CHAPTER 6 A Place Where Nothing Ever Happens ON THE EMPLOYMENT OF IMAGINARY CONSTRUCTS IN ECONOMICS SOME STATES OF REST

WEWILLNOW consider several situations in which the market has, in some sense, “come to rest.” While some of the market states we will examine are not possible states of the real world, they are nevertheless important to our understanding of economics. In order to conceive of the impact of changes in the economy, we must first imagine an economy where change has stopped. We can then introduce a single change and ponder what its impact will be. Gradually introducing change into our mental models, we build up an inkling of the market process in its full complexity.

The first of these states is the plain state of rest. The plain state of rest is not an imaginary state, but actually occurs in the market. It comes about whenever all buyers and sellers who wish to exchange at the market price, and who know that the option is available to them, have been able to do so. We saw the plain state of rest in Chapter 4, where our goat and corn traders made all of the trades from which they expected to profit, then stopped trading.

In the real market economy, this state occurs again and again. Anyone who watches a stock market ticker can observe the plain state of rest many times a day. Sometimes for seconds, sometimes for minutes, sometimes, with lightly traded securities, for hours, no market activity will take place. All buyers who wish to buy at the current price and all sellers who wish to sell at the current price have done so.

The plain state of rest never lasts. A change in the market data prompts market participants into activity. In our example of the goat-corn market, we imagined that Kyle and Stephen grew tired of eating corn and found a source of squash down the road. That change starts the market process anew, as the buyers and sellers search for a new price, which will again result in the plain state of rest.

Similarly, in the securities market, a given price lasts as long as there is no change in data that are seen as relating to that price. Even an investor’s view of the prospects of a company could be an item of market data. A price may last only while some investor is recalculating a spreadsheet evaluating the stock at the current price. If the investor decides to buy as the result of that evaluation, that increases the quantity demanded, introducing new data into the market.

The plain state of rest may not take into account future plans of market participants. Perhaps Emma has planted a new strain of corn that she will have on the market next season. Today’s goat-corn market may have reached the plain state of rest, but looking ahead we can see that there is new data coming that will alter this state. However, we can imagine a situation where all changes in the data relevant to this market have stopped. Such a market will approach the final price, or the final state of rest. It is an imaginary state, which can never come about in the real economy. The essence of human action is the attempt to replace what is with what ought to be, in the eyes of the actor. As long as humans and not robots populate the economy, we will never see the final state of rest emerge.

Now, we can take our imaginings one step further, and picture an economy where for all goods, the final state of rest has been reached. Such an “economy” is an endless cycle of the same events being repeated. The same number of babies is born each year, and that number exactly equals the number of people dying. The same goods are manufactured each year and demanded in the exact same quantities. No harvest ever fails, no business ever goes bankrupt, no new products are ever introduced, and no person’s tastes ever change.

If you have seen the movie Groundhog Day, you can begin to envision what such a world would be like. The star of that film, Bill Murray, awakens each morning to find that it is the same day as the previous one, with all of the same events occurring again and again. The difference between the movie and our imaginary world is that, in the movie, Bill Murray’s character continues to learn and change. If we eliminate that difference, Groundhog Day is a perfect image of the world we are envisioning.¹

Such an economy is sometimes described as being in equilibrium. However, because it does not lack economic activity, but rather consists of a situation where every economic activity is repeated at the same time interval, over and over, Ludwig von Mises christened it the evenly rotating economy.

Such a world could not possibly exist, but it is helpful for us to create the image of such a world for use as a mental tool. By introducing a single change into our mental construction, we can isolate what the effects of that particular change would be, apart from the welter of complicating data that exists in our real world. We will see applications of the evenly rotating economy in chapters to come.

Regarding such a mental construct, we face danger from two sides. As Mises commented in Human Action:

The 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 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.

On one side of the razor’s edge is the danger of failing to employ imaginary constructions at all, because they are not realistic. However, we employ such mental tools precisely because they are not realistic—they allow us to abstract from reality just those factors relevant to any given analysis. We should not for a moment mistake our models for images of the real world, nor should we judge the real world by how closely it approximates the models.

On the other side of the blade lies the danger of taking our fancies too seriously, as in too much of modern economics. Reams of paper have been filled with mathematical equations describing “equilibrium conditions,” as if the real economy were being discussed. But equilibrium is a mental tool for studying human action isolated from all changes but one, and not a potential state of the economy. As Mises says, “What they are doing is vain playing with mathematical symbols, a pastime not suited to convey any knowledge.”

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¹Thanks to Sanford Ikeda of SUNY Purchase for pointing out this analogy.