The Love of Economics; S. Richman

Economics is not primarily about money and stock markets. Those are topics within economics. Economics is the study of certain implications and consequences of human action; hence the title-Human Action-of Ludwig von Mises's magnum opus. "Human action is purposeful behavior," Mises writes at the start of his treatise. We can identify a long series of facts about human action without doing "research." This is what distinguishes economics from physics. In eco nomics the unit of analysis is the individual, which we know from the inside, so to speak. As human beings we can observe introspec tively the features of action. In contrast, when we observe stars or molecules, we are out siders. We can make repeated observations and experiments to discover the principles and relationships of entities, but we cannot have the same intimate knowledge that we can have about human action. We can all readily see that when we act, certain things must be true. An action consists in the pursuit of an objective, or end, using means perceived as appropriate to its accomSheldon Richman is editor a/The Freeman.

29 plishment. This has many implications. Act ing is choosing. To pursue an end is to choose it from an array of alternatives, including the option of "doing nothing." To embark on a course of action intended to obtain an end is a form of exchange. The actor opts for the intended state of affairs over the future cir cumstances envisioned in the absence of the action. Implicit in the necessity of choice is the idea of scarcity.All means, beginning with time, are scarce. You can't choose A and non A at the same time and in the same respect. You can't "have it all." Opportunity Cost If action entails choosing one thing rather than another, all action requires giving some thing up, namely, the most highly valued alternative not pursued. The alternative for gone is the cost of the action, more precisely, the opportunity cost. We can say with certain ty that when we act, we value the satisfaction from achievement of the end sought more highly than the satisfaction expected from the highest value forgone. (Anticipated satisfac tion can't be measured or subjected to mathe matical operations; nor can it be compared person to person.) Some have criticized this Misesian approach as mere tautology, true by defini tion. But clearly it is more than that. One's action demonstrates a preference for the cho sen objective over anything else one could have aimed at. Hence, Murray Rothbard's term "demonstrated preference." This is not 30 THE FREEMAN/IDEAS ON LIBERTY • OCTOBER 1999 an empty tautology; it is a truth that underlies and makes sense of our observations of the human world. An attempt to refute it is a self-contradiction: the attempt requires action. Thus, these principles of human action has the status of an axiom.

The focus on the individual's selection of goals does not presume egoism or any other ethical category. Nor does it presume that the goal must be money or any other material good. These principles held true for Mother Teresa as well as for John D. Rockefeller. Each chose objectives and suitable (in their judgment) means. Mother Teresa wished to be efficient in ministering to the poor in India, just as Rockefeller wished to be efficient in producing kerosene from crude oil. Their par ticular ends dictated what "efficiency" meant, but the framework was conceptually the same. Economics is concerned with neither why people choose as they do or nor what they ought to choose. Those matters are left to psy chology and ethics. Marginal Utility A further implication of human action is the law of diminishing marginal utility. We act to attain values, in effect, according to a scale of descending importance. As we obtain suc cessive units of a good, we devote them to lower priorities. Anyone unit is only as important as the lowest priority. For example, I have three cups of water and plan to devote them to these three objectives ranked in descending importance: quenching my thirst, quenching my dog's thirst, watering my rhododendron. If as I begin to drink I acci dentally drop the cup, I do not forgo quench ing my thirst and devote the remaining cups to the other objectives. Rather, I move the remaining cups up the scale, leaving the least important objective unfulfilled. (Sorry, rhodo dendron.) In other words, the value to me of anyone unit of a good is determined by the value to me of the least important end that good can serve. The utility of the marginal unit (the last one or next one obtained) dimin ishes as I acquire more.

This all applies to the individual acting in isolation, what Mises calls "autistic exchange." But the principles apply to exchange between individuals too, which pre occupies most of economics. Things get more complicated-money eventually evolves from barter, long structures of production emerge-but the broad outline is the same. Exchange between two people entails some necessary truths. Each party intends to achieve a value through the exchange. Each ranks what he is willing to give up lower than what he will receive. Why exchange other wise? Each therefore comes out ahead. There's a "surplus" on each side. The same amount of stuff is there; it's only changed hands. Yet each has "more" than he started with. (Either party, being fallible, can err and regret the exchange. But each enters the rela tionship anticipating gain.) This is a good time to raise the idea of sub jectivism, a concept much misunderstood.

The economic meaning of subjectivism dif fers from its meaning in ethics. In ethics sub jectivism means that human beings can arbi trarily determine what is good for them. In economics it means that to understand market phenomena such as prices, the focus must be on subjects-acting beings-not objects. (Thus, there is no conflict on this count between Mises and Ayn Rand.) What we observe in markets grows out of the choices people make about things based on their beliefs and intentions, not out of anything intrinsic to those things. The price of a slow acting lethal poison might rise as people erro neously come to believe it is nutritious. But the poison will still kill them. Once economics is seen as focused on human choice, it is no great leap to grasp its relevance to other areas of life not usually thought of in economic terms, such as dating and marriage. This is not to say that econom ics is all that is relevant, only that the laws of human action apply. 0 Money and Gold in the 1920s and 1930s:An AustrianView by Joseph T. Salerno I n consecutive issues of The Freeman, Richard Timberlake has contributed an interesting trilogy of articles advancing a monetarist critique of the conduct of U.S.