Little Shop of Knowledge

Human Action, Chapter XV

THE MARKET

 

 

What is the book about as a whole?

 

Chapter XV of Human Action is an analysis of the market as a process where  through the voluntary exchange within individuals merge concepts such as prices and capital that allow for economic calculation. Mises makes a case as to what a true market is under capitalism and tries to remove any misconceptions and bad connotations that have been added to the terminology he offers from this economic perspective.

 

What is being said in detail?

 

Concept Inventory: Market Economy, Social System, Division of Labor, Capital, Capital Goods, Sovereignty of the Consumers, Economic Calculation, Income, Entrepreneur, Evenly Rotating Economy, Progressing Economy, Inequality of Wealth, Freedom, Biological Competition, Catallactic Competition, Pure Market Economy, Factors of Production, Capitalism, Socialism, “Volkswirtschaft”, Business Propaganda, Psychic Profit and Loss, Entrepreneurial Profit and Loss, Bureaucracy, Selective Process.

 

The Characteristics of the Market Economy

 

A market economy is that in which government does not intervene, allowing individuals to specialize in their ocupations and cooperate through the division of labor. In a market economy the means of production are privately owned, this allows for people to set prices to their own goods allowing for the formation of a price system that enables economic calculation, which has become perhaps one of the most accurate ways of providing information to the economic players of society (especially producers) so that they can engage in the market process and calculate the prices of what they are to produce as well in order to obtain profit.

 

Capital Goods and Capital

 

Capital is a mental concept of the market economy while capital goods are literally the objects themselves. Mises claims that in a market economy you have both capital and capital goods while in a socialist economy (due to the lack of private ownership of the means of production which disables a price system and thus economic calculation) you can only have capital goods. In a market economy you can claim that a water bottle costs $5, in a socialist economy you can only claim that you have a water bottle. This is due to the fact that in order to use the concept of Capital you need to have a system that allows you to literally calculate in numbers the economic value attached to something. Now a water bottle might have all sorts of meaning to a person, it might be special or worthless due to their subjective interpretations, however a price system allows for us to claim that such a bottle is worth this or that (perhaps $5) and each person will deem it as appropriate or not according to their own calculations with regard to other products in the market.

 

“Capital is the fundamental concept of economic calculation which expresses in monetary terms the net wealth (assets minus liabilities) of the complex of all kinds of capital goods and marketable assets (savings) belonging to a definite person or other unit participating in a market economy.”

 

​Capitalism

 

Capitalism in its purest form has never existed, always has there been some sort of intervention or lack of respect for individual rights, however Mises claims that in the West more aspects of the market economy have been embraced since the middle ages and this has brought as a result

 

 

The Sovereignty of the Consumers

 

With everything that you buy in a market economy you are exerting a vote that claims that you want that specific product or service to remain in the market, even if it doesn’t that very penny that you spent on something indicates that you value the product more than the money you gave away. In this sense in a market economy it is the consumers who decide what gets produced. Often companies are though to be small realms where the CEO is an evil ruler who doesn’t care about his consumers and is willing to sell them overpriced products in order to get richer. This might be the perspective some get from Mercantilism or Crony Capitalism (that is, an intervened market favoring only a few big businesses). But in real capitalism the case is that even monopolies are competing for the dollars of the consumers, businesses may attempt to set very high prices but if the consumers think that it is not worth it then their products and services will simply not stay in the market. At the same time those products and services that serve the people best will be the ones people spend their money in and then support them to stay longer in the market gaining profit and generating value.

 

Competition

 

Mises emphasizes the difference between Biological Competition and Catallactic Competition (catallactics being the science that studies the nature of exchange). In biological competition one creature’s profit is another creature’s loss. If the lions in the African plains catch the water buffalo before the cheetah does, then it’s a loss for the cheetah (and obviously for the water buffalo). In catallactic competition this isn’t the case, when you are under a system that respects your life, liberty and property and allows for all else to happen then people will compete to generate more profits. When an entrepreneur profits this doesn’t mean that the consumer suffers (actually, it’s always a win win situation because both parties valued more whatever they obtained than what they gave away), and it doesn’t mean that this profit is the cause for another entrepreneur’s loss. If an entrepreneur suffers a loss it is because he didn’t predict well how his product would be accepted in the market, but the emphasis is that it was his responsibility not someone else’s fault.

 

Freedom

 

The main aspect of freedom that Mises talks about in this chapter is the conception of how true freedom can only exist under social conditions where people live without being “at the mercy of arbitrary decisions” of others. Being alone in nature there is no “freedom” in this sense because there isn’t even the possibility of an imposition that is not a natural law to exist. It makes me think of light and darkness, if there is no darkness we wouldn’t really know what light is, however if all there was  was “light” we probably couldn’t even conceive of the term. All things that are must have also the capacity of not being in order for their being to mean something. If someone can arbitrarily force you to do something, then a society where they cannot do this and respect you is actually allowing for freedom to exist.

 

 

Inequality of Wealth and Income

 

It is typically criticized that in a market economy there is no equality of wealth or income which is “unfair”. In this section mises claims that inequality is natural (it’s how we’re born), inequality gives rise to the opportunity and potential for higher wages which usually incentive people to work harder and allows for mobility on an economic scale. If people don’t have the chance of receiving higher wages (or avoiding lower wages) then there is probably little freedom of occupation.

 

Entrepreneurial Profit and Loss

 

Psychic profit and loss are valued subjectively by each person. This is the case of when one person might have failed completely in making a business and lost many dollars but in the end they considered the opportunity of trying and the learning that such failure brought a profit. This type of profit is not possible to calculate in economic terms. The importance of entrepreneurial profit and loss is that it does fall under the price system and can be measured with economic calculation. Entrepreneurial profit and loss is what moves the entrepreneur to act, he might value very much a product but if its production and distribution do not bring profit then he will now continue doing it.

 

 

Promoters, Managers, Technicians, and Bureaucrats

 

In this section Mises described the different roles of the economic players in a market economy. The Entrepreneur is the person with the ideas, he will calculate action based on profit and loss and will hire Promoters, Managers, Technicians and even Bureaucrats to receive help in carrying out the functions of the business that generates products or provides services.

 

 

The Selective Process

 

This is the process of the market where there is constant adaptation to changes and past success is no guarantee of future wealth. If a producer comes to serve the wants of the consumer in a better way than previous consumers then he will replace them, there is a need of constantly proving one’s merit to being in the market gaining wealth. Under interventionist policies such dynamism is barely observed and people gain their wealth based on their reputation, contacts and previous wealth rather than on their true merit.

 

The Individual and the Market

 

Though many people (often economists) speak of “the market” Mises devotes this sub section of the chapter to emphasize that all actions come from individuals. There are no “forces” that merge automatically from the market but rather individuals and their decisions.

 

 

Business Propaganda

 

Mises talks about how in general advertisements may not be of the highest artistic qualities because that is not their purpose but rather to reach a mass of consumers (which he says don’t have the same “refined” tastes as the elite). Advertisement can never “force” a consumer to buy a product.

 

The “Volkwirtschaft”

 

“Volkwirtschaft” is a term coined by German Stasists that describe the complex of economic activities taken by the German government in order to expand into nations abroad to obtain more resources and achieve self-sufficiency.

 

What was most meaningful to me?

 

 

I often used to defend the market based on a moral ground, where respect for natural rights such as life, liberty and property were essential. However as I inquired more into the nature and function of the market I realize that not only does it embrace these respects but in economic science it is in fact what actually works best for bringing prosperity. I used to believe that perhaps the market was “too risky” and that it wouldn’t bring as much prosperity as other systems do in quicker ways but as long as it respected the will of the people it would serve best. After this chapter I feel that I have a well founded understanding of what the market is, how it works, and why so often it is the case best defended by capitalists. I can see how the market not only allows for individual choices, but it was able to generate an amazing thing as the Price System, something we haven’t been able to do in social and political institutions. The price system offers information that allows for everyone to adjust and communicate the abundance or scarcity of a resource. Such facilitation in information connects human beings in ways that they probably can’t think of, a true free market allows for individuals that wouldn’t even be able to stand in the same room to cooperate for the improvement of their conditions and the betterment of their lives. I hope to see one day this system in Guatemala. The more I understand it, the more holes I see in our current system. Some regard so many economies as capitalistic and free market founded when in reality they are trampled markets, benefiting the desires of big corporations that are spending their dollars in manipulating public policy. A clean definition of Capitalism is necessary in our world today, otherwise we’ll keep fighting and striving for things which we cannot understand between ourselves. Never had I seen so strongly the impact and importance of “coming to terms” as in this clash of economic ideas between human beings regardless of their self definitions of capitalism, socialism, and other political paradigms.  

 

 

Quotes

 

“The specific entrepreneurial function consists in the employment of the factors of production. The entrepreneur is the man who dedicates them to special purposes. In doing so he is driven solely by the selfish interest of making profits and in acquiring wealth. But he cannot evade the law of the market. He can succeed only by best serving the consumers. His profit depends on the approval of his conduct by the consumers.”

 

“Thus the advocates of totalitarianism chose other tactics. They reversed the meaning of words. They call true or genuine liberty the condition of the individuals under a system in which they have no right other than to obey orders.”

 

“Socialism means the emancipation of the common man, means freedom for all. It means, moreover, riches for all. These doctrines have been able to triumph becase they did not encounter effective rational criticism. Some economists did a brilliant job in unmasking their crass fallacies and contradictions. But the public ignores the teachings of economics.”