What Is Economy?


Dr. Carson has written and taught extensively, specializing in Amercian intellectual history. His most recent book, The Rebirth of Liberty: The Founding of the American Republic 1760-1800 is now available in a 350-page attractive Bicentennial paperback from The Foundation for Economic Education, Irvingtonon-Hudson, N.Y. 10533.

The dramatization of the early years of Helen Keller brings to our attention in a memorable way what a marvelous thing it is to be able to use words to communicate with others. Miss Keller was deaf and blind almost from birth. Whether she would ever be able to speak was a secondary question at first, for there was no known technique for even making her aware of the existence of words. The play centers around the struggle of her teacher to break through this barrier to communication. There is an electric moment in the play when Helen recognizes and pronounces her first word. It is the moment toward which the concentrated energies of the actors, and the audience, have been bent. On reflection, we realize what a boon to us is this ability to use words. Unfortunately, words can not only be used to communicate clearly and directly but also to distort, obscure, obfuscate, and confuse whatever the subject may be. Sometimes our failure to communicate is the result of loose and sloppy use of the language. At other times, however, the channels of communication get clogged because words are cut loose from their original meanings and wander around in new surroundings. When this happens, whatever is communicated may be quite different from what it appears to be.

Something like this has happened in our use of "economy" and of terms related to and derived from it. The result is distortion of the language, the breakdown of communication, and something much more serious: extension of the power of government and curtailment of liberty. The distortions are produced mainly by the use of modifiers of "economy" and "economics," modifiers which wrench the root words away from their meanings and put them in alien contexts.

For example, many textbooks today divide their discussion between "macro-economics" and "micro-economics." Micro-economics deals with economics at the level of the individual or firm. Macro-economics is supposed to deal with economy at the level of nations. Macro-economics deals in terms of such indices as gross national product, national income, employment and unemployment figures, wholesale price index, and so forth. These and other such indices are supposed to tell us how well "the economy" is performing.

Then, "economy" itself is modified in a great variety of ways. We speak of a free economy, a planned economy, a controlled economy, a capitalist economy, a socialist economy, and of a mixed economy.

We talk about "the" economy, and sometimes "an" economy. There are supposedly national economies: an American economy, a German economy, a Japanese economy, and a Russian economy, to mention a few.

"Economy" is also referred to figuratively, in language drawn from macro-economics, no doubt. Thus, there is talk of stimulating the economy, of a depressed economy, of prosperity, of heating up the economy and of cooling it off. Our literature is full of analyses, ranging from brief columns in newspapers to lengthy scholarly tomes in libraries, using such phraseology.

"Helper" Words

The basic reason for adding modifiers to words is to gain precision in usage and to clarify the meaning. Modifiers are sometimes referred to as "helper" words in the lower grades in school. They can only help, however, when the meaning of the word is clear in the first place. For example, we can say round hibbett, flat hibbett, square hibbett, rectangular bibbett, oblong hibbett and modify it in whatever way we choose; yet, if we did not know what a hibbett was when we began we would know little more when we had finished modifying it. The same goes for a word like economy.

There is great likelihood, too, that if the word does not have some fixed meaning the adding of modifiers will lead those who use it to suppose that there is substance to what they have brought into being by their modifiers. Is there substance to macro-economics, to planned economy, to American economy, to stimulating the economy, to an economy? There may well be; people use these terms and phrases as if they were talking about something, but the way to find out is to strip away the modifiers and explore the concept itself.

What, then, is economy? Not, be it noted, what is an economy, the economy, or economy modified in any way. Simply, what is economy? Before that is clear all modifications are obstructions to understanding.

Economy, says one dictionary, is "thrifty management, frugality in the expenditure or consumption of money, materials, etc." Another says that it is "The management, regulation, and government of a household; especially, the management of the pecuniary concerns of a household…. A frugal and judicious use of money, etc.; that management which expends money to advantage and incurs no waste…." The meaning of economy may be further clarified by the definition of "economical," a word derived from it. "Economical implies prudent planning in the dispositon of resources so as to avoid unnecessary waste or expense." To "economize" is "to manage economically; use sparingly or frugally." A more formal definition would be: Economy is the careful and frugal use of land, labor, and capital (e. g., resources, energy and ingenuity, and productive devices) so as to realize the greatest return of goods and services from them.

Man’s Wants Exceed His Means

The necessity for economy arises from the nature of man and the conditions of life on planet Earth. Man’s wants are such that there is no way they can be completely filled by goods and services. His wants are limited only by his imagination, which is another way of saying that they are infinite. But the means of supplying them are certainly limited, limited by the available resources, limited because the supply of energy and ingenuity is limited, limited because productive devices are in short supply. Man’s wants are infinite; the means of supplying them are scarce. Economy is the means for supplying the most pressing wants by careful husbandry in the employment of the elements that go into providing for them.

There are only a very limited number of ways by which man can supply his wants for goods or services. He must either provide them for himself (in the manner of a Robinson Crusoe) or acquire them from others. He can acquire them from others by exchange (which includes gifts) or force (which includes fraud). But the use of force cannot be fitted into the definition of economy because there is no relation between the land, labor, and capital employed in thievery and the goods and services acquired. Furthermore, the victim of force or fraud is left without incentive to repeat the performance. It must seem to him that his productive effort and resources were wasted, that he might better devote them to defense or counterforce. Such a course is a departure from the concept of economy. In fact, then, there are only two economical ways to acquire goods and services: by production and trade.

The practice of economy is normal for man. He is inclined to be economical, to spend as little as he can to gain as much of what he wants as he can. To these ends, he saves, conserves, invents, and devises all sorts of ways to increase his supply of goods and services more efficiently. It is true that men are sometimes wasteful and destructive, but if this is anything more than a temporary aberration, they will be found to be incompetent to engage in production and trade. The normal bent to economy produces the array of modes and devices which constitute an economy in any locale.

The Nature of An Economy

It is correct, then, to refer to an economy. An economy consists of the interaction among all the means by which goods and services are provided and traded at any time and place. It consists of the specialization of labor, financial institutions, assembly lines, factories, mines, labor saving devices, markets and whatever goes into the production and distribution of goods. It could embrace the whole world, or it could be, as it sometimes has been, restricted to a small isolated community of people who have no relations with the rest of the world.

Most other commonly used modifications are, however, superfluous, dubious, or erroneous. It is difficult to see, for example, how you could have a mixed economy. On the face of it, a mixed economy would be one in which some resources are frugally employed and others wastefully, or something of the sort. Such a condition could exist, but the wasteful use of resources would not be economy at all. It would be something else.

Actually, those who speak of mixed economies are referring to situations where government owns or controls some of the means of production and distribution of goods and the remainder are privately owned and controlled. That is mixed ownership, not a mixed economy.

Nor does it make much sense to refer to a depressed economy. Undoubtedly, an economy can be disrupted, with all sorts of untoward consequences. The people, afflicted by these disruptions, can be depressed, sometimes deeply and for quite a while. In a figurative sense, of course, an economy could be depressed, that is, contracted, or not expanding. But that would only signify that it had become economical for men to employ their capital in other ways than expanding production. The focus of attention, in that case, would need to be on the cause of this rather than upon economy. The depressant is much more worthy of attention than is the depressed. If a man’s chest is depressed because a log is lying on it, the indicated action is to remove the log, not to pump up his chest. Talk of depressed economies has set the stage for pressing down on the log and pumping up the chest, so to speak.

There are a considerable number of ways of talking about the economy which propose to deal with it as if it were a thing. There is talk of adjusting the economy, of heating it up, cooling it off, stimulating it, and so forth. Although these are clearly figurative uses, they are not made correct by being of this character. An economy is not a thing. It is not analogous to a man, say, or a machine. What economy is may be made to stand out by a little discussion of the close analogy between man and his machines and comparing them with economy.

Of Man and Machines

There are striking similarities between man and the machines he creates, the automobile, say. Man has a circulation system; he takes in food, water, and air. The automobile has a system which utilizes fuel, water, and air. Man has an elimination system; the automobile has an exhaust system. Man has a heart which acts to pump ‘uids throughout the body; the automobile has gasoline and water pumps and an air intake system. Man gets sick; the automobile breaks down. Man can have surgery performed on him; the automobile can have parts replaced. Man dies; the automobile wears out. Both man and the automobile can heat up, cool off, have checkups, have things adjusted, so to speak, and benefit from outside intervention of experts. Economy has none of these things nor does any of these things. It is simply the means by which man efficiently supplies his wants. It has no working parts nor organs, can neither wear out nor benefit from surgery.

It follows, then, that if there is even a modicum of meaning to all this talk it is derived from something other than economy. There is something other, of course. That something other is government and its moral and ethical underpinnings. The stage has already been partially set for the discussion of the role of government. It has been noted that the use of force is not economical. Force is anathema to economy, it should be added.

The practice of economy is normal for man. It enables him to survive and sometimes prosper in a world where he must earn his living by the sweat of his brow. He makes progress by devising techniques and tools which reduce the amount of sweat necessary to producing a given amount. But there is a nether side to all of this. Man, or at least, some men, are not above concocting schemes whereby they can live off the labor of others by using force or fraud. Force is not economical, but it can be applied so as to make it quite profitable to the user. It is to prevent, punish, and reduce the amount of force being used that governments legitimately exist. To that end, governments attempt to monopolize the use of force in their jurisdictions. Government is necessary, then, to the practice of economy as well as to safety and security in all other aspects of life.

Government Shifts the Problem

The existence of government does not, of course, solve the problem force poses for economy. So far as government is effective in preventing private thievery, it shifts the problem to a different plane. The contest — and it is a continual one — then becomes one of who shall control government and how government shall be used. There is the possibility, nay, the strong probability, that those who control the government will use its force to appropriate the goods produced by others so that they may live in ease and with little labor. If moral and ethical pressures work against this, we may expect ever more subtle justifications for doing what is proscribed.

At any rate, every actual economy is, so to speak, a political economy. It is economy as it can be practiced within the governmental framework that prevails. At the least, government will affect economy by taxation and spending. At the most, government may involve itself in virtually every aspect of economic activity.

There is now before us a partial explanation for the use of language that on the face of it is mystifying. It does make a kind of sense to refer to an American economy, or French economy, or British economy, or economy modified by whatever nation is under discussion. Such terms could mean economy as it can be practiced given the governmental framework in that nation. Even so, the terminology is misleading and places the emphasis on the wrong thing. Economy does not differ from place to place — it is everywhere the same, though products and techniques may differ — the difference is in the government. We have only a partial explanation as yet, however; a fuller explanation requires probing deeper. The probe takes us directly into the domain of economics.

Economics is an analytical and theoretical science. One of the reasons is already before us. The subject matter of economics — economy — does not exist outside the framework of government, which alters, distorts, and rearranges it. It is as if a chemist knew water only as it exists in such compounds as milk, and had to abstract it in theory only. There is another reason, one that has nothing to do with government. Economy cannot be experienced through the senses. What we see is human action, as

Ludwig von Mises so aptly named his masterpiece on economics, human action prompted by inner motives which elude all efforts at objectification. Economy can be deduced from the human action but only at the level of theory which admits that the heart has reasons of its own.

The Glory, Illusion and Shame

The glory, the illusion, and the shame of economics stem from its theoretical character. The glory is the precise, harmonious, and elaborate structures that can be and have been made to explain economy. The illusion is that all this could actually be, if — if there were no government, if there were no private property, if there were no capitalists, or whatever. The shame of economics is that it is possible to contrive all sorts of theories and contend for their rightness against all others.

More important for the matter at hand, the study of economics probably has little or no practical value so far as the practice of economy is concerned. There is every reason to believe that man is economical by nature and inclination. Economics is no more written to induce people to be economical than books on astronomy are written to persuade the stars to stay in their orbits. True, economics might be studied just as astronomy is, for the pleasure derived from the contemplation of harmonious arrangements. It might be, possibly sometimes is, but it is inherently less interesting than astronomy. One can, after all, see the stars, even see them much more closely by the use of a telescope. But the most powerful microscope will not enable us to see economy. Nor is there any good reason to suppose that it requires any considerable theoretical background in order to practice economy. Some of the most effective practitioners of economy known to the present writer have been devoid of such learning.

Economics is about economy, on the surface and usually, but its purpose and importance lies elsewhere. It is about economy but its object is political. True, an economics that would be academic would be possible and may have been written on occasion, but it would be something out of the ordinary. Many schools of economics have arisen over the years, but they all tend to fall into one or the other of two categories: they either explain why government should not intervene in the economy or why it should. They do not even have to say they are doing this to do it, but they sometimes do. What is written will have an implicit political policy.

That this has been the case can be shown by a brief examination of the history of economic thought. It can be brief because economics is a late comer as a field of study or academic discipline. There is little enough on the subject before the seventeenth century. In the seventeenth and early eighteenth century a sort of pseudo-science of economics took shape. The theory that was advanced is now known as mercantilism. It consisted of a melange of arguments about how a monarch might enrich himself and augment the power and wealth of the nation by the aggressive use of government power. It was what today is called macro-economics, if it was economics at all.

Adam Smith’s Introduction to Micro-Economics

Adam Smith’s Wealth of Nations was written most pointedly to refute mercantilist theories. He advanced a natural law-natural order explanation of economy and held that government intervention was detrimental and disruptive of economic activity. Though the title suggests that he was discussing wealth at the national level, he was in fact expounding mainly what is today called micro-economics. To put it more precisely, he maintained that the best way to enhance the wealth of a nation, of all nations, for that matter, was for each individual to pursue his own interest, undisturbed by the political authorities. In support of his position, Smith advanced some important economic theories and appealed to the historical record in support of them. But the thrust of his argument was political, toward the removal of political obstructions to economic practices.

Classical economics grew out of Smith’s work. Economics took on its abstract character and began to be a theoretical science. It was not long, however, before some of the strains in classical economics were being removed from their context and being made into arguments for government intervention and even revolution. Karl Marx even employed economic analysis to posit a scientific explanation of the revolutions to come in the future. Reformism got new life with the publication of Henry George’s Progress and Poverty. Many economists turned more and more to finding what were supposed to be flaws in economy which would need to be corrected by government action. In the twentieth century, this reformist bent is frequently ascribed to the works of John Maynard Keynes, but in fact Keynes did not invent intervention nor even the notion of using fiscal policy and monetary measures as a means of intervention, though he did provide a ponderous gloss for them in his massive work.

Austrian School Contributions

Meanwhile, however, the Austrian school of economics had emerged. The main effort of this school has been to refute socialist theories, particularly Marxist, and to plug what they took to be holes in classical economics occasioned by the fact that it did not take sufficiently into account the subjective character of decision making. Economics had become an increasingly complex, controverted, and abstract, even abstruse subject.

Something else had happened, too. As economics took shape as a discipline in the nineteenth century, it was called political economy. The great advantage of this name was that it correctly identified what was at issue in the study, namely, the place and role of government in the economy. Even so, a successful movement occurred to call the discipline economics. Whether those who succeeded, in doing this hoped to divorce it from its political orientation or to remove the onus of calling attention to it does not much matter. The fact is that economics is as politically oriented as political economy ever was. Moreover, the attempt to keep politics out of sight or beneath the surface has resulted in misnaming what is really being discussed. Thus, all these modifiers of economy are used which do not refer to economy at all but to the political context within which people live.

There is no such thing as a macro-economy, then. Macro-economics is a subterfuge of those who are talking about government, not economy, who are advancing government regulation, control, and planning beneath the cover of statistics. Their formulations —gross national product, national income, figures on employment, and such like — are simply aggregates to influence political policy. Nor is there any such thing as micro-economics. Economy is the same for any unit, whether that unit be an individual or an organization. Economics is a theoretical study of the workings of economy. Once it proceeds beyond theory into the actual world at any time and place, it ceases to be economics and becomes political economy. That is, it becomes a study of economy as it can be practiced in a given political situation. It becomes, then, not a study of economy, as such, but a study of the effects of government action.

It is of critical importance that this be understood. So long as interventionists can succeed in using the words as they are being used today, they succeed in drawing our attention away from the real subject and focusing on an imaginary and illusive one. They take our eyes away from government, too, and turn them on the business community. By so doing, they make it appear that the economy is somehow at fault for whatever is wrong, and that government must come to the rescue. If, for example, unemployment is announced as being at nine per cent, then the trouble is supposed to be with the economy. But if we keep clearly in mind what economy is — the careful and frugal use of land, labor, and capital so as to realize the greatest return of goods and services — it will be clear that the fault does not and cannot lie with economy. Economy can only result in providing the most goods and services that are most urgently wanted. The fault must lie with government, then, either in its failure to protect property, or in its interventionist measures, or both.

"Corrective" Interventions

By focusing attention on the economy, interventionists justify and initiate a host of "corrective" measures. They attempt to use government as if it were chief surgeon or master mechanic to the economy. Much as the physician prescribes drugs, injections, surgery, the wearing of corrective braces, changes in diet, the altering of habits, or whatever, much as the mechanic advises the installation of a new muffler, the replacement of the water pump, a tune-up for the ignition system, the tightening of the fan belt, the flushing of the radiator, or what not, just so, the interventionists propose deficit spending, the lowering of the Federal Reserve discount rate, subsidies for housing, a new road program to stimulate the economy, a tax bonus, regulation of industry, consumer protection measures, and so on, and on, and on. Indeed, interventionists treat the economy as if it were a terminally ill patient requiring every sort of conceivable remedy just to keep it going. In point of fact, economy can no more need adjustments than does the multiplication table. It no more needs stimulating than does the solar system. How well economy is functioning can no more be determined by statistics than the performance of a man’s heart can be determined by weighing the amount of blood being pumped through it. By misnaming what they are talking about, interventionists create an illusion that they are ministering to economy when they are really using force on people.

Given the terminology that is now in use, people pose questions such as these: "How is the economy doing?" "Is the economy improving or getting worse?" "How long will it be before the economy is prosperous again?" An appropriate answer might go something like this:

Economy is as well as could be expected, all things considered. In fact, economy is perfect. People everywhere are practicing it in their affairs. Businesses are producing as much as they can as inexpensively as they can. Producers are moving their supplies to the points of greatest demand. Land, labor, and capital are being efficiently employed to provide a vast array of goods at the best prices possible. Workers are set to work on those projects which our information tells us are most likely to yield the results that people want. Economy, then, is doing well. The trouble is with government. Government inhibits, prohibits, obstructs, alters, and intervenes in all our efforts at economy. It confiscates a considerable amount of what can be produced to pay its own workers or to redistribute it as it sees fit. It interferes with prices so as to make it difficult to know what should be produced. It even makes it economical for some individuals to act in ways that are harmful to economy in general. Economy is well, but government is in bad shape.

The Proper Questions

There are questions, then, that can be asked which will yield answers about the state of the economy. They are not, however, questions about economy; they are questions about the government. They can be posed in such ways as the following. How open is the market to all corners? What laws, rules, regulations, and restrictions hamper entry to the market? How readily can a drug be introduced, a construction project be begun, a new factory opened, or changes be made in a product? Can prices change to reflect changing conditions, or are they fixed by government decree or made difficult to alter by government involvement? Can wages be determined by mutual agreement between employer and employee? What portion of the fruits of his labor, his earnings, can a man keep? How private is property? Must its use depend upon the approval of a host of government agencies? What portion of the cost of production goes into providing evidence of compliance with government regulations? Does government subsidize some operations and penalize others? Are there privileged groups and organizations who are enabled by government to evade some of the requirements of economy? The answers to these and like questions tell us what we need to know about the state of the economy.

Statistics are even useful once we are clear what it is they can tell us. They cannot tell us how efficiently economy is operating. They can tell us something about the impact of government on the economy. For example, when England, in the early nineteenth century, struck away its restrictions on trade, it began a dramatic move toward economic ascendancy in the world. When it began once again to impose restraints ever more vigorously in the twentieth century, it began its precipitate decline. Statistics give precision to these results of government policy. Economy was the same in England as anywhere else, but government policy changed.

The Means of Communication

Language is indeed a marvelous contrivance. It enables us to express ourselves, to communicate with others, to be social beings. But if words are not used with care and kept to commonly accepted meanings which bear a close relation to accepted reality, the channels of communication are clogged and words become clanging symbols to divide us from one another and sever our ties with society. Those very words which it is so difficult for anyone deaf and blind to grasp become instruments for deafening and blinding us to reality.

Language is also, however, subtle and tenacious, resistant to change and unavailable to be shaped just as we might desire. It holds its course or responds to needs in ways that analysis fails to divulge. It may well be that the present writer has proscribed usages which have good and sufficient reason for being there. It was not my purpose, however, so much to alter the way we talk about economy as to get us to talk about government when that is the subject we should have in mind.

Economy does not stand in need of much public attention; government requires a great deal more than we might suppose it should just to keep it in its place. It may be redundant to refer to a free economy, for can economy be anything but free, but limited government is a necessary condition for free men, and the practice of economy by free men is the necessary condition for prosperity.


Freedom and Morality

It seems to me one of the great merits of a free society that material reward is not dependent on whether the majority of our fellows like or esteem us personally. This means that, so long as we keep within the accepted rules, moral pressure can be brought on us only through the esteem of those whom we ourselves respect and not through the allocation of material reward by a social authority. It is of the essence of a free society that we should be materially rewarded not for doing what others order us to do, but for giving them what they want. Our conduct ought certainly to be guided by our desire for their esteem. But we are free because the success of our daily efforts does not depend on whether particular people like us, or our principles, or our religion, or our manners, and because we can decide whether the material reward others are prepared to pay for our services makes it worth-while for us to render them.

–F. A. HAYEK, "The Moral Element in Free Enterprise"


July 1976

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