Praxeology—Why Capitalism Makes Sense

While the principles of property rights and prosperity are timeless, they are also particularly timely. It seems when things go south in societies, there is a knee-jerk reaction to suspend the free market and embrace central control. Even though there is a well-established history of these attempts to reallocate scarce resources to help those with less ending up in humanitarian catastrophes. Literally tens of millions of people died from getting a little too close to communism. Despite the piles of carnage, the simplicity and allure of handing power over to someone promising to take care of you when things are dire is still the instinct of many. The reality is, it is when we face the greatest deprivations and the toughest challenges that we need to unleash the free market. It is the engine that organizes people to find ways to help each other in the most efficient way possible.

I love Leonard E. Read’s essay, “I Pencil.” It is an inspiring description of the genius and power of the market, given in this video.

There has been a lot of work done understanding why this actually works. Economist Ludwig von Mises did extensive scholarly work on the invisible hand of the market in his book Human Action. There are easier to understand lessons by Praxgirl on youtube. I went through her videos and broke down some of the important concepts for you.

Understanding the Harmony of Human Society

Praxeology is a way to understand human action logically. It takes undeniable facts about the nature of human action and derives economic truths. When Praxeology talks about human action, it means purposeful behavior. It is not talking about natural phenomenon like physical reflexes.

The essence of an intentional act is imagining a state that you prefer to the one you are in, and believing that an action that you can take will bring you closer to it. Like voltage and current. There is a tension, and a path. A dream, goal, desire, value, need, aspiration, or end. And a method, strategy, tactic, or means. Notice that these values are subjective, that is to say they are of the subject. They are yours, and depend on you.

Every choice involves tradeoffs. Even doing nothing is choosing the current state to the potential other. In each moment as opportunities present themselves, we spend that moment going one way or the other. We form preferences. This ranks our choices. This is what Praxeology calls the “value scale.”

While people may feel and desire a lot of things, ultimately the thing that determines their value scale is how they act.


Things in the physical world become useful, that is they have utility, as people perceive that these things will help them reach their goals. Note, it does not mean that the thing actually is useful, only that the person believes it is. That is, after all, what will determine their action.

If more of the same kind of thing becomes available to you, you will have already used the first unit for your highest priority, so the next unit will go to the next lower priority on your value scale.

For example, your first priority for water might be drinking, then cleaning, cooking, bathing, watering the lawn, throwing water balloons, etc. Each additional unit of the same thing goes to a lower priority need. It is less valuable to you. This is called The Law of Diminishing Marginal Utility.

There are two kinds of things: those that directly satisfy your goals, consumer goods, and those that have to be combined with other things before they can satisfy your goals, producer goods. The way you determine the value of a consumer good is compare it with the alternatives you exchanged for it, thus ranking it on the value scale. The way you determine the value of a producer good is to see what consumer good you would lose if you removed it.

One thing that is different about producer goods is it matters how many of them you have, because it may take a certain number to complete a consumer product. For example, you want to consume a sandwich. One piece of bread is pretty sad. Three pieces of bread is worse. There is a batch amount that you are aiming for depending on what you are trying to produce.

Technology is an arrangement of materials into a more useful state.


Labor is human effort in producing consumer goods. It is in itself not immediately gratifying, but is the cost that a person is willing to pay in exchange for some result. The more effort required, the higher the cost, and at some point the effort may no longer be worth the payment. Labor is like a producer good, and leisure is the consumer good.

The limitations of labor are:

    1. The number of people
    2. The number of hours in a day
    3. The ability of each laborer
    4. Whether the payoff is worth the labor to the laborers


Production is done in stages. Some things must be done first before others can be accomplished. One thing that tends to be true is the more stages of production, the more products can be produced. For example, a sewing machine takes many steps to build, but it enables clothes to be made much more efficiently as compared to hand sewing.

Whether or not it is worth it to take the time to build efficiency tools depends in part on a person’s time preference. In other words, how much do they need something now, vs how long are they willing to wait.

The main factors of production are:

    1. Land
    2. Labor
    3. Time


Capital is stored up land, labor, or time, and it has the capacity to be used to make the tools that create consumer goods more efficiently. Basically, it is savings.



Action is always an exchange. It can be an exchange you do with yourself, choosing one alternative over another, or it can be an exchange with another person. When exchanging with another person, the exchange can be non-invasive, meaning a gift or voluntary exchange, or invasive, meaning threat, fraud, assault, murder, etc.

In the case of voluntary exchange, each person must logically and necessarily benefit from the action. One person prefers food to money, and the other prefers money to food. After the exchange, they are both wealthier. They have both more fully satiated their own needs on their value scales, and more fully satisfied the needs of the other.

In the case of invasive “exchange,” one person chooses to better themselves, while their victim’s options are taken. Their ability to control what is rightfully theirs and fulfill their own priorities is reduced.

In the first case, wealth is created. All people in the exchange are brought closer to their goals, and pursue their happiness, their psychic satisfaction. In the second case, one person benefits while the other suffers, so it cannot be said that wealth is produced.

Exchange also implies a division of labor, because the things exchanged must be different from each other for each person to value them differently. The division of labor means different people specialize in different tasks, and benefit from each other’s expertise. People naturally have different talents, and have different resources accessible them, and therefore have differing abilities to produce. When each person focuses on what they are best able to produce, more is produced over all and everyone is wealthier. As markets advance, people are pushed to become more and more specialized, increasing efficiency, making more goods and services available, and subsequently raising the standard of living.

Even those without the same natural abilities or opportunities benefit from the higher standard of living. They will have more and better things at cheaper prices.

Even where people might be inclined to prejudice, they will be incentivized to peacefully cooperate through voluntary exchange to benefit from each other’s strengths. People who would otherwise be enemies, from different cultures, classes, or religions, serve their fellow man’s needs all over the world through trade.


Before money people depended on bartering, where they negotiated specific goods they were willing to give up in exchange for goods the another person had. This was limiting. It was difficult to find someone who had what you were looking for, who also was interested in what you happened to have to trade at the same time. Imagine trying to run a business and finding something each of your workers would take as payment each day. Ultimately, people resorted to using something commonly useful to trade for goods and services that could then be traded again by the other person for what they needed. Many things were tried, but what stood the test of time was silver and gold. The existence of an intermediary of exchanged revolutionized society. It enabled many more complex transactions, opening people up to work with each other in ways that would have otherwise been impractical.


A price at its root is a ratio of exchanged goods. This many of A for this many of B. If we go back to our barter relationship, let’s say two people exchange a cloak for an axe. This means that the first person happens to want the axe more than the cloak, and the second happens to want the cloak more than the axe. By trading, they are both satisfying their own ends and therefore becoming wealthier. The price is one cloak for one axe. Note that the price is just a historical record of two people’s value scales as they related to each other. It doesn’t speak for what others have or will prefer in the future. A cloak is not inherently worth an axe. It is important to remember that prices reflect the subjective values that people ascribed to things.

Money is like a common denominator for the things exchanged. Instead of relating the cloak directly to the axe, they are both related to $50, so the price of the cloak is still equal to the price of the axe.

Money allows not only for a plethora of trading opportunities, but also for two other invaluable uses. It enables economic calculation. It becomes possible to easily see the value of what you have, and whether you can afford what you need. This enables you to organize your own objectives more effectively.

But more importantly, money transmits information about the subjective values and needs of other people. As each purchase is made, people are demonstrating their scale of values, and that communicates what things need to be produced, or what actions need to be done to satisfy those needs.

“Most profitable means the best and most efficient use of resources in order to satisfy the highest and most urgent desire.” -Praxgirl

A common objection is that capitalism breeds consumerism, and that people are more concerned with material profit rather than the things you can’t buy—happiness, friendship, love, self-worth, etc. Voluntary exchange isn’t necessarily about buying junk you don’t want with money you don’t have to impress people you don’t like. It just means you get to choose. Do you want to live simply? You have that choice. Do you want to make less money and spend time with family, or more money and create jobs for other people who need to support them? It is up to you. Do you want to spend your time in leisure enjoying the present or working tirelessly for a future day when you can relax and enjoy yourself? Praxeology isn’t a tool to judge whether people are making right or wise choices with their time and property. It is only a tool to point out that people act based on their own values to satisfy their own definition of happiness. There are other arguments for why people do in fact have the right to pursue their own happiness as long as they aren’t violating the property of someone else, but that is for another article. Instead, the creation of wealth allows people who would otherwise have to pour all their energy into eating, housing, or other necessities, to explore their higher passions and interests.

The Market

The market is not a place, thing, or entity. Rather, it is a process in which people make choices with their own property to benefit themselves. But at the same time, they also benefit each other. There are no central planners. In fact, the market is distinct from central planning, because no planner can perfectly know and reflect the individual values and choices of each person.

Obstacles to free exchange mean the lives that people design for themselves are withheld from them. They may have to live with their parents for longer rather than spending their young adulthood creating their own lives. They may have to put off entering into a serious relationship they want, or having the children they would love to raise, or else enjoy those things while under financial stress. They may let travel, vacations, or other luxuries pass them by. They may not be able to start the business they dream of. Socialism is personal, and it is tragic.

In the market, relationships are win-win. This is in sharp contrast to relationships based on force or fraud. These are win-lose relationships. The market is also distinct from democracy. While everyone can vote with their dollars, not everyone is forced to accept the preferences of the majority. People with minority beliefs and interests still can create products and lifestyles that cater to them. For example, imagine if the country voted on what singer they would listen to for the next four years.

The Capitalist

The capitalist is someone who saves their resources to be able to produce more efficiently in the future. However, “capitalist” isn’t a person or group of people, rather it is a description of an act which people may participate in. The “capitalist” is a person who saves, but that same person may also take on different positions in their relationships with others. In order to reap the benefits of using his savings to create efficiency tools, he must produce something that serves the needs of the consumers, who are his bosses. In order to retain labor to produce, the capitalist must also make it worth their while to do the labor. The capitalist is not an exploiter of workers as long as their relationship is a voluntary one.

Note that property rights are necessary for the capitalist to be able to save.

The Entrepreneur

The entrepreneur is someone who sees something others do not and takes a risk based on his own judgement. He discovers a way to produce a product that will cost him less than what consumers are willing to pay for it. He may see ways that the means of production are underutilized, or where there is waste. The profit is his wage. Many are far too quick to disparage the successful entrepreneurs for their sometimes extravagant wealth.

First, the entrepreneur took a risk. He put his own skin in the game. He put in savings or took out loans. A lot of people fail, and they have to deal with the costs and the lost dreams. The wage earner typically makes less money, but there is more stability and certainty in his position. The entrepreneur is being rewarded for his risk.

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Second, if he does succeed, what that really means is that he has succeeded in helping others pursue their own happiness. When you consider all the people who are made better off by one innovator who took a risk, he only receives a fraction of their cumulative wealth.

Third, while the entrepreneur enjoys the initial benefits of his insights, his success is a magnet for competition who are driven to recreate his methods and undercut his prices, thus increasing the supply of affordable goods further benefiting those with less.

Entrepreneurship cannot be taught, because it is at its essence the ability to see what others don’t. If the entrepreneur wants to keep succeeding, he must keep innovating, building on to the library of human knowledge, building on to technology.

However, technology is most often not the limiting factor preventing people from producing. A technology is a concept that can be easily multiplied and distributed. The limiting factor is usually the lack of resources set aside to build more efficient means of production—that is, capital. In this way, it is the savers who most build society.

The market rewards those who use recourses effectively to satisfy their fellow men, and punishes misuse proportionately. It is the engine of society. It offers constantly driving incentives to innovate and find ways to do more for more people with less effort—discovering what it is people truly value and bringing that into reality.

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1) Humanitarian catastrophes of communism:
2) Table of deaths by communist countries:
3) I Pencil:
4) Human Action:
5) Praxgirl’s Playlist:
6) Arguments for self-ownership and property rights:

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