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Evolutionary possibilities of the emergence of economic calculation and money.
The problem of the impossibility of socialism.
Matúš Pošvanc
Abstract
Problem of the economic calculation is usually associated with the problem of the impossibility
of the economic calculation in the socialist society and with impossibility to calculate without
money. The monetary calculation is considered as the beginning of economic calculation in
cardinal units, given the fact it sets the so-called common denominator of calculation. The
authors active in this area typically resort to claims that before the emergence of money there
had to be some form of ineffective type of calculation. This paper focuses on the critique of the
current approaches to the economic calculation problem. It points out the logical errors of the
Mises’s or Hayek’s interpretation of the problem. Nonetheless, it seeks the solution in a
modified Hayek’s version of the interpretation of the problem defined as a knowledge problem.
It proposes an alternative, evolutionary solution, consistent with other claims of the Austrian
School of Economics. I present here not a superficial solution to the problem. The problem is
solved in the context of the modified theory of the subjective value, value imputation problem,
as well as the problem of the transition from the subjective evaluation of economic goods to
objectively set values (prices) of such goods (appraisal problem). Modification of the approach
enables the description of the problem of economic calculation in the non-monetary economy,
and then also in the monetary one. On the basis of this line of reasoning it is possible also to
explain the so-called problem of the objective exchange value of money, meaning the
purchasing power of money. Furthermore, this argumentation also shows the options of the
evolution of money (economic tool) also in accordance with different competitive approaches
to the problem of money from the perspective of economic anthropology. It follows from the
argumentation provided in this paper that the term ‘economic effectiveness’ has a relativistic
character. The conclusions reached in this paper clearly show the possibility of the existence of
economic calculation in the socialist society. In order to refuse socialism, there is a need for
other forms of reasoning, based on the principles of personal freedom of each individual within
the boundaries of the private property, which have the form of “absolute” social norms. I also
claim that regardless of the fact that the term economic effectiveness has a relativistic character,
socialist society has to be a less effective economic community by definition. This is due to the
fact that socialism is applying anti-social (involuntary) standard of economic calculation
leading to the weaker satisfaction of the ends of individuals as members of these societies
compared with capitalism, or some forms of more free society where the calculation standard
is chosen within the competitiveness process.
Key words
Theory of value, Pricing theory, economic calculation, socialism, money
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Contents
Abstract ................................................................................................................................................... 1
1. Introduction ......................................................................................................................................... 2
2. Problem of the economic calculation and the criticism of the existing approach of the Austrian
school ...................................................................................................................................................... 4
3. Revision of the economic calculation theory ...................................................................................... 8
3.1 Subjective theory of value ........................................................................................................... 11
3.2 Economic calculation as an accounting standard of the other one .............................................. 27
3.3 Historical context of the evolution of money and economic calculation .................................... 41
4. The problem of the impossibility of socialism and the problem of economic efficiency ................. 48
1. Introduction
The problem of the economic calculation has generated numerous economic discussions. And
I sincerely hope that this contribution will generate a new ones. Mainly, because It will be quite
controversial. The problem of the economic calculation is usually associated with the problem
of impossibility of the economic calculation in the socialist society. None of the works on the
topic, however, focuses on the answering of the question related to the evolution of the
emergence of the monetary economic calculation. The monetary calculation is considered either
as a beginning of the possibility of any effective calculation in the cardinal units of common
denominator of calculation, or the authors writing on this topic resort to the claims, that prior
to that there had to be only some ineffective form of calculation (which is not worth a mention?)
It is the background of the answers to the question of the evolution of the economic calculation
phenomenon that shows that the perception so far is not correct. The order of my argument
supporting the claim is chosen in the following manner:
We describe the problem of economic calculation, we present the critique of the current
interpretation of the problem and we identify the valid parts of current interpretation. Within
this context we make use as the basic texts Mises´s “Economic Calculation in the Socialist
Commonwealth”1 and Hayek´s “The Use of Knowledge in Society”2. Subsequently, we will
criticize Mises and Hayek. As we shall see, the premises underlying the arguments of Mises
and then Hayek, are logically inconsistent. However, Hayek's interpretation of the problem of
the economic calculation of socialist society, as well as the theory of cultural evolution, suggests
a direction in which the identified problems could be eliminated (as we shall see, however,
Hayek does not solve the identified problems completely). During the criticism we of course
point out also the valid parts of the theories, whether Mises’s or Hayek’s. It is actually the valid
parts of the arguments of both authors that will form the foundation for the reformulation of the
1 Mises, L. 1920. Economic Calculation in the Socialist Commonwealth. WWW DOCUMENT
<https://mises.org/library/economic-calculation-socialist-commonwealth/html>
2 Hayek, F.A. 1945. The Use of Knowledge in Society. WWW DOCUMENT
<https://www.econlib.org/library/Essays/hykKnw.html?chapter_num=1#book-reader>
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solution. The offered solution to the problem focuses on the three areas of problems, namely
the nature of the evaluation of economic goods and their subsequent pricing, the problem of the
common denominator of the economic calculation (its gradual emergence) and placing the
presented solution into the potential historical context. The reconstruction of the evolutionary
emergence of economic calculation will obviously have a logical-formal character, meaning
that it is not an exact reconstruction of the historical facts, but rather a possible interpretation
of the motivations and logical framework. It will not, therefore, make a claim for an absolute
truthfulness. It will seek to identify the principles. In the process I will also uncover my
comments to the arguments related to the previous debate on the economic calculation of
Austrian authors3 (in the alphabetical order): Boetke, P., Eshelman, L., Herbener, J., Hoppe,
H., Hülsmann, J., Lavoi, D., Kirzner, I., Rothbard, M. Salerno, J. as well as the contribution of
B. Caplan4. The paper follows my previously presented criticism of the Mises’s branch of the
Austrian School and its interpretation of the problem of the purchasing power of money, the
criticism of the regression theorem, or the revision of the Austrian approach to the interest rate,
which are related to the problem of calculation, and thus I shall make references to my previous
works5.
The paper shall lead us to some quite controversial claims. I argue that the economic calculation
in socialism is possible and so is socialism. It is just that socialism is by definition less effective
and so is the economic calculation within the socialism. I will also address the importance of
the property rights and I will state that the property rights are a condition for a higher efficiency.
I describe the problem of organizational units (family, company, community,…) and the
problem of economic calculation: I argue that the calculation is derived also from the
determination of the accounting standard of the given organizational unit. I also focus on the
contribution of Hayek and his so-called knowledge problem. I will claim that Hayek’s
contribution to the discussion is valid and, conversely, it is the Mises’s interpretation that is
actually incorrect, even though from the beginning of his thought process Mises explicitly
suggests the solution. Nevertheless, he does not develop it leading his line of reasoning to
logical difficulties. Finally, we show the answers to some new related questions related to the
topic of economic calculation, which shall arise from the presented interpretation of the
problem; for example, why capitalism and free society are more effective in the use of the scarce
resources.
3 Kinsela, S. The Great Mises-Hayek Dehomogenization/Economic Calculation Debate. WWW DOCUMENT
<http://www.stephankinsella.com/2016/02/the-great-mises-hayek-dehomogenizationeconomic-calculation-
debate/>
4 Caplan, B. Is socialism really “impossible”? WWW DOCUMENT
<https://www.tandfonline.com/doi/abs/10.1080/08913810408443598>
5 These works are published e.g on the webpage http://www.hayek.sk/category/austrian-school-research-center-
en/
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2. Problem of the economic calculation and the criticism of the existing
approach of the Austrian school
The problem of the economic calculation is associated with a question of how it is possible to
explain the existence of a calculating unit, which is identical for each person, if each person
attributes value to economic goods subjectively. The problem stems from the fact that the
subjective attribution of value to economic goods is not comparable. Each human subject has
its own value scale, based on he/she perceives the reality around. The second problem stems
from the fact that human subjects approach the evaluation of economic goods in different ways,
so these economic goods have value-heterogeneous character. This means that the economic
good – water – can be value-perceived differently by two different human subjects. If we
include time frame, or time continuum, in the picture, the problem becomes all the more obvious
even in the case of one person, not to mention more people. This is true given the point of view,
that the water as economic good can be value-perceived by that same person at time t differently
compare to the time t+1. We face, therefore, a very interesting problem of how human subjects
can, based on these presumptions, economically calculate at all? The fact that they deal with
this problem is obvious from the empirical reality, which we perceive around us, i.e. that people
calculate and solved this issue. We must “only” describe how.
In 1920 Mises proposes a solution, about which he claimed that it is consistent with the theory
of subjective value. Mises realizes the problem of the subjective perception and subjective
attribution of value to the economic goods. He proposes to solve the problem using exchange!
Mises claims that the exchange of two economic goods, which is based on evaluating
exchanged goods in question differently, creates however an objective exchange ratio of these
economic goods; the price. The objective nature of this exchange ratio allows subsequently its
perception not just by the two human subjects undertaking the exchange, but also by other
humans. It is because the price is objective feature of reality. This way people mutually
“communicate” subjectively perceived ends, which they satisfy through the exchanged means.
Subjective and inverse evaluation of the two means by two human subjects creates in fact an
objective feature of reality. The price is indeed an objective fact. On this topic Mises writes:
“In an exchange economy the objective exchange value of commodities enters as the
unit of economic calculation. This entails a threefold advantage. In the first place, it
renders it possible to base the calculation upon the valuations of all participants in
trade. The subjective use value of each is not immediately comparable as a purely
individual phenomenon with the subjective use value of other men. It only becomes so
in exchange value, which arises out of the interplay of the subjective valuations of all
who take part in exchange. But in that case calculation by exchange value furnishes a
control over the appropriate employment of goods. Anyone who wishes to make
calculations in regard to a complicated process of production will immediately notice
whether he has worked more economically than others or not; if he finds, from
reference to the exchange relations obtaining in the market, that he will not be able to
produce profitably, this shows that others understand how to make a better use of the
goods of higher order in question. Lastly, calculation by exchange value makes it
possible to refer values back to a unit. For this purpose, since goods are mutually
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substitutable in accordance with the exchange relations obtaining in the market, any
possible good can be chosen. In a monetary economy it is money that is so chosen.”
(p. 10, Mises 1920)
This part is crucial with respect to our argument, both from the perspective of validity of Mises’s
line of reasoning, as well as in terms of our criticism. That is why I have presented citation in
full. Here Mises points out the possibility of mutual comparison of the activities of human
subjects related to the economization of objects of reality. The comparison allows on one hand
uncover the valuation of the second human subject associated with the evaluation of the object
of reality, which he demands in the exchange, as well as on the other hand the valuation
associated with that object of reality, which he offers in the exchange and vice versa from the
point of view of the other one. Thus, we are setting some kind of mutual value benchmark.
Valid here and now and valid for two given human subjects, however, the information is
transferable also to other human subjects that are aware of the exchange. Literally this shows
to the two sides of the exchange, as well as to others the mutual relation of the ascribing of
value to the economic goods by the two human subjects during exchange. Mises cautions that
the objective exchange value of the goods at the same time allows to calculate (re-calculate)
our economic activity in some units. So far up to this point one cannot really criticize Mises as
he presents a brilliant solution to the subjective nature of valuation of economic goods. Then,
however, he follows with a part that seems logical: „since goods are mutually substitutable in
accordance with the exchange relations obtaining in the market, any possible good can be
chosen. In a monetary economy it is money that is so chosen.“ As we shall see, this is from
Mises an unfortunate simplification of the problem, which in turn necessarily leads him to
wrong logical conclusions and directs his argument to logically contradictory statements.
It is true that Mises describes the process of the transition from subjective valuation to
calculation based on objective criteria. However, he talks about economic calculation primarily
only as a monetary calculation. In essence, he cannot imagine a different one. When mentioning
the non-monetary calculation, he refers to statements, that it is possible only with the economic
goods of lower order. He mentions the example of a household, or a peasant who does not have
to have any calculation problem, until economic goods of higher order enter the scene (capital
goods, needed for the production of the consumer goods of lower order). He equally refers to
Robinson Crusoe, saying that he does not necessarily need to have a calculation problem,
insofar as the calculation focuses on the satisfaction of his ends (in kind calculation). His
argumentation in the context of economic calculation in socialist society is quite the same. It is
a developed economic community, which cannot exist without monetary calculation, given the
fact that it is mainly the advanced production processes, in which the community needs the
monetary economic calculation created in the free market in the context of individual property
rights:
Calculation in natura, in an economy without exchange, can embrace
consumption goods only; it completely fails when it comes to dealing with goods
of a higher order. And as soon as one gives up the conception of a freely
established monetary price for goods of a higher order, rational production
becomes completely impossible. Every step that takes us away from private
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ownership of the means of production and from the use of money also takes us
away from rational economics. [emphasis in original, p. 17. Mises 1920)]
However, the perception of the economic calculation as the monetary calculation puts Mises
and his defenders to the mutually contradicting and illogical claims. I claim, that the main
problem of this line of argument is in the derivation of the calculation from the past
monetary exchange price. The problem is of course the past price. Whether monetary or
non-monetary. The claim creates a three-way problem; the third one is the most serious one.
The first problem is that our predecessor have not always had money. This is not denied by
either Mises or his followers. However, what was then before our predecessors invented
money? After all they had to conduct economic calculation and a successful one, even though
in the context of (their mental) capacities. Without undertaking some form of “successful”
economic calculation we would not be here and also there would be no way to create more
complicated production structures, where Mises demands calculation and he even claims that it
can only be monetary. Non-calculation simply cannot lead to calculation6. It appears that Mises
was not in the mood to go deeper into the explanation of such answers associated with the
means of calculation before the monetary economy. He circumvents the answer by the argument
about the application of calculation for the so-called simple and complex economic processes.
In case of the simple processes he claimed that it is actually simple to do the calculation. The
estimates of the prices be undertaken by the mini community (individual, family, small
community). Of course, based on the previous (barter) prices. This, nonetheless, creates a
second problem. The empirical question of since when the monetary calculation is necessary
and until what kind of process is not. Alternatively, the question is what kind of economic
process is still simple and which one is already a complex one? The third problem, which is
related to the two previous ones and which is the main problem (it is exactly this third problem
that creates the first two problems), is the discord of the claim about the economic calculation
based on the past prices in the context of future oriented activity. The past is given and
“forgotten” history for new action. It is something what already happens based on something
what was perceived in the past. This is not my claim; this is Mises proper claim. If the
calculation process is based on previous prices and previous prices are also outcome of
calculations, how then, however, is previous calculation even possible? The price (fact) is
outcome of some calculation process and calculation process is based on past prices. This is the
so-called contradictory regressus ad infinitum. In other words, how could we even, based on
this logic, presented by Mises, ever start calculating? The presumption of the past price actually
implies the existence of the past calculation7. Mises, however, claims that without the past price
one cannot calculate. This is not some obscure argument in terms of Mises's interpretation. This
is the explicit position of the Misesians. They even explain it as a form of “Verstehen” of the
6 This problem is usually avoided by the authors of the Austrian School. See for example de Soto, J. H. (2012)
Socialism, Economic Calculation and Entrepreneurship, p. 131, Bratislava: Conservative Institute of M. R.
Stefanik, where de Soto dedicates to the problem the following statement: „A koncom 19. storočia Walter
Bagehot jasne odpozoroval, že primitívni divosi neboli schopní urobiť ani jednoduché odhady výnosov
a nákladov.“
7 Hülsmann used contradictory regressus ad infinitum e.g. against Selgin. See in Hülsmann, Jörg Guido. "A
Realist Approach to Equilibrium Analysis." The Quarterly Journal of Austrian Economics 3, No.4 (Winter
2000), p. 45
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situation that it is only this way that one can perceive previous conditions of the actions of the
human subjects, based on which we can make further decisions and actions and calculation8.
There are two ways to look at this issue. The first options is that we stay with Mises’s position,
but then we necessarily have to get to the vicious argument cycle. Prices (whether monetary or
non-monetary) are for Mises the prerequisite for any economic calculation, but at the same time
a result of an exchange, which is inevitably the result of an activity including an element of
calculation. The second option is to admit that Mises did not really explain the problem of
economic calculation.
And as we can see, the fundamental question is how humans ever started to calculate under the
assumptions set out above, i.e. there is no common denominator of economic calculation and
there is a heterogeneity in the value perception of economic goods. How is than possible to
calculate once there is no common denominator and there is value heterogeneity of goods? Both
must be explained in the context of the validity of the theories, such as the subjective value
theory and the marginal utility theory.
The problem we face here is of a twofold nature. First, it is necessary to explain how a common
denominator for the economic calculation acquires its purchasing power – per se9. Yet on the
other hand, we must also explain the principles of economic calculation itself.
Before we can proceed to the revision of Mises’ approach, let us introduce Hayek’s claims
about the calculation problem. Hayek writes his work clearly in the reference to Mises –
monetary calculation. He is, therefore, subject to identical criticism as Mises. Nonetheless,
Hayek brings the discussion about the calculation problem to a slightly different level, which I
consider in the context of this paper to be instructive and valid. Hayek calls this level
“knowledge problem”, which the community solves through the price system. Hayek perceives
the actual realization of the economic calculation only as a computing problem. This is,
however, preceded in Hayek’s words by the problem of the input of data inaccessible to anyone
(implies the existence of the central planner) on their own. He writes that the problem of
economic allocation of resources lies in how to ensure the best use of scarce resources for the
members of the community, as the members of the community exactly perceive those resources.
Hayek focuses on the fact that information is of course necessary for the proper allocation of
resources. He claims that there is, in principle, nothing that would happen in the world that
would not affect people’s decision about the allocation of scarce resources. However, he
emphasizes that it is a price system that, by condensing these scattered atomized information,
makes it easier to decide about the right allocation of resources. And this is without the each
individual having to deal with the causes related to what directly affects his/her interest. Hayek
writes:
8 See e.g. in Hülsmann, J.G., Knowledge, Judgment, and the Use of Property. p. 47. WWW DOCUMENT
<https://mises.org/library/knowledge-judgment-and-use-property>
9 I have realized Mises' criticism of the regression theorem and the problem of acquiring the purchasing power of
money in Pošvanc, M. The theory of intersubjectively perceived value of money. WWW DOCUMENT
<http://www.hayek.sk/theory-of-intersubjective-perception-of-value-of-money/ >, and in “Why We needn’t
(inevitable) Gold Standard but Free Banking System. (not published in English).
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„It is indeed the great contribution of the pure logic of choice that it has demonstrated
conclusively that even such a single mind could solve this kind of problem only by
constructing and constantly using rates of equivalence (or “values,” or “marginal
rates of substitution”), i.e., by attaching to each kind of scarce resource a numerical
index which cannot be derived from any property possessed by that particular thing,
but which reflects, or in which is condensed, its significance in view of the whole
means-end structure. In any small change he will have to consider only these
quantitative indices (or “values”) in which all the relevant information is
concentrated; and, by adjusting the quantities one by one, he can appropriately
rearrange his dispositions without having to solve the whole puzzle ab initio or without
needing at any stage to survey it at once in all its ramifications.“ (part V, Hayek 1945)
Thus, Hayek understands the price system as a communication tool that society has
spontaneously created. Hayek writes this passage in the context of the monetary pricing system.
However, as we shall see below, the monetary price system is only a further step in the evolution
of economic calculation. This Hayek’s claim needs to be anchored first in a community without
a monetary unit, thus showing the more general validity of the given premises (for forgetting
this step, Hayek must be criticized), and only then argue the monetary system is only a vital
“communication extension tool” of the solution to the problem of the economic calculation.
Then we will be able to point out that the institutionalized pricing system (e.g. today’s stock
exchange system, impact of market-makers, today’s HFT technologies) is even another
extension of this tool. It is even possible to speculate, whether the new technologies bringing
the possibilities of the so-called triple-accounting (a double-entry cryptographic transaction-
based confirmation based on decentralized blockchain technologies, or other data consensus-
based technologies) are/will be the next technological evolutionary step, which will improve
the price system-related tool to address the problem of economic calculation and price
discovery. Although we will not explicitly discuss this topic. The fact that Hayek looks at the
pricing system as an evolutionary tool can be seen in the following passage of his work:
„The price system is just one of those formations which man has learned to use
(though he is still very far from having learned to make the best use of it) after he had
stumbled upon it without understanding it.“ (bold added, part VI, Hayek 1945)
So let us go to the revision of the original Misesian concept of economic calculation and use
vital parts of either Mises´s or Hayek's arguments.
3. Revision of the economic calculation theory
Even though it does not appear so, based on the previous criticism, Mises actually hinted at the
solution to the problem, but he never elaborated it. Whether the reasons was his method or
something else, is for another discussion. Nonetheless Mises clearly shows, that the price is an
objective feature of the reality, which makes it possible for it to be grasped by any subject. It is
at the same time the price, meaning the exchange ratio of the two economic goods, which
reveals the attribution of value to two economic goods inversely by two human subjects during
the exchange. The problem faced by Mises is that the direct exchange (in particular time t) as
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soon as it is passes, it ends and becomes the past. Its conditions can be theoretically replicated,
but this is not given and we should rather presuppose a constant change. The economic
calculation in the context of barter or past monetary prices then must necessarily lead to logical
problems. Economic calculation needs to be explained with reference to the future, without the
past being relevant in any way.
Let us try for the beginning of our inquiry take the valid part of the Mises’s argument. In doing
so we shall undertake a slight change in its interpretation, thus defining the basic positions,
from which we can take the inquiry further. The problem can be solved by a small change of
the perspective on the problem and by abandoning the exchange at the specific time t, which
ends and becomes the past. We need to focus on the debt exchange, meaning the exchange at
times t, when the creditor provides the debtor the economic good X and at time t+1 the debtor
eliminates his/her obligation to the creditor in terms of the good Y. In this case the objects of
the evaluation of the two human subjects is not the comparison of the past and present as it is
within the exchange at particular time t. During the exchange at particular time t we exchange
something that we have already previously created. We judge something that has already
happened. For this type of calculation, we necessarily have to compare the price at time t and a
different price at t – 1. However, as we have shown already, the reference to the past creates
problems; we are comparing two situations, which have a different value context. The past is
completely heterogenous compare to present. Without money we compare apples to oranges.
Nonetheless, our goal is to explain such comparison without money.
The debt exchange, on the contrary, lasts into the future. It is a plan. It is a future elimination
of debt through some units of economic good Y in exchange for the debtor earning X, which
has already been made, earlier in time. I claim here that from the point of this exchange the
economic calculation is the accounting standard10 of the creditor in terms of the economic good
Y, which he agreed with the debtor. It is at the same time a common standard of the creditor
and the debtor given that even the debt exchange implies a mutual agreement of both human
subjects. However, it is true that the standard is proposed more by the creditor in terms of the
ratio Y/X, which is fulfilled later in time, because the exchange ratio X/Y is already realized at
time t and becomes the past. The accounting standard (standard of economic calculation) is
rather an agreement in terms of the elimination of the obligation in Y. Based on that the
participants of the exchange can calculate their profits, which from the perspective of the
creditor take the form of the promised economic good Y and from the perspective of debtor in
the form of what he keeps, if he respects the obligation towards the creditor, meaning the
remains of some economic goods, which are the result of his economic activity during the time
period t t+1, minus Y, by which the debtor eliminated the debt.
10 I consider the term “accounting standard” as proper due to the fact that it is agreement between two or among
more human subjects about the conditions of the debt and its elimination later in time. It is agreement about what
is Y, how many units of Y is used later in time, timescale, and also about what is collateral and what happens if
this or that happens and debt is not eliminated. It has many implications as: e.g. it is a banking sector which
creates very same unit of account standard however on institutional level, or the problem of economic error is
inherent intersubjective phenomenon of this agreed standard or the problem of large scale error of entrepreneurs
(crisis) is very connected with the issue and also it has implication on theory of capital. I will develop more
implications in more detail in later texts.
10
The change of the focus from the direct exchange (time t) to the debt exchange provides a
number of qualitative changes. First, the debt exchange happens over time and at the given time
the created accounting standard lasts. This makes the standard transferable also to other
members of the economic community. Second, the economic calculation focuses on the future,
which is completely in line with the claim that the human action always focuses on the future;
that means that the calculation is not derived from the past prices, it is based on an objective ex
ante agreement. Other prices of economic goods in the period of the duration of the obligation
we derive from the activity of the debtor that tries to eliminate the debt in the form of Y. This
means that in the period of the duration of the obligation the debtor exchanges the results of his
economic activity for some part of Y so that by the end of the agreement, he will have repaid
the entire obligation in Y. The ongoing exchange in Y is motivated by the effort to eliminate
the obligation in t+1. The other prices thus generated during the duration of the obligation
expressed in Y (the debtor demands Y in order to repay the obligation) have their future
orientation as well. At the same time, it is irrelevant, whether the Y takes the form of money or
any other economic good. It is an agreement about the debt exchange, which implies the
objective standard of calculation between the creditor and the debtor expressed in Y, which is
provided later in time for X, which is provided earlier in time. At the same time it is completely
irrelevant, whether the given exchange concerns a simple or complicated production process.
What is also essential is that the principle of the standard of economic calculation is applicable
in the evolutionary development of the economic relations, meaning it is possible to describe
its gradual creation from the debt exchange of two subjects, which create a sort of binary
economic calculation standard (standard of the two human subjects) for any production process,
up to any numerous community of human subjects, which in time create mutual economic-
calculation standard (n-nary standard), which, as we shall see, logically collapses into the
expression of economic calculation only in a certain number of economic goods, which the
community uses for calculation in the form of several kinds of money.
At the same time the context of such line of reasoning is connectable to the Hayek’s argument
about the price system as the tool of economic calculation. The economic good Y as the
accounting standard of the two human subjects is transferable to other human subjects.
Obviously only in the case that other human subjects agree to the given standard, meaning that
it is beneficial for them to use the standard. It could become the part of the rules of the
community and it could be formed in the primitive competitive environment among numerous
economic goods used by the community. Subsequently the “price” system in a given
community is also determined in units Y. The good Y could have started to serve as the basis
for the further estimation of the acceptability and feasibility of the fulfilment of the subsequent
debt exchanges of other members of the community. This means that in a simplified manner
human subjects are beginning to address gradually the question of whether or not to accept the
terms of the debt exchange, which is proposed in the given standard. This then influences the
further development of the production structures and its potential expansion (also beyond the
borders of the community) based on repetition of the process. The specialization of economic
activities connected with the standardization of debt exchanges in Y are further developed in
communities, which improve the determination of the purchasing power of Y (the emergence
of money primitive banking system modern banking system) and on the other hand the
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price system itself is improving as well (first primitive exchanges beyond the border of
community first primitive standard market places first stock markets global financial
system).
In the following subchapters we describe in detail this brief outline of the solution and give a
deeper argumentation and its explanation. Indeed, we have to show how this theory can be
linked to subjective value theory. Then we need to show how subjective valuations lead to
prices and what their role is and how we calculate in non-monetary exchanges. Ultimately we
focus on the processes standing behind the attribution of the purchasing power of the monetary
calculation unit (money) and how this theory can be linked to other theories of the emergence
of money.
3.1 Subjective theory of value
Economic calculation needs to be anchored in the context of the value theory and the associated
problem, so-called value imputation problem. The method that we choose follow on the recent
and very inspirational works of a Slovak social scientist Šimon Biľo. As Biľo shows, the value
theory and the problem of the attribution of value to the so-called goods of higher order (in the
context of the value imputation theory) was a topic basically unopened since 1930. Misesian,
so-called ordinalistic approach to the valuation theory “defeated” the cardinalistic attempts to
explain the valuation of economic goods of higher order present in the works of Böhm-Bawerk
and Wieser11. While Böhm-Bawerk and Wieser try to solve the problem of the value imputation
of economic goods of higher order through a cardinalistic approach, it is Čuhel-Mises’s solution
of the given problem claims that in the context of the evaluation there is nothing more than the
preference of a against b. That means no value calculation, just a comparison of what is better
and what is worse. However, Mises’s solution still contains equation, meaning that the value of
product equals the value of the overall combination of production factors necessary for its
production. Biľo points out that it is professor Hülsmann who identified this point of Mises’s
“legacy” inherited from other Austrian school authors12. This claim is, according to Hülsmann,
not in line with Mises’s claims that the valuation can be based only on the ordinalistic principle,
11 Biľo, Š. 2004. The Theory of Imputation: A context of value spreads between means and ends. WWW
DOCUMENT <http://www2.gcc.edu/dept/econ/ASSC/Papers2004/Imputation_Bilo.pdf>
12 Hülsmann writes: „Mises brings up the following case:
<Let us suppose that the scale of values of the possessor of an apple, a pear, and a glass of lemonade, is as
follows:
1. An apple
2. A piece of cake
3. A glass of lemonade
4. A pear
If now this man is given the opportunity of exchanging his pear for a piece of cake, this opportunity will increase
the significance that he attaches to the pear. He will now value the pear more highly than the lemonade.>
It is true that this passage is no clear-cut evidence that Mises championed value imputation theory. Mises does
not actually say that the value of the goal of the exchange (the piece of cake) is fully imputed on the means (the
pear); he just says that the exchange opportunity will increase the significance of the pear, to the point that the
value of the pear will now be higher than the value of the glass of lemonade—but not necessarily equal to the
value of the cake“. See in more detail in Hülsmann, J.G. Theory of Interest. WWW DOCUMENT
<https://mises-media.s3.amazonaws.com/qjae5_4_7.pdf> p.89
12
meaning the valuation is based only on the “preference a to b” principle, not “equals” principle.
Professor Hülsmann, building on this finding, determines in the context of theory of interest
that the interest originates from the value spread between ends and means, meaning that means
have to be on the value scale always lower than their corresponding ends.
Šimon Biľo, however, provides an excellent critique of prof. Hülsmann ending in the claim that
there is nothing like the existence of the value spread between ends and means. It is no
coincidence that in doing so Biľo also presents his own solution to the valuation problem and
the problem of value imputation. It is also a very inspirational solution. We shall first introduce
the solution, and then I shall provide my own critical remarks of it. Based on these remarks, I
try to eliminate the identified errors, so that his valuation theory can sustain such criticisms.
This way I shall introduce a new version of this theory, which can serve as an explanation of
how our predecessors calculated even without money.
Biľo is a praxeologist, and so he begins his description by defining, what is action. He considers
that an action has to be purposeful and requiring choice leading to the achievement of desired
ends. He points out that the condition for action is the person’s feeling of uneasiness, the vision
of a more satisfying state and the expectation that the action will causally leads to the removal
or amelioration of the feeling of uneasiness. As he explains, the action is necessarily focused
only on the future, the goal of the action is always so-called action-result category, assessed in
the context of contra-factuality of the result of the action, meaning the potentially alternative
state of what could happen in other circumstances, if the person did not take the action to
remove the perceived uneasiness. Thus, it is not the present state of the perceived uneasiness
that is important for the person, but rather the potential situations, which are “unacceptable” to
us, if we do not act.
Biľo follows Mises, that it is an active man that transforms the things and makes them into
economic means („acting man makes them – things – means“). Biľo further paraphrases Mises,
that the means must always be scare at the same time, otherwise it would not make sense to act
and the means would just be general conditions of human welfare. It is the decision (choice)
between the different options, which represents the value, and the given alternatives are
ordinary valued on the preferential scale. In the context of evolution of the value theory Biľo
notices, that the ordinal evaluation can only take place at the level of ends and not on the level
of means. He explicitly confronts the contradictory claim of professor Hülsmann who claims
that the value is a trilateral relation between the subject and at least two economic goods. It is
not. The use of means, or the decision on their acquisition, is derived from the ends and their
valuation. The trilateral relation must exist only on the level of ends. This means that the
valuation is a trilateral relation between end, contrafactual end and the human subject. The
value can only be determined from the valuation of ends. Not from the valuation of economic
goods.
From these foundations then follows the key point of his work – he identifies two kinds of
value, or valuation. In doing so, he refers to Mises who specifies that the mind of a man
imagines before taking action in reality two possible situations and decides between these two
imagined situations in the sense of “which of them suits him better?” Based on this Biľo
identifies the existence of so-called ex ante value. He claims that this ex ante value is a
13
necessary condition for any action (it is a pre-action nexus), meaning that the value exists also
“outside” of action (quotation marks are used by Biľo himself). From this it necessarily follows
for Biľo that there must be two different kinds of valuation – ex ante and in action. At this point
he very cleverly connects this finding with the Rothbard’s perception of the valuation, while in
Biľo’s words Rothbard slightly deviates from his predecessors given that the basis of the
Rothbard’s explanation of value is the transformation of the ordinal relationship between ends
and means. This signifies that based on the ordinal valuation of ends, the ordinal valuation of
means is achieved through transformation, by which Rothbard solves also the value imputation
problem, meaning that the valuation of consumer and production goods is not interconnected,
but rather is derived from the ends. Biľo cleverly uses Rothbard’s thinking and applies it to his
conclusions – to the existence of ex-ante valuation and in action valuation. He introduces a so-
called praxeological point. Biľo himself claims that it is an aid in the process of the imagining
of the problem. He uses the praxeological point to divide ex-ante valuation and in-action
valuation. The valuation is ex-ante attributed to ends and their corresponding ultimate ends;
Biľo does not differentiate between the two. Consequently valuation is transformed into the
valuation of the means through the valuation in-action, which, however is not a valuation per
se, but a specific choice of the state of affairs, the state of means – economic goods, which
satisfy the intended ends. It is clear the choice of means is thus completely influenced by ex-
ante value of what should be satisfied by them. It is clearly not about the state of economic
goods per se, it is all about the satisfaction of our ends through means! It is a very important
point that has been inspired possibly by the work of professor Hülsmann who claims that if the
person is able to satisfy his ends without having to choose any means for their fulfilment, he
would do so. This way Biľo really solves the value imputation problem through fresh thinking
in such a way that the (quasi) valuation of the ends directs always towards the satisfaction of
ultimate ends and we transfer these value relations (ordinarily preferred) between the ends into
reality and based on the subjective viewpoint we choose the best matching means of their
satisfaction. He equally formulates13 the following rules of value imputation:
„1. Every action is only action-result oriented – only action-result categories
could be valued.
2. Only ultimate ends (= uneasiness = action-result desires) are really valued
(“ex ante”), their quasi-ends are valued only derivatively. No choice could be
thought of between these two (ends and their quasi ends) and also between
consequent quasi-ends of the same end – choice represents taking and giving
up, whereas these have to be either chosen or given up together from the nature
of the choice.
3. Means in the role of conditions of relevant praxeological point are not
valued at all, only ultimate ends and quasi-ends – action-result means, are
valued, “ex ante” and “in action”, second one only “in action”. Means that in
particular “praxeological point” represent our abilities just are. They are
“given”, or they are the result of previous quasi-ends.“
13 Ibid. p. 20
14
Thus, we have in front of us a new theory of value and imputation formulated by Biľo. At the
same time, it follows that the search for the interest in the spread between ends and means is
not possible, therefore logically proving the invalidity of interest theory by professor Hülsmann.
Biľo very elegantly connects the existing findings in the area of value theory, while connecting
the older findings, which he improves by new insights14.
Critique of Biľo’s theory
While, I am going to criticize Biľo’s approach, I shall nonetheless propose a solution addressing
the identified problems. I see the problems in his theory on the following places. The first is the
praxeological point, the second, related one is the following hierarchy of ends. And the third
issue is that Biľo does not solve nor describe his theory in the time continuum.
Biľo claims that he use the praxeological point as an aid in the explanation process. The problem
is that this is a key point of his work. It is exactly on the basis of this point that it is possible to
differentiate between ex-ante and in-action valuation. It is not an aid. It is principle. Such a
distinction, however, causes a problem. On such a foundation Biľo claims that the valuation
exists also outside the action, namely before it. This is not a presumption on my part. Biľo is
too explicit. It is, however, a clear objectification of the valuation. But the valuation must be,
by definition, subjective. It has no way of existing outside the action, i.e. before it. In other
words the action does not begin with it, or alternatively stated even the thinking about the
hierarchy of ends is action. Biľo could still claim, that there are two kinds of action. One in the
process of thinking and the second one in the context of conducting the action. This is,
nonetheless, a logical nonsense. There is only one action. The problem is, however, that Biľo
is, at the same time, right. The action does really need a state, from which it could take off. A
praxeological presumption is necessary. This is the first area of problems that we must solve.
The second issue is the solution to the problem of value imputation. Biľo follows Rothbard’s
work and explains that the problem of value imputation can be viewed only from the point of
ends and their hierarchy. He claims that man realizes his valuation based on the choice of so-
called ultimate ends and ends (ends are derived from ultimate ends). However, in the footnote
he claims15 that he does not differentiate between ultimate ends and ends, but then he claims
that quasi-ends become in the valuation process the means to fulfil the ultimate-ends. From the
above follows a clear hierarchisation of ends and the need to differentiate between them. It
seems that here Biľo creates a similar hierarchisation, which was attempted by Böhm in solving
the value imputation on the side of means. Biľo himself uses Mises’s argument that the
organization of production goods and consumer goods is not at all important. The argument
about ex-ante and in-action valuation, however, implies the hierarchisation of the ends. Does
not Biľo commit the identical mistake, for which Mises criticizes Böhm?
At the same time, an attentive reader may have noticed that Biľo elegantly avoids the given
problem of prof. Hülsmann who points out that Mises left in the imputation theory a problem
14 It is a pity that he does not proceed further and does not introduce his view on the issue of transition from
valuation to appraisement, or the relation between value and appraisement. It is equally a pity that he avoided the
application of his theory within the time.
15 Ibid. p. 11 (footnote no. 5)
15
of the value equality. Biľo following Rothbard talks about a transposition, or derivation of in-
action from ex-ante valuation. The derivation, or deduction or transfer from ex-ante to in-
action, however, implies either identical valuation, hence equality. Biľo himself claims that in
in-action valuation it is not an actual valuation per se. It is not entirely clear, what he means by
that. Based on the context I am inclined to say that with in-action we cannot use valuation at
all. In – action valuation per se is then only about the choice of the state of economic goods –
state of affairs in reality. This signifies that when it comes to the question of whether there is
any kind of valuation of goods, he should answer that there is not any; we only valuate the ends.
And from this it follows that it is not possible to consider any equaling of value nor any
inclusion of means in the value scale of ends. So, the Mises’s problem is eliminated by Biľo
per se. It does not exist in his system at all.
The last problem, which we can imply in his theory, is the problem of time continuum. He does
not solve the above-noted description in time16. At the same time, he does not hesitate to claim
that any economic good M, which the subject used for the satisfaction of ends in time “t”, is
later in time a completely different good and from the praxeological viewpoint there is no value
connection with M (regardless of the physical similarities). If this were to be true, however, the
law of diminishing marginal utility would be by definition invalid, as the law claims that over
time the later unit of economic good M satisfies ends less. We cannot even talk about some
demand for the good M (there would be nothing like the demand, everything would be in time
continuum praxeologically different goods) and we cannot even explain, how can a person
prefer the ends, which should be satisfied by M more today, than tomorrow. Or we would have
to claim that, when the human subject is demanding M, he does not change the valuation of the
end, which the M should satisfy, which is very problematic in time, because we would have to
presume either the constancy of the valuation of ends in time or admit that we know the future17.
It is a pity, that Biľo did not pay attention to the problem of application of his theory in the time
continuum. He left us only with estimates in this field.
Remedy
The aim of this section is not the deny Biľo’s claims. Rather, I will try to describe the problem
so as to eliminate all the above-mentioned reservations. Biľo’s theory is, thus, not problem-
free. But which one is, right? The key problem is, however, in my opinion the above-identified
problem – the ex-ante valuation and in-action valuation. And we have to remove it. By its
16 Ibid. p. 16. „The static auxiliary tool of “praxeological point” will help us to understand the relation and
interdependence of concrete decision-making aspects in the dynamics of human action. It also enables us to deal
with the problem of value by itself and not distort our analysis by the phenomenon of time that is not under the
present scope of investigation. This holds true especially for the actions the end of which is fulfilled in the same
“physical time” as they are performed, for example exchange. In the “praxeological point”-analysis, we are
easily able to see “pre action” and “action result” categories and not to confuse ourselves with considerations
of unchanged physical world“
17 A more detailed description of this problem can be seen in Potužák, P. 2016. CAPITAL AND THE
MONETARY BUSINESS CYCLE THEORY. pp. 100-110.WWW DOCUMENT
<https://vskp.vse.cz/49157_capital_and_the_monetary_business_cycle_theory_essays_on_the_austrian_theory_
of_capital_interest_and_business_cycle> My proposed solution of the given problem can be found in v Pošvanc,
M. he Theory of Interest. Revision of the Austrian Approach. Annex 1: Remarks, Relations and Arguing over the
Work of Pavel Potužák. WWW DOCUMENT <http://www.hayek.sk/the-theory-of-interest-revision-of-the-
austrian-approach-annex-1-remarks-relations-and-arguing-over-the-work-of-pavel-potuzak/>
16
removal we avoid the praxeological point and as we shall see we can also avoid the
hierarchisation of ultimate ends and their corresponding ends. We have to equally present a
solution applicable over the time continuum, so that the law of the diminishing marginal utility
is valid. And, at the same time, we must answer the relation between the ends and means in the
sense of Hülsmann’s critique of equality and Biľo’s avoiding of the problem. And to make
matters more difficult, the general problems of the previous approaches, meaning not only that
one of Biľo, is, in my opinion, also the argument about the perception of scarcity in the context
of ends – means and action, which should equally be corrected18.
The remedy needs to be obviously directed towards the main problem. Where the economic
value comes from. To the problem of the valuation of goods, Menger writes19:
„The value of goods [i.e. means] arises from their relationship to our needs
[i.e. ends], and is not inherent in the goods themselves. With changes in this
relationship, value arises and disappears. “
Menger describes a causal relationship. The economic goods themselves have no value for him.
The value is ascribed in the context of ends. The end-mean relationship at the same time creates
in a way the two sides of the equation. On one side we have the ends, on the other side we have
the means. This division has caused for example, that a part of Austrian scientists have
addressed the problem of value on the side of the goods and searched how the value is imputed
to the goods. Given that they “operated” on the side of economic goods, it is not a wonder that
they search the solution in the cardinal expression of value20. The Čuhel-Mises ordinalistic
solution eliminates problems of the cardinal calculation of value and it directs us much more to
the valuation of ends, based on the baseline comparison of the a always being more suitable /
preferred to b. At the same time Mises retains the consistency in the evaluation of ends and
corresponding valuation of means. He omits the problem of the imputation and derives the
mutual connection between the production and consumer goods only from the comparison,
whether they satisfy defined ends. Hülsmann notices, however, that Mises maintains equality,
which bothers Hülsmann, since it implies the mathematical comparison of the value between
ends and means. He even seeks in the spread between ends and means the interest rate. Rothbard
(together with Biľo) focus explicitly on the valuation of ends. It is, however, Biľo who is
consistent and comes with a solution to the valuation only on the level of ends; means are for
him just a chosen state of things (state of affairs), which is derived from the valuation of ends.
This way, however, he ends in the vicious circle, where he has to claim that the subjective
valuation during action is derived from the valuation before action, which implies either
objective existence of valuation before action or existence of different kinds of action. What do
18 Mises does not hesitate to claim that the scarcity of the reality is the presumption of the action and at the same
time claim that it is the action, which economizes the reality, meaning that reality is perceived as economically
scarce as a result of action.
19 Menger, K. Principles of Economics. p.120. WWW DOCUMENT < https://mises-
media.s3.amazonaws.com/Principles%20of%20Economics_5.pdf?file=1&type=document
20 See for example Biľo, Š. 2004. Imputation and Value in the works of Menger, Bohm-Bawek and Wieser. Str.
9. „Böhm-Bawerk’s muddle is the question of what he is really counting – utility, prices, or both is easily seen in
the end of this exposition, where he simply skips from the “utility economy” to examples with monetary prices
(ibid., p. 167).“ WWW DOCUMENT <https://nb.vse.cz/kfil/elogos/miscellany/bilo105.pdf>
17
we see? We see the intellectual discussion focusing on the value problem, which was identified
by Menger in the context of the revelation of the causal ends-means relationship. In the
beginning the discussion was focused on the side of means and later it moved to the side of
ends. Both approaches, however, lead to problematic conclusions. So only one thing really
remains. To focus on the relationship per se21. And I think this is the only feasible solution. Let
us consider, e.g. Hülsmann’s remark, which Biľo also notes, that if a man could prefer the
satisfaction of ends without the use of means, he would have done so. Hülsmann writes22:
„The end is what really counts for the acting person, whereas the means is
merely the thing or the action that is in between his present state of affairs and
the state of affairs in which his end is realized .... if an acting person could
choose between either having his end realized or having the means to attain it,
he would choose the end.“
According to him, if the means is chosen, then it is only because it satisfies the corresponding
end23. It was this abstraction (probably) that has led Biľo to the realization that it is the ends,
which we valuate, not the means. We choose the means. From here it is possible to divide the
action into ex-ante and in-action. What is, however, important, we choose means only in the
context of ends. There is no other context. As we know, the fact that something exists in reality,
does not mean that it is automatically means. It is the acting agent that takes a thing and makes
it into means.
„A thing becomes a means when human reason plans to employ it for the
attainment of some end and human action really employs it for this purpose.
Thinking man sees the serviceableness of things, i.e., their ability to minister to
his ends, and acting man makes them means“24.
Hülsmann’s abstraction in the sense that we could avoid the choice of means and directly satisfy
ends, is incorrect25. It is a causal relation per se. Though one’s mind can define some end per
se and this is the main focus for this person. However, subsequently the mind implies the
question how to satisfy the defined end. This is why we seek means and the mind creates the
causal relationship. From the point of view of rejecting Hülsmann’s thesis, this is not about a
practical problem of scarcity and the fact that given our perception of scarcity we are forced to
choose means, i.e. it is not possible just to choose ends by very nature of the reality around us.
This is about the nature of causality created by mind, meaning the rules of the thought process.
21 It should be noted that this is not something new. The relationship in question occurs in all the works of the
authors. At the same time, it is not a pragmatic solution like “when it is not possible either in one direction or the
other one, let's try it through the middle”. The solution in question is, in my opinion, very well connected, for
example with the Hayek’s Sensory order or works of other authors, which are focused on the fact that our
thinking has categorization, i.e. relational character. Thus, we can connect the thesis on the ends-means
relationship with the causal world, i.e. how our mind works.
22 Hülsmann, J.G. A Theory of Interest. pp.86-87. WWW DOCUMENT <https://mises-
media.s3.amazonaws.com/qjae5_4_7.pdf?file=1&type=document>
23 Biľo, Š. 2004. The Theory of Imputation: A context of value spreads between means and ends. str.8. WWW
DOCUMENT <http://www2.gcc.edu/dept/econ/ASSC/Papers2004/Imputation_Bilo.pdf>
24 Mises, L. Human Action. p. 93 WWW DOCUMENT <https://mises.org/library/human-action-0/html/pp/663>
25 Biľo shows its inaccuracy from a different point of view.
18
The scarcity is not a feature of the reality per se, not it is the precondition for action, as several
authors within the Austrian school mistakenly believe.
The thesis that the scarcity is a necessary condition for any reasoning and argument regarding
the human action is incorrect. It cannot be true both that a precondition for action is the scarcity
of the reality and that only economic goods are scare, which can become economic goods solely
based on action (…. Human action really employs it…”). Before that these are just things, or if
they are not scarce, they are general conditions of human welfare26. Either things (reality)
become economic goods based on the action, with the subsequent revelation that they are rare
respectively it is realized that some part of reality is not rare and thus it is only a general
condition of human welfare, or the scarcity of the reality is the precondition for action. Both
claims cannot be valid at the same time. Reality is not scarce per se. It is scarce for the acting
person. And it is scarce in the context of his ends27. That means that the scarcity is derived from
the fact that we evaluate the reality. The scarcity then has to be revealed ex-post, after the subject
identifies the relation end-mean. Let us focus on the Mises’s citation. „Thinking man sees the
serviceableness of things, i.e., their ability to minister to his ends, and acting man makes them
means“. The order of the explanation should be the following. In case that there is a form of
abundant good (say I choose 2 apples and I find myself in the warehouse with a million of
apples) or even unlimited good (I choose sunlight or air), then in the context of our ends it is
still a mean, which we can call a kind of thing-mean28. Even such a thing satisfies our ends,
subject can identify in such case an end-mean causality. Without us the given thing would be
just part of reality. This way (with us) it is a part of general conditions of human welfare! If,
however, it is a case of a limited good in the context of our ends, only then can the mind identify
its relative scarcity; and only in such a case we can call it economic-mean, precisely for the
reason that it must be used economically. Also, at the same time, let us note that the law of
diminishing marginal utility29 applies both in the case of thing-mean as well as in the case of
26 „Means are always scarce compared with desired services, otherwise there would be no need for action in
connection with them and they would be only “general conditions of human welfare”. See in Biľo, Š. 2004. The
Theory of Imputation: A context of value spreads between means and ends. p.10. WWW DOCUMENT
<http://www2.gcc.edu/dept/econ/ASSC/Papers2004/Imputation_Bilo.pdf>
27 We can also use thought experiment to show the point. If we assume a Garden of Eden a permanently living
body (we do not die there) and also let us suppose that there is a community of, say 100 people, and let us also
assume, that each of the person realizes the maximum potential of the possible consciousness of others, in other
word he would be aware of the 99 other ones and vice versa, even in this situation there can be a scarcity in the
form of role-play of these eternal and all-conscious beings. From this, it follows that the scarcity is the result of
the thinking, not the result of the surrounding reality. The reality just is. What makes it scarce is our thinking in
the context of our ends – for example for the needs of the play of these beings. The same applies also for the
Hülsmann’s abstraction of the situation of having the opportunity to satisfy our ends without the need to choose
the means. This given causality can still exist in our thought experiment in the context of the game of the all-
conscious and eternal beings. That means that these beings would for example willfully abandon the general
state of satisfaction of ends and they acted as if they did not have it and would have to choose means.
28 It is a thing of reality, with which we realize that it satisfy some of our ends and at the same time we do not
have to economize the given thing.
29 The Law applies generally. It has to apply then also for example for the case of air. In the normal state we
demand air e.g. roughly 12 breaths per minute and not more regardless of the fact that there is unlimited amount
of it (the body regulates the satisfaction of the given end of course automatically) and only with the changes in
our goals, for example I want to run, changes its use, we actually economize it, if we alter the goal to, say,
“survive under water”. In case of air we see, that it is not a practical problem of scarcity, but the change of the
19
economic-mean. The law results from the end-mean relation per se and from the relation among
various potentially valuated relations of ends-means. These are then the mutually indivisibly
perceived causal relations, which the mind categorizes and creates among them a preferential
scale in the context of the perceived scarcity of the means30.
Through the assessment of the relation end-mean as such or per se we can sustain the valid part
of the Biľo’s argumentation without presupposing the valuation ex-ante and in-action at the
same time. We “need” to describe the valuation only in-action. And we do this through the
relationship. If we stop here and if we use traditional value scale, we would describe it as
follows:
1st end-mean relationship
2nd end-mean relationship
…
Nth end-mean relationship
This is not correct. The end-mean relationship would not be possible to use in time continuum.
It could always happen that it will be changed due to fact that action is future oriented what
cause the change of the value context and reasonable action and preference scale has to be
applicable in time. So, we “need” the explanation to be applicable in time and maintain the
validity of the law of the diminishing marginal utility at the same time. We must then make
further necessary adjustment, besides the application of the theory on the relationship per se.
The adjustment is not too radical. Actually, it is very simple one. We need to make a claim that
the person does not value the particular relationship and some explicit scale in the sense:
1st end-mean
2nd end-mean
…
Nth end-mean relationship
goals (ends), which cause the change in term of the perception of need for air. While the causality “need to
breathe – air” exists before the good air is economized.
30 For a greater degree of precision, it must be noted, that the mind categorizes the given relations on multiple
levels of knowledge. Multi-level character of ends-means relationship could be illustrate by example of division
of knowledge provided by Karl Engliš. Engliš divides the knowledge to empirical (causal level), teleological
(economic level) and normative level, over which exists a formal-logical knowledge framework, so we can look
at the given relation on one hand from the physically-chemical causal viewpoint, i.e. water eliminates the thirst,
however, at the same time the mind categorizes the given relation from the teleological view point, when it
evaluates the rate, intensity and the time character of the given relationship in the context of our needs, i.e. I
prefer thirst-water to say warm-fire, or I prefer the thirst-water immediately, not tomorrow. Subsequently after
thirst-water I want to satisfy the end of rest so I prefer rest-sleep relationship, etc.. Normative level grasp the
relationship from the point of view of property rights or possibilities to acquire water. The causal relation End-
Mean is assessed here from different viewpoints, while the scarcity as such is evaluated in the sense of Engliš’s
terminology within the teleological knowledge. Of course, the Hayekian evolutionary monism will explain this
principle in a different manner, through the mental maps. However, it is just a different illustration of how we
view the world.
20
We will claim, that the given relation must be viewed as the sum, i.e.. the person perceives
ΣEnds which he tries to satisfied by ΣMeans (portfolio of goods)31. The perception of the ΣEnds
→ ΣMeans is necessary for the explanation of the problem of the valuation in the time
continuum. Once we use ΣEnds → ΣMeans we can explain the functionality of relationship in
time. Mathematical construct of sum of ends is satisfied by sum of means (portfolio of economic
goods). Mathematical construct is a time invariant, so usable in time continuum and the relative
position of goods within the portfolio enables to solve different subjective valuation context in
time as we change our sum of ends to eliminate new and new uneasiness. So do we are able to
describe preference scale in this way?
1st ΣEnds → ΣMeans,
2nd ΣEnds → ΣMeans,
...
N-th relationship ΣEnds → ΣMeans
As I was notified by Fratišek Chroustal32, the use of such a modified albeit traditionally
displayed preferential scale, would imply the following problems. First, some automatic
creation and stable ends-mean relationship. Second problem of the classic display, which I
originally did not realize, is that it implies always the existence of some actually existing mean
for any thinkable end. However, it must be admitted that it is the ends, which are essential and
primary. Only then the mind searches for the corresponding means and creates a relational
structure of the mind. Nonetheless, sometimes the mind may not find any mean. It does not
mean, however, that mind cannot formulate the vision of some end per se. The mind of a man
can seamlessly, say, formulate an end, that it would be fine if I could do for example magic. He
can equally “formulate” a corresponding mean in a form of magic wand or spell. Although,
these things from their very nature do not exist. Equally, if automatic and stable formulation of
the end-mean relationship exists, it would follow, that we would not be able to formulate new
kinds of means, for example in the form of inventions or innovative discoveries of the
satisfaction of ends. All of this forces us to refrain from traditional display of the preferential
scale completely.
However, it is still true that the Čuhel-Mises’s solution of valuation in the context a is more
preferred than b is valid. The scale must exist. However, Hayek's description of the functioning
of mind, which says that our mind is formulating mental maps and greatly simplifies the
interpretation of reality, can be instructive in our proposed modification. We can be also
inspired by interpreting the factual and counter-factual (hypothetical) part of human action33. A
preview of the structure of the preferential scale can be seen in the following figure:
31 We are not describe something unusual from the empirical point of view. Humans built always some kind of
portfolio of goods to satisfy different kinds of ends. And we are going here only slightly adjust present theory of
value when we are focused on ΣEnds in their totality which is satisfied by ΣMeans (portfolio of goods). The law
of diminishing marginal utility is here applied to the marginal change of portfolio instead of marginal change of
particular good.
32 Chroustal, F. Personal interview. Vienna. 20th March 2019.
33 „Human action is realised in the actual movement of the body and in the actual activity of the mind. But it also
contains two types of unrealised parts: the ends sought after and the foregone alternatives. This fact is almost
21
Figure no. 1: Illustrative preferential scale:
This approach brings multiple solutions. The Figure shows the vision of the preferential scale.
The Ends part is divided into two basic categories – factual and counter-factual, or hypothetical.
Hypothetical (counterfactual) is divided further into two categories – real and unreal (potential).
Everything, to what we subordinate our current actions, is located on the level of the factual
preferential scale. Everything that is non-priority and at the same time feasible in the context of
means is in the real counterfactual level of the preferential scale. Everything that unrealizable
in the context of means is in hypothetical – counterfactual level of the preferential scale. The
universally acknowledged, but while the analysis of the subjective and objective role of ends has attracted at
least some attention among economists (under headings such as “intentionality” and “meaning”), the analysis of
foregone alternatives, the hidden side of choice, has been neglected.“ Hülsmann, J.G. FACTS AND
COUNTERFACTUALS IN ECONOMIC LAW. p 70. WWW DOCUMENT
<https://bastiat.mises.org/sites/default/files/17_1_3.pdf> see also Tyler, N. Counterfactual Shortcomings in
Economic Law. WWW DOCUMENT <http://www2.gcc.edu/dept/econ/ASSC/Papers2005/ASSC05_Tyler.pdf>
22
preferential scale is, thus, relatively simple. It has two basic levels34, which corresponds to
Hayek’s claim that mind simplifies the interpretation of the reality. By focusing on the
relationship ΣEnds → ΣMeans in the context of the preferential scale, we do not have to
differentiate between the valuation ex-ante and in-action. In the specific action we choose from
the totalities of the relationship ΣEnds → ΣMeans. By this adjustment we are able to explain
valuation of ends in time and imputation of value to economic goods in time. ΣMeans =
portfolio of means is demanded and hold by individual to satisfy factual and real-contra-factual
ΣEnds.
When man acts, he is doing this or that in the context of current factually perceived ΣEnds. The
idea should imply that the formulation of ends is, however, crucial. At the same time, it is
implied that the mind is trying to match the corresponding combination of means to create
relationship. On the factual level the corresponding combination of means is clearly identified;
that is why it is illustrated by a fixed bond. This is what we see in-action when we chose current
state of affairs. What is important to stress is that one of the need which is part of the factual
ΣEnds could be focused also on the elimination of some contra-factual ends; meaning that we
built portfolio of ΣMeans by our current action as diversify as possible which enable us to react
to uncertain future35.
On the counterfactual level the corresponding combination of means is intended; thus it is
illustrated by a non-fixed bond. At the same time the idea implies the possibility of the
formulation of end without a corresponding combination of real means. The person can, then,
formulate some idea of an end, for which he tries to identify the corresponding means, although
it is not by the very nature of world of things possible. The extreme case can be the end of
immortality (for now), or the ability to do magic, which the human mind can identify. It can
even identify some idea of means, like the elixir of the immortality or some magic wand, which,
nonetheless, do not exist in reality and the human mind cannot it materialize.
On this example we also show, that the formulation of ends is the main feature of the
preferential scale. However, we also show that the mind tries to formulate the link to means and
34 The difference from for example Rothbard’s interpretation of the scale should be obvious. Rothbard claims
that the scale is formed in the following manner:
„The actor may be interpreted as ranking his alternative ends in accordance with their value to him. This scaling
of ends may be described as assigning ranks of value to the ends by the actor, or as a process of valuation. Thus,
suppose that Jones ranked his alternative ends for the use of an hour of time as follows:
(First) 1. Continuing to watch the baseball game
(Second) 2. Going for a drive
(Third) 3. Playing bridge
This was his scale of values or scale of preferences. The supply of means (time) available was sufficient for the
attainment of only one of these ends, and the fact that he chose the baseball game shows that he ranked that
highest (or first)....“ Rothbard, M. Man, Economy and State. p. 6. WWW DOCUMENT <https://mises-
media.s3.amazonaws.com/Man%2C%20Economy%2C%20and%20State%2C%20with%20Power%20and%20M
arket_2.pdf>
35 This is one of the reasons why we demand money. The diversification of portfolio of ΣMeans is replaced by
money as the most liquid good. However, as reader will see below, the path to this discovery of mankind was not
so straightforward.
23
in doing so sometimes encounters a real impossibility of the satisfaction of the given end. If, at
the same time the mind can identify in form of, say, some invention or innovation, the
satisfaction of up till then only unrealistic ends, it is possible formally to incorporate the given
ends to a lower, though still counterfactual level of ends. The counterfactual level of ends as a
whole, however, expresses still what the part of current action isn’t. However it could be part
of plan.
The reasons why the counterfactual level of ends is not fully realized by men are of twofold
nature. This nature results on one hand from the prioritization of ends – factual ends have a
higher priority as others combination of ends. On the other hand it is caused by the very fact
that something is impossible to do by the nature of reality, or our limitations in terms of our
available knowledge, means or savings36.
In the sketch we defined, the decision about the factual or counterfactual nature of ends is
influenced by the bond itself or by its evaluation with respect to means. The reason is that it is
a relationship. It follows, that one could have desire the end to have a factual character in the
context of considering it to be a priority and he put it among actual plans, nonetheless it still
remains to be on the counterfactual level, since it cannot be fulfilled for some objective reasons,
given the limited nature of means available to man. The first example can be a man in the dessert
that given his thirst, desires water to extinguish his thirst as his most urgent factual end, which
nonetheless does not imply that he can drink immediately. He may not find water and since his
elimination of thirst is among actual plans and so in factual level of the scale, so happens that
he exchanges diamond for camel to reach water more quickly. However, it does not mean that
he will find water and eliminate thirst. The second example of the impact of means on ends can
be the end of reaching some social status, which, however, will never be fulfilled given the
limited access to the goods signaling a given social status. This is so not due to the fact that the
person cannot prioritize the given end or that he would not want to, but due to the fact that he
is not so skillful so as to obtain in his lifetime the goods, securing the end.
In the sketch we can also see two gray-colored fields. At the side of ends, an explicitly defined
field of the concurrently perceived sum of factual ends is shown, in the context of which one is
acting, and which are satisfied by a portion of the goods portfolio one owns. As we can see, the
colored field at the side of means exceeds into the area of counterfactual ends. The reason is
that the idea of a man in the time continuum also includes the awareness of the counterfactual
ends. The fact that they are currently not preferred, does not mean that one ignores the given Σ
Ends. On the contrary. The created Σ Means is in this way “ready” to satisfy the ends, which
move into the factual Σ Ends according to the man’s decision and the currently perceived factual
36 Menger is instructive in this point: „When men recognise that their wellbeing is bound up with the command
over certain goods within certain periods of time, and that such goods are likely to be insufficient for their
demand, their impulse is (1) to get such goods into their possession or disposal; (2) to preserve the useful
properties of the same ; (3) to decide which are their more important and which their less important wants, and to
satisfy the former only ; and (4) to so dispose of the goods as to get the greatest possible result or satisfaction on
the whole, and to obtain every individual result with the smallest possible expenditure. " The activity men direct
to those ends, in its totality, we call their ' economy,' and the goods which stand in these quantitative relations, as
the exclusive objects of that economy, we call ' economic goods.' " See in Menger, K. Grundsatze, chap. ii. § 3.
cit Smart, W. An Introduction to the Theory of Value. p. 17. WWW DOCUMENT < https://mises-
media.s3.amazonaws.com/An%20Introduction%20to%20the%20Theory%20of%20Value_2.pdf>
24
Σ Ends later in time. The man perceives himself in some time continuum. And it is exactly this
expansion of Σ Means, which enables the person to better satisfy the perception of the changing
current Σ Ends sometimes later in the future.
Thus, a man has some totally perceived ΣEnds → ΣMeans, which forms some form of “pool”,
from which person chooses and just simply scales the currently perceived relationship – factual
relationship - ΣEnds → ΣMeans against the counterfactual in the context of the perception of
himself in some subjectively perceived time continuum. We do not have any other
hierarchization of ends. We can imagine it in such a way that under some circumstances and
the feeling of what Mises calls uneasiness, the person will perceive the current relationship
ΣEnds → ΣMeans related to the satisfaction by food however it is affected also by a religious
or cultural background of the given person (these factors enter the formulation of particular
ΣEnds). This results in a specific mixture of goods (specific food), by which our man satisfies
the complex of ends, meaning that, for example, he would demand that his food was kosher or
he will not prefer the beef, so that it would suit the entire complex of ends. However, under
different conditions, the religious perception is placed to the background and what prevails is
the survival instinct (to which he subjects the ΣEnds). In case of such a radical change of the
environment, such a part forming of ΣEnds, in the form of the religious or cultural background,
will obviously not disappear, but It will be transferred to the counterfactual level and will not
have any influence the factual side of the ends. Of course, even the extreme situation does not
necessarily need to change the perception of ΣEnds, in the context of the religious or cultural
perception of ends and one can still sacrifice one’s life (die of hunger) in the context of the end
of his religious and cultural background.
It is not a specific and clearly hierarchized scale in the sense of ultimate ends vs. quasi-ends, as
we see with Biľo. It is a created current scale of particular relationships ΣEnds → ΣMeans,
which move from counterfactual to factual level and the other way depending on the kind of
choice the person makes. From the point of view of the person, it is rather about different
combinations of ends, which this person perceives and chooses from some pool of ends. Thus,
it is not necessary to claim that some End is just a quasi-end (in Biľo’s interpretation it is Mean),
which corresponds to the fulfilment of some ultimate end. The related Ends (say in the form of
some complex business plan) are equally ΣEnds, while their mutual relationship is (flexibly)
constructed already in the given and evaluated factual ΣEnds as some undertaken plan.
In some cases it can have a very specific and sometimes very vague form within the factual
level of ΣEnds. An example of a vague ends can be the goal to live to the highest age possible.
But a man does not know the place, time circumstances and his precise age related to the
possible delay of death. He can, nonetheless, implicitly adjust ΣMeans, say, in the form of
optimal diet, or physical exercise. Conversely, he can determine in some subjectively perceived
time continuum a very specific ΣEnds, which can be related to, for example, a loss of weight to
a target of 80 kilograms. At other time, he can indeed create some ΣEnds, which can fulfil the
condition to be of an ultimate nature. For example, in a case of a life-threatening situation, when
all of his action will be adjusted to this goal. Therefore, perhaps a best description of the scaling
is a choice and formulation of a current scale as ΣEnds → ΣMeans relationships in the context
of some perceived actual ΣEnds → ΣMeans relations and counterfactual ΣEnds, which do not
necessarily have to have a defined corresponding ΣMeans (as we described in the illustration),
25
on the basis of which one determines his current preferences in some subjectively perceived
time continuum.
While the claim that the mind evaluates just a particular End-Mean relation and at the same
time “competitive” End-Mean relations would imply, that mind would have to handle extreme
number of different alternatives and connections between End-Mean given that an End can be
theoretically satisfied in a N-number of ways through countless number of specific means.
Suggested mathematical perception of ΣEnds → ΣMeans greatly simplifies the whole process.
We can imagine it in the way that the total sum of what we mean by “being full” (or being
satiated), can be currently satisfied by different combinations of sums of goods from very
specific combinations (like this meat prepared in such a way satisfies my end of hunger this
way or another), through different combinations (for example, kosher food is related to a
combination of religious ends and ends of satisfying one’s hunger, meaning a sum of the value
properties of the good of kosher food must correspond with a given sum of ends) up to very
general ones (since I had eaten such a berry yesterday and I was no longer hungry after that, so
I shall eat today this one, though looking different). The access to the problem through sums of
Ends and Means allow us to change and perceive the ends-means causality very flexibly.
The ΣEnds → ΣMeans relation allows us at the same time to explain the evaluation and
preferences of the economic goods in the time continuum. We need not to decide between these
two statements:
a) we prefer some specific good M at time t and we prefer from the praxeological point of
view a completely different kind of good M at time t+1;
or
b) we prefer the good M at time t and then our preferences do not change against the time
t+1, so we prefer the very same M; such identical valuation of M demands a validity of
a Law of the diminishing marginal utility.
The explanation of how we realize the valuation in the time continuum is allowed specifically
by a mathematical view of the causal ΣEnds → ΣMeans relationship. We do not need to claim
that M is later in time different in value given that with the change of the economic context
there is necessarily a change of the placement on our preferential scale of the End, which was
satisfied by M. ΣMeans relativizes the placement of M, and thus allows to explain the
preference of goods in the time continuum, because the specific M is a part of the ΣMeans. It
means it is in a relative position towards other goods. In other words, since the particular End
and particular Mean are a part of some perceived sums, their particular evaluation changes of
course. But the change of the particular valuation of End and the preference of some particular
good is, however, irrelevant since one looks at the given problem in terms of total factual and
counterfactual value perception of ΣEnds → ΣMeans, which he applies over time. In principle,
there is no change in the valuation and preference of the particular end and mean (good) per se.
What changes is the preference perception of the given good within the overall preference of
the entire portfolio of goods. This way the Law of the diminishing marginal utility remains
valid, since we do not apply it on the one particular good, but rather on the marginal change of
the sum of goods. Thereby claims by Mises and Rothbard that in the time continuum the
26
valuation and attribution of value must necessarily change, are valid and at the same time the
Law of the diminishing marginal utility is valid as well. The valuation and preferences are
indeed changing, but the comparison cam be made given that it is a marginal change of
valuation of two sums of ends and marginal change of preference of sum of goods over time37.
This approach also enables to combine the identified “equation problem” between the valuation
of ends and means by Mises and Rothbard through the derivation approach, i.e. the derivation
of value. Since it is a mathematical relation, Mises’s approach is consistent in the context of the
equation and so is applicable the Rothbard’s approach of the derivation of value. In our
interpretation it is a connected relationship implying the feasibility of equation as well as the
derivation of value. We can, therefore, explain how valuation is transformed into the preference
of goods, i.e. the concept of sum of valuation is transformed into the concept of sum of
preferences of goods; the same concept is applied on “different worlds” – normative (human
one) and objective reality.
However, the relationship implies the necessity of some alteration of the perception of valuation
of goods (value imputation). Valuation of goods is not realized in the context of the transferring
of the valuation of the end per se on the good per se. It is realized in the context of the sum of
satisfaction of the perceived factual and counterfactual ends through the sum of goods, i.e. the
portfolio human has. It follows from this, that one does not prefer moor goods over fewer goods
of the same kind and quality. One prefers a higher rate of the satisfaction of ends to a lower
rate of the satisfaction of ends. In this context one builds his portfolio of goods. The more a
portfolio of goods is suitable to the satisfaction of factual and counterfactual ends, the more it
will be preferred to another portfolio of goods. Adding or removing of a good to/from portfolio
through one’s direct action38 or exchange, or debt exchange over time (meaning building a new
portfolio), is evaluated in the context of whether the old portfolio (build on one´s action,
exchange, savings, heritage in the past) can satisfy the perceived needs more or less over time.
This way it is possible to explain the action of an ordinary person, but also of people such as
martyrs, hermits, or suicidal persons. Value imputation is thus mathematically transferred
(through perceived sums or identical concepts) from a thought assessment of the given relations,
i.e. from the assessment of ΣEnds to the reality, i.e. to the ΣMeans39.
After these modifications the core of Biľo’s theory remains valid and we have eliminated our
reservations to his theory. The suggested solution enables further to explain the economic
calculation principle, first without money at the individual level, then at the level of exchange
without money and finally at the level of exchange using money, with one principle following
from another.
37 This solution is used also to explain the interest problem. For more details see e.g. Pošvanc, M. The Theory of
Interest. Revision of the Austrian Approach. Annex 1: Remarks, Relations and Arguing over the Work of Pavel
Potužák WWW DOCUMENT <http://www.hayek.sk/the-theory-of-interest-revision-of-the-austrian-approach-
annex-1-remarks-relations-and-arguing-over-the-work-of-pavel-potuzak>
38 I mean here action focused on direct satisfaction of ends. Indirect action is exchange.
39 The approach in my opinion allows a certain mathematization of the problem in its nature. This would equally
suggest that the mainstream economics and its tools are to a certain extent a suitable tool for a description of a
human action in the context of the abstract description. However, this interpretation explicitly implies the
impossibility of knowing the individual preferences in their total sum.
27
3.2 Economic calculation as an accounting standard of the other one
The necessity to explain the principle of calculation at the individual level and subsequently at
the level of exchange – first non-monetary and only then monetary – stems from the fact that
our predecessors somehow had to decide, what to produce and what to prefer to something else,
while it is clear that they had not used money immediately and at the same time it had to be
some kind of successful strategy. Otherwise none of us would be here today.
As Mises shows, the valuation can be realized only on the ordinal scale or ordinal basis. It is
impossible to use cardinalist calculation of value. Cardinalist calculation is possible only once
we can use objective inputs. For Mises the inputs were prices; and on top of that expressed in a
single denominator – money.
Our solution introduces the solution of the problem a certain scope of the use of mathematics;
it relativizes the mutual status of goods in the context of the perceived ΣEnds. This allows to
explain preference of ΣMeans1 to a different ΣMeans2. A marginal addition or removal of a
certain good to / from a portfolio of goods changes ΣMeans1 to ΣMeans2. The solution also
enables one to prefer different portfolios over time; the person does not compare a specific good
over time, which is subject to value change due to the changes in man’s preferences over time.
The person compares the sums of goods – portfolios, which are mathematical concepts and
which can be compared over time. This equally maintains the possibility of a comparison of
potential changes of ΣEnds, which results from the changes in the economic context.
As we have shown the value stems from the assessment of ΣEnds, which are already in a causal
and indivisible relationship to the ΣMeans. Human subject does not apriori prefer more goods
of the same kind and quality to less. Human subject apriori prefers a higher degree of
satisfaction of his ends over time. Only in case that a higher degree of satisfaction of ends is
associated with a higher number of goods, he will also prefer more goods. However, if a higher
degree of satisfaction of ends is associated with other combination of goods rather than the one
with the highest number of them, he will prefer such alternative.
Already at this level it is possible to undertake the individual calculation, which has an ordinal
principle and is expressed in the sum of diverse and changing goods in the context of the
satisfaction of one’s ends over time. The subject finds himself in a state of higher satisfaction,
if ΣMeans (portfolio) satisfies his ΣEnds in the time continuum in the context of subjective
perceived anticipation of the ΣEnds ΣMeans relationship and vice versa. He can, however,
evaluate a marginal change of ΣMeans. That means that he can compare different strategies
aimed at getting more or less preferred ΣMeans (different portfolios). His calculation “unit” can
only be the entire ΣMeans (portfolio). It is obviously a very subjective calculation unit and a
very complicated one. At this level, however, there should be clear difference between Mises’s
approach and approach used here. The value relationship ΣEnds ΣMeans enables us to realize
a very basic calculation also on a completely individual level. This makes it possible to assess
the success or failure of the activities of the individual. Of course, very “ordinarily” and in the
context of expressing that I am / I am not successful at the satisfaction of my ΣEnds, however,
through the changes of ΣMeans (portfolio of goods), i.e. I can assess that the addition of e.g. 13
apples to the portfolio is more satisfying for me than the addition of 1 apple (or vice versa)
while the given calculation is realized in the context of other goods such as a bow, house, or
28
some fur, which can protect me from cold and so on40. The fact that the calculation unit is the
entire portfolio of goods is best realized when we imagine, for example, that another subject
could prefer the addition of 2 apples to 13 in the context of other goods in the portfolio. It all
depends on what ΣEnds the portfolio satisfies.
Calculation can only be realized in the context of factually perceived ΣEnds in the units of
portfolio, i.e. ΣMeans. Obviously, the problem is the calculation in the context of
counterfactually perceived ΣEnds because we do not know whether the planned change in
ΣMeans will be useful later in time to satisfy today only the counterfactually perceived ΣEnds.
This means that human subject can only estimate whether the goods acquired among the
ΣMeans will have a different kind of use as the one, which is factually perceived in the context
of factually perceived ΣEnds. This problem is not at all a trivial one. We will come back to it
again and again, since it is one of the motivational factors of the creation of money and the
monetary calculation. It is a monetary unit at the end of the day which allows full solution to
this problem. Human subjects could have solve this problem at this level only by diversification
of ΣMeans41.
At the same time, a man has never lived alone. He always developed within a community. Even
at this level, even if we presumed that there was not exchange between people, human subject
would have at least the opportunity to compare ΣMeans (portfolio) of the other person to his
own portfolio and imply, whether his neighbor is more successful than him and vice versa.
Individual calculation is enriched in community by a comparison of different ΣMeans, i.e. other
portfolios, however, still just in the context of very diverse personal accounting standards. The
40 Note at the same time that the description is constantly focused towards the future. Even at this individual
level we value ΣMeans, i.e. our individual calculation unit in the context of whether we satisfy the anticipated
ΣEnds successfully or unsuccessfully. The calculation unit is not expressed by a single good, it is expressed by
all goods in the portfolio. So we are able to compare it in time.
41 To realize the depth of this problem, which outside of the monetary economy we solve precisely through the
diversification of the portfolio of goods, is suitable to use this very apt note from Hoppe with Hülsmann and
Block, which they actually make in a different context, however, it exactly explains what the man faces and what
he solves through money:
„... this feature of money as the most easily and widely saleable commodity, far from rendering it a future good,
qualifies money at the same time as the good best suited to alleviate presently felt uncertainty and, as such, the
most universally present good of all. Although only indirectly useful — in this regard like producer goods, and
unlike any consumer good — money is precisely on account of its supreme saleability a uniquely present good —
in this regard like consumer goods, and unlike any producer good. Because money can be employed for the
instant removal of the widest range of possible needs (or the satisfaction of the widest range of possible
desires), it provides its owner with the best humanly possible protection (insurance) against uncertainty, that
is, against his uneasiness of not being able to predict — of not being certain about — all of his future needs
and desires. In holding money, its owner gains in the satisfaction of being able instantly to meet, as they arise
unpredictably, the widest possible range of future contingencies.“ (emphasis added). See in Hoppe, H. with
Hülsmann, J.G. Block, W.: Against Fiduciary Media. WWW DOCUMENT <https://mises-
media.s3.amazonaws.com/qjae1_1_2.pdf> p.45.
The invention of money must have been a crucial invention for mankind in this respect. With money we are able
to react to our changing needs very flexibly. And it is a quite huge problem to flexibly react at the
counterfactually perceived ΣEnds by one´s portfolio of ΣMeans at the individual level unless money was
invented. Using of as much diversified portfolio as possible is significantly limited in the context of estimation
what purposes ΣMeans could or should serve later in time.
29
ΣMeans (portfolio) thus represents a fully subjective calculation unit of not interacting human
subjects. This, however, already allows some comparison between at least two of them42.
But let us move on and let go off the unrealistic presumption that people have not realized any
exchanges. On the contrary, life in a community implies the exchange, i.e. the opportunity to
satisfy ΣEnds by another one. Of course, prices of goods are created during the exchange.
However, as we know, past prices are irrelevant. So, how do two human subjects calculate
during the exchange, when the price becomes the past? Again, let us repeat that the human
subjects do not prefer more goods in the exchange, they prefer a higher degree of satisfaction
of their ends. The higher satisfaction could be done also indirectly by exchange. Thus, they
exchange the goods in the context of satisfying the factually perceived ΣEnds and they perceive
them in the context of the used and already owned ΣMeans (portfolio). We need to realize that
the exchange is based on the indirect satisfaction of ends. That means I have to give up
something to get something else, but in the context of what I have. And here comes the price-
related information. The price of the exchanged good X for Y (from the other subject’s point
of view it is the other way round) is not assessed against a past price (it may have never even
been created because X never had to have been exchanged for Y before). The price informs the
subject, how much one will have to give up to the other, compare how much he acquires, i.e.
how acquired thing contributes to his ΣMeans (portfolio). Here, the human subject compares
his ΣMeans minus the good X against the ΣMeans plus the good Y in the context of the factual
ΣEnds. Thus, he always assesses, whether the new ΣMeans satisfies ΣEnds, however, while in
the previous example he could have only compared ΣMeans of the other person to his own
portfolio, during the exchange he uses a part of the portfolio of the other human subject
expressed in Y to achieve a new and better satisfactory structure of his ΣMeans in the context
of his ΣEnds, while he assumes for any reasons that he will be better off, i.e. he will be able to
satisfy his factually perceived ΣEnds better this way. The price X/Y informs him at the given
place and given time, whether it is worth getting rid of X and acquire Y in the context of the
comparison of the portfolio before the exchange and after the exchange. Again let us repeat that
the anticipation of the counterfactually perceived ΣEnds and its potential satisfaction is still
very complicated, even if a bit simpler given that the exchange implies that a man could start
to realize that the counterfactually perceived ΣEnds, in case it becomes factually perceived, can
be satisfied through the exchange without having to anticipate through his portfolio ΣMeans all
the possible eventualities associated with the counterfactually perceived ΣEnds. Already the
exchange itself and the calculation in the exchange reduces the problem of the uncertainty in
the time continuum.
As we can see, the human subjects start to uncover much more including their own preferences
and their personal costs and revenues in the exchange. While in the first example the subject
42 I do not know, whether the reader notices, but we have just made a step towards a standardization of the
expression of calculation. We are starting to compare different calculation standards. This means that if a
calculation standard (portfolio consist of meat, bow, house, apples) appears to be from the point of view of
another one as more successful as a different standard (portfolio bow, sleigh, house, pears) and it is say house
and apple that others in the community miss in their personal calculation standard for the satisfaction of their
ends, the community can start to perceive these goods, which others want to include in their calculation standard
as more valuable, thereby creating space for inter-subjective comparison of calculation standards expressed in
some commodity, which has a higher chance to become the good M (how it happens potentially see below)
30
could “envy” the other one in terms of what ΣMeans he has and how can he satisfy the presumed
ΣEnds, he did not know in principle, how the other human subject values the parts of his
portfolio, what his subjectively perceived costs are and how he perceives his revenues. Note
that the interpretation is still focused on the future. The other human subject reveals his costs
in the exchange, however only in the context of what it means for him to give up Y for the
acquired X. It is not, therefore, a particular calculation of the costs of the production of Y. It is
a ratio of what in the context of his ΣMeans Y actually means, in order to satisfy his ΣEnds. He
equally evaluates, what his revenue means for him, i.e. the acquiring of X in the context of his
remaining ΣMeans, which he keeps after giving up Y. Thus, the human subjects no longer
compare just their own portfolios as we have mentioned in the first example, they begin to
interact economically. It is possible to refer here at the correct statement of Mises, that the
subjects beginning during the exchange to objectivise their subjectively perceived state of
things (see his quote in the beginning of this work), which as we have shown, however, leads
Mises directly to money and he does not explain this in the environment without money43.
The currently perceived price of the exchange allows the subjects to know the subjectively
perceived scarcity of goods derived from the action of other one. And as the attentive reader
surely notices, this is directed to the future. The potentially existing past prices of this X/Y
exchange are not completely dis-interesting for the human subjects. Although it is true, that
they are not crucial. The crucial thing is the current status. The past potential prices just inform
us about the past state of things and about the fact that in case of some change in the context of
the new ration, say 2X/3Y something has happened in the sense of the changed perception of
the state of things by other members of the community.
As we have indicated above, it is only the debt exchange, or the existence of the obligation over
time, or the existence of securing44 of ΣEnds ΣMeans by the community per se, which is in
some prehistoric community much more likely than barter. As we have already shown, the
obligation in time, which is expressed in some good M, allows a direct economic calculation.
43 During the exchange we do not compare the specific good to a specific good. We compare a mathematical
concept of one person against a mathematical concept of another one, or from the point of the view of human
subjects we mutually compare relative, not absolute, variables, i.e. marginal addition of some good X against
ΣMeans (in the context of ΣEnds) and giving up of Y in this context. We do not compare apples to oranges. We
compare mathematical functions. On the other hand, compare what Mises writes on the given subject:
„Calculation in kind is to be substituted for calculation in terms of money. This method is worthless. One cannot
add or subtract numbers of different kinds (heterogeneous quantities)“. Herbener adds to this: „ The
impossibility of comparing the number of apples to the number of oranges is an arithmetic problem; and a
fundamental, not trivial, problem of arithmetic. Without its solution, no arithmetic operations can be conducted
at all..“ See in Herbener, J. M. Calculation and the Question of Arithmetic. pp. 153-154. WWW DOCUMENT
<https://mises.org/library/ludwig-von-mises-and-austrian-school-economics>
44 Communal securing of ΣEnds → ΣMeans is not unlikely. We can see it today for example in the family. In the
given example, the group of the individuals shares a common accounting standard and tries for a common
securing of ΣEnds. The communal level also implies the existence of the obligation of the others against the
member of the group and vice versa. It is at the same time the most probable route, experienced by our
predecessors and only subsequently the communities became more individualized. Barter exchange has equally
developed as a later concept.
Preceding examples of individual comparison of standards and barter exchange only demonstrate the possibility
to use here presented concept also on these options of calculation. The author believes that the emergence of
calculation was based on debt exchange which is much more likely concept among our predecessors. See e.g.
Graeber, D.: Debt. The First 5000 Years. Melville House. 2012.
31
Its elimination by a debtor later in time, expressed in M, which the creditor demands, makes it
possible to do several things. First, the debtor can identify, whether his economic activity
focused on the clearing of the debt in M (the debtor must obtain M), causes a higher or lower
satisfaction of ΣEnds after he received from the creditor some good at time t. He can identify
this way, whether or not he is in a loss. Frist, he must clear the obligation in M. In case that he
succeeds in time t+1, then what he has left as ΣMeans he can consider to be his profit/loss,
which he evaluates in the context of ΣEnds. Second, in order for the debtor to be able to clear
the obligation, he must either gradually create or exchange with others during the period t t
+ 1 the good M, which the creditor demands at t+1. This way the prices arise in the given
community expressed in M, and the debtor expresses his activity, which should ensure the
clearing of the obligation to the creditor, in M. The agreed standard of the clearing of the
obligation with the other person in M then does not cause anything else but the fact that the
debtor can express in M a part of his activity leading to the clearing of his debt and equally he
can express in M what he got from the creditor at time t, while at the time t+1 he can evaluate
the correctness of his decision at time t. In other words, he can evaluate in M, whether what he
got from the creditor at time t helped him satisfy his ΣEnds more or less. And at the same time
the creditor can express, whether the clearing of the debt at time t+1 in the agreed M increases
or decreases the satisfaction of his perceived ΣEnds. The common denominator of the
calculation at least between two subjects has been established45.
Let us get back again to our problem of the planning of the satisfaction of also counterfactually
perceived ΣEnds. The debt exchange, which takes place over time acquires qualitatively
completely new characteristics. The abstraction of the plan related to the securing of some
ΣMeans later in time implies two states. Either that humans subjects do not presume the change
of the factually perceived ΣEnds later in time, i.e. the debt exchange is realized in the context
of the factually perceived ΣEnds, or they presume a change in the factually perceived ΣEnds in
the context of counterfactually perceived ΣEnds, meaning the debt exchange is realized also in
the context of the counterfactually perceived ΣEnds. Both of these states imply the idea of the
human subject in the time continuum. And both states imply the solution to the same problem
– the future securing of ΣEnds and a planned lowering of insecurity related to the future. While
in the direct exchange at time t we can imply just potential thinking about the solution to the
45 This implies an explicit answer to the Caplan’s question, which he poses against the Mises’s interpretation of
the economic calculation. He writes: „Crusoe runs his one-man economy under the guidance of what Mises calls
"calculation in kind." He mentally weighs his preferences and opportunities. Why would a socialist planner be
unable to do the same? Mises's only response is to declare this method unworkable for a larger economy: <To
suppose that a socialist community could substitute calculations in kind for calculations in terms of money is an
illusion. In an economy that does not practice exchange, calculations in kind can never cover more than
consumption goods. They break down completely where goods of higher order are concerned. (Mises 1981,
102.)> This passage suggests a question: Does Crusoe's one-man socialism “completely break down” when
Friday shows up?“
The answer, whether anything changes, once Friday shows up, is certainly Yes. Once Friday shows up,
everything changes completely. By having Friday show up, there is a possibility of comparison and mutual
economic interaction and mutual satisfaction of the ends, from which mutatis mutandis follows the possibility of
economic calculation. See in Caplan, B. Is socialism really “impossible”? p. 10. WWW DOCUMENT
<https://www.tandfonline.com/doi/abs/10.1080/08913810408443598>
32
problem of the future securing of ΣEnds, in the case of debt exchange it is a planned state. The
good M, which is used in the debt exchange gains liquidity in the context of this planned state.
The crucial question is, however, how M becomes the general denominator, and at the same
time, how is it possible that we can compare prices of our economic activities (profit/loss)
expressed in M at time “t” and “t+n” without claiming that M has a purchasing power on its
own. We have to realize that we can compare the effectiveness of our activity over time
expressed in M. However what is more crucial, we can explicitly compare the activities of
multiple subjects with each other over time and expressed in M. And it is valid regardless of
the fact that the costs and revenues have subjective character. And what is the most crucial we
can compare with someone else, whether our subjective costs/expenses are higher/lower than
someone else’s even over time. In other words, we are facing with the problem of explaining
why we can value-invariantly calculate in one constant good M in time continuum. Please think
about this once again. These are crucial problems connected with monetary calculation unit
which seems to us as it has some kind of objective exchange value per se.
And it is not at all responsible just to declare that the rest is left to competition of which good
is the most suitable as M. This is not the case! In explaining the purchasing power of the good
M, this method (let´s competition decide) is chosen by Menger, and subsequently by Mises-
Rothbard, when they claim that M has become the most salable good in the economic
community. This is, however, a very problematic claim.
In my other works, “Theory of intersubjectively perceived value of money” and “Why We
Needn't (Inevitable) Gold Standard But Free Banking System”, I have explained that the theory
of the most salable good in the community necessarily leads to the petito principi error. The
purchasing power of the most salable good, i.e. money cannot be explained based on the fact
that it is most traded. Either the good is the most traded and is money already or it is not the
most traded, and thus it is not money. And on the other side, I have explained that the problem
of this logical circle needs to be solved by stepping out of it and “pulling out” the economic
good money (i.e. M) to as if a separate layer of thinking, which is formed as human
(intersubjective and not individual) abstraction of mind. At the same time, I have explained,
that it is the fact that human mind has realized the existence of new end per se in the form of
“how to satisfy one’s perceived ends indirectly over time” and solves this problem through an
obligation, i.e. exchange over time, which becomes a mean on its own. The modus operandi of
economic reality and human actions. The obligation is also expressed in M. The obligation in
time becomes as it is an economic good per se. As an empirical fact the obligation needs to be
created – produced like any other good and it is per se tradeable as well. I have equally shown,
that the amount of M must be therefore entrepreneurially explored; based on the very fact that
we express obligations in M. This is associated with the fact that the marginal unit of M
mediates an additional debt exchange, thus correctly reflecting the interest rate as a separate
value phenomenon. What the previous works allow to explain is the question, why we can even
33
value-invariantly calculate in one constant good M. As an aid to the interpretation of this very
context, I can use again an important note of Mises, where he faces this problem46:
„Money is no yardstick of value, nor yet of price. Value is not indeed measured
in money, nor is price. They merely consist in money. Money as an economic
good is not of stable value as has been naively, but wrongly, assumed in using
it as a "standard of deferred payments." The exchange-relationship which
obtains between money and goods is subjected to constant, if (as a rule) not
too violent, fluctuations originating not only from the side of other economic
goods, but also from the side of money.“ (emphasis added)
Although Mises is referring to the changes of so-called objective exchange value of money in
the form of the changes of the number of monetary units, which stems from the context of his
other works, he realizes that the purchasing power of money changes as well, and subsequently
causes changes in the price levels, in the exchange of money for other goods. This means that
money needs to be viewed from a twofold perspective. On the one hand, it is true that the price
level expressed in M changes according to how human subjects change their value approach to
the goods exchanged for money. On the other hand, it is equally true that it is very the change
of the purchasing power of the good M, which causes changes of the price levels. That can only
imply one thing. The choice of the good M from other goods and subsequent changes of the
purchasing power of the money “good” must be described separately. Given that I have shown
in the previous works, that through money we express the tradeable obligation in time, which
is a good per se (the obligation as such is the good per se), through which we satisfy a separately
perceived end of satisfying of other specific goods in time, we can realize:
a) a separate description of economic processes, which affect the acquisition of the
purchasing power of money separately;
b) the choice of the good separately; and,
c) separately we can describe even the economic processes related to the changes of its
purchasing power.
It is a three-dimensional character of the problem. The calculation outside of the monetary
economy was described as being the ratio of what I have to give up from my ΣMeans (without
the good X) against how the new ΣMeans (with the added good Y) will satisfy my ΣEnds. In
the monetary economy the good M must solve the identical problem, although at a different
qualitative level – multidimensionally and in the time continuum. It is this that opens a problem
we set and a question of why can we calculate in different times in M so that the given
calculation makes sense to people. The division of the problem to three separate dimensions
allows us to follow the level – the existence of the purchasing power on the horizontal axis, the
second level – the mutual competition of the goods M and any other M´, on the second axis in
space and the third dimension – the oscillation of the purchasing power on the vertical axis.
Illustratively and simplistically we can outline the problem through Figure no. 2 (see below).
46 Mises, L: Economic Calculation in the Socialist Commonwealth. WWW DOCUMENT
<https://mises.org/library/economic-calculation-socialist-commonwealth/html/c/10>
34
The figure shows a three-dimensional character of money. We have there the upper layer of the
economic relations (cubes / rectangles) we express them through money. Under this layer there
is a layer of economic goods (gray rectangle area), which is as if it is “controlled” by money;
economic goods are moved and enter into the economic relations based on what happens in
upper (money) layer. In the bottom (gray area) layer there is an exchange of goods (labor,
consumer and capital goods) for money. Capital production structures are created based on this
process. The bottom layer are all those goods that in the monetary economy have their value
expressed in money, i.e. in the good M (under the commodity money-B one can imagine a
different layer of goods, which is not drawn there for the sake of the clarity of the picture). The
upper layer is thus also a price level of goods in the bottom layer. In the figure there is an
illustration of the time continuum, in which all of the economic processes take place (cubes and
rectangles are put together). The upper layer is a separate monetary layer, which is created over
time and is created based on the debt exchange47.
The X-axis shows the undertaken debt exchanges. Each area (of cube or rectangle) represent
one debt exchange followed by consequent one. In their case the creditor demands in this
context elimination of this exchange at time t+1 the good M. The debt exchange is thus
expressed in the good M (our calculating standard). It is also illustrated on the spatial axis – Z,
the good B (there could be other competitive commodities illustrated as well), as a competitive
monetary commodity, which has a different range of spread than M has. In the figure we see
the good M has a narrower and more stable spread of the exchange (width of cubes is more
similar). The exchanges expressed in the good B are illustrated with wider spread in the last
debt exchange; as you can see the spread has changed – it has widened, e.g. due to the lack of
the given good B, or due to the inappropriate physical-chemical qualities of B (durability,
divisibility). It is possible to show this way that in the economic community people would prefer
a more stable and narrower spread, which M has in comparison to B. So this will motivate
agents to use M instead of B when they want to conclude another debt exchange agreement
later in time. They have negative experience with using B from this point of view of suitability
of B compare to M.
On the vertical axis subsequently success / failure of the debt exchange is illustrated. The
success comes with the correct estimate of the success of given economic project, for which the
money should be used, i.e. the money M were used on the purchase of goods in the bottom layer
at time t, the combination of which produces new and productive goods at time t+1, which are
successfully sold for money M. The debt exchange is successful and the purchasing power (per
se) of the commodity M thus rises (we see it when we move from first cube to the second). All
of this works also the other way. The changes are, thus, illustrated by the oscillation on the
vertical axis, when it can be seen that the through the good M some exchanges did not work out
and the M loses the purchasing power per se (from second to third cube), while on the other
hand in the case of the good B the exchanges were more successful (cubes in money-B are
drawn as more stable). The figure, therefore, shows that, from this point of view (!), the good
47 Let´s reaped it once again. It is a new – abstract – layer of the perception of the economic reality. Human
subjects pulled out the problem of exchange over time (per se) into a separately perceived environment, which is
expressed for example in the good M. It means that humans by doing debt exchange in time create a separate
problem per se, which is solved and expressed by good M.
35
B could seem to be more suitable than good M. The economic community must, hence, decide
between some form of “trade-off” between the two goods, where one may have a wider spread
or more stable purchasing power and the second has a more fluctuating purchasing power, but
has a more stable spread of the given exchange (for example due to the fact that it is more
flexible to use this commodity).
The above-described motivations of the sale of the debtor-produced goods within time period t
t+1 for M, or the obtaining of M by the creditor in time t+1, while at time t he got rid of the
good X (which he gave to the debtor), are just motivations or consequences so that the M has a
relatively higher liquidity than other goods. The reason (horizontal axis), why the M can be
used over time, is elsewhere. It lays in the abstraction of the calculation of the obligation and
obligation value invariability over time. It means that it is the obligation which will simply
remain an obligation, i.e. the same abstraction at time t but also t+1, and so on. That is exactly
why the subjects could start to perceive the problem of the debt exchange per se and they could,
thus, create a new abstractive layer of the economic insight into the reality in some good, in
which the obligation is expressed. And they are doing this together and in the very same way;
and that is the reason why we perceive the value of money in the same way in time no matter
that from time to time horizontal and vertical spreads could change. And this way is the
competition among possible money-goods also by humans considered.
36
Figure. 2: Illustrative 3D displaying of purchasing power of money:
Zdroj: Autor
37
The reason (the spatial axis), why the subjects choose from the competition of goods M or any
other M’ (or B) is again dependent on how well and appropriately the people can express the
mutual obligations in M (or B), i.e. how they will perceive the width of the spread of the
obligation expressed in M, while they value physical and chemical qualities of M. And the
reason for the oscillation of the purchasing power (the vertical axis) is the success or the failure
of the debt exchange in the time continuum, which is expressed in M. All three reasons affect
the calculation in M and its use in the time continuum. Let us shed a bit more light on these
reasons.
The fact that two subjects decide to eliminate the obligation at time t+1 in good M has the form
of the expression of the given abstraction in M. The extent of the purchasing power (vertical
axis), which is attributed to M, stems from the success / failure to fulfil or not fulfil the
obligation. The fulfilment of the obligation means for the creditor that his ΣMeans will be
enriched by the good M. For the debtor it means that he must within the period of time t t+1
obtain the good M from someone else or he must directly produce / find it. It is, thus, the
decision of the creditor (the horizontal axis) to add the good M to his portfolio (spatial axis),
and the success of the debtor to fulfil the obligation (vertical axis) in exchange for the fact that
at time t the creditor provided the good X, which enables over the time t t+1 express the
economic activity of the debtor in M, which is thus derived from the part of the subjective
accounting standard of the creditor who demands M and when M becomes the accounting
standard of the two human subjects.
In the context of the horizontal and spatial axis it does not matter, whether the activity of the
debtor is successful. If it is not successful, the purchasing power of the good M as such “just”
oscillates, because the creditor at time t provided the debtor with the good X, where the debtor
did not provide M at time t+1, i.e. the creditor at time t+1 has neither X nor M, which could
have served to satisfy his ΣEnds. However it is still possible to calculate. Even in such a case
the creditor can quantify his loss in M and the debtor his relative economic “profit” and the
relative legal “loss”. The creditor knows this based on the calculation of his loss of X expressed
in M because M was not delivered in the context of his ΣMeans and the debtor based on the
calculation of his economic “profit” in the form of X within his context of ΣMeans because he
have not provided M. However, calculation of debtor has to include also the legal loss
(following from the rules of the community enforcing the obligation) against the M which was
not provided. In case of the fulfilment of the obligation the same happens from the calculation
point of view, only with the difference that M increases its purchasing power as the debtor
fulfilled his obligation, while he had to satisfy the ends of others within the period of t t+1
(otherwise he would not obtain M for his economic activity) or he would have to find M (he
would have to conduct some form of economic activity to obtain M).
Therefore, the answer to our question, how the economic calculation is possible in the unit of
measure of some good (money) over time, is the following. The possibility of the economic
calculation results from the fact that the human subjects infinitely (ad infinitum) solve the
satisfaction of their ends in time indirectly, i.e. they use the obligation, a form of modus
operandi, a recurring process, while they express it in M; we imply here the mutual agreement
of at least two human subjects, that they express the given obligation in M. This is modus
38
operandi of value time invariance of money. The value invariance of M is, therefore, dependent
on the decision to enter into a debt exchange by two human subjects, while they jointly agree
on the accounting standard (the horizontal and spatial axis). In this respect the economic
calculation is possible over time. However, as we have said the purchasing power is also
impacted by the fact that M is also linked with the economic process of “movement” of other
economic goods (as if by the lower economic layer) and whose purchasing power is, thus, also
completely dependent on the fact, whether the given debt exchanges and economic processes
which they represent are economically successful or not. The influence of the spatial and
vertical axis, therefore, impacts on the accuracy of the economic calculation in the good M
over time.
The possibility and, consequently, the accuracy of the economic calculation is then dependent
from how well the economic community can estimate the success of the indirect satisfaction
of the ends in the time continuum. It is not at all a straightforward process, it is an
entrepreneurial discovery; discovering of the market level of the interest rate in the economic
community, the discovery of the time preferences of the members of the community, the
discovery of the institutional system (financial and banking sector), the discovery of the just
rules regulating business, which directly impact the economic processes surrounding money.
This is naturally associated with errors and the attempts for their elimination and/or political
interference into this specialized market process. This is not at all about, whether one
community uses coconuts to express the given relationship and the other one uses gold. It is
about the given modus operandi and the surrounding system. If it exists, then so does the
comparativeness of the economic calculations of different groups of population, while the
exchange rate emerges between the goods used as money. The comparison of the economic
calculation over time is equally dependent on, whether the given modus operandi from time t
is maintained at the following t+1, the following t+2 and the following t+n. Once it is, we are
dealing with the very same concept in time and then it is only about the arithmetic of the whole
process which enables one to calculate over time. Even when there are improvements or, vice
versa, deteriorations of the tools of the financial system. The comparability is available because
of the same modus operandi behind.
The convergence of the subjects to a single M is then associated with a single factor (this
concerns the spatial axis of the problem). The spread. Dealing with this factor is all about the
specialization and the division of labor. Just as it is in the case of any other goods. In the case
of M, which can be anything in the beginning (from apple, to a house), it is just the width of
the spread of the given exchange which motivate human subjects (entrepreneurs in the area in
question) to narrow it. While the width of spread associated with, say, apples can face the
problem of storage of apples between time t t+1 and in case the problem is the indivisibility
of the good, or non-mobility, the given spread is narrowed and people naturally converge to
some good, which is from their viewpoint best one to use it (narrows the spread). Subsequent
awareness of the exchange over time in the form of its components – time preference, interest,
principal, legal circumstances of the debt – also have an impact on the effort to discover the
narrowest spread of the given exchange and the most suitable good, through which the given
problem can be solved.
39
The more the process of the discovering of realization of a marginal debt exchange, i.e. an
indirect form of the satisfaction of ends over time, is successful, the M has a more stable
purchasing power and allows a more accurate calculation. With the accuracy of calculation we
need to remember, that human subjects can inter-subjectively compare their different
perception of costs and revenues (perceived completely subjectively). At that point they begin
to use an identical accounting standard – money. The interesting thing is that the given area is
not a separate area from the economic community. Quite on the contrary, it is intrinsically
bound to it. It is actually as if the top economic layer, which “moves” – in terms of value and
physically – the lower one composed of other goods.
As we can see, even in the monetary economy, it still holds that we consider ΣEnds, which we
solve through ΣMeans, while we prefer that ΣMeans, which better satisfy ΣEnds. We have not
dispensed our ordinal value insight through money. That is, why it is still valid that the costs
and revenues have subjective character. However, the changes brought through the discovery
of money have twofold character. First, through money we can better react to subjective
factually and counterfactually perceived ΣEnds of each individual, given that through money
as good we can satisfy in principle any factually as well as counterfactually perceived real
ΣEnds, thanks to the reason that money becomes a very important liquid asset, within the
individual portfolio, i.e. ΣMeans. Second, it is also possible to compare subjective costs and
subjective revenues. In this respect the monetary-price perception of the world is a tool of
humanity, how to communicate mutually our subjective economic ideas about the world in the
context of others. This is reason for illustration this as a separate layer of the perception of the
economic reality (in the Figure no. 2,). This is exactly what brings the qualitative change in the
process of satisfying the perceived, whether factual or counterfactual, ΣEnds, given the
possibility of much more specialization of various activities of different people, the growth of
production structures, and thus expanding the portfolios of ΣMeans of different people, so that
the satisfaction of the ΣEnds, whether at the individual level or the level of the entire
community, increased.
Thus, it is a tool formed by the two sides of the same coin – money and prices of goods
expressed in money (in the Figure no. 2 this relationship is indicated by arrows connecting the
level of goods, to which people attribute so-called use value, and the monetary level expressed
in form of the goods M or B, to which people attribute only a so-called exchange value). The
humanity further continues to refine this tool (and will continue to refine it). On one hand, there
are specific activities – banking activities, through which we discover the purchasing power of
our money (vertical axis in the Figure no. 2, which can be realized at the individual level, but
also by the specialized entrepreneurs in the banking sectors48). And on the other hand, there
48 The “attack” of the human mind on the narrow spread does not end with the discovery of money (the good
M). Above the good M that became money there can be a new layer of relations – based on the clearing of debts
between people in space and between people over time. This is nothing else than the fractional reserve banking.
The following rule applies to it. The more successful the mutual clearing of debts in the banking IOUs in space
and mainly in time, the more narrow the spread of the given exchange becomes, which will at the same time
incline to use more IOUs than to money. And vice versa. It implies of course an advanced banking system, but
also an efficient system of debt recovery. This is, however, a different topic, which we do not address in this
paper.
40
are tools for the discovery of the correct reflection of value preferences of people in the form
of the institutions focused on the discovery of the market prices of goods, for example stock
exchanges, markets (these are institutions, which specialize on the discovery of prices of goods
in money-good; in the Figure no. 2, this is the area of arrows connecting the upper level of
money with the level of goods). It is already at this point that the reader might feel that our
interpretation is fully in line with what Hayek wrote in 1945, albeit from a different perspective
and that in the case of economic calculation the so-called knowledge problem is neither
vicarious, nor secondary problem.
The difference between Mises’s line of reasoning and the argumentation presented here should
be obvious also from the point of view of his claims about the distinction of the calculation in
simple and complicated production structures. The Mises’s interpretation of the problem of the
economic calculation “pushes” him to claims that the economic calculation is not so
problematic at the level of the consumer goods, as is at the level of the more complicated
production structures. It is in these cases that we inevitably need money in his opinion. It is
quite a complicated assumption, because it implies three questions. Does this mean that money
is a precondition for the complicated production structures? Which production structures are
still simple, for which we do not need money, and which are already complicated, and thus can
come from money and monetary calculations? Then how did money come about as the most
saleable good, when according to Mises we first need money and then we can expand the
production structures, which are, however, a precondition for having something to trade and
find out, which good is the most sealable one?
The line of reasoning presented here is of different nature. The expansion of the production
structures is a process preceding the creation of money. First there is a change of time
preferences of human subjects related to the existence of the obligation. Human subjects
entering to the debt exchange in time calculate even without money. As we have shown they
are able assess their costs against their earnings already on this level. What is, however, more
important, they spontaneously discover the possibility of the debt exchange over time. The
exchange of X for Y in different times (interest implicitly included) creates an environment for
wider production structures. Connected problems motivates human subjects to seek the
solution of the problem of this exchange; money. The tool, which of course enables further to
develop the more effective planning in the production of goods, given that people know better,
through the calculation in money, to reveal their preferences (they have an evaluation tool
which show them if they are successful in satisfying the other one) and at the same time they
are able better to compare the mutually realized production processes.
Let us stop, finally, at the claim that through money people reveal their mutual preferences. It
is again a simplifying element of the human understanding of the economic system, and thus
the given element is spreading among people. In the barter exchange human subjects reveal,
what they demand from the other in exchange for what they offer and vice versa. The use of
money sort of “packages” this process into a new form and simplify it significantly. While
previously the members of some community know that the person X wants apples for pears, a
spade for pears, or wood for pears, then after the discovery of money, the person X wants
money for pears. In principle on one hand he covers all his preferences in the time continuum
41
into one good, through which he communicates his preferences. As we can see, this does not
mean that he was not calculating previously or that he did not produce anything. It means that
he transfers the problem to a different level of understanding. And according to Hayek, that is
exactly, how our brain works49.
3.3 Historical context of the evolution of money and economic calculation
We are, thus, left with the last problem awaiting us, to show the connection of the theory on
other, rather empirical research projects conducted in the area of the creation of money.
Empirical research projects of the today’s primitive communities indicate various problems in
the context of the economic calculation. For example, they show that the members of the
primitive communities can count only to 2 or 5 and everything else is just “more”. These
research projects also imply that it could have been very similar in the past as well. Can / could
such people even calculate? What lies behind the pre-historical discoveries of so-called tally
sticks, which in turn imply some form of (economic?) records of our predecessors? And even
when we look into the economic system of recent or still existing, so-called primitive
communities, we see that even these communities use a variety of kinds of goods in the context
of what the modern society calls money. How do these empirical facts fall into our theory?
Of course, the objective of this paper is not to assess and answer all the questions related to the
evolution of money. The ambition of this paper is rather to link (and even that only to a certain
extent) the empirical research in this area with the presented calculation theory. We pose here
a question, how our predecessors likely calculated? And how they discovered the concept of
calculation and the concept of money?
In the answers to these questions, let us have the following structure. First let us introduce,
what theories of the creation of money are being considered, let us look at, what ideas the
Austrian school of economics has about the creation of money, given that in its context I present
this work, then we try to link the presented theory to some existing theory of the money creation
and, finally, let us try to evolutionarily reconstruct the problem of the economic calculation
and the common denominator – money.
In his book Primitive Money: In its Ethnological, Historical and Economic Aspects50, Paul
Einzig identifies the following 10 theories of the creation of money51: 1. Theory of the origin
49 See Hayek, F.A. (1952, 2010). Sensory Order. Kessinger Publishing, LLC.
50 For more detail see Einzig, P. (1966, 2014). Primitive Money: In its Ethnological, Historical and Economic
Aspects. Pergamon Publisher.
Even though many economists ignore the anthropological research in the area of the economic history, it is still
interesting to look at its findings and try to offer a theory that will answer also the questions raised by
anthropology. This is also the purpose of this chapter of my paper, to try to link the presented economic
theories, so that the observed anthropological phenomena can be explained.
51 Einzig is a fairly honest empiricist and in his book he does not dare to decide, which of the theories is the
correct one or valid one. This is justified by the in-depth approach to money he have chosen and within which
he have shown not only a wide variety of goods we can and cannot consider money from the historical,
anthropological or theoretical perspective across world and across the literature, which describes the given
phenomena, but also the summary of different theoretical approaches described the creation of money.
42
of money as a medium of exchange, 2. Theory of the origin of money through external trade,
3. Theory of the origin of money though the internal trade, 4. Theory of the origin of money as
the standard of value, 5. Theory of the origin of money as the store of value, 6. Theory of the
origin of money as the standard of the deferred payments, 7. Theory of the origin of money
based on the ornamental and ceremonial functions, 8. Theory of the origin of money based on
the religion, 9. Theory of the origin of money based on the political decision and 10. Theory
of the origin of money based on the settlement of the marital relations.
Einzig explains that money was not invented out of the blue and did not start to be used all over
the world after their discovery. Multiple times such institution of money was copied from other
communities, multiple times the communities solved this question through their very specific
and particular way and simplistically without knowing that other community solves the given
problem in a similar or completely different manner. This really suggests a spontaneous and
uncoordinated creation of the institution of money. Which of the above-mentioned theories is
the correct one cannot be determined according to Einzig.
From the point of view of the Austrian theory, which is greatly influenced in this question by
the works of Mises, which follows Menger, only one theory is considered to be the right one.
In the context of Einzig’s classification it is the theory no. 1, i.e. the theory of money as the
medium of exchange. The theory is founded on the premise of so-called marketability, i.e. the
biggest salability of some chosen good. Menger’s theory is based on the description of barter,
in which the market generates goods, which given their characteristics are more salable than
any other goods, which directs the market gradually to the situation, that it chooses the most
traded commodity to become money. Mises chooses it for the following reasons:
„If the objective exchange value of money must always be linked with a pre-
existing market exchange ratio between money and other economic goods
(since otherwise individuals would not be in a position to estimate the value of
the money), it follows that an object cannot be used as money unless, at the
moment when its use as money begins, it already possesses an objective
exchange value based on some other use. This provides both a refutation of
those theories which derive the origin of money from a general agreement to
impute fictitious value to things intrinsically valueless and a confirmation of
Menger's hypothesis concerning the origin of the use of money. This link with
a pre-existing exchange value is necessary not only for commodity money, but
equally for credit money and fiat money. No fiat money could ever come into
existence if it did not satisfy this condition.52
The problem with this theory is not the theory on its own, but rather its interpretation by Mises.
I have shown this already in multiple works53. And in principle it concern the fact that Mises
claims that people have attributed to the money-good at time, when the money-good should
52 Mises, L. The Theory of Money and Credit. p.110. WWW DOCUMENT <https://mises.org/library/theory-
money-and-credit/html/ppp/1230>
53 See for example in Pošvanc, M. The theory of intersubjectively perceived value of money. WWW
DOCUMENT <http://www.hayek.sk/theory-of-intersubjective-perception-of-value-of-money/ >, and in “Why
We needn’t (inevitable) Gold Standard but Free Banking System. (not published yet).
43
have been created, both so-called use value and also exchange value at the same time, which
is illogical. The subjects use money only in the context of the exchange value. Mises, thus, has
to come to the claim that some most salable good has exchange value per se, which means that
he uses objectivism to explain the exchange value of the good in question, which is not in line
with the subjective value theory. It is, thus, not surprising that Mises is able to claim in the
citation above „that an object cannot be used as money unless, at the moment when its use as
money begins, it already possesses an objective exchange value based on some other use.“ It
is in this statement that we can see that he attributes value to the good per se and he does not
derive it from human action or valuation.
The theory of economic calculation presented here, which also relates to my theories of the
creation of money, has very reason to fall into the category of what Mises calls the so-called
catallactic theories54,55. In the sense of the work by Einzig it is probably most similar to the
Theory no. 6. The theory of the origin of money as the standard of deferred payments. Einzig
describes that the probability of the existence of debt in the primitive societies is certainly
strong and likely to be higher than the existence of barter and concept of debt should precede
any medium of exchange. However, the empirical studies suggest that the chronological
character may not have been in some communities the same as is suggested by this theory, i.e.
debt barter means of exchange, but rather just the opposite, meaning that the given means
of exchange started to be used for the clearing of the debt, which undermines the general
validity of the theory. Theories of the creation of money on the basis of debt are nothing new.
In his book The Money and Credit Mises subjects these theories to criticism. Rightfully so.
Theory of the money creation based on the deferred payments is focused on the explanation of
the purchasing power of currency (we use currencies today as money) and not commodity
money and describes rather the functioning of the banking system, which is in my opinion only
a superstructure above money (commodity). The theory of the deferred payments claims that
money has the form of the debt, or that they are the debt by themselves. These theories
considered money as general claims for or records of debt which the society has against the
current owner of money. This theory, however, does not explain the creation of commodity
money, i.e. the final eliminator of the debt. Our presented theory, however, can be linked to the
Theory of the origin of money as the standard of deferred payments (Einzig’s theory), or on
the so-called Banking school (Mises’s terminology). For this, however, we need to slightly
change the context and to show the possibility of the emergence of the commodity money even
within the theory of the purchasing power based on debt.
Construction of the theory of the evolution of money and economic calculation
54 „The catallactic theories of money, ... do fit into a theory of exchange ratios. They look for what is essential in
money in the negotiation of exchanges; they explain its value by the laws of exchange. It should be possible for
every general theory of value to provide a theory of the value of money also, and for every theory of the value of
money to be included in a general theory of value. The fact that a general theory of value or a theory of the
value of money fulfils these conditions is by no means a proof of its correctness.“ Mises, L. The Theory of
Money and Credit. p. 462. WWW DOCUMENT <https://mises.org/library/theory-money-and-
credit/html/ppp/1230>
55 Paradoxically, it is the Mises’s doctrine and theory, which does not meet its own definition of the catallactic
theory, since Mises uses objectivism to explain the objective exchange value of money.
44
In the context of the theory of the standard of the deferred payments, or the so-called Banking
school, the money is considered to be debt. The commodity money are not debt! Its purchasing
power, however, stems from the mediation of the exchange over time, meaning in the
expression of the debt (abstraction) in the commodity. The debt and the commodity money are
separate phenomena. Acceptance of obligation and its elimination (elimination of debt) can be
realized even without the commodity money. This modification or the realization of this fact
allows the explanation of how some commodity acquired a purchasing power and becomes
money. The exchange over time, the obligation, is perceived mean (good) per se. Two or more
human subjects react through obligation to the newly created abstract End to satisfy needs of
human subjects indirectly in the time continuum in general. It is, therefore, a new thought layer
or construct related to the abstraction of mind in the form of planning of the future, which
becomes an End per se56, which is satisfied through the obligation expressed in money (some
commodity). This way it is possible to explain, on one hand, the creation of the commodity
money and at the same time also a further evolution of this abstraction in the form of the
banking sector (as another relationship layer)57, which is subsequently a subject matter of the
theories of the so-called Banking school.
In addition, from the perspective of the problem of the economic calculation and money we
must focus on the numerosity of the problem itself. The number and calculation are equally
complicated abstractions. Money is not the same abstraction as the number. It is a real good,
which we own and which we prefer just as other goods. It is, however, a good, which obtains
purchasing power based on what the person tries to do, and as a separate problem, whether he
ensures his own ƩEnds in the time continuum, directly or indirectly. That means that its
purchasing power is related with the abstraction of the emergence of numbers and mathematics.
We have in front of us two abstractions, which had to gradually develop in the minds of our
predecessors58.
56 In terms of the theory of value presented in this work the obligation (the plan to borrow the goods and the
plan to return the goods with interest) is composed into the preferential scale among ƩEnds → ƩMeans
relationship of the two human subjects at the same time and in the very same manner – of course in different
context (one subject is the creditor and other is a debtor). From the creditor’s point of view, the factually
perceived surrender of some good at time t is compensated by the counterfactually perceived relation ƩEnds →
ƩMeans at time t+1. That means that the creditor imagines at time t+1 the acquisition of some goods from the
debtor, which are to be at time t+1 a part of the portfolio ƩMeans, which he believes that it will at time t+1
better ensure the planned perceived ƩEnds. From the point of view of the debtor, the given exchange is
perceived time-inversely. This means that at time t, he satisfies factually perceived ƩEnds → ƩMeans
relationship through the good from the creditor who enriches his portfolio, and thus satisfies factually perceived
ends, while he counterfactually perceives at time t+1 that he has to give up some good from his newly formed
ƩMeans.
57 This is possible only due to the fact that we are connecting money with different thinking layer of economic
relations (in our interpretation money are inter-subjetive concept) and Mises is looking for the cause of money
within human subject per se.
58 The fact that the development of the concept of numbers and subsequently mathematics was quite
complicated should follow just from the fact that the humanity has discovered the mathematical abstraction in
the form of “0” (zero) from the perspective of its history in principle only recently (in the Euro-Indian culture it
is used since circa 700 AD, while its development can be traced somewhere to year 300 AD. It seems that for
example Mayan culture very likely independent from the Euro-Indian culture uses this concept from 450 AD, if
not earlier). See in Butterworth, B. (1999). What Counts. The Free Press. pp 78-84.
45
Within the presented theory it needs to be noted, that the main role to explain the phenomenon
in question is “played” by time, or the perception of the obligation over time, which causes that
the mind approaches the given problem through the abstraction of the mind. Of course, the
abstraction of mind implies the conscious behavior of human subjects. However, assuming the
existence of identically conscious mind of the pre-historic and today’s person is a not very
realistic assumption. The mind of our pre-historic predecessors could from the today’s
perspective more resemble a mind of today’s children. There are some “signs” of awareness,
however, much of the activity goes on somewhere in the background. The creation of money
needs to be sought, therefore, somewhere in the lower form of awareness and spontaneously
emerging rules of the community. But can this be combined? Can it be explained, how from
the vaguely aware activity of the prehistoric man emerges some thought abstraction, which is
present in every human being?
For the sake of clarity, we must link the presented theory explaining the gradual and
evolutionary creation of these abstractions, by which we overcome not fully aware and just
very specific perception of reality by our predecessors. This is where we can use Hayek-
Pavlík’s theory of mind, within which simplifying mental models of the interpretation of the
surrounding reality (a concrete state of affairs) are created. In the case these meet their limits,
they generate new mental ties, which cause again more abstract and again slightly simplified
perception of the surrounding reality (the concrete state of affairs becomes the new abstraction,
which becomes consequently a new concrete state of affairs; and the process continues
onward). And using the Hayek-Pavík’s perception of the spontaneous creation of catallactic
rules when the theory of the spontaneous order and cultural evolution needs to be applied first
on the so-called norms of the distributive justice, which while “blindly” (supported by, say,
religion) lead human subjects to live within the prehistoric community, while in the background
of these undertaken activities the sediments of the catallactic rules are being formed. The theory
states that catallactic rules are grasped by human subjects only after human subjects reach a
higher level of self-awareness59.
What we can say with some certainty about the first mathematical calculations it follows that
they existed already by 5000 B.C. and they were used in the context of the records about the
payments in the standardized rate of wheat – commodity money of Sumerians. Everything
before is just our guesswork, based on either excavations or our explorations of the linguistic-
mathematical structures of the populations of different tribes who previously had not had an
explicit contact with our civilization. The oldest potential sings of counting or records of
something, date somewhere to 32 thousand B.C. and it is most probably the oldest record of
the so-called tally stick60. Tally sticks were used for the record of the trading activity (record
of debt) in principle until recently (19th – 20th century). Were tally sticks, then, the first records
about some form of trade, debt, obligations in some prehistoric communities long before money
59 See Hayek, F.A. (1952, 2010). Sensory Order. Kessinger Publishing, LLC., and also in PAVLÍK, Ján. Austrian
Economics and the Problems of Apriorism. E-Logos – Electronic Journal for Philosophy [online], 2006, Vol. 13,
pp. 1–73. ISSN 1211-0442. URL: http://nb.vse.cz/kfil/elogos/science/pavl106.pdf. and in PAVLÍK, Ján. About
the Spontaneous Emergence of the Norms of Distributive Justice and Catallactic Rules. E-Logos – Electronic
Journal for Philosophy, 1999. ISSN 1211-0442
60 Butterworth, B. (1999). What Counts. The Free Press. pp. 32-48
46
was created? We do not know. We can just assume that this is a relevant record, which we can
imply from the fact that tally sticks were used for this purpose later and from the fact that the
precision of the record suggests that some effort had to be undertaken for the given records, so
it is not just a case of some random creation of lines into some stick.
A realistic assumption is that if our predecessor realized the given records, then the level of
abstraction was low, i.e. this was rather a specific description of the state of things. Only then
could the given specific description of the state of things become higher level of abstraction61.
As a subsequent argument we can support this idea from the fact that even the mathematical
grasping of the reality developed gradually62 from the specific records through the grouping
of the records into larger units (collection principle) subsequent addition of the summation
(the adding composition principle) the creation of the base principle of numbers (base-2,
base-4, base-5, base-10, base-60 system) 63 recursion principle (application of the identical
rules of the result of the mathematical operation) or finally the principle of the numerical
place and value (this way the concept of zero was created) 64. These stages of the mathematical
perceptions of the reality are nothing else just a principle of changing particular state of affairs
into the higher abstraction, when the mind of the person changes a specific perception of reality
to a higher form of abstraction.
The same assumption can be realized in relation to our problem of calculation as the accounting
calculation principle of the other one in the exchange over time. As we have shown, the
economic obligation over time allows the human subject (debtor) to express in some good,
through which he can clear his obligation towards the other one (creditor), calculate his activity
and evaluate the suitability / unsuitability of the satisfaction of his ends over time directly or
indirectly. While from the beginning of the use of this institute this probably involved different
kinds of very specific goods, with the more frequent use of the institute of obligation human
subjects tried to solve potential problems associated with the fact that the given obligation even
passed in time. In fact they tried to lower the uncertainty that if they chose an unsuitable
economic good for the clearing of the debt, which unnecessarily expanded the spread of the
obligation over time, they were unsuccessful. Therefore, they moved from these diverse goods
to those they evaluated from the perspective of their (objective) physical qualities that made it
possible to better respond to the problems that emerged – whether in terms of their storage,
durability, divisibility or salability, or even from the perspective the religious rituals, communal
coexistence, traditions, or political or societal rules and norms, which the given community
(blindly) followed and through which it enforced the given obligation (as a separate concept).
61 Attentive reader sees that we used here Hayek-Pavlik´s theory of mind 62 See in Butterworth, B. (1999). What Counts. The Free Press. pp. 68-75
63 The base principle means that our predecessors counted for example in the base-4 (quaternary numerals
system), by having explicit name for the numbers 1-4 and then they made a record of the group and started
counting as 4+1, 4+2, 4+3 and 4+4, and so on. The given counting principle has equally developed. Today we
use for example base-20 numeral system, but China uses for example base-10 system. Even if the base-2 system
it is possible to conduct different mathematical operations and so to calculate. However, it is much more
difficult than in other bases. As a potentially possible system before the base system is the system of the body
parts. Our predecessors have developed different technological aids in the form of mathematical tablets and
others for the given base systems. See for example in lbid. pp 49-68
64 Ibid. pp 68-75
47
It is the very activities of human subjects and their life in the community, which imply that it
is not necessary to presume the identical conscious humans as we see today. On the contrary,
multiple human activities could have been intuitive, or guided by the rules of the cultural
evolution. However, in the background of given activities, sediments of thinking about these
concepts arose, having gradually emerged through the spontaneous discovery by emerging
language. Thus, the mutual and spontaneous economic interaction taking place over time,
having various combinations of specific forms, led us to the perception of money- more abstract
phenomenon.
While the Menger / Mises’s version of the description of money chooses one theory, the theory
presented here is in my opinion in principle applicable to all the theories presented by Einzig
at once. The theories in question describe only the empirical variants of above mention
problems and solutions of communities leading them to the emergence of money. And to leave
out one of them would mean to ignore some of the motivations. The reason, why here presented
theory can be applied across the other theories is the fact that it explains the creation of money
as a reaction of Ego on the emerging abstraction, a new problem, i.e. the solution to the problem
of indirect satisfaction of ends of the people mutually and over time, which people gradually
recognized as a separate problem per se at the background of their spontaneous activities
within communities ruled by spontaneously developed rules. The main roles play here: a) the
problem of time, b) the problem of changing preferences over time and c) the life within a
community. These problems had to be gradually processed by an emerging mind of humans,
as they emerged step by step on the background of the (spontaneous) activities of human
subjects within that communities. And particularly this has created a new layer of thought and
new way of grasping of economic reality, which is solved by money and later through the
institute of banking system.
What does this mean in other words? It means that the emerging abstraction of the mind is
applicable to each of the presented theories as they describe more the empirical context of how
the given abstraction manifested in the economic reality. This means that even the political
theory is valid65, it is a subset of events, when the moneyness in the community was ensured
through the decision of the local rulers. What about the theory of the most salable good? Mises
and Menger cannot explain through this theory the universality of the objective exchange value
of money or even, how the calculation monetary standard was created, which, however, does
not mean, that human subjects would not use the most salable commodity for the clearing of
the obligations, or that over time they would not attribute to the surpluses of the commodity
even the exchange value. Nor it is any surprise, when Einzig claims, that in some documented
cases, abstract and ideal units of measure have been used in the context of the origin of money
as a standard of value, which had no concrete representation in reality, and thus could not be
65 The political theory is often used within the Austrian school as an example of incorrect approach to the
emergence of moneyness of some good. As we can see in our theory it certainly has its place. The political
circumstances were just as historical circumstances as any other circumstances. Paradoxically it is also the
history of gold as money, which became dominant in the economic ties also thanks to its popularity related to
the political powers.
48
used as the medium of exchange66. Why would the ornamental, ceremonial, religious, or the
marriage-related circumstances in the prehistoric communities be separated from the
development of the given abstraction and equally with the change and the development in the
internal and external trade among communities? The fact that people have responded to the
abstract nature of thought, which appears in their mind first vaguely and subsequently as an
explicit problem, through money, explains why each of the presented theories bears its part of
rationality and allows us to state that in the context of our theory all of them are in principle
valid. They focus on the empirical diversity of the reaction of Ego on the common nature of
thinking of humanity. While Einzig claims that none of the aforementioned theories can be
unambiguously determined as the valid one, our line of argument shows that, on the contrary,
each of the mentioned theories presents certain empirical realities that have led the mankind to
money and it is possible to claim that all of them are valid.
4. The problem of the impossibility of socialism and the problem of economic efficiency
The problem of the absolute impossibility of socialism based on the argument of the
impossibility of the economic calculation must be, based on our line of reasoning, rejected.
This does not mean that socialism is the correct social system. It means that it is not possible
decide about the correctness / incorrectness of the given system through the economic
calculation argument. In order to do this, we need to use a different apparatus of arguments. As
we shall see, socialism has an inherent component of economic coercion from the very
definition of its nature. And that is the argument, based on which it can be rejected.
As we have shown, the non-monetary economic calculation is the adopted accounting standard
of the other one (creditor). It is not dependent upon the knowledge of past prices and their
expression in money. It is dependent on the degree of mutual “adoption”, or as if a natural
penetration of the individual and subjective accounting standards of members of the economic
community. In the context of the subjective value the costs and revenues are completely
subjective. However, this does not mean that they are not comparable through the economic
calculation, as the accounting standard of the other one. As we have shown, the economic
calculation enables numerous possibilities of a mutual comparison of subjectively perceived
costs and revenues in the context of the perceived ƩEnds and the used ƩMeans. Even without
the exchange subjects can at least imply, whether some ƩMeans could satisfy their ƩEnds better
or worse. In the case of barter exchange they can evaluate the marginal acquisition of some
good X and at the same time a marginal loss of their own good Y in the context of their overall
perception of ƩMeans, which should satisfy their ƩEnds. Even at this level they can compare
the extent of what they have to give up against what they gain and they can equally estimate
what is preferred by the other one and what the human has to give up. They reveal the mutual
66 „In a large number of instances, the units serving as a standard of value could not possibly have been used as
media of exchange, for the simple reason that they were merely ideal units without any concrete existence.
Admittedly it is possible that in the remote past those abstract units were represented by concrete objects
serving as media of exchange. It is, to say the least, conceivable that some units of account at any rate were
purely imaginary from the outset. Einzig, P. (1966, 2014). Primitive Money: In its Ethnological, Historical and
Economic Aspects. Pergamon Publisher. p.367
49
subjective perception of their costs and revenues to others. The discovery and the use of the
common denominator of exchange through the indirect satisfaction of the mutual ends over
time has led into the situation, when they collectively calculate within a certain unit of some
good, which subsequently spreads within the community given the lowering of spread of the
debt exchange. Human subjects can mutually compare their costs and revenues this way to the
extent that they commonly use the common denominator of the economic calculation. This
does not mean that the costs and revenues are objective. They remain subjective in the context
of ƩEnds, which the ƩMeans should satisfy. What is objectified (or more precisely, inter-
subjectivised) is the possibility of comparing the effectiveness of their economic activities. Nor
does this mean that at some specific case of some economic activity, which is completely
different from others we can say that the subject X does something wrong. We can only say
that he conducts his economic activity differently to someone else. The economic efficiency is
inevitably a relative term. There is no possibility of its objectification. Its inter-subjectification
is dependent always on what other people set as their economic benchmark. In the specific case
it means for example that if the subject X spends a lot of time on the social networks, we cannot
say about him that he is not efficient per se. He has a subjective perception of costs and
revenues. The only thing we can tell about his activity is that there is also a subject Y who, for
example, works more and has a different kind of preferences and different kind of perception
of his economic costs and revenues. And this is what we can compare. Money (and the prices
of economic activities) allow us relatively well67 to compare the costs and revenues of X and
Y in some common unit of measure. We can for example say that the X must give up his hourly
wage in favor of spending more time on the social networks, while Y obtains some hourly
wage. It equally does not mean that the opportunity costs of X are worse than of Y or vice
versa. The only thing this means is that we can compare something. And comparison is
important.
The view radically changes in case that the X contractually commits himself to work for Y. He
voluntarily adopts the standard of Y. Based on this we can evaluate the economic activities of
X, for example in the context of his comparison with the other employees of Y, or for example
in comparison with the employees of another company belonging to the subject Z, whose goal
is to achieve profit just as the Y who has the same goal of achieving profit. If then somebody
spend his time on social networks instead of working, we are able consequently state that he/she
is inefficient despite he/she has subjective cost/revenue perception. It is the benchmark which
change the point of view. The economic evaluation of the activities is, therefore, always
relative; it is always in the context of some goal. And goal may or may not be widespread in
the economic community.
This implies a rather simple conclusion in the context of socialism. Socialism is possible. As
we see it is all about relative assessment of economic possibilities and successes and what it
67 It would be relatively tougher to compare the costs and revenues in some form of barter, where we would
have to set some common benchmark of the exchange in the context of what they have to give up in order to
gain something and the most difficult it would be to compare the revenues and costs if they did not enter into the
exchange. What I am trying to suggest is that we can see the options of the mutual comparisons, or difficulties
associated with it based in barter and how the humanity could create an interesting tool of the comparison of the
mutual activity in the form of money and economic calculation.
50
brings to members of the economic community. Any form of socialism implies that the
accounting calculation standard is determined differently than by market discovery. That
means that some economic activity that affects the determination of the given accounting
standards is determined either by some individuals or on the basis of a different kind of decision
(for example by Politburo). It is therefore based on different method compare to the discovery
of the common accounting standard on the market. From a socio-economic perspective, this is
actually a question of the rate of voluntary acceptance and discovery of calculation / accounting
standard vs. the rate of politically given standard.
At the level of family, company, private club, but also a small primitive community, or kibbutz,
it is a common and “voluntarily” accepted accounting standard given by someone in “power”68.
However, even within these institutions it is determined in different ways. While at the level
of the family and in some communities the key role can be played by the father for example,
however in others it can be the key role of mother (ΣEnds is determined by them). The standard
can be equally influenced by very different cultural-societal backgrounds. It is similar from the
perspective of the company. While some companies are in the hands of the individual
“despotic” owners, which decide everything, then for example in the case of the joint stock
companies, the company (as entity) has created separate – democratic – voting rights about
what standard will be enforced; whether the company shall try to achieve for example a
complete profit maximization, or it will be in this context also environmentally friendly context
of standard, because consumers demand it (maybe even for some strange reasons), etc..
However, the degree of voluntariness is quite different in the political organizational units.
Political organizational units different to capitalism are not infeasible in principle from the
economic point of view. It is about to what extent the common, politically determined,
accounting standard is accepted in the given community and what other mechanisms the given
community perform to make the common standard (at least partly) accepted. If we use Hoppe’s
division of the socialist societies69 and add various despotic tyrannies or idealistic versions of
socialism, then these differ in principle only in what kind of mechanisms the societies create
in the context of how the political “elites” 70 decide, meaning what political accounting standard
is enforced in the community. By the politically determined accounting standard I mean what
part of the economic activity is left to the decision of the political elites. The extent of the given
political decision can obviously change from some form of the mini-city states, through
minimal state all the way to the despotic tyrannies. Neither of these options means that the
economic calculation is impossible within them. It means just that it is determined by
something specific and for a specific purpose rather than being discovered in the market. These
68 It does not mean that particular member of the given community cannot abandon a given standard or to
change it somehow. However, in terms of his ƩEnds he voluntarily incorporate some common ƩEnds which are
typical for the given organizational unit of the community.
69 Hoppe recognizes the socialism of the Russian type, the socialism of the social-democratic type, conservative
socialism and the social engineering. See in Hoppe, H.H. A Theory of Socialism and Capitalism. WWW
DOCUMENT <https://mises-
media.s3.amazonaws.com/Theory%20of%20Socialism%20and%20Capitalism%2C%20A_4.pdf>
70 In numerous cases these are not some elites in the true sense of the word. The empirical experience shows
often an exact opposite of what the word elite actually means.
51
communities approach the determination of the economic standard in different ways –
beginning with a direct despotic determination, i.e. someone literally makes up and plucks out
of thin air the prices of goods, because he can and has the power to do it, through the effort to
simulate the market mechanisms (e.g. Taylor – Lange), the copying of the market prices, decide
about the “most clever ones“ decision makers or only suitable representatives through the
democratic processes all the way to some forms of social engineering71. None of this means
that the socialism is impossible. The tyrant does not care, actually. He enforces his vision,
which he imposes on others and if others do not identify with his vision, he uses his political
power or some other methods. This power is sometimes despotic and sometimes more
moderate, sometimes it is even acceptable for the community, as we can see today in the
examples of the social-democratic and partially market based political regimes72.
The problem we face from the perspective of the economic calculation is that the economic
efficiency is a relative term. From the view of the theory of subjective value it is not primarily
about preferring more goods to fewer goods of the same kind and quality. It is about the
preference of a higher degree of satisfaction of Ends. At the same time humanity has created
mechanisms, which allow the comparison of the mutual effectiveness of its members.
However, there are, by definition, no objective goals, or an objective evaluation tools of what
is economically more effective or not. The costs and revenues are by definition subjective.
Thus, from the perspective of the economic efficiency we live in the economic relativism.
There is no other option, our preferences are subjective. However, humans cannot live based on
relativism. It is therefore the very reason they develop tools (money, calculation as common standard,
catallactic rules, language, etc.) which help them to eliminate relativism and to find out what the most
suitable state of affairs for them (as individuals living within the society) is73.
To reject socialism is possible only from other perspective. From the perspective of the
universal validity of societal norms. Those, on the other hand, allow us to define generally valid
rules for the functioning of the society. These rules are and will be evolutionarily discovered
in very continuity. Some of them we have already as humanity discovered, others still only
await as the challenges of the era that still awaits us. Already discovered include, for example,
the protection of the private property and personal freedoms of the individual. These are moral
and intersubjectively valid ethical maxims, whose importance, definition of their boundaries
and their content are continuously refined and which should be firmly enshrined in the legal
framework. They create a universally valid benchmark, which unlike the economic efficiency,
71 Caplan for example describes absence of proper incentives within socialism and some efforts to introduce
these incentives, which always crash with the political power. He sees the problem of socialism rather in the
absence of the opportunities to do business, rather than in the calculation. See for example in Caplan, B. IS
SOCIALISM REALLY “IMPOSSIBLE”? WWW DOCUMENT
https://www.tandfonline.com/doi/abs/10.1080/08913810408443598>
72 From this point of view, there is an interesting question of what is and what is not acceptable for individuals
within such different socialist communities and what is taken voluntarily and what is given by real force.
73 This particular change of premise changes the whole perspective. The premise “I prefer more goods which
are the same kind and quality over less” has objectivist character and paradoxically is not possible to use it over
time because of the problem of change of valuation of goods in time. The premise “I prefer higher satisfaction
of ends over smaller” is fully subjective and as I have shown it is possible to use it over time. The very true is
that it introduces some kind of economic relativism. I will deal with the issue in more detail in later works
focused on the problem of economic error, dealing with uncertainty and the problem of equilibrium concept.
52
is intersubjectively fully valid. Only within this framework it is possible to apply subjective
preferences of people, meaning to apply mutually and at the same time subjective preferences
with respect to each other.
This implies that it depends on the extent of the imposition vs. voluntary acceptance of the
societal accounting standard (economic calculation of the other one) on the remaining human
subjects, from which follows the assessment of the economic ineffectiveness. While in the
family, a private club, or a small community, or within the so called ideal of free market the
acceptance of the given standard can be fully voluntary, and thus included among the
intersubjective preferences of all members of the given community, and thus subjectively
effective, in the political organization, within which the given voluntary acceptance cannot be
assumed74, the imposition of the standard of the other one is inevitably enforced through power
or there are used other more or less suitable instruments (democracy, social engineering, etc.),
compare to completely free market system. It follows that we can then state that socialist
economic behavior is economically less effective. The member of the socialist community must
accept it. In the given socialist community there must be suboptimal economic processes; i.e.
there are no optimal prices, profits, costs or even the economic calculation. In this case any
attempts to determine and solve a problem of economic calculation must, by definition, face
the inaccuracy of its determination. But not impossibility. We can state that such prices and
calculation is ineffective from the perspective of all of the agents. None of this, however,
implies that a central planner cannot impose his idea of an accounting standard on the whole
society. He can do it through the coercion and power. And in principle he does not care that he
is wrong and uses the resources ineffectively75.
Thus, the denial of socialism is only possible in the context of the intersubjectivised societal
maxims, i.e. in the form of the societal rules, which in turn enable people to fully express their
subjective preferences with respect to each other at the same time. The economic calculation
on its own is, however, a knowledge problem. It is the question of the effectiveness of the
74 I think that the Hayek’s problem of the centralized nature of the information about the preferences of people
in the big society versus a smaller community needs to be taken exactly in this context. The problem exists in
the small community as well as in the large one. In the small community, however, the agents voluntarily adapt
the “centrally” determined standard of calculation - by an owner of the club, the head of the family, the chief of
the clan, to the spontaneously created rules of the pre-historic community and so on. It is a voluntary acceptance
of a standard and not a solution to the problem of the subjective preferences. And the given community
calculates in the context of the given standard what it considers to be a profit and loss. The fact that other
community can consider the economic activity senseless, is not the sign of a lower efficiency. The ƩEnds
voluntarily accepted by them, which they try to satisfy by some ƩMeans, may have for them some sense, which
we may not know. That is why these voluntarily organized units of society cannot face the identical problem as
socialism does. The voluntary organizational unit must have by definition an identical weight at the mutual
acceptance of the accounting standard of another one in the communication of the mutual economic preferences
as a subject by itself. In this respect the voluntary organizational units are equally the tool, through which the
subjects perceive the surrounding economic reality. Confront this with Hoppe, H. H.: A Property or Knowledge
problem? str.144. WWW DOCUMENT <https://mises.org/library/socialism-property-or-knowledge-problem>
75 Within the original discussion about the economic calculation authors like Taylor or Lange suggests nothing
else than some kind of way of forcefully determining an accounting economic standard (it does not matter that
was inspired by market process) that cannot be realized without people being forced to accept it. We must
inevitably say about these attempts that these are ineffective and bad attempts. However, the fact remains that
they are feasible. For more details about the original discussion see e.g. de Soto, J.H. (2012) Socializmus,
Ekonomická kalkulácia a podnikanie. pp. 167-274. Bratislava. Konzervatívny inštitút M. R. Štefánika.
53
economic calculation and usability of scarce resources that is a so-called private property
problem.
It follows that capitalism must be always more effective system, because it ensures that an
economic accounting standard is voluntarily accepted by all the members of the community.
And conversely socialism is always a less effective system, because the accounting standard of
the other one is always involuntarily imposed and enforced on the others. Therefore, socialism
must be, by definition, the less effective economic system; but not impossible one.
Matúš Pošvanc
Original final Slovak version of the article was published on March 26th 2019. English version
was published on June 27th 2019.