The Ludwig von Mises: Catallactic Converter

Ludwig von Mises said something amazing—a sentence with just 25 words—with a profound insight into how societies work, or could work.

The 25 words are these:

The fact that my fellow man wants to acquire shoes as I do, does not make it harder for me to get shoes, but easier.

One could teach an entire course in introductory economics on just this one sentence. There are three aspects of the claim I want to discuss to illustrate just how profound this insight is.

1. Catallactic converter: In the state of nature, I want shoes, and you want shoes. There are not enough shoes, so we have to fight. But if we can create a system where private property is reliably preserved, and can be exchanged, at low transaction costs, then we can make more shoes. So, rather than fighting over a fixed quantity of shoes in the state of nature, we can cooperate, because we all want shoes. The difference between the state of nature and a system of catallactic cooperation is that social relations are not fixed in the latter system. Commercial society rewards cooperation and manners. Montesquieu famously noted this tendency of commerce in Spirit of the Laws:

Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that whereever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners. Let us not be astonished, then, if our manners are now less savage than formerly. Commerce has every where diffused a knowledge of the manners of all nations; these are compared one with another, and from this comparison arise the greatest advantages. Commercial laws, it may be said, improve manners, for the same reason as they destroy them. They corrupt the purest morals; this was the subject of Plato’s complaints: and we every day see, that they polish and refine the most barbarous.

The usual critique of markets is that commerce is animated by greed and ignores manners. But commercial interaction, and the need to accept our dependence on others, actually creates a sense of shared purpose and belonging to something larger than ourselves. The “leveling” of manners may coarsen the very wealthiest, but the least well-off are elevated and have a sense of participation in a system that supplies their needs. Mises is making not (just) a consequentialist argument for catallactics, but also a deeply moral claim.

2. Division of labor: Mises is clear about the role of the division of labor in society, expanding on the original insight of Adam Smith. Mises describes the division of labor as the mechanism by which the catallactic converter is sustained:

What makes friendly relations between human beings possible is the higher productivity of the division of labor. It removes the natural conflict of interests. For where there is division of labor, there is no longer question of the distribution of a supply not capable of enlargement. Thanks to the higher productivity of labor performed under the division of tasks, the supply of goods multiplies. A pre-eminent common interest, the preservation and further intensification of social cooperation, becomes paramount and obliterates all essential collisions. Catallactic competition is substituted for biological competition. It makes for harmony of the interests of all members of society. The very condition from which the irreconcilable conflicts of biological competition arise–viz., the fact that all people by and large strive after the same things–is transformed into a factor making for harmony of interests. Because many people or even all people want bread, clothes, shoes, and cars, large-scale production of these goods becomes feasible and reduces the costs of production to such an extent that they are accessible at low prices. (emphasis added)

3. Economizing on benevolence: Mises advances what he calls the “harmony theorem” in a way that accepts and extends Adam Smith’s deep insight about the universal benefits of commercial society. As Smith put it (TMS, Section II, Chapter 3):

It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy. All the different members of it are bound together by the agreeable bands of love and affection, and are, as it were, drawn to one common centre of mutual good offices.

But though the necessary assistance should not be afforded from such generous and disinterested motives, though among the different members of the society there should be no mutual love and affection, the society, though less happy and agreeable, will not necessarily be dissolved. Society may subsist among different men, as among different merchants, from a sense of its utility, without any mutual love or affection; and though no man in it should owe any obligation, or be bound in gratitude to any other, it may still be upheld by a mercenary exchange of good offices according to an agreed valuation. (emphasis added)

This point is both important and little understood. In the “state of nature,” there is not enough stuff to go around, and competition is biological, or zero-sum: if I get it, you lose it. In small groups, we can share and, to some extent, can realize the gains of specialization. But the division of labor is limited by the extent of the market. As a consequence, the system needs to operate at scale while economizing on the scarce resource of direct benevolence. An emergent system of division of labor based on impersonal commercial exchange, then, can substitute for benevolence. Further, since there are increasing returns to a greater division of labor, a more extensive market actually increases the quantity and lowers the price of shoes, and other useful things, even if we all want those things and even if there is no strong connection between love, gratitude, or affection. All that is necessary is enforceable property rights and a financial system for organizing the exchange.

In Theory of Moral Sentiments, Adam Smith recognized four sources of “sentiment,” which I summarized here. The fourth source, the one relevant to the 25 words of Mises, goes like this:

When we consider such actions as making a part of a system of behaviour which tends to promote the happiness either of the individual or of the society, they appear to derive a beauty from this utility, not unlike that which we ascribe to any well-contrived machine.

The problem, as Smith recognized and as Mises worked to solve, is to enable the people who benefit from commercial society to recognize that they benefit, not just in terms of increased wealth, but in terms of the emergence of the well-contrived machine of market process. The reason that economic education is so important is that people are not automatically drawn to that “one common centre of mutual good offices.” Our task must be to explain and persuade the public of the moral value of the catallactic converter.

This article was adapted from a piece originally featured on AIER.org. You can read the original here.