XIV. The Scope and Method of Catallactics (continued)

0:005. THE STATE OF REST AND THE EVENLY ROTATING ECONOMY The only method of dealing with the problem of action is to conceive that action ultimately aims at bringing about a state of affairs in which there is no longer any action, whether because all uneasiness has been removed or because any further removal of felt uneasiness This is out of the question. Action thus tends toward a state of rest, absence of action. The theory of prices accordingly analyzes interpersonal exchange from this aspect. People keep on exchanging on the market until no further exchange is possible, because no party expects any further improvement of its own conditions from a new act of exchange.

0:54The potential buyers consider the prices asked by the potential sellers unsatisfactory and vice versa. No more transactions take place. A state of rest emerges. This state of rest, which we may call the plain state of rest, is not merely an imaginary construction. It comes to pass again and again. When the stock market closes, the brokers have carried out all orders which could be be executed at the market price. Only those potential sellers and buyers who consider the market price too low or too high, respectively, have not sold or bought. For the sake of simplicity, we disregard the price fluctuations in the course of the business day. The same is valid with regard to all transactions. The whole market economy is a big exchange or marketplace, as it were. At any instant, all those transactions take place which the parties are ready to enter into at the realizable price. New sales can only be affected when the valuations of the parties have changed. It has been asserted that the notion of the plain state of rest

2:11is unsatisfactory. It refers, people have said, only to the determination of prices The Theory of Money and Credit The Theory of Money and Credit

2:48to enter the market in order to sell their products and to buy what they want for their own consumption and for continuing production processes. But this does not invalidate the scheme. This scheme, to be sure, does not contend that the state of rest will last. The lull will certainly disappear as soon as the momentary conditions which brought it about change. The notion of the plain state of rest is not an imaginary construction, but the adequate description of what happens again and again on every market. In this regard, it differs radically from the imaginary construction of the final state of rest. In dealing with the plain state of rest, we look only at what is going on right now.

3:39We restrict our attention to what has happened momentarily and disregard what will happen later, in the next instant, or tomorrow, or later. We are dealing only with prices really paid in sales, that is, with the prices of the immediate past. We do not ask whether or not future prices will equal these prices. But now we go a step further. We pay attention to factors which are bound to bring about a tendency toward price changes. We try to find out to what goal this tendency must lead before all its driving force is exhausted and a new state of rest emerges. The price corresponding to this future state of rest was called the natural price by older Economists. Nowadays the term static price is often used. In order to avoid misleading associations it is more expedient to call it the final price and, accordingly, to speak of the final state of rest. This final state of rest is an imaginary construction, not a description of reality. For the final state of rest will never be attained. New disturbing

4:58What makes it necessary to take recourse to this imaginary construction is the fact that the market at every instant is moving toward a final state of rest. Every later new instant can create new facts altering this final state of rest, but the market is always disquieted by a striving after a definite final state of rest. The market price is a real phenomenon. It is the exchange ratio which was actual in business transacted. The final price is a hypothetical price. The market prices are historical facts, and we are therefore in a position to note them with numerical exactitude in dollars and cents.

5:49The final price can only be defined by defining the conditions required for its emergence. No definite numerical value in monetary terms or in quantities of other goods can be attributed to it. It will never appear on the market. The market price can never coincide with the final price coordinated to the instant in which this market structure is actual. But catallactics would fail lamentably in its task of analyzing the problems of price Price Determination if it were to neglect dealing with the final price. For in the market situation from which the market price emerges, there are already latent forces operating which will go on bringing about price changes until, provided no new data appear, the final price and the final state of rest are established.

6:47We would unduly restrict our study of price determination if we were to look only upon the momentary market prices and the plain state of rest, and to disregard the fact that the market is already agitated by factors which must result in further price changes, and a tendency toward a different state of rest. The phenomenon with which we have to cope is the fact that changes in the factors which which determine the formation of prices, do not produce all their effects at once. A span of time must elapse before all their effects are exhausted. Between the appearance of a new datum and the perfect adjustment of the market to it, some time must pass.

7:35And of course, while this period of time elapses, other new data appear. In dealing with the effects of any change in the factors operating on the market, we must never forget that we are dealing with events taking place in succession, with a series of effects succeeding one another. We are not in a position to know in advance how much time will have to elapse, but we know for certain that some time must elapse, although this period may sometimes be so small that it hardly plays any role in practical life. Economists often erred in neglecting the element of time. Take for instance the controversy concerning the effects of changes in the quantity of money.

8:23Some people were only concerned with its long-run effects, that is, with the final prices and the final state of rest. Others saw only the short-run effects, that is, the prices of the instant following the of Change in the Data. Both were mistaken, and their conclusions were consequently vitiated. Many more examples of the same blunder could be cited. The imaginary construction of the final state of rest is marked by paying full regard to change in the temporal succession of events. In this respect, it differs from the imaginary Imaginary Construction of the Evenly Rotating Economy, which is characterized by the elimination of change in the data and of the time element.

9:12It is inexpedient and misleading to call this imaginary construction, as is usual, the static economy or the static equilibrium, and it is a bad mistake to confuse it with the imaginary construction of a stationary economy. The evenly rotating economy is a fictitious system in which the market prices of all goods and services coincide with the final prices. There are in its frame no price changes whatever. There is perfect price stability. The same market transactions are repeated again and again. The goods of the higher orders pass in the same quantities through the same stages of Man.

9:57The system is in perpetual flux, but it remains always at the same spot. It revolves evenly around a fixed center. It rotates evenly. The plain state of rest is disarranged again and again, but it is instantly reestablished at the previous level. All factors, including those bringing about the recurring disarrangement of the plain state of rest, are constant.

10:43Therefore, prices, commonly called static or equilibrium prices, remain constant too. The essence of this imaginary construction is the elimination of the lapse of time and of the perpetual change in the market phenomena. The notion of any change with regard to supply and demand is incompatible with this construction. Only such changes as do not affect the configuration of the price-determining factors can be considered in its frame. It is not necessary to people the imaginary world of the evenly rotating economy with immortal, non-aging and non-proliferating men. We are free to assume that infants are born, grow old and finally die, provided that total population figures and the number of people in every age group remain equal.

11:40Then, the demand for commodities whose consumption is limited to certain age groups does not Walter, although the individuals from whom it originates are not the same. In reality, there is never such a thing as an evenly rotating economic system. However, in order to analyze the problems of change in the data and of unevenly and irregularly varying movement, we must confront them with a fictitious state in which both are hypothetically eliminated. It is therefore preposterous to maintain that the construction of an evenly rotating economy does not elucidate conditions within a changing universe, and to require the economists to substitute a study of dynamics for their alleged exclusive occupation with statics.

12:34This so-called static method is precisely the proper mental tool for the examination of change. There is no means of studying the complex phenomena of action other than first to abstract from change altogether, then to introduce an isolated factor provoking change, and ultimately to analyze its effects under the assumption that other things remain equal. It is furthermore absurd to believe that the services rendered by the construction of an of an Evenly Rotating Economy are the more valuable the more the object of our studies, the realm of real action, corresponds to this construction in respect to absence of change.

13:21The static method, the employment of the imaginary construction of an evenly rotating economy, is the only adequate method of analyzing the changes concerned without regard to whether Whether they are great or small, sudden or slow. The objections hitherto raised against the use of the imaginary construction of an evenly rotating economy missed the mark entirely. Their authors did not grasp in what respect this construction is problematic, and why it can easily engender error and confusion. Action is change, and change is in the temporal sequence. But in the evenly rotating economy, change and succession of events are eliminated.

14:11Action is to make choices and to cope with an uncertain future. But in the evenly rotating economy, there is no choosing, and the future is not uncertain, as it does not differ from the present known state. Such a rigid system is not peopled with living men making choices and liable to error. It is a world of soulless, unthinking automatons. It is not a human society. It is an anthill. These insoluble contradictions, however, do not affect the service which this imaginary construction renders for the only problem for whose treatment it is both appropriate and indispensable. The problem of the relation between the prices of products and those of the factors required for their production, and the implied problems of entrepreneurship and of profit and loss.

15:06In order to grasp the function of entrepreneurship and the meaning of profit and loss, we construct a system from which they are absent. This image is merely a tool for our thinking. It is not the description of a possible and realizable state of affairs. It is even out of the question to carry the imaginary construction of an evenly rotating system to its ultimate logical consequences. For it is impossible to eliminate the entrepreneur from the picture of a market economy. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purposive efforts of men aiming at certain ends and motivated by the urge to improve their state of satisfaction.

15:57In eliminating the entrepreneur, one eliminates the driving force of the whole market system. Then there is a second deficiency. In the imaginary construction of an evenly rotating economy, indirect exchange and the The use of money are tacitly implied. But what kind of money can that be? In a system without change, in which there is no uncertainty whatever about the future, nobody needs to hold cash. Every individual knows precisely what amount of money he will need at any future date. He is therefore in a position to lend all the funds he receives in such a way that the Let us assume that there is only gold money and only one central bank.

16:49With the successive progress toward the state of an evenly rotating economy, all individuals and firms restrict step by step their holding of cash and the quantities of gold thus released flow into non-monetary industrial employment. When the equilibrium of the evenly rotating economy is finally reached, there are no more cash holdings. No more gold is used for monetary purposes. The individuals and firms own claims against the central bank, the maturity of each part of which precisely corresponds to the amount they will need on the respective dates for the settlement of their obligations. The central bank does not need any reserves, as the total sum of the daily payments of its customers exactly equals the total sum of withdrawals.

17:44All transactions can, in fact, be affected through transfer in the bank's books without any recourse to cash. Thus, the money of this system is not a medium of exchange. It is not money at all. It is merely a numérère, an ethereal and undetermined unit of accounting of that vague and indefinable character which the fancy of some economists and the errors of many laymen mistakenly have attributed to money. The interposition of these numerical expressions between seller and buyer does not affect the essence of the sales. It is neutral with regard to the people's economic activities. But the notion of a neutral money is unrealizable and inconceivable in itself.

18:35If we were to use the inexpedient terminology employed in many contemporary economic writings, we would have to say, money is necessarily a dynamic factor. There is no room left for money in a static system. But the very notion of a market economy without money is self-contradictory. The imaginary construction of an evenly rotating system is a limiting notion. In its frame there is in fact no longer any action. Automatic reaction is substituted for the conscious striving of thinking man after the removal of uneasiness. We can employ this problematic imaginary construction only if we never forget what purposes it is designed to serve.

19:26We want, first of all, to analyze the tendency prevailing in every action toward the establishment of an evenly rotating economy. In doing so, we must always take into account that this tendency can never attain its goal in a universe not perfectly rigid and immutable, that is, in a universe which is living and not dead. Secondly, we need to comprehend in what respects the conditions of a living world in which there is action differ from those of a rigid world. This we can discover only by the argumentum a contrario provided by the image of a rigid economy. Thus, we are led to the insight that dealing with the uncertain conditions of the unknown and Future, that is, speculation, is inherent in every action, and that profit and loss are necessary features of acting which cannot be conjured away by any wishful thinking.

20:29The procedures adopted by those economists who are fully aware of these fundamental cognitions may be called the logical method of economics, as contrasted with the technique of the mathematical method. The mathematical economists disregard dealing with the actions which, under the imaginary and unrealizable assumption that no further new data will emerge, are supposed to bring about the evenly rotating economy. They do not notice the individual speculator who aims not at the establishment of the evenly rotating economy, but at profiting from an action which adjusts the conduct of affairs better to the attainment of the ends sought by acting, the best possible removal of uneasiness.

21:19They stress exclusively the imaginary state of equilibrium which the whole complex of all such actions would attain in the absence of any further change in the data. They describe this imaginary equilibrium by sets of simultaneous differential equations. They fail to recognize that the state of affairs they are dealing with is a state in which there is no longer any action, but only a succession of events provoked by a mystical prime mover. They devote all their efforts to describing in mathematical symbols various equilibria, that is, states of rest and the absence of action. They deal with equilibrium as if it were a real entity and not a limiting notion, a mere mental tool.

22:10What they are doing is vain playing with mathematical symbols, a pastime not suited to convey any knowledge. 6. The Stationary Economy The imaginary construction of a stationary economy has sometimes been confused with that of an Evenly Rotating Economy, but in fact, these two constructions differ. The stationary economy is an economy in which the wealth and income of the individuals remain unchanged. With this image, changes are compatible, which would be incompatible with the construction of the evenly rotating economy. Population figures may rise or drop, provided that they are accompanied by a corresponding Banking Rise or Drop in the Sum of Wealth and Income.

23:03The demand for some commodities may change, but these changes must occur so slowly that the transfer of capital from those branches of production which are to be restricted in accordance with them into those to be expanded can be affected by not replacing equipment used up in the shrinking branches and instead investing in the expanding ones. The imaginary construction of a stationary economy leads to two further imaginary constructions, the progressing, expanding economy, and the retrogressing, shrinking economy. In the former, the per capita quota of wealth and income of the individuals and the population figure tend toward a higher numerical value, in the latter toward a lower numerical value.

23:57In the stationary economy, the total sum of all profits and of all losses is zero. In the progressing economy, the total amount of profits exceeds the total amount of losses. In the retrogressing economy, the total amount of profits is smaller than the total amount of losses. The precariousness of these three imaginary constructions is to be seen in the fact that The Theory of Money and Credit

24:53when men in dealing with the problems of their own actions, and when economic history, descriptive economics and economic statistics in reporting other people's actions, employ the terms In the terms entrepreneur, capitalist, landowner, worker and consumer, they speak of ideal types. When economics employs the same terms, it speaks of catalactic categories. The entrepreneurs, capitalists, landowners, workers and consumers of economic theory are not living men as one meets them in the reality of life and history.

25:41They are the embodiment of distinct functions in the market operations. The fact that both acting men and historical sciences apply in their reasoning the results of economics, and that they construct their ideal types on the basis of and with reference to the categories of praxeological theory, does not modify the radical logical distinction between ideal type and economic category. The economic categories we are concerned with refer to purely integrated functions. The ideal types refer to historical events. Living and acting man by necessity combines various functions.

26:26He is never merely a consumer. He is, in addition, either an entrepreneur, landowner, capitalist or worker, or a person supported by the intake earned by such people. Moreover, the functions of the entrepreneur, the landowner, the capitalist and the worker are very often combined by the same persons. History is intent upon classifying men according to the ends they aim at and the means they employ for the attainment of these ends. Economics, exploring the structure of acting in the market society without any regard to to the ends people aim at and the means they employ is intent upon discerning categories and functions. These are two different tasks. The difference can best be demonstrated in discussing the catallactic concept of the entrepreneur. In the imaginary construction of the evenly rotating economy, there is no room left for entrepreneurial activity, because This construction eliminates any change of data that could affect prices.

27:37As soon as one abandons this assumption of rigidity of data, one finds that action must needs be affected by every change in the data. As action necessarily is directed toward influencing a future state of affairs, even if sometimes is only the immediate future of the next instant. It is affected by every incorrectly anticipated change in the data occurring in the period of time between its beginning and the end of the period for which it aimed to provide, period of provision. Thus, the outcome of action is always uncertain. Action is always speculation. This is valid not only with regard to a market economy, but no less for Robinson Crusoe, the imaginary isolated actor, and for the conditions of a socialist economy.

28:32In the imaginary construction of an evenly rotating system, nobody is an entrepreneur and speculator. In any real and living economy, every actor is always an entrepreneur and speculator. The people taken care of by the actors, the minor family members in the market society, and the masses of a socialist society, are, although themselves, not actors and therefore not speculators, affected by the outcome of the actors' speculations. Economics, in speaking of entrepreneurs, has in view not men, but a definite function. This function is not the particular feature of a special group or class of men.

29:20It is inherent in every action and burdens every actor. In embodying this function in an imaginary figure, we resort to a methodological makeshift. The term entrepreneur as used by catalactic theory means acting man exclusively seen from from the Aspect of the Uncertainty Inherent in Every Action. In using this term, one must never forget that every action is embedded in the flux of time, and therefore involves a speculation. The capitalists, the landowners and the laborers are, by necessity, speculators. So is the consumer, in providing for anticipated future needs.

30:06As many as slip, twixt cup and lip. Let us try to think the imaginary construction of a pure entrepreneur to its ultimate logical consequences. This entrepreneur does not own any capital. The capital required for his entrepreneurial activities is lent to him by the capitalists in the form of money loans. The law, it is true, considers him the proprietor of the various means of production purchased by expending the sums borrowed. Nevertheless, he remains propertyless, for the amount of his assets is balanced by his liabilities. If he succeeds, the net profit is his. If he fails, the loss must fall upon the capitalists who have lent him the funds.

30:56Such an entrepreneur would, in fact, be an employee of the capitalists who speculates on their account and takes a 100% share in the net profits without being concerned about the losses. But even if the entrepreneur is in a position to provide himself a part of the capital required and borrows only the rest, things are essentially not different. To the extent that the losses incurred cannot be borne out of the entrepreneur's own funds, they fall upon the lending capitalists, whatever the terms of the contract may be. A capitalist is always also virtually an entrepreneur and speculator. He always runs the chance of losing his funds.

31:42There is no such thing as a perfectly safe investment. The self-sufficient landowner who tills his estate only to supply his own household is affected by all changes influencing the fertility of his farm or the object of his needs. Within a market economy, the result of a farmer's activities is affected by all changes regarding the importance of his piece of land for supplying the market. The farmer is clearly, even from the point of view of mundane terminology, an entrepreneur. No proprietor of any means of production, whether they are represented in tangible goods or in money, remains untouched by the uncertainty of the future.

32:30The employment of any tangible goods or money for production, that is, the provision for for Later Days is in itself an entrepreneurial activity. Things are essentially the same for the laborer. He is born the proprietor of certain abilities. His innate faculties are a means of production which is better fitted for some kinds of work, less fitted for others, and not at all fitted for still others. If he has acquired the skill needed for the performance of certain kinds of labor, he He is, with regard to the time and the material outlays absorbed by this training, in the position of an investor. He has made an input in the expectation of being compensated by an adequate output.

33:18The laborer is an entrepreneur in so far as his wages are determined by the price the market allows for the kind of work he can perform. This price varies according to the change in conditions, in the same way in which the The price of every other factor of production varies. In the context of economic theory, the meaning of the terms concerned is this. Entrepreneur means acting man in regard to the changes occurring in the data of the market. Capitalist and landowner mean acting man in regard to the changes in value and price which, Man with all the market data remaining equal are brought about by the mere passing of time as a consequence of the different valuations of present goods and of future goods.

34:10Worker means man in regard to the employment of the factor of production, human labor. Thus every function is nicely integrated. The entrepreneur earns profit or suffers loss. The owners of means of production, capital goods, or land, earn originary interest. The workers earn wages. In this sense, we elaborate the imaginary construction of functional distribution as different from the actual historical distribution. Economics, however, always did and still does use the term entrepreneur in a sense other than that attached to it in the imaginary construction of functional distribution.

34:56It also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement. This notion is narrower than the concept of an entrepreneur as used in the construction of functional distribution. It does not include many instances which the latter includes. It is awkward that the same term should be used to signify two different notions. It would have been more expedient to employ another term for this second notion, for instance, the term promoter.

35:42It is to be admitted that the notion of the entrepreneur-promoter cannot be defined with praxeological rigor. In this, it is like the notion of money, which also defies, different from the notion of a medium of exchange, a rigid praxeological definition. However, economics cannot do without the promoter concept, for it refers to a datum that is a general characteristic of human nature that is present in all market transactions and marks them profoundly. This is the fact that various individuals do not react to a change in conditions with the same quickness and in the same way. The inequality of men, which is due to differences both in their inborn qualities and in the vicissitudes of their lives, manifests itself in this way too.

36:36There are in the market pacemakers and others who only imitate the procedures of their more agile fellow citizens. The phenomenon of leadership is no less real on the market than in any other branch of human activities. The driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter and his eagerness to make profits as large as possible. There is, however, no danger that the equivocal use of this term may result in any ambiguity in the exposition of the catalactic system. Wherever any doubts are likely to appear, they can be dispelled by the employment of the term promoter instead of entrepreneur.

37:26The Entrepreneurial Function in the Stationary Economy The futures market can relieve an entrepreneur of a part of his entrepreneurial function. As far as an entrepreneur has ensured himself through suitable forward transactions against losses he may possibly suffer, he ceases to be an entrepreneur and the entrepreneurial function devolves on the other party to the contract. The cotton spinner, who, when buying raw cotton for his mill, sells the same quantity forward, has abandoned a part of his entrepreneurial function. He will neither profit nor lose from changes in the cotton price occurring in the period concerned.

38:12Of course, he does not entirely cease to serve in the entrepreneurial function. Those changes in the price of yarn in general, or in the price of the special counts and kinds he produces, which are not brought about by a change in the price of raw cotton, affect The Theory of Money and Credit

38:59separated from all other functions. There emerges a class of pure entrepreneurs. The prices determined on the futures markets direct the whole apparatus of production. The dealers in futures alone make profits and suffer losses. All other people are insured, as it were, against the possible adverse effects of the uncertainty of the future. They enjoy security in this regard. The heads of the various business units are employees, as it were, with a fixed income. If we further assume that this economy is a stationary economy and that all futures transactions are concentrated in one corporation, it is obvious that the total amount of losses precisely equals the total amount of profits.

39:52We need only to nationalize this corporation in order to bring about a socialist state without profits and losses, a state of undisturbed security and stability. But this is so only because our definition of a stationary economy implies equality of the total sum of losses and that of profits. In a changing economy, an excess either of profits or of losses must emerge. It would be a waste of time to dwell longer upon such over-sophisticated images which do not further the analysis of economic problems. The only reason for mentioning them is that they reflect ideas which are at the bottom of some criticisms made against the economic system of capitalism and of some delusive plans suggested for a socialist control of business.

40:47Now it is true that a socialist scheme is logically compatible with the unrealizable imaginary constructions of an evenly rotating economy and of a stationary economy. The predilection with which mathematical economists almost exclusively deal with the conditions of these imaginary constructions, and with the state of equilibrium implied in them, has made people oblivious of the fact that these are unreal, self-contradictory and imaginary expedience of thought and nothing else. They are certainly not suitable models for the construction of a living society of acting men.