What Is Economy?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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