XIV. The Scope and Method of Catallactics

0:00Part 4. Catallactics or Economics of the Market Society Chapter 14. The Scope and Method of Catallactics 1. The Delimitation of Catallactic Problems There have never been any doubts and uncertainties about the scope of economic science. Ever since people have been eager for a systematic study of economics or political economy, All have agreed that it is the task of this branch of knowledge to investigate the market phenomena, that is, the determination of the mutual exchange ratios of the goods and services negotiated on markets, their origin in human action, and their effects upon later action.

0:48The intricacy of a precise definition of the scope of economics does not stem from uncertainty with regard to the orbit of the phenomena to be investigated. It is due to the fact that the attempts to elucidate the phenomena concerned must go beyond the range of the market and of market transactions. In order to conceive the market fully, one is forced to study the action of hypothetical isolated individuals on one hand, and to contrast the market system with an imaginary socialist First Commonwealth, on the other hand. In studying interpersonal exchange, one cannot avoid dealing with autistic exchange. But then it is no longer possible to define neatly the boundaries between the kind of action which is the proper field of economic science in the narrower sense, and other action.

1:45This widens its horizon and turns into a general science of all and every human action, into praxeology. The question emerges of how to distinguish precisely, within the broader field of general praxeology, a narrower orbit of specifically economic problems. The abortive attempts to solve this problem of a precise delimitation of the scope of of Catallactics have chosen as a criterion either the motives causing action or the goals which action aims at. But the variety and manifoldness of the motives instigating a man's action is without relevance for a comprehensive study of acting.

2:30Every action is motivated by the urge to remove a felt uneasiness. It does not matter for the science of action how people qualify this uneasiness from a physiological, psychological or ethical point of view. It is the task of economics to deal with all commodity prices as they are really asked and paid in market transactions. It must not restrict its investigations to the study of those prices which result, or are likely to result from a conduct displaying attitudes to which psychology, ethics or any other way of looking at human behavior would attach a definite label. The classification of actions according to their various motives may be momentous for psychology and may provide a yardstick for a moral evaluation.

3:24For economics, it is inconsequential. Only the same is valid with regard to the endeavors to restrict the scope of economics to those actions which aim at supplying people with tangible material things of the external universe. Strictly speaking, people do not long for tangible goods as such, but for the services which these goods are fitted to render them. They want to attain the increment in well-being which these services are able to convey. But if this is so, it is not permissible to accept from the orbit of economic action those actions which remove uneasiness directly without the interposition of any tangible and visible things.

4:12The advice of a doctor, the instruction of a teacher, the recital of an artist, and other personal services are no less an object of economic studies than the architect's plans for the construction of a building. The Scientist's Formula for the Production of a Chemical Compound and the Author's Contribution to the Publishing of a Book. The subject matter of catallactics is all market phenomena, with all their roots, ramifications and consequences. It is a fact that people in dealing on the market are motivated not only by the desire Man is always concerned both with material and ideal things.

5:02He chooses between various alternatives, no matter whether they are to be classified as material or ideal. In the actual scales of value, material and ideal things are jumbled together. Even if it were feasible to draw a sharp line between material and ideal concerns, one must realize that every concrete action either aims at the realization both of material and ideal ends, or is the outcome of a choice between something material and something ideal. Whether it is possible to separate neatly those actions which aim at the satisfaction of Needs exclusively conditioned by man's physiological constitution from other, higher needs can be left undecided.

5:53But we must not overlook the fact that in reality, no food is valued solely for its nutritive power, and no garment or house solely for the protection it affords against cold weather and rain. It cannot be denied that the demand for goods is widely influenced by metaphysical, religious and ethical considerations, by aesthetic value judgments, by customs, habits, prejudices, tradition, changing fashions and many other things. To an economist who would try to restrict his investigations to material aspects only, the subject matter of inquiry vanishes as soon as he wants to catch it. All that can be contended is this.

6:41Economics is mainly concerned with the analysis of the determination of money prices of goods and services exchanged on the market. In order to accomplish this task, it must start from a comprehensive theory of human action. Moreover, it must study not only the market phenomena, but no less the hypothetical conduct of an Isolated Man and of a Socialist Community. Finally, it must not restrict its investigations to those modes of action which, in mundane speech, are called economic actions, but must deal also with actions which are, in a loose manner of speech, called uneconomic. The scope of praxeology, the general theory of human action, can be precisely defined and Circumscribed.

7:34The specifically economic problems, the problems of economic action in the narrower sense, can only by and large be disengaged from the comprehensive body of praxeological theory. Accidental facts of the history of science and conventions play a role in all attempts to provide a definition of the scope of genuine economics. Not logical or epistemological rigor, but considerations of expediency and traditional convention make us declare that the field of catallactics or of economics in the narrower sense is the analysis of the market phenomena. This is tantamount to the statement, catallactics is the analysis of those actions which are conducted on the basis of monetary calculation.

8:26Direct exchange and monetary calculation are inseparably linked together. A market in which there is direct exchange only is merely an imaginary construction. On the other hand, money and monetary calculation are conditioned by the existence of the market. It is certainly one of the tasks of economics to analyze the working of an imaginary socialist system of production. But access to this study too is possible only through the study of catallactics, the elucidation of a system in which there are money prices and economic calculation. The Denial of Economics There are doctrines flatly denying that there can be a science of economics.

9:14What is taught nowadays at most of the universities under the label of economics is practically a denial of it. He who contests the existence of economics virtually denies that man's well-being is disturbed by any scarcity of external factors. Everybody, he implies, could enjoy the perfect satisfaction of all his wishes, provided a reform succeeds in overcoming certain obstacles brought about by inappropriate man-made institutions. In the doctrine of Karl Marx and his followers, scarcity is a historical category only.

10:13It is the feature of the primeval history of mankind which will be forever liquidated by the abolition of private property. Once mankind has effected the leap from the realm of necessity into the realm of freedom, and thereby reached the higher phase of communist society, there will be abundance, and consequently it will be feasible to give to each according to his needs. There is in the vast flood of Marxian writings not the slightest allusion to the possibility that a Communist society in its higher phase might have to face a scarcity of natural factors of production. The fact of the disutility of labor is spirited away by the assertion that to work, under Communism of course, will no longer be pain, but pleasure, the primary necessity of life.

11:08The unpleasant experiences of the Russian experiment are interpreted as caused by the capitalists' hostility, by the fact that socialism in one country only is not yet perfect and therefore has not yet been able to bring about the higher phase, and, more recently, by the war. Then there are the radical inflationists, as represented, for example, by Proudhon, Ernest Solvay, and, in present-day America, by the doctrine of functional finance. In their opinion, scarcity is created by the artificial checks upon credit expansion and other methods of increasing the quantity of money in circulation, enjoined upon the gullible public by the selfish class interests of bankers and other exploiters.

11:59They recommend unlimited public spending as the panacea. The foremost American champion of the substitution of an economy of abundance for the allegedly artificial economy of scarcity is the former Vice President of the United States, Henry A. Wallace. Mr. Wallace will be remembered in history as the originator of the vastest scheme ever are carried out to restrict, by government decree, the supply of essential foodstuffs and raw materials. However, this record in no way impairs the popularity of his teachings. Such is the myth of potential plenty and abundance. Economics may leave it to the historians and psychologists to explain the popularity of this kind of wishful thinking and indulgence in daydreams.

12:52All that economics has to say about such idle talk is that economics deals with the problems man has to face on account of the fact that his life is conditioned by natural factors. It deals with action, that is, with the conscious endeavors to remove, as far as possible, felt uneasiness. It has nothing to assert with regard to the state of affairs in an unrealizable, and for or Human Reason, even inconceivable universe of unlimited opportunities. In such a world, it may be admitted, there will be no law of value, no scarcity and no economic problems. These things will be absent because there will be no choices to be made, no action and no tasks to be solved by reason.

13:44Beings, which would have thrived in such a world, would never have developed reasoning and thinking. If ever such a world were to be given to the descendants of the human race, these blessed beings would see their power to think wither away, and would cease to be human. For the primary task of reason is to cope consciously with the limitations imposed upon man by nature, to fight against scarcity. Acting and thinking man is the product of a universe of scarcity, in which whatever Whatever well-being can be attained is the prize of toil and trouble, of conduct popularly called economic. 2.

14:29The Method of Imaginary Constructions. The specific method of economics is the method of imaginary constructions. This method is the method of praxeology. That it has been carefully elaborated and perfected in the field of economic studies in the narrower sense is due to the fact that economics, at least until now, has been the best developed part of praxeology. Everyone who wants to express an opinion about the problems commonly called economic takes recourse to this method. The employment of these imaginary constructions is, to be sure, not a procedure peculiar to the scientific analysis of these problems.

15:14The layman, in dealing with them, resorts to the same method. But while the layman's constructions are more or less confused and muddled, economics is intent upon elaborating them with the utmost care, scrupulousness and precision, and upon examining their conditions and assumptions critically. An imaginary construction is a conceptual image of a sequence of events logically evolved from the elements of action employed in its formation. It is a product of deduction, ultimately derived from the fundamental category of action, the act of preferring and setting aside. In designing such an imaginary construction, the economist is not concerned with the question of whether or not it depicts the conditions of reality which he wants to analyze, nor Or does he bother about the question of whether or not such a system as his imaginary construction posits could be conceived as really existent and in operation?

16:20Even imaginary constructions which are inconceivable, self-contradictory or unrealizable can render useful even indispensable services in the comprehension of reality, provided the economist knows how to use them properly. The method of imaginary constructions is justified by its success. Praxeology cannot, like the natural sciences, base its teachings upon laboratory experiments and sensory perception of external objects. It had to develop methods entirely different from those of physics and biology. It would be a serious blunder to look for analogies to the imaginary constructions in the field of the natural sciences.

17:07The imaginary constructions of praxeology can never be confronted with any experience of things external, and can never be appraised from the point of view of such experience. Their function is to serve man in a scrutiny which cannot rely upon his senses. In confronting the imaginary constructions with reality, we cannot raise the question We must ask whether the assumptions of our construction are identical with the conditions of those actions which we want to conceive. The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present in actual action.

17:58Then we are in a position to grasp the hypothetical consequences of the absence of these conditions, and to conceive the effects of their existence. Thus we conceive the category of action by constructing the image of a state in which there is no action, either because the individual is fully contented and does not feel any uneasiness, or because he does not know any procedure from which an improvement in his well-being, state of satisfaction, could be expected. Thus we conceive the notion of originary interest from an imaginary construction in which no distinction is made between satisfactions in periods of time equal in length, but unequal with regard to their distance from the instant of action.

18:50The method of imaginary constructions is indispensable for praxeology. It is the only method of praxeological and economic inquiry. It is, to be sure, a method very difficult to handle because it can easily result in fallacious syllogisms. It leads along a sharp edge. On both sides yawns the chasm of absurdity and nonsense. Only merciless self-criticism can prevent a man from falling headlong into these abysmal depths. 3. The Pure Market Economy The imaginary construction of a pure or unhampered market economy assumes that there is a division of labor and private ownership, control, of the means of production, and that, consequently, there is market exchange of goods and services.

19:46It assumes that the operation of the market is not obstructed by institutional factors. It assumes that the government, the social apparatus of compulsion and coercion, is intent upon preserving the operation of the market system, abstains from hindering its functioning, and protects it against encroachments on the part of other people. The market is free. There is no interference of factors foreign to the market with prices, wage rates and interest rates. Starting from these assumptions, economics tries to elucidate the operation of a pure market economy. Only at a later stage, having exhausted everything which can be learned from the study of this imaginary construction, does it turn to the study of the various problems raised by interference It is amazing that this logically incontestable procedure, the only one that is fitted to solve the problems involved, has been passionately attacked.

20:57People have branded it as a pre-possession in favor of a liberal economic policy, which They Stigmatize as Reactionary Economic Royalism, Manchesterism, Negativism and so on. They deny that anything can be gained for the knowledge of reality from occupation with this imaginary construction. However, these turbulent critics contradict themselves as they take recourse to the same method in advancing their own assertions. In asking for minimum wage rates, they depict the alleged unsatisfactory conditions of a free labor market, and in asking for tariffs, they describe the alleged disasters brought about by free trade.

21:43There is, of course, no other way available for the elucidation of a measure limiting the free play of the factors operating on an unhampered market, than to study first the state of affairs prevailing under economic freedom. It is true that economists have drawn from their investigations the conclusion that the goals which most people, practically even all people, are intent on attaining by toiling and working and by economic policy, can best be realized where the free market system is not impeded by government decrees. But this is not a preconceived judgment stemming from an insufficient occupation with the operation of government interference with business.

22:31It is, on the contrary, the result of a careful, unbiased scrutiny of all aspects of interventionism. It is also true that the classical economists and their epigones used to call the system Interventionism of unhampered market economy, natural, and government meddling with market phenomena, artificial and disturbing. But this terminology also was the product of their careful scrutiny of the problems of interventionism. They were in conformity with the semantic practice of their age in calling an undesirable state of social affairs contrary to nature. M and Dism of the Age of Enlightenment viewed the regularity of natural phenomena as an emanation of the decrees of Providence.

23:22When the philosophers of the Enlightenment discovered that there prevails a regularity of phenomena also in human action and in social evolution, they were prepared to interpret it likewise as evidence of the paternal care of the Creator of the universe. This was the true meaning of the doctrine of the predetermined harmony as expounded by some economists. The doctrine of the predetermined harmony in the operation of an unhampered market system must not be confused with the theorem of the harmony of the rightly understood interests within a market system, although there is a certain congeniality between them. The social philosophy of paternal despotism laid stress upon the divine mission of kings and autocrats predestined to rule the peoples.

24:14The liberals retorted that the operation of an unhampered market, on which the consumer, that is, every citizen, is sovereign, brings about more satisfactory results than the decrees of anointed rulers. Observe the functioning of the market system, they said, and you will discover in it the finger of God. Along with the imaginary construction of a pure market economy, the classical economists elaborated its logical counterpart, the imaginary construction of a socialist Commonwealth. In the heuristic process which finally led to the discovery of the operation of a market economy, This image of a socialist order even had logical priority.

25:01The question which preoccupied the economists was whether a tailor could be supplied with bread and shoes if there was no government decree compelling the baker and the shoemaker to provide for his needs. The first thought was that authoritarian interference is required to make every specialist serve his fellow citizens. The economists were taken aback when they discovered that no such compulsion is needed. In contrasting productivity and profitability, self-interest and public welfare, selfishness and altruism, the economists implicitly referred to the image of a socialist system. Their astonishment at the automatic, as it were, steering of the market system was precisely due to the fact that they realized that an anarchic state of production results in supplying people better than the orders of a centralized, omnipotent government.

26:03The idea of socialism, a system of the division of labor entirely controlled and managed by a planning authority, did not originate in the heads of utopian reformers. These utopians aimed rather at the autarkic coexistence of small, self-sufficient bodies. Take for instance Fourier's Falange. The radicalism of the reformers turned toward socialism when they took the image of an economy managed by a national government or a world authority, implied in the theories of the economists as a model for their new order. The Maximization of Profits It is generally believed that economists in dealing with the problems of a market economy are quite unrealistic in assuming that all men are always eager to gain the highest attainable advantage.

26:59They construct, it is said, the image of a perfectly selfish and rationalistic being for whom nothing counts but profit. Such a homo economicus may be a likeness of stock-jobbers and speculators, but the immense majority are very different. Nothing for the cognition of reality can be learned from the study of the conduct of this delusive image. It is not necessary to enter again into a refutation of all the confusion, error and distortion inherent in this contention. The first two parts of this book have unmasked the fallacies implied. At this point it is enough to deal with the problem of the maximization of profits.

27:44Praxeology in general and economics in its special field assume with regard to the springs of human action nothing other than that acting man wants to remove uneasiness. Under the particular conditions of dealing on the market, action means buying and selling. Asserting that economics asserts about demand and supply refers to every instance of demand and supply, and not only to demand and supply brought about by some special circumstances requiring a particular description or definition. To assert that a man faced with the alternative of getting more or less for a commodity he He wants to sell, Ceteris Paribus chooses the high price, does not require any further assumption.

28:36A higher price means for the seller a better satisfaction of his wants. The same applies mutatus mutundus to the buyer. The amount saved in buying the commodity concerned enables him to spend more for the satisfaction of other needs. To buy in the cheapest market and to sell in the dearest market is, other things being equal, not conduct which would presuppose any special assumptions concerning the actor's motives and morality. It is merely the necessary offshoot of any action under the conditions of market exchange. In his capacity as a businessman, a man is a servant of the consumers, bound to comply with their wishes.

29:24He cannot indulge in his own whims and fancies, but his customers' whims and fancies are, for him, ultimate law, provided these customers are ready to pay for them. He is under the necessity of adjusting his conduct to the demand of the consumers. If the consumers, without a taste for the beautiful, prefer things ugly and vulgar, he must, contrary to his own convictions, supply them with such things. A painter is a businessman if he is intent upon making paintings which could be sold at the highest price. A painter who does not compromise with the taste of the buying public and, disdaining all unpleasant consequences, lets himself be guided solely by his own ideals is an artist, a creative genius.

30:15If consumers do not want to pay a higher price for domestic products than for those produced Abroad, he must buy the foreign product, provided it is cheaper. An employer cannot grant favors at the expense of his customers. He cannot pay wage rates higher than those determined by the market if the buyers are not ready to pay proportionately higher prices for commodities produced in plants in which wage rates are higher than in other plants. It is different with man in his capacity as spender of his income. He is free to do what he likes best. He can bestow alms. He can, motivated by various doctrines and prejudices, discriminate against goods of a certain origin or source, and prefer the worse or more expensive product to the technologically better and cheaper one.

31:11As a rule, people in buying do not make gifts to the seller. But nonetheless that happens. The boundaries between buying goods and services needed and giving alms are sometimes difficult to discern. He who buys at a charity sale usually combines a purchase with a donation for a charitable purpose. He who gives a dime to a blind street musician certainly does not pay for the questionable performance, he simply gives alms. Man in acting is a unity. The businessman who owns the whole firm may sometimes efface the boundaries between business and charity. If he wants to relieve a distressed friend, delicacy of feeling may prompt him to resort to a procedure which spares the latter the embarrassment of living on alms.

32:06He gives the friend a job in his office, although he does not need his help, or could hire The Federal Reserve and the Federal Reserve are an equivalent helper at a lower salary. Then the salary granted appears formally as a part of business outlays. In fact, it is the spending of a fraction of the businessman's income. It is, from a correct point of view, consumption and not an expenditure designed to increase the firm's profits. The boundaries between business outlays and consumptive spending is often encouraged by institutional conditions. An expenditure debited to the account of trading expenses reduces net profits and thereby the amount of taxes due.

32:52If taxes absorb 50% of profits, the charitable businessman spends only 50% of the gift out of his own pocket. Rest burdens the Department of Internal Revenue. Awkward mistakes are due to the tendency to look only upon things tangible, visible and measurable, and to neglect everything else. What the consumer buys is not simply food or calories. He does not want to feed like a wolf. He wants to eat like a man. Food satisfies the appetite of many people the better, the more appetizingly and tastefully it is prepared. The finer the table is set, and the more agreeable the environment is in which the food is consumed.

33:40Such things are regarded as of no consequence by a consideration exclusively occupied with the chemical aspects of the process of digestion. To be sure, a consideration from the point of view of the physiology of nutrition will will not regard such things as negligible. But the fact that they play an important role in the determination of food prices is perfectly compatible with the assertion that people prefer satyrus paribus to buy in the cheapest market. Whenever a buyer, in choosing between two things which chemists and technologists deem perfectly equal, prefers the more expensive, he has a reason. If he does not err, he pays for services which chemistry and technology cannot comprehend with their specific methods of investigation.

34:35If a man prefers an expensive place to a cheaper one because he likes to sip his cocktails in the neighborhood of a duke or of café society, we may remark on his ridiculous vanity. But we must not say that the man's conduct does not aim at an improvement of his own What a man does is always aimed at an improvement of his own state of satisfaction. In this sense, and in no other, we are free to use the term selfishness and to emphasize that action is necessarily always selfish. Even an action directly aiming at the improvement of other people's conditions is selfish.

35:20The actor considers it as more satisfactory for himself to make other people eat than to eat himself. His uneasiness is caused by the awareness of the fact that other people are in want. It is a fact that many people behave in another way and prefer to fill their own stomach and not that of their fellow citizens. But this has nothing to do with economics. It is a datum of historical experience. At any rate, economics refers to every kind of action, no matter whether motivated by the urge of a man to eat or to make other people eat. If maximizing profits means that a man in all market transactions aims at increasing to the utmost the advantage derived, it is a pleonastic and periphrastic circumlocution.

36:15It only asserts what is implied in the very category of action. If it means anything else, it is the expression of an erroneous idea. Some economists believe that it is the task of economics to establish how in the whole of society the greatest possible satisfaction of all people, or of the greatest number, could be attained. They do not realize that there is no method which would allow us to measure the state of Satisfaction attained by various individuals. They misconstrue the character of judgments which are based on the comparison between various people's happiness. While expressing arbitrary value judgments, they believe themselves to be establishing facts.

37:03One may call it just to rob the rich in order to make presents to the poor. However, to call something fair or unfair is always a subjective value judgment, and as such purely personal and not liable to any verification or falsification. Economics is not intent upon pronouncing value judgments. It aims at a cognition of the consequences of certain modes of acting. It has been asserted that the physiological needs of all men are of the same kind, and and that this equality provides a standard for the measurement of the degree of their objective satisfaction. In expressing such opinions and in recommending the use of such criteria to guide the government's policy, one proposes to deal with men as the breeder deals with his cattle.

37:57But the reformers fail to realize that there is no universal principle of alimentation valid for all men. Which one of the various principles one chooses depends entirely on the aims one wants to attain. The cattle breeder does not feed his cows in order to make them happy, but in order to attain the ends which he has assigned to them in his own plans. He may prefer more milk or more meat or something else. What type of man do the man breeders want to rear? Athletes or mathematicians? Warriors or factory hands? He who would make man the material of a purposeful system of breeding and feeding, would arrogate to himself despotic powers, and would use his fellow citizens as means for the attainment of his own ends, which differ from those they themselves are aiming at.

38:56The value judgments of an individual differentiate between what makes him more satisfied and What Less? The value judgments a man pronounces about another man's satisfaction do not assert anything about this other man's satisfaction. They only assert what condition of this other man better satisfies the man who pronounces the judgment. The reformers searching for the maximum of general satisfaction have told us merely what State of Other People's Affairs would best suit themselves. 4. The Autistic Economy No other imaginary construction has caused more offense than that of an isolated economic actor entirely dependent on himself. However, economics cannot do without it. In order to study interpersonal exchange, it must compare it with conditions under which it is absent.

39:56It constructs two varieties of the image of an autistic economy in which there is only autistic exchange, the economy of an isolated individual and the economy of a socialist society. In employing this imaginary construction, the economists do not bother about the problem of whether or not such a system could really work. We are dealing here with problems of theory, not of history. We can therefore abstain from refuting the objections raised against the concept of an isolated actor by referring to the historical role of the self-sufficient household economy. They are fully aware of the fact that their imaginary construction is fictitious.

40:43Robinson Crusoe, who for all that may have existed, and the general manager of a perfectly isolated socialist commonwealth that never existed would not have been in a position to plan and to act as people can only when taking recourse to economic calculation. However, in the frame of our imaginary construction, we are free to pretend that they could calculate whenever such a fiction may be useful for the discussion of the specific problem to be dealt with. The imaginary construction of an autistic economy is at the bottom of the popular distinction between productivity and profitability as it developed as a yardstick of value judgments.

41:29Those resorting to this distinction consider the autistic economy, especially that of the socialist type, the most desirable and most perfect system of economic management. Every phenomenon of the market economy is judged with regard to whether or not it could be justified from the viewpoint of a socialist system. Only to acting that would be purposeful in the plans of such a systems manager are positive value and the epithet productive attached. All other activities performed in the market economy are called unproductive, in spite of the fact that they may be profitable to those who perform them. Thus, for example, sales promotion, advertising and banking are considered as activities profitable but non-productive.

42:22Ludwig's, of course, has nothing to say about such arbitrary value judgments.