Reasoning in Economics; E. Facey

Acts of man give rise to produc tion and prices. They cause the prices and production to be what they are. If prices change, individ uals will respond and instigate changes in the production and sale of the goods involved. The extent of the change cannot be determined Dr. Facey teaches economics at Hillsdale College in Michigan. because the individuals' precise evaluations of the goods are not known. Therefore it is not possible to draw up mathematical relationships be tween quantitative occurrences tak ing place in the market. No mathematical predictions can be made, since the extent of response by acting men to changes about to take place cannot be known. What is known is that men will try to profit. This happens when a sought-for end is valued more than the means thought necessary to achieve it. For example, there will be more quantity demanded if the price of a good is lowered (as the cost to the consumers is lessened relative to their value of it). There will be more quantity supplied if the price of a good is raised (as the revenue 59 60 THE FREEMAN January from the sale of a unit has increased relative to the cost of producing it).

In these cases, things, other than the price changes, remain the same. The Use of Constructs Economic theory operates within ideal situations, called constructs, in order to view certain causal tenden cies undisturbed by many other con current causal factors. In theory one can view developments stemming from a given policy. Then, when those developments do in fact occur, one looks for the causes indicated by theory to see if they are operating. For example, shortages may be seen following control policies. Sup,. pose that there are presently con tinuous shortages in Ruritania and the Ruritanian government has a system of price control. Theory shows that price controls lead to shortages. If there is increasing de mand for certain goods-buyers will ing to offer more money for such goods-but if prices are not allowed to rise in consequence of this, there would then be no incentive for pro ducers to increase the supply of these goods and, thus, shortages would oc cur. If no other dominating influ ences are at work, this is why there are shortages in Ruritania.

Constructs are not to be confused with models. Models are miniature representations of pieces of reality where the coexistence and re lationships of the elements in reality are in the model, as in an archi tectural model. In a construct, the imaginary situation is one where the elements in it do not coexist in real ity. It is not a ~~miniature" of society because, in society, persons' values, technology and the resources avail able, both human and natural, are continually changing. But in con structs unless specifically indicated, these things do not change. The equilibrium construct, wherein people continue to do what they have been doing, is a construct of real importance. With adjust ments, acting men are moving labor, land and capital to keep up with the profitable ventures and avoid the losing ventures. So there is an ever-present tendency to move re sources to serve the most important ends of the consumers. A state of equilibrium-requiring no further adjustments-is never reached be cause, for one thing, men's chosen ends keep changing. So the flows of land, labor and capital constantly shift to keep up with those changes.

Isolating Causes and Explaining Effects In reality, we find many things influencing the price of a good: changing evaluations of the item, the money supply, new labor laws, technological factors, so-called ~~hoarding" of money, weather condi tions' epidemics, wars, and the like. The economist alludes to his 1978 REASONING IN ECONOMICS 61 equilibrium construct and then con siders one or two of such changes taking place, and the effects that can flow from them while other things remain the same. He deduces various laws and theorems, depend ing upon what changes he considers, and thus develops the science of eco nomics. When he comes to explain reality, he simply selects from his theorems the ones which are appli cable to the situation under study. By giving appropriate weight to each theorem used, he will be able to show why the effects viewed in that situation have taken place. For example, suppose there had been a rapid expansion of the money supply in Ruritania along with the imposition of price controls. The economist will want to relate the conclusions of his monetary theory (about the expansion of money) along with the conclusions of his price theory (about the imposition of controls) to the explanation of the historical results. In this case there are two major causes bearing on the observed outcome. If significant technological improvements have also taken place, then the economist may note them and call upon his productivity theory to further eluci date the Ruritarian develnpments.

It should "be stressed that from theory the economist proceeds to the understanding of the historical/sta tistical facts about a society gleaned by observation. He does not get his theory from the facts. These facts result from many causes, and it is not possible to control and manipu late the facts, as in a laboratory, to take away or add causal factors so as to derive hypothetical theory that will explain the facts. Nor is it necessary to do so. For the economist already has his deduced theories at hand, ready to explain economic oc currences or events depending upon which types are to be explained. All he has to do is to select and combine from among these theories the ones which will best help him explain causally, and clearly, the particular economic events that have come to his attention. @ -BIBLIOGRAPHYKirzner, Israel, The Economic Point of View (Princeton: D. Van Nostrand Company, Inc., 1960).

Mises, Ludwig von, Epistemological Problems of Economics (Princeton: D. Van Nostrand Company, Inc., 1960). Mises, Ludwig von, Human Action (New Ha ven: Yale University Pres~, 1949). Rothbard, Murray N., "In Defense of 'Extreme Apriorism'," Souther,,: ~conomic Journal, Volume XXIII, Number 3 (January, 1957). Rothbard, Murray N., Man, Economy, and State (Princeton: D. Van Nostrand Com pany, Inc., 1962). Rothbard, Murray N., "Toward a Reconstruc tion of Utility and Welfare Economics," in M. Sennholz, ed., On Freedom and Free Enterprise, Essays in Honor of Ludwig von Mises (Princeton: D. Van Nostrand Com pany, Inc., 1956).