How Economic Competition, Rational Economic Calculation, And Civilization Emerge From Private Property. By Jorge Besada.
This article was published at the Ludwig von Mises Institute on 4/11/2025 with significant modifications. Below is my original.
Mises writes:
“All civilizations have up to now been based on private ownership of the means of production. In the past civilization and private ownership have been linked together. If history could teach us anything, it would be that private property is inextricably linked with civilization”
Let’s delve deeper into what Mises is stating above.
The matter that comprises living things is guided by precise information that keeps life going-orderly. We can further divide this matter into two categories, biological and social. The biological order is hypothesized to emerge and function via the well-known mechanism of ‘biological evolution’, with genes containing the information necessary to create-coordinate life-order. Mutations cause new genes-information to arise which leads to a different life-form which is then ‘naturally selected’ as it inadvertently competes with others, with the winner reproducing more, passing on more copies of the new better-adapted-”fitter” genes-information-design to future generations-orders.
Every living thing-order — whether it’d be a single cell, or a collection of them like a human, or a collection of humans like a community or a company — is in a constant cycle of the production and consumption-use of wealth. The production and consumption-use of wealth, and all action, is just a transformation or relocation of ‘matter into more advantageous shapes’ guided by information. Let’s get real fancy by quoting famed ‘Austrian Economist’ Eugen von Böhm-Bawerk:
“To “produce”: what does this mean? It has been so often said by economists that the creation of goods is not the bringing into existence of materials that hitherto have not existed — is not “creation” in the true sense of the word, but only a fashioning of imperishable matter into more advantageous shapes…”
These cycles of production and consumption use information that leads to profitability, in other words, more production of wealth than consumption so that the order-life can continue to live-consume-grow.
The information that coordinates the modern global socioeconomic order, or what the great founder of the ‘Austrian School of Economics’, Carl Menger, and British philosopher Herbert Spencer, both referred to as the ‘The Social Organism’, emerges and spreads via ‘economic competition’, which itself emerges from the tradition of private property and we summarize next.
Free people are motivated to discover the best information with which to increase the rate at which they reorder the matter they exclusively control (their private property) to produce wealth to then trade with others. If we are employees, we act-reorder our bodies as we produce our labor and trade it for money with companies-employers, who combine it with the labor of others, to produce goods-services which are then traded for money with the public. The money we obtain by trading what we produce we then trade for the wealth (food, shelter, energy, etc.) we must consume to sustain-nourish-grow our order-life-families-businesses. These general cycles of production and trade for money, and trade of money for the wealth we consume, repeat until our biological order breaks down in a manner where it can’t continue to maintain our order and we die.
In our role as producers, via private sector companies, we are motivated to innovate thus creating new-superior information. In our role as consumers, thanks to our ‘freedom to trade’ our money-wealth with the companies with the best ideas-products, companies have to learn-copy innovations from each other(competitors) thus inadvertently cooperate to innovate-create and spread superior information and subsequent social order throughout the world. Some automaker invented power windows, competition spread the idea to other automakers helping them make better cars and spread the innovation. As cost-cutting ideas emerge and inevitably spread via competition leading relative prices to continuously fall, new profitable ideas easily arise and spread via competition in an endless cycle of knowledge generation-innovation. Computers were once very expensive, but as their prices came down, people easily realized that every home could have them, which birthed our computerized world, the Internet, etc. The more wealth is produced, the more wealth must be offered in exchange for labor as companies compete against each other for the labor they need which helps explain why the economic pie grows for everyone.
Just like in the Olympics we can discover the best athletes in the world due to global competition, so does having the ‘freedom to trade’ our private property with companies anywhere in the world, motivates all competitors to copy innovations regardless of where they arise, thus ensuring the best possible global order, inadvertently turning mankind into a supercomputer.
Morals are ways of acting, they too are knowledge-information which to considerable degrees also spreads via ‘economic competition’. It is hard-working, tolerant, courteous people who, thanks to competition, inevitably motivate everyone else to be likewise, and thus “civilized”. As Hayek writes:
“Competition is, after all, always a process in which a small number makes it necessary for larger numbers to do what they do not like, be it to work harder, to change habits, or to devote a degree of attention, continuous application, or regularity to their work which without competition would not be needed.”
The information-creating-and-spreading benefits of economic competition only exist in the private sector. Governmental or ‘public sector’ bureaucracies, being coercive monopolies which get their wealth through compulsion via taxes, have no incentive-pressure to innovate or copy innovations from competitors like private sector companies, so they are intellectually stagnant-regressive. Governmental-central plans can’t work if people are free to ignore them — so they inevitably require coercing and making potential criminals out of everyone, not because they have actually harmed someone or their property, but simply for not wanting to fund or go along with the coercive-competition-immune central plans-regulations.
Private property is also indispensable for discovering the information that coordinates the social order’s cycles of production and consumption in a profitable and thus wealth-order-life increasing manner.
Consider the following example. Jose owns a Cuban restaurant located in Miami that sells Cuban dishes for $10/meal. Perhaps $2, might be profit, and $8 will be spent in costs, in other words, in the necessary consumption of wealth needed to produce the meal-wealth, things like equipment-electricity-supplies, and everything employees and their families will consume at home (food, energy) thanks to their paychecks that came from the $8/meal. Jose discovered vital information, 1) that there are enough customers nearby willing to patronize the restaurant at the $10/meal price he has set, and 2) how to acquire $8 worth of stuff (labor-supplies-etc.) at the particular time and place customers desire it and reorder it thus profitably producing the meal.
If he sets prices too high, customers will freely trade their money with other superior competing options-businesses-orders. If he sets prices below costs, he’d be consuming (spending in costs) more wealth than what he produces (sales revenue) thus consuming-shrinking his savings and socioeconomic order-pie-wealth, and eventually go out of business. Socialism-Communism or ‘central economic planning’ can’t work because only free businessmen dispersed throughout society, with a focus-attention on customers and resources that are highly time-and-place specific, are at the right time and place needed to discover people’s desires (1) and (2) how to acquire and reorder wealth while setting a price that leads to a profitable order ( i.e., one that produces more than it consumes while also providing a superior alternative to customers-society).
Given the above, how do we discover how much wealth had to be consumed to produce a gallon of gasoline sold in Seattle? Or a pound of beef sold in London? Or a flight from Miami to London? Easy, we look at their prices which must include the costs. The price of any good-service-wealth in the world lets us know that there is a social order at that particular time and place that is coordinated by entrepreneurs discovering information that can on average produce the good-wealth while consuming less than the advertised price (since the price will include some amount for profit). THAT IS AMAZING! This is what allows what Mises would refer to as ‘rational economic calculation.’ This allows ‘factors of production’-wealth to be purchased-acquired and combined so that the combination-aggregate-order (Cuban-meal) can easily have a price set that properly accounts for the costs-consumption by just adding the prices of the parts (cooks, ingredients, building, refrigerators, ovens, etc.) used to produce it. The costs-consumption to create-grow a banana in Colombia may be 2 cents, but 30 cents as part of a transported, cooked, waited-on-served Cuban-dish in Miami. Like interlocking conveyor belts, each company (grower, food-distributor, restaurant) reorders matter-wealth passing on the associated costs in the prices they set, using highly time-and-place specific information to best ensure-estimate profitability-growth-order-life.
Thus from private property emerges: 1) The economic competition that discovers and spreads superior information and order, which includes THE TRUTH! 2) The freedom to live and order our lives as we wish since no one else can coerce-reorder our property without our consent. 3) The ‘rational economic calculation’ that allows us to best ensure that our plans are profitable and thus wealth-order-life-increasing.
“The continued existence of society depends upon private property.” — Mises.
