantity of outputs, then inflation is the outcome, but if spending is too low compared to the output, then unemployment and recession is the outcome. Should unemployment be too high, modern macroeconomic equations suggest how this can be fixed by increasing government spending or reducing interest rates.
But accounting identities do not denote real world causality. There are no mechanisms in macroeconomics to experimentally establish causality in the same way as in natural sciences. Keynes’ equations attempting to predict the impact of one aggregate metric to another bears no relation to the actual causes in the world, because there is no way of measuring, testing and verifying any of it.
There can be no studies done to test this hypothesis, because one cannot experiment on entire economies made of millions of people who have other plans for their lives. However, the theory persists to this day, in spite of decades of accumulated evidence it is not an accurate representation of how the world works. In the 1970s, as inflation and unemployment both increased at the same time, the Keynesian trade-off was comprehensively refuted beyond a shadow of doubt. But the advantage of economics having no systematic and replicable method of experimentation and testing is that theories can always be adjusted after their failure in a way that can justify non-compliant real world observations.
Keynesians simply revised their theory to include a new term called “supply shock” which is an incoherent term made as an after-the-fact justification to explain how an increase in unemployment and inflation can happen at the same time. Since then, the world’s economies have witnessed every imaginable combination of inflation and unemployment rates, and the Keynesians have successfully maintained the delusion that such a trade-off exists. Any diversion away from this relationship can be explained by invoking a “supply shock”, and so there can be absolutely no observation that falsifies the Keynesian theory of a trade-off between unemployment and inflation. The illusion of economics as a precise, quantitative and empirical science is only maintained through the exemption of its theories from empirical real world examination.
To illustrate the human action approach to economics, and to compare it with modern quantitative economic methodology, we can use as an example the question of government-mandated minimum wages, which impose a lower limit on what employers can pay their employees. A popular policy intervention in the majority of the world, the two opposing perspectives on it serve as an object lesson in the two different frameworks for thinking about economics: human action and aggregates.
Imagine a country with no minimum wage laws, and a politician looking to win an election. As in all times and places in human history, there is a natural variation in the wages earned by workers. The politician decides to center their campaign around improving the living standard of the poorest members of society by mandating a minimum wage which he imagines guarantees its recipient a decent living. Based on his aggregate-focused macroeconomist, the aspiring leader decides to mandate a minimum wage of $10 per hour. The fiat economist concludes that 20% of all workers, supporting 35% of all the population, currently earn less than $10 per hour. The aggregate effect of imposing the minimum wage would lead to a rise in wages equal to $10 billion per year. Based on sophisticated historical and theoretical models, the fiat economist further estimates that the $10b increase in payrolls would translate to an $8b increase in consumer spending, which models estimate would result in the creation of 40,000 new jobs, a 12% increase in industrial output, a 4% rise in exports, and a $16b rise in Gross Domestic Product.
According to this collectivist approach to economic analysis by aggregates, the causal agents in economic phenomena are the aggregates, and they act according to the theoretical relationships established by fiat economists, in a way similar to how physicists and chemists establish scientific rules. These conclusions were arrived at using scientific-looking equations not very different from those used in the ideal gas law. Using the framework of collective economic analysis, the minimum wage law sounds like a great boon to society. The poorest workers will increase their living standards significantly, some unemployed workers will find work as a result of the extra spending, and all of society becomes more productive. What's more, exports rise, helping obtain foreign currency.
If this sounds too good to be true, that is because it is not true.
Things look very different through the lens of the sound economist's Mises-tinted glasses. Knowing that human action is the real driver of human affairs, the sound economist does not analyze the world through aggregate numbers, but instead, he analyzes the decisions of the real humans who are affected by this new law. Employment is an agreement between two individuals, the employer and the worker. The sound economist understands that a business owner's choice to hire someone is based on a simple calculus: they will hire him if his contribution to the firm's revenue exceeds his wage. If the minimum legal wage exceeds the marginal revenue they bring, then hiring them costs the business money, and is akin to a donation from the business to the worker. Employers know that making such a hire is a costly mistake, and employers who do not know that will soon witness their business fail as it continues to hemorrhage money on wages it cannot afford. Only employers who understand this economic reality will remain as employers, and all those who do not will lose their businesses, and emotional blackmail by politicians can change nothing about this reality.
Wages, like all prices, are not just arbitrary numbers chosen by greedy employers, they are a reflection of the marginal productivity of the worker. As the law now stipulates that a worker must be paid $10, the employer now has to reconsider whether it is worth it for him to hire this worker. When the government mandates a minimum wage, it does not magically alter the calculus of the employer, nor does it magically increase the productivity of the worker. The employer will still only hire workers whose productivity is higher than their wage. Thus, the minimum wage law makes it illegal for employers to hire anyone whose marginal productivity is less than $10 per hour. Any worker whose productivity is less than $10/hour will now become a drain on any business that hires him and pays him that amount. Either they get fired, or the businesses that hire them lose money and go out of business. In all cases, these jobs are eliminated, and everyone whose productivity is less than $10/hour is now not just unemployed, but legally unemployable.
Viewed through the lens of human action, the effect of a minimum wage law is to make it illegal for workers with a low productivity to get jobs, and many of these workers will lose their jobs. Continuing to look through the lens of human action, one would find that the workers who lose their jobs are the workers with the lowest productivity in society, and these are usually the poorest and the youngest workers. Making it illegal for them to work is effectively making it illegal for them to raise their productivity by learning on the job and acquiring the valuable on-site work experience. Minimum wage laws are thus particularly pernicious to the people who need work the most, and a causal factor in the emergence of wide-scale unemployment, as well as unemployability. Another possible implication is that some businesses, particularly the ones that depend on these low-wage laborers for their operation, would pay the higher wages but also raise the prices of their goods to finance the higher wages. Consumers would then pay the price through higher prices and lower quantities of goods available.
All of these consequences of the minimum wage are deductible by the sound economists from analyzing the human action of the wage law, and the implications it will have on acting individuals. It turns out to be a far more useful and accurate assessment of the situation than anything that can be conjured from examining mathematical metrics.
Prices are a reflection of underlying market reality driven by human action. Attempting to alter underlying market reality by altering its reflection is unworkable. Every attempt at passing price controls has backfired because it ignores the role of human action, and studies economics as if it were about material objects, and not about humans' actions. Schuettinger and Butler have written a depressingly entertaining history of price controls in Forty Centuries of Price Controls, illustrating how this exact dynamic has repeated itself across cultures and nations throughout history. The kings, emperors, politicians, and bureaucrats look at the world of economic transactions as an inhuman process they can alter to suit their needs. They mandate that the observable epiphonema associated with markets fall within acceptable ranges. They assume humans will just adjust their actions to ensure these laws are upheld, but in reality, humans adjust actions optimizing for their own well-being, not for adhering to the law. The merchant would rather not sell at all than sell at a loss. You will either see the free market price, or you will see no market price at all. In such an economy, underground markets become the markets where real prices are expressed.
Actual economists understand that observable economic phenomena and metrics are but manifestations of underlying actions by the humans involved. Humans are constantly seeking to improve their own situation in life, and it is futile to mandate that they act against their interest. The result of mandating laws against human nature is not to change human nature, but to destroy society's respect for laws. This essential realization is an indicator of why the sound economist is in favor of individual economic freedom and against its restriction by governments. The human spirit is indomitable, and it will not act in a way that is harmful to itself.
The sound economist understands humans are constantly acting to improve their lot in life, and that imposing legal punishment on any peaceful economic activity they might choose cannot lead to an improvement in their life, as it will simply restrict their options and reduce the choice of actions available to them. Aggregate analysis blinds the fiat economist to the implications of these laws to the humans whose freedom it restricts. After formulating mathematical measures of social phenomena, the collectivist economist then assumes that these measures are causal factors in the determination of human affairs.
The world already has far too many economics textbooks written in the pseudo-scientific quantitative tradition, but this book will definitely not be one of them. It will not try to explain economics in the terms of the natural sciences, and it will have no sophisticated aggregate equations. Such an approach promises much but delivers little in terms of reliable, useful, and actionable insight. I have taught these textbooks for years and witnessed droves of intelligent students leave the class with more questions than they entered it, struggling to understand the significance of these equations, or see any convincing reason to believe their output, and incredulously try to convince themselves to undertake the astounding leaps of logic necessary to make Keynes' ridiculous equations conform with reality. The Austrian method, in contrast, promises little in quantitative terms, but it does deliver a deeper understanding of economic concepts and phenomena which learners find far more insightful, actionable, and useful.
Instead of pretending to have the certainty of the natural sciences, and leaving you with complicated and irrelevant mathematical models and exercises with little relevance to the real world, this book is unapologetically Austrian in its approach. It uses the English language to explain what many economists throughout history have arrived at.
This book applies the human action approach to explaining the most important concepts and topics in economics, building on the work of the economists of the Austrian school. The book tackles the major economic concepts and topics independently, in a logical sequence. This chapter introduces the Austrian methodological approach to economics, and provides an example, as well as a comparison with the methodological approach of the natural sciences. The next chapter introduces the foundational concept of value, and explains its subjective nature, as well as the concepts of utility and marginal analysis, based on the work of Carl Menger, father of the Austrian school. Chapter 3 introduces the importance of time in economics, the unique nature of economizing time, and how all economizing acts can be understood as attempts to increase the quantity and subjective value of our time on earth. This chapter also introduces the pivotal concepts of opportunity cost, and time preference.
The second section of the book introduces the main actions humans carry out to economize individually. In each of the chapters of this section, a key concept is introduced and analyzed in terms of the reasons for humans to engage in it, the problem it solves, and how it helps humans economize on time. The first and most basic is labor, the topic of chapter 4. Chapter 5 explains the economics of property, why it emerges and the problem it solves, and applies it to the concept of self-ownership. Chapter 6 introduces a particular type of property, capital, which is used for the production of other goods. The cost of capital, its productivity, and its connection to time preference are discussed.
Chapter 7 discusses technology as an economic concept, why it means higher productivity of labor, and its unique status as a non-material economic good that is non-scarce. The chapter concludes with a discussion of the concept of intellectual property, and why the non-scarce nature makes them differ from other productive goods.
Energy, the topic of Chapter 8, is not a conventional topic in most economic textbooks, but it is the author's consideration that understanding the economics of energy is essential to understanding all economics, particularly as the modern advanced capital-intensive and technologically advanced market economy would not be possible without the very large increases in modern humans' power, or the ability to wield large amounts of energy in short periods of time. Moreover, approaching economics in the Austrian method, through marginal analysis, is essential to understanding the realities of energy production in the world today, and can correct many common misconceptions.
Whereas the second section of the book examined individual economizing acts, the third section looks at economizing in a social context, introducing other human beings into the analysis and exploring the implications. As soon as another person is present, trade becomes possible, and both parties have an incentive to engage in it, as it benefits them both. Chapter 9 explains the rationale of trade, the benefits from it, and the implications of the growing extent of the market in which division of labor takes place.
Chapter 10 introduces the concept of money, explaining the problems it solves, how these problems shape the characteristics that are desirable in money, and how money helps humans economize and increase the value and productivity of their time. The chapter explains how money is a product of the market, and not the state, as is commonly erroneously taught in economic textbooks. While this chapter introduces money, it will be left for Part V of the book to explore monetary economics in depth.
The social order in which individuals peacefully engage in all the aforementioned economizing acts is called a market order, and Chapter 11 examines how individual preferences and economizing acts result in the formation of prices, whose essential significance to the market process is explained.
Chapter 13 explains the term capitalism in the Misesean tradition, and how it is an entrepreneurial system inseparable from private property and economic calculation. We examine Mises' litmus test for determining if a society has a market economy, and what it can tell us about economic prospects, and how it can help us understand economic history.
Chapter 14 concludes Part III on the market order by explaining human civilization and economic progress as the spontaneously emergent social order from a world in which a few simple abstract rules govern the behavior of all individuals, making them free to economize to improve their lives, while not infringing on the property and person of one another.
Having so far focused on free exchange and human relationships built on peaceful consent, the book's Part IV introduces the topic of violence and its economic analysis and implications. We begin with an exploration of the economic rationale and implications of violence in Chapter 15, as well as the role the state plays in an economy. Chapter 16 examines the real-world application of violence to the conduct of economic affairs through coercive central planning, by examining one of the most pivotal concepts of the Austrian school: economic calculation. Mises' century-old explanation of the economic calculation problem has proven a fatal blow to economic socialism, with socialists unable to solve the calculation problem intellectually, and witnessing the consistent collapse of all their economic plans in precisely the manner Mises' analysis would predict.
Chapter 17 discusses the economics of security and defense, and examines how a market economy treats these goods, theoretically and in the real world. Even as governments are able to finance their security apparatus with taxes, there are more private security employees than there are policemen in the world. Similar to all other goods, there are no reasons to expect a coercive monopoly to provide security and peace reliably to its beneficiaries.
After having briefly and conceptually introduced money in the market process in Part III of the book, Part V focuses on monetary economics. Approaching this topic from an Austrian perspective, Chapter 18 begins by explaining time preference, the starting point for thinking of money. Chapter 19 explains the emergence of money as a market good, and the unique Austrian perspective that views any quantity of money as being sufficient for an economy. Chapter 20 discusses banking and credit, introducing the use of credit money and its effects. Chapter 21 builds on the concept of time preference, money, and credit to formulate the Austrian pure time preference theory of interest rates. With this foundation on how money works in the market economy, it becomes clear how to explain how money malfunctions in the centrally planned economy, through the Austrian theory of the business cycle, which is the topic of Chapter 22. Finally, chapter 23 discusses how a free market in money would handle investments, drawing on the rise of bitcoin as an explanatory tool.