Praxeology - Episode 17
Translations of this material:
- into Russian: Праксиология Эпизод 17 — Каталлактика. Translated in draft, editing and proof-reading required.
Submitted for translation by IrinaChernykh 22.06.2015
Are men always acting to maximize profit?
Hi guys, Praxgirl here.
In our last lesson we learned about the importance of economic calculation. We found that true economic calculation is only possible once money emerges within an economy. We also found that money best serves the owners of capital goods, the Capitalists. And therefore, a system where Capitalists are allowed to own the means of production is appropriately named Capitalism. It emphasize the importance the Capitalists play in the growth of an economy.
This lesson will serve as an introduction to Praxeology’s area of study dealing with markets, the determination of prices in terms of money, and the tools used to understand how these mechanisms work.
We’ve now sufficiently covered the basic principles of exchange between individuals. As I’ve stated before, the pattern of interrelations of individuals trading for mutual benefit is called the market. The specific area of Praxeology that deals with all market-related phenomena is called Catallactics. Don’t let this new term scare you. What Catallactics studies is the same thing that in common usage is known as Economics.
Catallactics is concerned with the determination of money prices of goods and services as exchanged on the market. But unlike Economics, in Catallactics we don’t simply limit the scope of our study to exchange. This is because human action is never restricted to dealing with only those aspects of life which are commonly referred to as exchangeable or material. We can never forget 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. Many times the way in which a food is served at a restaurant raises the price people are willing to pay to enjoy that food. Likewise, the surrounding neighbors or the layout and architecture of a house raises the price people are willing to pay to enjoy it. Therefore, one must always be ready and able to understand that human action deals in the realm of exchangeable AND non-exchangeable goods.
Catallactics when dealing with markets and money, must always take into account these important facts.
THE MAXIMIZATION OF PROFIT
To fully grasp the phenomena of trade through Catallactics, one must have a strong understanding of the general theory of all human action: Praxeology. Understanding Praxeology frees us from the potential confusions of Catallactic conclusions. If a Praxeologist says that a buyer will always buy at the lowest price, and a seller will always sell at the highest price, we can now understand that “highest” and “lowest” don’t necessarily refer simply to money prices, but to the highest and lowest price for the acting individual.
For example: suppose that Jeff wants to buy a car. He finds that there are two dealerships in town which sell the car he’s looking for. The first dealership is selling the car for $100 more than at the second dealership. Physically both cars are identical. But in the first dealership, the owner is Jeff’s high school friend. In the second dealership, the owner is someone Jeff doesn’t know. If Jeff buys the more expensive car from his high school friend, he is still buying at the cheapest price. This is because to Jeff, there’s an added psychic benefit in buying from a friend. Although we know that physically the cars are identical, in Jeff’s mind, the cars are two different goods.
As we can see, individuals are always aiming at maximizing profits by not only considering exchangeable goods but also considering non-exchangeable goods. Any theory that attempts to explain human action by assuming a man who always acts to only maximize exchangeable goods--is unrealistic. It is not applicable to real men. The actions of real men are guided by various doctrines and prejudices, aesthetic value judgments, ethical, religious and metaphysical considerations, customs, habits, traditions, changing fashions and many other things.
We just attacked an imaginary construction: homo economicus. But that does not mean that imaginary constructions are useless for the study of human action. In fact, they are essential! The fault with homo economicus is that it is uncritically applied to the study of real action, and used as an ethical basis for which to criticize the real “deviations” from this theory. Praxeology on the other hand, uses imaginary constructions without attaching ethical merit, and only uses them for a scientific explanation of human activity. The problem is, that unlike natural sciences, we cannot use experiments in our study. Therefore, we must employ imaginary constructions in a deductive process. We have to abstract from real world situations, the crucial elements that we’re interested in studying, and then either imagine their absence or try to pinpoint their exact consequences if present.
The important point to note is ANYONE who wants to engage in a discussion of markets engages in the use of imaginary constructions. When someone argues that minimum wages should be raised, their point of attack is the imaginary construction of a pure free market. They misunderstand the logical consequences of voluntary exchange, but nevertheless employ imaginary constructions as Praxeologists.
As we have seen, Catallactics is the branch of Praxeology that deals with all market phenomena-their roots, their ramifications, and their consequences. The important thing to understand about our introduction to Catallactics is that it differs from Economics by having a less concrete definition. The nature of this problem does not arise because we have uncertainty in what we’re studying. It exists because to explain the market, our investigations have to go beyond the market. We need to understand the actions of the hypothetical isolated individual like Robinson Crusoe, the pure free market and that of the Socialist commonwealth.
Our investigations will begin with one goal in mind first: analyzing the consequences of voluntary exchanges in an unhampered market or “free market” where respect for property rights is maintained and there is no coercion or violence of any kind. Once we have fully elaborated all the implications of such a system, we will begin to introduce more factors in order to better understand the consequences of interventions in the market.
I’ll see you guys in the next lesson.