One Can NEVER Understand the Operation of a Private Property Society IF One Thinks in Terms of the TOTALITY of a Society’s Economy

The old tendency, taken over from the Cameralists, to base the analysis of economic problems of the “national economy,” on the “totality” and not on the acting human subjects, seems hard to eradicate. In spite of all the warnings of the subjective economists, we continue to observe relapses. It is one of the lesser evils that ethical judgments regarding phenomena are presented under the guise of scientific objectivity. For example, productive activity (i.e., activity carried out in an imagined socialist community led by the critic) is contrasted with profit-seeking activity (i.e., the activity of individuals in a society based on private property in the means of production). The former will be viewed as the “just” and the latter as the “unjust” mode of production. Much more important is the fact that if one thinks in terms of the totality of a society’s economy, one can never understand the operation of a society based on private property in the means of production. It is erroneous to maintain that the necessity for the collectivist method can be proved by showing that actions of the individuals can only be understood within the framework of that individual’s environment. This is so because economic analysis does not depend on the psychological understanding of the motives of action, but only an understanding of action itself. It is unimportant for catallactics why bread, clothes, books, cannons or religious items are desired on the market; it is only important that a certain demand does exist. The mechanism of the market and, therefore, the laws of the capitalistic economy can only be grasped if one begins with the forces operating on the market. But on the market there are only individuals acting as buyers and sellers, never the “totality.” In economic theory, the totality can be taken only in the sense of an economic collective where the means of production are entirely outside the orbit of exchange and, therefore, cannot be sold for money. Here there is neither room for price theory nor a theory of money. But if we wish to grasp the value problems of a collective economy, we can  — ironically — only use that method of analysis which has come to be known as the “individualistic method.”

—Ludwig von Mises, “The Position of Money among Economic Goods,” in Money, Method, and the Market Process: Essays by Ludwig von Mises, ed. Richard M. Ebeling (Norwell, MA: Kluwer Academic Publishers, 1990), 60-61.

The Austrian Theory of the Business Cycle Is a MICROECONOMIC PROCESS as the Price of Time Is Severed from the Preferences that Underlie It

It is the unobservability of the natural rate that is central to understanding the Austrian theory of the business cycle. Because the natural rate of interest is a theoretical construct and not a phenomenon observable on any real market, we cannot know with certainty that any given market rate of interest is accurately reflecting the underlying natural rate. It is in this sense that the Austrian theory of the business cycle is ultimately a microeconomic process; the problem begins with a price that becomes severed from the preferences that are supposed to underlie it. The whole theory elaborates the microeconomic results of that mistaken price signal. Because the price in question is the price of time, and all economic production involves time, the effects of that erroneous price are much more pervasive than those of any other price. It is that pervasiveness that makes the Austrian cycle theory ‘macroeconomic.’ It is not, however, macroeconomic in the sense of explaining some relationship among aggregates. This confusion arises with some frequency, especially when the theory is referred to as an overinvestment theory. The problem is not that there is too much investment (per se) but that the wrong kind of investment is taking place. That distinction is not readily visible through the eyes of modern macroeconomics since Keynes, which has understood investment only in terms of some aggregate measure rather than as part of an interconnected capital structure where the composition of investment is just as important as its overall level.

—Steven Horwitz, Microfoundations and Macroeconomics: An Austrian Perspective, Foundations of the Market Economy (London: Taylor & Francis e-Library, 2003), 126.