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Freedom Founts

Source Materials About Freedom

Chapter 1 of Man, Economy, and State, 1962


Fundamentals of Human Action1

1. The Concept of Action

THE DISTINCTIVE AND CRUCIAL FEATURE in the study of man is the concept of action. Human action is defined simply as purposeful behavior. It is therefore sharply distinguishable from those observed movements which, from the point of view of man, are not purposeful. These include all the observed movements of inorganic matter and those types of human behavior that are purely reflex, that are simply involuntary responses to certain stimuli. Human action, on the other hand, can be meaningfully interpreted by other men, for it is governed by a certain purpose that the actor has in view.2 The purpose of a man's act is his end; the desire to achieve this end is the man's motive for instituting the action.

All human beings act by virtue of their existence and their nature as human beings.3 We could not conceive of human beings who do not act purposefully, who have no ends in view that they desire and attempt to attain. Things that did not act, that did not behave purposefully, would no longer be classified as human.

It is this fundamental truth—this axiom of human action—that forms the key to our study. The entire realm of praxeology and its best developed subdivision, economics, is based on an analysis of the necessary logical implications of this concept.4 The fact that men act by virtue of their being human is indisputable and incontrovertible. To assume the contrary would be an absurdity. The contrary—the absence of motivated behavior—would apply only to plants and inorganic matter.5

2. First Implications of the Concept

The first truth to be discovered about human action is that it can be undertaken only by individual "actors." Only individuals have ends and can act to attain them. There are no such things as ends of or actions by "groups," "collectives," or "States," which do not take place as actions by various specific individuals. "Societies" or "groups" have no independent existence aside from the actions of their individual members. Thus, to say that "governments" act is merely a metaphor; actually, certain individuals are in a certain relationship with other individuals and act in a way that they and the other individuals recognize as "governmental."6 The metaphor must not be taken to mean that the collective institution itself has any reality apart from the acts of various individuals. Similarly, an individual may contract to act as an agent in representing another individual or on behalf of his family. Still, only individuals can desire and act. The existence of an institution such as government becomes meaningful only through influencing the actions of those individuals who are and those who are not considered as members.7

In order to institute action, it is not sufficient that the individual man have unachieved ends that he would like to fulfill. He must also expect that certain modes of behavior will enable him to attain his ends. A man may have a desire for sunshine, but if he realizes that he can do nothing to achieve it, he does not act on this desire. He must have certain ideas about how to achieve his ends. Action thus consists of the behavior of individuals directed towards ends in ways that they believe will accomplish their purpose. Action requires an image of a desired end and "technological ideas" or plans on how to arrive at this end.

Men find themselves in a certain environment, or situation. It is this situation that the individual decides to change in some way in order to achieve his ends. But man can work only with the numerous elements that he finds in his environment, by rearranging them in order to bring about the satisfaction of his ends. With reference to any given act, the environment external to the individual may be divided into two parts: those elements which he believes he cannot control and must leave unchanged, and those which he can alter (or rather, thinks he can alter) to arrive at his ends. The former may be termed the general conditions of the action; the latter, the means used. Thus, the individual actor is faced with an environment that he would like to change in order to attain his ends. To act, he must have technological ideas about how to use some of the elements of the environment as means, as pathways, to arrive at his ends. Every act must therefore involve the employment of means by individual actors to attempt to arrive at certain desired ends. In the external environment, the general conditions cannot be the objects of any human action; only the means can be employed in action.8

All human life must take place in time. Human reason cannot even conceive of an existence or of action that does not take place through time. At a time when a human being decides to act in order to attain an end, his goal, or end, can be finally and completely attained only at some point in the future. If the desired ends could all be attained instantaneously in the present, then man's ends would all be attained and there would be no reason for him to act; and we have seen that action is necessary to the nature of man. Therefore, an actor chooses means from his environment, in accordance with his ideas, to arrive at an expected end, completely attainable only at some point in the future. For any given action, we can distinguish among three periods of time involved: the period before the action, the time absorbed by the action, and the period after the action has been completed. All action aims at rendering conditions at some time in the future more satisfactory for the actor than they would have been without the intervention of the action.

A man's time is always scarce. He is not immortal; his time on earth is limited. Each day of his life has only 24 hours in which he can attain his ends. Furthermore, all actions must take place through time. Therefore time is a means that man must use to arrive at his ends. It is a means that is omnipresent in all human action.

Action takes place by choosing which ends shall be satisfied by the employment of means. Time is scarce for man only because whichever ends he chooses to satisfy, there are others that must remain unsatisfied. When we must use a means so that some ends remain unsatisfied, the necessity for a choice among ends arises. For example, Jones is engaged in watching a baseball game on television. He is faced with the choice of spending the next hour in: (a) continuing to watch the baseball game, (b) playing bridge, or (c) going for a drive. He would like to do all three of these things, but his means (time) is insufficient. As a result, he must choose; one end can be satisfied, but the others must go unfulfilled. Suppose that he decides on course A. This is a clear indication that he has ranked the satisfaction of end A higher than the satisfaction of ends B or C.

From this example of action, many implications can be deduced. In the first place, all means are scarce, i.e., limited with respect to the ends that they could possibly serve. If the means are in unlimited abundance, then they need not serve as the object of attention of any human action. For example, air in most situations is in unlimited abundance. It is therefore not a means and is not employed as a means to the fulfillment of ends. It need not be allocated, as time is, to the satisfaction of the more important ends, since it is sufficiently abundant for all human requirements. Air, then, though indispensable, is not a means, but a general condition of human action and human welfare.

Secondly, these scarce means must be allocated by the actor to serve certain ends and leave other ends unsatisfied. This act of choice may be called economizing the means to serve the most desired ends. Time, for example, must be economized by the actor to serve the most desired ends. The actor may be interpreted as ranking his alternative ends in accordance with their value to him. This scaling of ends may be described as assigning ranks of value to the ends by the actor, or as a process of valuation. Thus, suppose that Jones ranked his alternative ends for the use of an hour of time as follows:

(First) 1. Continuing to watch the baseball game
(Second) 2. Going for a drive
(Third) 3. Playing bridge

This was his scale of values or scale of preferences. The supply of means (time) available was sufficient for the attainment of only one of these ends, and the fact that he chose the baseball game shows that he ranked that highest (or first). Suppose now that he is allocating two hours of his time and can spend an hour on each pursuit. If he spends one hour on the game and then a second hour on the drive, this indicates that his ranking of preferences is as above. The lowest-ranking end—playing bridge—goes unfulfilled. Thus, the larger the supply of means available, the more ends can be satisfied and the lower the rank of the ends that must remain unsatisfied.

Another lesson to be derived is that action does not necessarily mean that the individual is "active" as opposed to "passive," in the colloquial sense. Action does not necessarily mean that an individual must stop doing what he has been doing and do something else. He also acts, as in the above case, who chooses to continue in his previous course, even though the opportunity to change was open to him. Continuing to watch the game is just as much action as going for a drive.

Furthermore, action does not at all mean that the individual must take a great deal of time in deliberating on a decision to act. The individual may make a decision to act hastily, or after great deliberation, according to his desired choice. He may decide on an action coolly or heatedly; none of these courses affects the fact that action is being taken.9

Another fundamental implication derived from the existence of human action is the uncertainty of the future. This must be true because the contrary would completely negate the possibility of action. If man knew future events completely, he would never act, since no act of his could change the situation. Thus, the fact of action signifies that the future is uncertain to the actors. This uncertainty about future events stems from two basic sources: the unpredictability of human acts of choice, and insufficient knowledge about natural phenomena. Man does not know enough about natural phenomena to predict all their future developments, and he cannot know the content of future human choices. All human choices are continually changing as a result of changing valuations and changing ideas about the most appropriate means of arriving at ends. This does not mean, of course, that people do not try their best to estimate future developments. Indeed, any actor, when employing means, estimates that he will thus arrive at his desired goal. But he never has certain knowledge of the future. All his actions are of necessity speculations based on his judgment of the course of future events. The omnipresence of uncertainty introduces the ever-present possibility of error in human action. The actor may find, after he has completed his action, that the means have been inappropriate to the attainment of his end.

To sum up what we have learned thus far about human action: The distinguishing characteristic of human beings is that all humans act. Action is purposeful behavior directed toward the attainment of ends in some future period which will involve the fulfillment of wants otherwise remaining unsatisfied. Action involves the expectation of a less imperfectly satisfied state as a result of the action. The individual actor chooses to employ elements in his environment as means to the expected achievement of his ends, economizing them by directing them toward his most valued ends (leaving his least valued ones unsatisfied), and in the ways that his reason tells him are most appropriate to attain these ends. His method—his chosen means—may or may not turn out to be inappropriate.

3. Further Implications: The Means

The means to satisfy man's wants are called goods. These goods are all the objects of economizing action.10 Such goods may all be classified in either of two categories: (a) they are immediately and directly serviceable in the satisfaction of the actor's wants, or (b) they may be transformable into directly serviceable goods only at some point in the future—i.e., are indirectly serviceable means. The former are called consumption goods or consumers' goods or goods of the first order. The latter are called producers' goods or factors of production or goods of higher order.

Let us trace the relations among these goods by considering a typical human end: the eating of a ham sandwich. Having a desire for a ham sandwich, a man decides that this is a want that should be satisfied and proceeds to act upon his judgment of the methods by which a ham sandwich can be assembled. The consumers' good is the ham sandwich at the point of being eaten. It is obvious that there is a scarcity of this consumers' good as there is for all direct means; otherwise it would always be available, like air, and would not be the object of action. But if the consumers' good is scarce and not obviously available, how can it be made available? The answer is that man must rearrange various elements of his environment in order to produce the ham sandwich at the desired place—the consumers' good. In other words, man must use various indirect means as co-operating factors of production to arrive at the direct means. This necessary process involved in all action is called production; it is the use by man of available elements of his environment as indirect means—as co-operating factors—to arrive eventually at a consumers' good that he can use directly to arrive at his end.

Let us consider the pattern of some of the numerous co-operating factors that are involved in a modern developed economy to produce one ham sandwich as a consumers' good for the use of one consumer. Typically, in order to produce a ham sandwich for Jones in his armchair, it is necessary for his wife to expend energy in unwrapping the bread, slicing the ham, placing the ham between bread slices, and carrying it to Jones. All this work may be called the labor of the housewife. The co-operating factors that are directly necessary to arrive at the consumers' good are, then: the housewife's labor, bread in the kitchen, ham in the kitchen, and a knife to slice the ham. Also needed is the land on which to have room to live and carry on these activities. Furthermore, this process must, of course, take time, which is another indispensable co-operating factor. The above factors may be called first-order producers' goods, since, in this case, these co-operate in the production of the consumers' good. Many of the first-order producers' goods, however, are also unavailable in nature and must be produced themselves, with the help of other producers' goods. Thus, bread in the kitchen must be produced with the co-operation of the following factors: bread-in-retail-shop and housewife's labor in carrying it (plus the ever-present land-as-standing-room, and time). In this procedure, these factors are second-order producers' goods, since they co-operate in producing first-order goods. Higher-order factors are those co-operating in the production of factors of lower order.

Thus, any process (or structure) of production may be analyzed as occurring in different stages. In the earlier or "higher" stages, producers' goods must be produced that will later co-operate in producing other producers' goods that will finally co-operate in producing the desired consumers' good. Hence, in a developed economy, the structure of production of a given consumers' good might be a very complex one and involve numerous stages.

Important general conclusions can, however, be drawn that apply to all processes of production. In the first place, each stage of production takes time. Secondly, the factors of production may all be divided into two classes: those that are themselves produced, and those that are found already available in nature—in man's environment. The latter may be used as indirect means without having been previously produced; the former must first be produced with the aid of factors in order to aid in the later (or "lower") stages of production. The former are the produced factors of production; the latter are the original factors of production. The original factors may, in turn, be divided into two classes: the expenditure of human energy, and the use of nonhuman elements provided by nature. The first is called Labor; the latter is Nature or Land.11 Thus, the classes of factors of production are Labor, Land, and the produced factors, which are termed Capital Goods.

Labor and Land, in one form or another, enter into each stage of production. Labor helps to transform seeds into wheat, wheat into flour, pigs into ham, flour into bread, etc. Not only is Labor present at every stage of production, but so also is Nature. Land must be available to provide room at every stage of the process, and time, as has been stated above, is required for each stage. Furthermore, if we wish to trace each stage of production far enough back to original sources, we must arrive at a point where only labor and nature existed and there were no capital goods. This must be true by logical implication, since all capital goods must have been produced at earlier stages with the aid of labor. If we could trace each production process far enough back in time, we must be able to arrive at the point—the earliest stage—where man combined his forces with nature unaided by produced factors of production. Fortunately, it is not necessary for human actors to perform this task, since action uses materials available in the present to arrive at desired goals in the future, and there is no need to be concerned with development in the past.

There is another unique type of factor of production that is indispensable in every stage of every production process. This is the "technological idea" of how to proceed from one stage to another and finally to arrive at the desired consumers' good. This is but an application of the analysis above, namely, that for any action, there must be some plan or idea of the actor about how to use things as means, as definite pathways, to desired ends. Without such plans or ideas, there would be no action. These plans may be called recipes; they are ideas of recipes that the actor uses to arrive at his goal. A recipe must be present at each stage of each production process from which the actor proceeds to a later stage. The actor must have a recipe for transforming iron into steel, wheat into flour, bread and ham into sandwiches, etc.

The distinguishing feature of a recipe is that, once learned, it generally does not have to be learned again. It can be noted and remembered. Remembered, it no longer has to be produced; it remains with the actor as an unlimited factor of production that never wears out or needs to be economized by human action. It becomes a general condition of human welfare in the same way as air.12

It should be clear that the end of the production process—the consumers' good—is valued because it is a direct means of satisfying man's ends. The consumers' good is consumed, and this act of consumption constitutes the satisfying of human wants. This consumers' good may be a material object like bread or an immaterial one like friendship. Its important quality is not whether it is material or not, but whether it is valued by man as a means of satisfying his wants. This function of a consumers' good is called its service in ministering to human wants. Thus, the material bread is valued not for itself, but for its service in satisfying wants; just as an immaterial thing, such as music or medical care, is obviously valued for such service. All these services are "consumed" to satisfy wants. "Economic" is by no means equivalent to "material."

It is also clear that the factors of production—the various higher-order producers' goods—are valued solely because of their anticipated usefulness in helping to produce future consumers' goods or to produce lower-order producers' goods that will help to bring about consumers' goods. The valuation of factors of production is derived from actors' evaluation of their products (lower stages), all of which eventually derive their valuation from the end result—the consumers' good.13

Furthermore, the omnipresent fact of the scarcity of consumers' goods must be reflected back in the sphere of the factors of production. The scarcity of consumers' goods must imply a scarcity of their factors. If the factors were unlimited, then the consumers' goods would also be unlimited, which cannot be the case. This does not exclude the possibility that some factors, such as recipes, may be unlimited and therefore general conditions of welfare rather than scarce indirect means. But other factors at each stage of production must be in scarce supply, and this must account for the scarcity of the end product. Man's endless search for ways to satisfy his wants—i.e., to increase his production of consumers' goods—takes two forms: increasing his available supply of factors of production and improving his recipes.

Although it has seemed evident that there are several cooperating factors at each stage of production, it is important to realize that for each consumers' good there must always be more than one scarce factor of production. This is implied in the very existence of human action. It is impossible to conceive of a situation where only one factor of production produces a consumers' good or even advances a consumers' good from its previous stage of production. Thus, if the sandwich in the armchair did not require the co-operating factors at the previous stage (labor of preparation, carrying, bread, ham, time, etc.), then it would always be in the status of a consumers' good—sandwich-in-the-armchair. To simplify the example, let us suppose the sandwich already is prepared and in the kitchen. Then, to produce a consumers' good from this stage forward requires the following factors: (1) the sandwich; (2) carrying it to the armchair; (3) time; (4) the land available. If we assume that it required only one factor—the sandwich—then we would have to assume that the sandwich was magically and instantaneously moved from kitchen to armchair without effort. But in this case, the consumers' good would not have to be produced at all, and we would be in the impossible assumption of Paradise. Similarly, at each stage of the productive process, the good must have been produced by at least more than one (higher-order) scarce co-operating factor; otherwise this stage of production could not exist at all.

4. Further Implications: Time

Time is omnipresent in human action as a means that must be economized. Every action is related to time as follows:

Figure 1
Figure 1

...A is the period before the beginning of the action; A is the point in time at which the action begins; AB is the period during which the action occurs; B is the point at which the action ends; and B... is the period after the end of the action.

AB is defined as the period of production—the period from the beginning of the action to the time when the consumers' good is available. This period may be divided into various stages, each itself taking a period of time. The time expended during the period of production consists of the time during which labor energy is expended (or working time) and maturing time, i.e., time required without the necessity of concurrent expenditure of labor. An obvious example is the case of agriculture. There might be six months between the time the soil is tilled and the time the harvest is reaped. The total time during which labor must be expended may be three weeks, while the remaining time of over five months consists of the time during which the crop must mature and ripen by the processes of nature. Another example of a lengthy maturing time is the aging of wine to improve its quality.

Clearly, each consumers' good has its own period of production. The differences between the time involved in the periods of production of the various goods may be, and are, innumerable.

One important point that must be emphasized when considering action and the period of production is that acting man does not trace back past production processes to their original sources. In the previous section, we traced back consumers' goods and producers' goods to their original sources, demonstrating that all capital goods were originally produced solely by labor and nature. Acting man, however, is not interested in past processes, but only in using presently available means to achieve anticipated future ends. At any point in time, when he begins the action (say A), he has available to him: labor, nature-given elements, and previously produced capital goods. He begins the action at A expecting to reach his end at B. For him, the period of production is AB, since he is not concerned with the amount of time spent in past production of his capital goods or in the methods by which they were produced.14 Thus, the farmer about to use his soil to grow crops for the coming season does not worry about whether or to what extent his soil is an original, nature-given factor or is the result of the improvements of previous land-clearers and farmers. He is not concerned about the previous time spent by these past improvers. He is concerned only with the capital (and other) goods in the present and the future. This is the necessary result of the fact that action occurs in the present and is aimed at the future. Thus, acting man considers and values the factors of production available in the present in accordance with their anticipated services in the future production of consumers' goods, and never in accordance with what has happened to the factors in the past.

A fundamental and constant truth about human action is that man prefers his end to be achieved in the shortest possible time. Given the specific satisfaction, the sooner it arrives, the better. This results from the fact that time is always scarce, and a means to be economized. The sooner any end is attained, the better. Thus, with any given end to be attained, the shorter the period of action, i.e., production, the more preferable for the actor. This is the universal fact of time preference. At any point of time, and for any action, the actor most prefers to have his end attained in the immediate present. Next best for him is the immediate future, and the further in the future the attainment of the end appears to be, the less preferable it is. The less waiting time, the more preferable it is for him.15

Time enters into human action not only in relation to the waiting time in production, but also in the length of time in which the consumers' good will satisfy the wants of the consumer. Some consumers' goods will satisfy his wants, i.e., attain his ends, for a short period of time, others for a longer period. They can be consumed for shorter or longer periods. This may be included in the diagram of any action, as shown in Figure 2. This length of time, BC, is the duration of serviceableness of the consumers' good. It is the length of the time the end served by the consumers' good continues to be attained. This duration of serviceableness differs for each consumers' good. It may be four hours for the ham sandwich, after which period of time the actor desires other food or another sandwich. The builder of a house may expect to use it to serve his wants for 10 years. Obviously, the expected durative power of the consumers' good to serve his end will enter into the actor's plans.16

Figure 2
Figure 2. Period of Production and Consumption

Clearly, all other things being equal, the actor will prefer a consumers' good of greater durability to one of lesser, since the former will render more total service. On the other hand, if the actor values the total service rendered by two consumers' goods equally, he will, because of time preference, choose the less durable good since he will acquire its total services sooner than the other. He will have to wait less for the total services of the less durable good.

The concepts of period of production and duration of serviceableness are present in all human action. There is also a third time-period that enters into action. Each person has a general time-horizon, stretching from the present into the future, for which he plans various types of action. Whereas period of production and duration of serviceableness refer to specific consumers' goods and differ with each consumers'good, the period of provision (the time-horizon) is the length of future time for which each actor plans to satisfy his wants. The period of provision, therefore, includes planned action for a considerable variety of consumers' goods, each with its own period of production and duration. This period of provision differs from actor to actor in accordance with his choice. Some people live from day to day, taking no heed of later periods of time; others plan not only for the duration of their own lives, but for their children as well.

5. Further Implications

A. Ends and Values

All action involves the employment of scarce means to attain the most valued ends. Man has the choice of using the scarce means for various alternative ends, and the ends that he chooses are the ones he values most highly. The less urgent wants are those that remain unsatisfied. Actors can be interpreted as ranking their ends along a scale of values, or scale of preferences. These scales differ for each person, both in their content and in their orders of preference. Furthermore, they differ for the same individual at different times. Thus, at some other point in time, the actor mentioned in section 2 above might choose to go for a drive, or to go for a drive and then to play bridge, rather than to continue watching the game. In that case, the ranking on his preference scale shifts to this order:

(First) 1. Going for a drive
(Second) 2. Playing bridge
(Third) 3. Continuing to watch the baseball game

Moreover, a new end might have been introduced in the meantime, so that the actor might enjoy going to a concert, and this may change his value scale to the following:

(First) 1. Going for a drive
(Second) 2. Going to a concert
(Third) 3. Playing bridge
(Fourth) 4. Continuing to watch the baseball game

The choice of which ends to include in the actor's value scale and the assignment of rank to the various ends constitute the process of value judgment. Each time the actor ranks and chooses between various ends, he is making a judgment of their value to him.

It is highly useful to assign a name to this value scale held by all human actors. We are not at all concerned with the specific content of men's ends, but only with the fact that various ends are ranked in the order of their importance. These scales of preference may be called happiness or welfare or utility or satisfaction or contentment. Which name we choose for value scales is not important. At any rate, it permits us to say, whenever an actor has attained a certain end, that he has increased his state of satisfaction, or his contentment, happiness, etc. Conversely, when someone considers himself worse off, and fewer of his ends are being attained, his satisfaction, happiness, welfare, etc., have decreased.

It is important to realize that there is never any possibility of measuring increases or decreases in happiness or satisfaction. Not only is it impossible to measure or compare changes in the satisfaction of different people; it is not possible to measure changes in the happiness of any given person. In order for any measurement to be possible, there must be an eternally fixed and objectively given unit with which other units may be compared. There is no such objective unit in the field of human valuation. The individual must determine subjectively for himself whether he is better or worse off as a result of any change. His preference can only be expressed in terms of simple choice, or rank. Thus, he can say, "I am better off " or "I am happier" because he went to a concert instead of playing bridge (or "I will be better off" for going to the concert), but it would be completely meaningless for him to try to assign units to his preference and say, "I am two and a half times happier because of this choice than I would have been playing bridge." Two and a half times what? There is no possible unit of happiness that can be used for purposes of comparison and, hence, of addition or multiplication. Thus, values cannot be measured; values or utilities cannot be added, subtracted, or multiplied. They can only be ranked as better or worse. A man may know that he is or will be happier or less happy, but not by "how much," not by a measurable quantity.17

All action is an attempt to exchange a less satisfactory state of affairs for a more satisfactory one. The actor finds himself (or expects to find himself) in a nonperfect state, and, by attempting to attain his most urgently desired ends, expects to be in a better state. He cannot measure the gain in satisfaction, but he does know which of his wants are more urgent than others, and he does know when his condition has improved. Therefore, all action involves exchange—an exchange of one state of affairs, X, for Y, which the actor anticipates will be a more satisfactory one (and therefore higher on his value scale). If his expectation turns out to be correct, the value of Y on his preference scale will be higher than the value of X, and he has made a net gain in his state of satisfaction or utility. If he has been in error, and the value of the state that he has given up—X—is higher than the value of Y, he has suffered a net loss. This psychic gain (or profit) and loss cannot be measured in terms of units, but the actor always knows whether he has experienced psychic profit or psychic loss as a result of an action-exchange.18

Human actors value means strictly in accordance with their valuation of the ends that they believe the means can serve. Obviously, consumers' goods are graded in value in accordance with the ends that men expect them to satisfy. Thus, the value placed on the enjoyment contributed by a ham sandwich or a house will determine the value a man will place on the ham sandwich or the house themselves. Similarly, producers' goods are valued in accordance with their expected contribution in producing consumers' goods. Higher-order producers' goods are valued in accordance with their anticipated service in forming lower-order producers' goods. Hence, those consumers' goods serving to attain more highly valued ends will be valued more highly than those serving less highly valued ends, and those producers' goods serving to produce more highly valued consumers' goods will themselves be valued more highly than other producers' goods. Thus, the process of imputing values to goods takes place in the opposite direction to that of the process of production. Value proceeds from the ends to the consumers' good to the various first-order producers' goods, to the second-order producers' goods, etc.19 The original source of value is the ranking of ends by human actors, who then impute value to consumers' goods, and so on to the orders of producers' goods, in accordance with their expected ability to contribute toward serving the various ends.20

B. The Law of Marginal Utility

It is evident that things are valued as means in accordance with their ability to attain ends valued as more or less urgent. Each physical unit of a means (direct or indirect) that enters into human action is valued separately. Thus, the actor is interested in evaluating only those units of means that enter, or that he considers will enter, into his concrete action. Actors choose between, and evaluate, not "coal" or "butter" in general, but specific units of coal or butter. In choosing between acquiring cows or horses, the actor does not choose between the class of cows and the class of horses, but between specific units of them—e.g., two cows versus three horses. Each unit that enters into concrete action is graded and evaluated separately. Only when several units together enter into human action are all of them evaluated together.

The processes that enter into valuation of specific units of different goods may be illustrated in this example:21 An individual possessing two cows and three horses might have to choose between giving up one cow or one horse. He may decide in this case to keep the horse, indicating that in this state of his stock, a horse is more valuable to him than a cow. On the other hand, he might be presented with the choice of keeping either his entire stock of cows or his stock of horses. Thus, his stable and cowshed might catch fire, and he is presented with the choice of saving the inhabitants of one or of the other building. In this case, two cows might be more valuable to him than three horses, so that he will prefer to save the cows. When deciding between units of his stock, the actor may therefore prefer good X to good Y, while he may choose good Y if he must act upon his whole stock of each good.

This process of valuation according to the specific units involved provides the solution for the famous "value paradox" which puzzled writers for centuries. The question was: How can men value bread less than platinum, when "bread" is obviously more useful than "platinum"? The answer is that acting man does not evaluate the goods open to him by abstract classes, but in terms of the specific units available. He does not wonder whether "bread-in-general" is more or less valuable to him than "platinum-in-general," but whether, given the present available stock of bread and platinum, a "loaf of bread" is more or less valuable to him than "an ounce of platinum." That, in most cases, men prefer the latter is no longer surprising.22

As has been explained above, value, or utility, cannot be measured, and therefore cannot be added, subtracted, or multiplied. This holds for specific units of the same good in the same way as it holds for all other comparisons of value. Thus, if butter is an object serving human ends, we know that two pounds of butter will be valued more highly than one pound. This will be true until a point is reached when the butter is available in unlimited quantities to satisfy human wants and will then be transferred from the status of a means to that of a general condition of human welfare. However, we cannot say that two pounds of butter are "twice as useful or valuable" as one pound.

What has been involved in this key concept of "specific units of a good"? In these examples, the units of the good have been interchangeable from the point of view of the actor. Thus, any concrete pound of butter was evaluated in this case perfectly equally with any other pound of butter. Cow A and cow B were valued equally by the individual, and it made no difference to him which cow he was faced with the choice of saving. Similarly, horse A was valued equally with horse B and with horse C, and the actor was not concerned which particular horse he had to choose. When a commodity is in such a way available in specific homogeneous units equally capable of rendering the same service to the actor, this available stock is called a supply. A supply of a good is available in specific units each perfectly substitutable for every other. The individual above had an available supply of two cows and three horses, and a supply of pounds of butter.

What if one pound of butter was considered by the actor as of better quality than another pound of butter? In that case, the two "butters" are really different goods from the point of view of the actor and will be evaluated differently. The two pounds of butter are now two different goods and are no longer two units of a supply of one good. Similarly, the actor must have valued each horse or each cow identically. If he preferred one horse to each of the others, or one cow to the other, then they are no longer units of the supply of the same good. No longer are his horses interchangeable for one another. If he grades horse A above the others and regards horses B and C indifferently, then he has supplies of two different goods (omitting the cows): say, "Grade A horses—one unit"; and "Grade B horses—two units." If a specific unit is differently evaluated from all other units, then the supply of that good is only one unit.

Here again, it is very important to recognize that what is significant for human action is not the physical property of a good, but the evaluation of the good by the actor. Thus, physically there may be no discernible difference between one pound of butter and another, or one cow and another. But if the actor chooses to evaluate them differently, they are no longer part of the supply of the same good.

The interchangeability of units in the supply of a good does not mean that the concrete units are actually valued equally. They may and will be valued differently whenever their position in the supply is different. Thus, suppose that the isolated individual successively finds one horse, then a second, then a third. Each horse may be identical and interchangeable with the others. The first horse will fulfill the most urgent wants that a horse can serve; this follows from the universal fact that action uses scarce means to satisfy the most urgent of the not yet satisfied wants. When the second horse is found, he will be put to work satisfying the most urgent of the wants remaining. These wants, however, must be ranked lower than the wants that the previous horse has satisfied. Similarly, the third horse acquired might be capable of performing the same service as the others, but he will be put to work fulfilling the highest of the remaining wants—which, however, will yet be lower in value than the others.

The important consideration is the relation between the unit to be acquired or given up and the quantity of supply (stock) already available to the actor. Thus, if no units of a good (whatever the good may be) are available, the first unit will satisfy the most urgent wants that such a good is capable of satisfying. If to this supply of one unit is added a second unit, the latter will fulfillthe most urgent wants remaining, but these will be less urgent than the ones the first fulfilled. Therefore, the value of the second unit to the actor will be less than the value of the first unit. Similarly, the value of the third unit of the supply (added to a stock of two units) will be less than the value of the second unit. It may not matter to the individual which horse is chosen first and which second, or which pounds of butter he consumes, but those units which he does use first will be the ones that he values more highly. Thus, for all human actions, as the quantity of the supply (stock) of a good increases, the utility (value) of each additional unit decreases.

Let us now consider a supply from the point of view of a possible decrease, rather than an increase. Assume that a man has a supply of six (interchangeable) horses. They are engaged in fulfilling his wants. Suppose that he is now faced with the necessity of giving up one horse. It now follows that this smaller stock of means is not capable of rendering as much service to him as the larger supply. This stems from the very existence of the good as a means.23 Therefore, the utility of X units of a good is always greater than the utility of X − 1 units. Because of the impossibility of measurement, it is impossible to determine by how much greater one value is than the other. Now, the question arises: Which utility, which end, does the actor give up because he is deprived of one unit? Obviously, he gives up the least urgent of the wants which the larger stock would have satisfied. Thus, if the individual was using one horse for pleasure riding, and he considers this the least important of his wants that were fulfilled by the six horses, the loss of a horse will cause him to give up pleasure riding.

The principles involved in the utility of a supply may be illustrated in the following value-scale diagram (Figure 3). We are considering any given means, which is divisible into homogeneous units of a supply, each interchangeable and capable of giving service equal to that of the other units. The supply must be scarce in relation to the ends that it is capable of fulfilling; otherwise it would not be a good, but a condition of human welfare. We assume for simplicity that there are 10 ends which the means could fulfill, and that each unit of means is capable of serving one of the ends. If the supply of the good is 6 units, then the first six ends, ranked in order of importance by the valuing individual, are the ones that are being satisfied. Ends ranked 7–10 remain unsatisfied. If we assume that the stock arrived in successive units, then the first unit went to satisfy end 1, the second unit was used to serve end 2, etc. The sixth unit was used to serve end 6. The dots indicate how the units were used for the different ends, and the arrow indicates the direction the process took, i.e., that the most important ends were served first; the next, second, etc. The diagram illustrates the aforementioned laws that the utility (value) of more units is greater than the utility of fewer units and that the utility of each successive unit is less as the quantity of the supply increases.

Figure 3
Figure 3. Value-Scale Diagram

Now, suppose the actor is faced with the necessity of giving up one unit of his stock. His total will be 5 instead of 6 units. Obviously, he gives up satisfying the end ranked sixth, and continues to satisfy the more important ends 1–5. As a result of the interchangeability of units, it does not matter to him which of the six units he must lose; the point is that he will give up serving this sixth end. Since action considers only the present and the future not the past, it does not matter to him which units he acquired first in the past. He deals only with his presently available stock. In other words, suppose that the sixth horse that he had previously acquired (named "Seabiscuit") he had placed in the service of pleasure riding. Suppose that he now must lose another horse ("Man o' War") which had arrived earlier, and which was engaged in the more important duty (to him) of leading a wagon. He will still give up end 6 by simply transferring Seabiscuit from this function to the wagon-leading end. This consequence follows from the defined interchangeability of units and from disregard of past events which are of no consequence for the present and the future.

Thus, the actor gives up the lowest-ranking want that the original stock (in this case, six units) was capable of satisfying. This one unit that he must consider giving up is called the marginal unit. It is the unit "at the margin." This least important end fulfilled by the stock is known as the satisfaction provided by the marginal unit, or the utility of the marginal unit—in short: the marginal satisfaction, or marginal utility. If the marginal unit is one unit, then the marginal utility of the supply is the end that must be given up as the result of a loss of the unit. In Figure 3, the marginal utility is ranked sixth among the ends. If the supply consisted of four units, and the actor were faced with the necessity of giving up one unit, then the value of the marginal unit, or the marginal utility, would have a rank of four. If the stock consisted of one unit, and this had to be given up, the value of the marginal unit would be one—the value of the highest-ranked end.

We are now in a position to complete an important law indicated above, but with different phraseology: The greater the supply of a good, the lower the marginal utility; the smaller the supply, the higher the marginal utility. This fundamental law of economics has been derived from the fundamental axiom of human action; it is the law of marginal utility, sometimes known as the law of diminishing marginal utility. Here again, it must be emphasized that "utility" is not a cardinal quantity subject to the processes of measurement, such as addition, multiplication, etc. It is a ranked number expressible only in terms of higher or lower order in the preferences of men.

This law of marginal utility holds for all goods, regardless of the size of the unit considered. The size of the unit will be the one that enters into concrete human action, but whatever it is, the same principle applies. Thus, if in certain situations, the actor must consider only pairs of horses as the units to add or subtract from his stock, instead of the individual horses, he will construct a new and shorter scale of ends with fewer units of supply to consider. He will then go through a similar process of assigning means to serve ends and will give up the least valued end should he lose a unit of supply. The ends will simply be ranked in terms of the alternative uses of pairs of horses, instead of single horses.

What if a good cannot be divided into homogeneous units for purposes of action? There are cases where the good must be treated as a whole in human action. Does the law of marginal utility apply in such a case? The law does apply, since we then treat the supply as consisting of one unit. In this case, the marginal unit is equal in size to the total supply possessed or desired by the actor. The value of the marginal unit is equal to the first rank of the ends which the total good could serve. Thus, if an individual must dispose of his whole stock of six horses, or acquire a stock of six horses together, the six horses are treated as one unit. The marginal utility of his supply would then be equal to the first-ranking end that the unit of six horses could supply.

If, as above, we consider the case of additions instead of decreases to stock, we recall that the law derived for this situation was that as the quantity of supply increases, the utility of each additional unit decreases. Yet this additional unit is precisely the marginal unit. Thus, if instead of decreasing the supply from six to five horses, we increase it from five to six, the value of the additional horse is equal to the value of the sixth-ranking end—say, pleasure riding. This is the same marginal unit, with the same utility, as in the case of decreasing the stock from six to five. Thus, the law derived previously was simply another form of the law of marginal utility. The greater the supply of a good, the lower the marginal utility; the smaller the supply, the higher the marginal utility. This is true whether or not the marginal unit is the unit of decrease of stock or the unit of addition to stock, when these are considered by the actor. If a man's supply of a good equals X units, and he is considering the addition of one unit, this is the marginal unit. If his supply is X + 1 units, and he is considering the loss of one unit, this too is his marginal unit, and its value is identical with the former (provided that his ends and their ranking are the same in both cases).

We have dealt with the laws of utility as they apply to each good treated in human action. Now we must indicate the relationship among various goods. It is obvious that more than one good exists in human action. This has already been definitely proven, since it was demonstrated that more than one factor of production, hence more than one good, must exist. Figure 4 below demonstrates the relationship between the various goods in human action. Here the value scales of two goods are considered—X and Y. For each good, the law of marginal utility holds, and the relation between supply and value is revealed in the diagram for each good. For simplicity, let us assume that X is horses and Y cows, and that the value scales representing those held by the individual are as follows (horizontal lines are drawn through each end to demonstrate the relationship in the ranking of the ends of the two goods): End Y-1 is ranked highest (say, cow one); then ends X-1, X-2, and X-3 (horses one, two, and three); Y-2; Y-3; X-4; Y-4; X-5; Y-5; X-6; X-7; Y-6; Y-7.

Figure 4
Figure 4. Value Scales

Now, the man's value scales will reveal his choices involving alternatives of action in regard to these two goods. Suppose that his stock is: 3Y (cows) and 4X (horses). He is faced with the alternative of giving up either one cow or one horse. He will choose the alternative that will deprive him of the least valued end possible. Since the marginal utility of each good is equal to the value of the least important end of which he would be deprived, he compares the marginal utility of X with the marginal utility of Y. In this case, the marginal unit of X has a rank of X-4, and the marginal unit of Y has a rank of Y-3. But the end Y-3 is ranked higher on his value scale than X-4. Hence, the marginal utility of Y is in this case higher than (or greater than) the marginal utility of X. Since he will give up the lowest possible utility, he will give up one unit of X. Thus, presented with a choice of units of goods to give up, he will give up the good with units of lowest marginal utility on his value scale. Suppose another example: that his stock is three horses and two cows. He has the alternative of giving up 1X or 1Y. In this case, the marginal utility of Y is ranked at Y-2, and that of X is ranked at X-3. But X-3 occupies a higher position on his value scale than Y-2, and therefore the marginal utility of Y is at this point lower than the marginal utility of X. He gives up a unit of Y.

The converse occurs if the man must choose between the alternative of increasing his stock by either one unit of X or one unit of Y. Thus, suppose that his stock is four units of X and four units of Y. He must choose between adding one horse or one cow. He then compares the marginal utility of increase, i.e., the value of the most important of the not yet satisfied wants. The marginal utility of X is then ranked at X-5; of Y at Y-5. But X-5 ranks higher than Y-5 on his value scale, and he will therefore choose the former. Thus, faced with the choice of adding units of goods, he will choose the unit of highest marginal utility on his value scale.

Another example: Previously, we saw that the man in a position of (4X, 3Y) would, if faced with the choice of giving up one unit of either X or Y, give up the unit of X, with a lower marginal utility. In other words, he would prefer a position of (3X, 3Y) to (4X, 2Y). Now suppose he is in a position of (3X, 3Y) and faced with the choice of adding one unit of X or one unit of Y. Since the marginal utility of the increased X is greater than that of Y, he will choose to add the unit of X and to arrive at a position of (4X, 3Y) rather than (3X, 4Y). The reader can work out the hypothetical choices for all the possible combinations of the actor's stock.

It is evident that in the act of choosing between giving up or adding units of either X or Y, the actor must have, in effect, placed both goods on a single, unitary value scale. Unless he could place X and Y on one value scale for comparison, he could not have determined that the marginal utility of the fourth unit of X was higher than that of the fourth unit of Y. The very fact of action in choosing between more than one good implies that the units of these goods must have been ranked for comparison on one value scale of the actor. The actor may not and cannot measure differences in utility, but he must be engaged in ranking all the goods considered on one value scale. Thus, we should actually consider the ends served by the two means as ranked on one value scale as follows:

Ends (Ranked)
1 — Y-1
2 — X-1
3 — X-2
4 — X-3
5 — Y-2
6 — Y-3
7 — X-4
8 — Y-4
9 — X-5
10 — Y-5
11 — X-6
12 — X-7
13 — Y-6
14 — Y-7

These principles permit of being extended from two to any number of goods. Regardless of the number of goods, any man will always have a certain combination of units of them in his stock. He may be faced with the choice of giving up one unit of any good that he might choose. By ranking the various goods and the ends served by the relevant units, the actor will give up the unit of that good of which the marginal utility to him is the lowest. Similarly, with any given combination of goods in his stock, and faced with the choice of adding one unit of any of the goods available, the actor will choose that good whose marginal utility of increase will be highest. In other words, all the goods are ranked on one value scale in accordance with the ends they serve.

If the actor has no units of some goods in his possession, this does not affect the principle. Thus, if he has no units of X or Y in his possession, and he must choose between adding a unit of X or one unit of Y, he will choose the marginal unit of greatest utility, in this case, Y. The principle is easily extended to the case of n goods.

It must be reiterated here that value scales do not exist in a void apart from the concrete choices of action. Thus, if the actor has a stock of (3X, 4Y, 2Z, etc.), his choices for adding and subtracting from stock take place in this region, and there is no need for him to formulate hypothetical value scales to determine what his choices would have been if his stock were (6X, 8Y, 5Z, etc.). No one can predict with certainty the course of his choices except that they will follow the law of marginal utility, which was deduced from the axiom of action.

The solution of the value paradox mentioned above is now fully clear. If a man prefers one ounce of platinum to five loaves of bread, he is choosing between units of the two goods based on the supply available. On the basis of the available supply of platinum and of bread, the marginal utility of a unit of platinum is greater than the marginal utility of a unit of bread.24

6. Factors of Production: The Law of Returns

We have concluded that the value of each unit of any good is equal to its marginal utility at any point in time, and that this value is determined by the relation between the actor's scale of wants and the stock of goods available. We know that there are two types of goods: consumers' goods, which directly serve human wants, and producers' goods, which aid in the process of production eventually to produce consumers' goods. It is clear that the utility of a consumers' good is the end directly served. The utility of a producers' good is its contribution in producing consumers' goods. With value imputed backward from ends to consumers' goods through the various orders of producers' goods, the utility of any producers' good is its contribution to its product—the lower-stage producers' good or the consumers' good.

As has been discussed above, the very fact of the necessity of producing consumers' goods implies a scarcity of factors of production. If factors of production at each stage were not scarce, then there would be unlimited quantities available of factors of the next lower stage. Similarly, it was concluded that at each stage of production, the product must be produced by more than one scarce higher-order factor of production. If only one factor were necessary for the process, then the process itself would not be necessary, and consumers' goods would be available in unlimited abundance. Thus, at each stage of production, the produced goods must have been produced with the aid of more than one factor. These factors co-operate in the production process and are termed complementary factors.

Factors of production are available as units of a homogeneous supply, just as are consumers' goods. On what principles will an actor evaluate a unit of a factor of production? He will evaluate a unit of supply on the basis of the least importantly valued product which he would have to forgo were he deprived of the unit factor. In other words, he will evaluate each unit of a factor as equal to the satisfactions provided by its marginal unit—in this case, the utility of its marginal product. The marginal product is the product forgone by a loss of the marginal unit, and its value is determined either by its marginal product in the next stage of production, or, if it is a consumers' good, by the utility of the end it satisfies. Thus, the value assigned to a unit of a factor of production is equal to the value of its marginal product, or its marginal productivity.

Since man wishes to satisfy as many of his ends as possible, and in the shortest possible time (see above), it follows that he will strive for the maximum product from given units of factors at each stage of production. As long as the goods are composed of homogeneous units, their quantity can be measured in terms of these units, and the actor can know when they are in greater or lesser supply. Thus, whereas value and utility cannot be measured or subject to addition, subtraction, etc., quantities of homogeneous units of a supply can be measured. A man knows how many horses or cows he has, and he knows that four horses are twice the quantity of two horses.

Assume that a product P (which can be a producers' good or a consumers' good) is produced by three complementary factors, X, Y, and Z. These are all higher-order producers' goods. Since supplies of goods are quantitatively definable, and since in nature quantitative causes lead to quantitatively observable effects, we are always in a position to say that: a quantities of X, combined with b quantities of Y, and c quantities of Z, lead to p quantities of the product P.

Now let us assume that we hold the quantitative amounts b and c unchanged. The amounts a and therefore p are free to vary. The value of a yielding the maximum p/a, i.e., the maximum average return of product to the factor, is called the optimum amount of X. The law of returns states that with the quantity of complementary factors held constant, there always exists some optimum amount of the varying factor. As the amount of the varying factor decreases or increases from the optimum, p/a, the average unit product declines. The quantitative extent of that decline depends on the concrete conditions of each case. As the supply of the varying factor increases, just below this optimum, the average return of product to the varying factor is increasing; after the optimum it is decreasing. These may be called states of increasing returns and decreasing returns to the factor, with the maximum return at the optimum point.

The law that such an optimum must exist can be proved by contemplating the implications of the contrary. If there were no optimum, the average product would increase indefinitely as the quantity of the factor X increased. (It could not increase indefinitely as the quantity decreases, since the product will be zero when the quantity of the factor is zero.) But if p/a can always be increased merely by increasing a, this means that any desired quantity of P could be secured by merely increasing the supply of X. This would mean that the proportionate supply of factors Y and Z can be ever so small; any decrease in their supply can always be compensated to increase production by increasing the supply of X. This would signify that factor X is perfectly substitutable for factors Y and Z and that the scarcity of the latter factors would not be a matter of concern to the actor so long as factor X was available in abundance. But a lack of concern for their scarcity means that Y and Z would no longer be scarce factors. Only one scarce factor, X, would remain. But we have seen that there must be more than one factor at each stage of production. Accordingly, the very existence of various factors of production implies that the average return of product to each factor must have some maximum, or optimum, value.

In some cases, the optimum amount of a factor may be the only amount that can effectively co-operate in the production process. Thus, by a known chemical formula, it may require precisely two parts of hydrogen and one part of oxygen to produce one unit of water. If the supply of oxygen is fixed at one unit, then any supply of hydrogen under two parts will produce no product at all, and all parts beyond two of hydrogen will be quite useless. Not only will the combination of two hydrogen and one oxygen be the optimum combination, but it will be the only amount of hydrogen that will be at all useful in the production process.

The relationship between average product and marginal product to a varying factor may be seen in the hypothetical example illustrated in Table 1. Here is a hypothetical picture of the returns to a varying factor, with other factors fixed. The average unit product increases until it reaches a peak of eight at five units of X. This is the optimum point for the varying factor. The marginal product is the increase in total product provided by the marginal unit. At any given supply of units of factor X, a loss of one unit will entail a loss of total product equal to the marginal product. Thus, if the supply of X is increased from three units to four units, total product is increased from 18 to 30 units, and this increase is the marginal product of X with a supply of four units. Similarly, if the supply is cut from four units to three units, the total product must be cut from 30 to 18 units, and thus the marginal product is 12.

Table 1

b units

a units

p units


30 0 0...
31 4 4 4
3210 5 6
3318 6 8
34307.5 12
3540 8 10
36457.5 5
3749 7 4

It is evident that the amount of X that will yield the optimum of average product is not necessarily the amount that maximizes the marginal product of the factor. Often the marginal product reaches its peak before the average product. The relationship that always holds mathematically between the average and the marginal product of a factor is that as the average product increases (increasing returns), the marginal product is greater than the average product. Conversely, as the average product declines (diminishing returns), the marginal product is less than the average product.25

It follows that when the average product is at a maximum, it equals the marginal product.

It is clear that, with one varying factor, it is easy for the actor to set the proportion of factors to yield the optimum return for the factor. But how can the actor set an optimum combination of factors if all of them can be varied in their supply? If one combination of quantities of X, Y, and Z yields an optimum return for X, and another combination yields an optimum return for Y, etc., how is the actor to determine which combination to choose? Since he cannot quantitatively compare units of X with units of Y or Z, how can he determine the optimum proportion of factors? This is a fundamental problem for human action, and its methods of solution will be treated in subsequent chapters.

7. Factors of Production: Convertibility and Valuation

Factors of production are valued in accordance with their anticipated contribution in the eventual production of consumers' goods. Factors, however, differ in the degree of their specifity, i.e., the variety of consumers' goods in the production of which they can be of service. Certain goods are completely specific—are useful in producing only one consumers' good. Thus, when, in past ages, extracts from the mandrake weed were considered useful in healing ills, the mandrake weed was a completely specific factor of production—it was useful purely for this purpose. When the ideas of people changed, and the mandrake was considered worthless, the weed lost its value completely. Other producers' goods may be relatively nonspecific and capable of being used in a wide variety of employments. They could never be perfectly nonspecific—equally useful in all production of consumers' goods—for in that case they would be general conditions of welfare available in unlimited abundance for all purposes. There would be no need to economize them. Scarce factors, however, including the relatively nonspecific ones, must be employed in their most urgent uses. Just as a supply of consumers' goods will go first toward satisfying the most urgent wants, then to the next most urgent wants, etc., so a supply of factors will be allocated by actors first to the most urgent uses in producing consumers' goods, then to the next most urgent uses, etc. The loss of a unit of a supply of a factor will entail the loss of the least urgent of the presently satisfied uses.

The less specific a factor is, the more convertible it is from one use to another. The mandrake weed lost its value because it could not be converted to other uses. Factors such as iron or wood, however, are convertible into a wide variety of uses. If one type of consumers' good falls into disuse, iron output can be shifted from that to another line of production. On the other hand, once the iron ore has been transformed into a machine, it becomes less easily convertible and often completely specific to the product. When factors lose a large part of their value as a result of a decline in the value of the consumers' good, they will, if possible, be converted to another use of greater value. If, despite the decline in the value of the product, there is no better use to which the factor can be converted, it will stay in that line of product or cease being used altogether if the consumers' good no longer has value.

For example, suppose that cigars suddenly lose their value as consumers' goods; they are no longer desired. Those cigar machines which are not usable in any other capacity will become, valueless. Tobacco leaves, however, will lose some of their value, but may be convertible to uses such as cigarette production with little loss of value. (A loss of all desire for tobacco, however, will result in a far wider loss in the value of the factors, although part of the land may be salvaged by shifting from tobacco to the production of cotton.)

Suppose, on the other hand, that some time after cigars lose their value this commodity returns to public favor and regains its former value. The cigar machines, which had been rendered valueless, now recoup their great loss in value. On the other hand, the tobacco leaves, land, etc., which had shifted from cigars to other uses will reshift into the production of cigars. These factors will gain in value, but their gain, as was their previous loss, will be less than the gain of the completely specific factor. These are examples of a general law that a change in the value of the product causes a greater change in the value of the specific factors than in that of the relatively nonspecific factors.

To further illustrate the relation between convertibility and valuation, let us assume that complementary factors 10X, 5Y, and 8Z produce a supply of 20P. First, suppose that each of these factors is completely specific and that none of the supply of the factors can be replaced by other units. Then, if the supply of one of the factors is lost (say 10X), the entire product is lost, and the other factors become valueless. In that case, the supply of that factor which must be given up or lost equals in value the value of the entire product—20P, while the other factors have a zero value. An example of production with purely specific factors is a pair of shoes; the prospect of a loss of one shoe is valued at the value of the entire pair, while the other shoe becomes valueless in case of a loss. Thus, jointly, factors 10X, 5Y, and 8Z produce a product that is valued, say, as rank 11 on the actor's value scale. Lose the supply of one of the factors, and the other complementary factors become completely valueless.

Now, let us assume, secondly, that each of the factors is nonspecific: that 10X can be used in another line of production that will yield a product, say, ranked 21st on the value scale; that 5Y in another use will yield a product ranked 15th on the actor's value scale; and that 8Z can be used to yield a product ranked 30th. In that case, the loss of 10X would mean that instead of satisfying a want of rank 11, the units of Y and Z would be shifted to their next most valuable use, and wants ranked 15th and 30th would be satisfied instead. We know that the actor preferred the satisfaction of a want ranked 11th to the satisfaction of wants ranked 15th and 30th; otherwise the factors would not have been engaged in producing P in the first place. But now the loss of value is far from total, since the other factors can still yield a return in other uses.

Convertible factors will be allocated among different lines of production according to the same principles as consumers' goods are allocated among the ends they can serve. Each unit of supply will be allocated to satisfy the most urgent of the not yet satisfied wants, i.e., where the value of its marginal product is the highest. A loss of a unit of the factor will deprive the actor of only the least important of the presently satisfied uses, i.e., that use in which the value of the marginal product is the lowest. This choice is analogous to that involved in previous examples comparing the marginal utility of one good with the marginal utility of another. This lowest-ranked marginal product may be considered the value of the marginal product of any unit of the factor, with all uses taken into account. Thus, in the above case, suppose that X is a convertible factor in a myriad of different uses. If one unit of X has a marginal product of say, 3P, a marginal product in another use of 2Q, 5R, etc., the actor ranks the values of these marginal products of X on his value scale. Suppose that he ranks them in this order: 4S, 3P, 2Q, 5R. In that case, suppose he is faced with the loss of one unit of X. He will give up the use of a unit of X in production of R, where the marginal product is ranked lowest. Even if the loss takes place in the production of P, he will not give up 3P, but shift a unit of X from the less valuable use R and give up 5R. Thus, just as the actor gave up the use of a horse in pleasure riding and not in wagon-pulling by shifting from the former to the latter use, so the actor who (for example) loses a cord of wood intended for building a house will give up a cord intended for a service less valuable to him—say, building a sled. Thus, the value of the marginal product of a unit of a factor will be equal to its value in its marginal use, i.e., that use served by the stock of the factor whose marginal product is ranked lowest on his value scale.

We now can see further why, in cases where products are made with specific and convertible factors, the general law holds that the value of convertible factors changes less than that of specific factors in response to a change in the value of P or in the conditions of its production. The value of a unit of a convertible factor is set, not by the conditions of its employment in one type of product, but by the value of its marginal product when all its uses are taken into consideration. Since a specific factor is usable in only one line of production, its unit value is set as equal to the value of the marginal product in that line of production alone. Hence, in the process of valuation, the specific factors are far more responsive to conditions in any given process of production than are the nonspecific factors.26

As with the problem of optimum proportions, the process of value imputation from consumers' good to factors raises a great many problems which will be discussed in later chapters. Since one product cannot be measured against other products, and units of different factors cannot be compared with one another, how can value be imputed when, as in a modern economy, the structure of production is very complex, with myriads of products and with convertible and inconvertible factors? It will be seen that value imputation is easy for isolated Crusoe-type actors, but that special conditions are needed to enable the value-imputing process, as well as the factor-allocating process, to take place in a complex economy. In particular, the various units of products and factors (not the values, of course) must be made commensurable and comparable.

8. Factors of Production: Labor versus Leisure

Setting aside the problem of allocating production along the most desired lines and of measuring one product against another, it is evident that every man desires to maximize his production of consumers' goods per unit of time. He tries to satisfy as many of his important ends as possible, and at the earliest possible time. But in order to increase the production of his consumers' goods, he must relieve the scarcity of the scarce factors of production; he must increase the available supply of these scarce factors. The nature-given factors are limited by his environment and therefore cannot be increased. This leaves him with the choice of increasing his supply of capital goods or of increasing his expenditure of labor.

It might be asserted that another way of increasing his production is to improve his technical knowledge of how to produce the desired goods—to improve his recipes. A recipe, however, can only set outer limits on his increases in production; the actual increases can be accomplished solely by an increase in the supply of productive factors. Thus, suppose that Robinson Crusoe lands, without equipment, on a desert island. He may be a competent engineer and have full knowledge of the necessary processes involved in constructing a mansion for himself. But without the necessary supply of factors available, this knowledge could not suffice to construct the mansion.

One method, then, by which man may increase his production per unit of time is by increasing his expenditure of labor. In the first place, however, the possibilities for this expansion are strictly limited—by the number of people in existence at any time and by the number of hours in the day. Secondly, it is limited by the ability of each laborer, and this ability tends to vary. And, finally, there is a third limitation on the supply of labor: whether or not the work is directly satisfying in itself, labor always involves the forgoing of leisure, a desirable good.27

We can conceive of a world in which leisure is not desired and labor is merely a useful scarce factor to be economized. In such a world, the total supply of available labor would be equal to the total quantity of labor that men would be capable of expending. Everyone would be eager to work to the maximum of capacity, since increased work would lead to increased production of desired consumers' goods. All time not required for maintaining and preserving the capacity to work would be spent in labor.28 Such a situation could conceivably exist, and an economic analysis could be worked out on that basis. We know from empirical observation, however, that such a situation is very rare for human action. For almost all actors, leisure is a consumers' good, to be weighed in the balance against the prospect of acquiring other consumers' goods, including possible satisfaction from the effort itself. The more a man labors, the less leisure he can enjoy. Increased labor therefore reduces the available supply of leisure and the utility that it affords. Consequently, "people work only when they value the return of labor higher than the decrease in satisfaction brought about by the curtailment of leisure."29 It is possible that included in this "return" of satisfaction yielded by labor may be satisfaction in the labor itself, in the voluntary expenditure of energy on a productive task. When such satisfactions from labor do not exist, then simply the expected value of the product yielded by the effort will be weighed against the disutility involved in giving up leisure—the utility of the leisure forgone. Where labor does provide intrinsic satisfactions, the utility of the product yielded will include the utility provided by the effort itself. As the quantity of effort increases, however, the utility of the satisfactions provided by labor itself declines, and the utility of the successive units of the final product declines as well. Both the marginal utility of the final product and the marginal utility of labor-satisfaction decline with an increase in their quantity, because both goods follow the universal law of marginal utility.

In considering an expenditure of his labor, man not only takes into account which are the most valuable ends it can serve (as he does with all other factors), these ends possibly including the satisfaction derived from productive labor itself, but he also weighs the prospect of abstaining from the expenditure of labor in order to obtain the consumers' good, leisure. Leisure, like any other good, is subject to the law of marginal utility. The first unit of leisure satisfies a most urgently felt desire; the next unit serves a less highly valued end; the third unit a still less highly valued end, etc. The marginal utility of leisure decreases as the supply increases, and this utility is equal to the value of the end that would have to be forgone with the loss of the unit of leisure. But in that case, the marginal disutility of work (in terms of leisure forgone) increases with every increase in the amount of labor performed.

In some cases, labor itself may be positively disagreeable, not only because of the leisure forgone, but also because of specific conditions attached to the particular labor that the actor finds disagreeable. In these cases, the marginal disutility of labor includes both the disutility due to these conditions and the disutility due to leisure forgone. The painful aspects of labor, like the forgoing of leisure, are endured for the sake of the yield of the final product. The addition of the element of disagreeableness in certain types of labor may reinforce and certainly does not counteract the increasing marginal disutility imposed by the cumulation of leisure forgone as the time spent in labor increases.

Thus, for each person and type of labor performed, the balancing of the marginal utility of the product of prospective units of effort as against the marginal disutility of effort will include the satisfaction or dissatisfaction with the work itself, in addition to the evaluation of the final product and of the leisure forgone. The labor itself may provide positive satisfaction, positive pain or dissatisfaction, or it may be neutral. In cases where the labor itself provides positive satisfactions, however, these are intertwined with and cannot be separated from the prospect of obtaining the final product. Deprived of the final product, man will consider his labor senseless and useless, and the labor itself will no longer bring positive satisfactions. Those activities which are engaged in purely for their own sake are not labor but are pure play, consumers' goods in themselves. Play, as a consumers' good, is subject to the law of marginal utility as are all goods, and the time spent in play will be balanced against the utility to be derived from other obtainable goods.30

In the expenditure of any hour of labor, therefore, man weighs the disutility of the labor involved (including the leisure forgone plus any dissatisfaction stemming from the work itself) against the utility of the contribution he will make in that hour to the production of desired goods (including future goods and any pleasure in the work itself), i.e., with the value of his marginal product. In each hour he will expend his effort toward producing that good whose marginal product is highest on his value scale. If he must give up an hour of labor, he will give up a unit of that good whose marginal utility is lowest on his value scale. At each point he will balance the utility of the product on his value scale against the disutility of further work. We know that a man's marginal utility of goods provided by effort will decline as his expenditure of effort increases. On the other hand, with each new expenditure of effort, the marginal disutility of the effort continues to increase. Therefore, a man will expend his labor as long as the marginal utility of the return exceeds the marginal disutility of the labor effort. A man will stop work when the marginal disutility of labor is greater than the marginal utility of the increased goods provided by the effort.31

Then, as his consumption of leisure increases, the marginal utility of leisure will decline, while the marginal utility of the goods forgone increases, until finally the utility of the marginal products forgone becomes greater than the marginal utility of leisure, and the actor will resume labor again.

This analysis of the laws of labor effort has been deduced from the implications of the action axiom and the assumption of leisure as a consumers' good.

9. The Formation of Capital

With the nature-given elements limited by his environment, and his labor restricted both by its available supply and its disutility, there is only one way by which man can increase his production of consumers' goods per unit of time—by increasing the quantity of capital goods. Beginning with unaided labor and nature, he must, to increase his productivity, mix his labor energy with the elements of nature to form capital goods. These goods are not immediately serviceable in satisfying his wants, but must be transformed by further labor into lower-order capital goods, and finally into the desired consumers' goods.

In order to illuminate clearly the nature of capital formation and the position of capital in production, let us start with the hypothetical example of Robinson Crusoe stranded on a desert island. Robinson, on landing, we assume, finds himself without the aid of capital goods of any kind. All that is available is his own labor and the elements given him by nature. It is obvious that without capital he will be able to satisfy only a few wants, of which he will choose the most urgent. Let us say that the only goods available without the aid of capital are berries and leisure. Say that he finds that he can pick 20 edible berries an hour, and, on this basis, works 10 hours in berry-picking and enjoys 14 hours a day of leisure. It is evident that, without the aid of capital, the only goods open to him for consumption are goods with the shortest period of production. Leisure is the one good that is produced almost instantaneously, while berries have a very short production period. Twenty berries have a production period of one hour. Goods with longer periods of production are not available to him unless he acquires capital goods.

There are two ways in which longer processes of production through the use of capital may increase productivity: (1) they may provide a greater production of the same good per unit of time; or (2) they may allow the actor to consume goods that are not available at all with shorter processes of production.

As an example of the first type of increase in productivity, Robinson may decide that if he had the use of a long stick, he could shake many berries off the trees instead of picking them by hand. In that way he might be able to step up his production to 50 berries an hour. How might he go about acquiring the stick? Obviously, he must expend labor in getting the materials, transporting them, shaping them into a stick, etc. Let us say that 10 hours would be necessary for this task. This means that to obtain the stick, Crusoe must forgo 10 hours' production of consumers' goods. He must either sacrifice 10 hours of leisure or 10 hours of berries at 20 per hour (200 berries), or some combination of the two. He must sacrifice, for 10 hours, the enjoyment of consumers' goods, and expend his labor on producing a capital good—the stick—which will be of no immediate use to him. He will be able to begin using the capital good as an indirect aid to future production only after the 10 hours are up. In the meantime, he must forgo the satisfaction of his wants. He must restrict his consumption for 10 hours and transfer his labor for that period from producing immediately satisfying consumers' goods into the production of capital goods, which will prove their usefulness only in the future. The restriction of consumption is called saving, and the transfer of labor and land to the formation of capital goods is called investment.

We see now what is involved in the process of capital formation. The actor must decide whether or not to restrict his consumption and invest in the production of capital goods, by weighing the following factors: Does the utility yielded by the increased productivity of the longer process of production outweigh the sacrifice that I must make of present goods to acquire consumers' goods in the future? We have already seen above the universal fact of time preference—that a man will always prefer obtaining a given satisfaction earlier than later. Here, the actor must balance his desire to acquire more satisfactions per unit of time as against the fact that, to do so, he must give up satisfactions in the present to increase his production in the future. His time preference for present over future accounts for his disutility of waiting, which must be balanced against the utility that will be eventually provided by the capital good and the longer process of production. How he chooses depends on his scale of values. It is possible, for example, that if he thought the stick would provide him with only 30 berries an hour and would take 20 hours to make, he would not make the saving-investment decision. On the other hand, if the stick took five hours to make and could provide him with 100 berries an hour, he might make the decision readily.

If he decides to invest 10 hours in adding to his capital goods, there are many ways in which he might restrict his consumption. As mentioned above, he can restrict any combination of berries or leisure. Setting aside leisure for purposes of simplification, he may decide to take a whole day off at once and produce no berries at all, completing the stick in one day. Or, he may decide to pick berries for eight hours instead of 10, and devote the other two hours a day to making the stick, in which case the completion of the stick will take five days. Which method he will choose depends on the nature of his value scale. In any case, he must restrict his consumption by 10 hours' worth of labor—200 berries. The rate of his restriction will depend on how urgently he wants the increased production, as compared with the urgency with which he desires to maintain his present supply of berries.

Analytically, there is little difference between working on consumers' goods, accumulating a stock of them, and then working full time on the capital good, and working on the capital good and consumer goods simultaneously. Other things being equal, however, it is possible that one of the methods will prove more productive; thus, it may be that the actor can complete the task in less time if he works on it continuously. In that case, he will tend to choose the former method. On the other hand, the berries might tend to spoil if accumulated, and this would lead him to choose the latter route. A balance of the various factors on his value scale will result in his decision.

Let us assume that Robinson has made his decision, and, after five days, begins to use the stick. On the sixth day and thereafter, then, 500 berries a day will begin to pour forth, and he will harvest the fruits of his investment in capital goods.

Crusoe can use his increased productivity to increase his hours of leisure as well as to increase his output of berries. Thus, he might decide to cut his daily labor from 10 hours to eight. His output of berries will then be increased, because of the stick, from 200 to 400 berries per day, while Crusoe is able to increase his hours of leisure from 14 to 16 per day. Obviously, Crusoe can choose to take his increased productivity in various combinations of increased output of the good itself and of increased leisure.32

Even more important than its use in increasing output per unit of time is the function of capital in enabling man to acquire goods which he could not at all obtain otherwise. A very short period of production enables Crusoe to produce leisure and at least some berries, but without the aid of capital he cannot attain any of his other wants at all. To acquire meat he must have a bow and arrows, to acquire fish he must have a pole or net, to acquire shelter he must have logs of wood, or canvas, and an axe to cut the wood. To satisfy any such wants, he must restrict his consumption and invest his labor in the production of capital goods. In other words, he must embark on lengthier processes of production than had been involved in culling berries; he must take time out to produce the capital goods themselves before he can use them to enjoy consumers' goods. In each case, the decisions that he makes in embarking on capital formation will be a result of weighing on his value scale the utility of the expected increased productivity as against the disutility of his time preference for present as compared to future satisfactions.

It is obvious that the factor which holds every man back from investing more and more of his land and labor in capital goods is his time preference for present goods. If man, other things being equal, did not prefer satisfaction in the present to satisfaction in the future, he would never consume; he would invest all his time and labor in increasing the production of future goods. But "never consuming" is an absurdity, since consuming is the end of all production. Therefore, at any given point in time, all men will have invested in all the shorter periods of production to satisfy the most urgently felt wants that their knowledge of recipes allows; any further formation of capital will go into longer processes of production. Other things being equal (i.e., the relative urgency of wants to be satisfied, and the actor's knowledge of recipes), any further investment will be in a longer process of production than is now under way.

Here it is important to realize that "a period of production" does not involve only the amount of time spent on making the actual capital good, but refers to the amount of waiting-time from the start of producing the capital good until the consumers' good is produced. In the case of the stick and the berries, the two times are identical, but this was so only because the stick was a first-order capital good, i.e., it was but one stage removed from the output of consumers' goods. Let us take, for example, a more complex case—the building by Crusoe of an axe in order to chop wood to produce a house for himself. Crusoe must decide whether or not the house he will gain will be worth the consumers' goods forgone in the meantime. Let us say it will take Crusoe 50 hours to produce the axe, and then a further 200 hours, with the help of the axe, to chop and transport wood in order to build a house. The longer process of production which Crusoe must decide upon is now a three-stage one, totaling 250 hours. First, labor and nature produce the axe, a second-order capital good; second, labor, plus the axe, plus nature-given elements, produces logs-of-wood, a first-order capital good; finally, labor and the logs of wood combine to yield the desired consumers' good—a house. The length of the process of production is the entire length of time from the point at which an actor must begin his labor to the point at which the consumers' good is yielded.

Again, it must be observed that, in considering the length of a process of production, the actor is not interested in past history as such. The length of a process of production for an actor is the waiting-time from the point at which his action begins. Thus, if Crusoe were lucky enough to find an axe in good condition left by some previous inhabitant, he would reckon his period of production at 200 hours instead of 250. The axe would be given to him by his environment.

This example illustrates a fundamental truth about capital goods: Capital is a way station along the road to the enjoyment of consumers' goods. He who possesses capital is that much further advanced in time on the road to the desired consumers' good. Crusoe without the axe is 250 hours away from his desired house; Crusoe with the axe is only 200 hours away. If the logs of wood had been piled up ready-made on his arrival, he would be that much closer to his objective; and if the house were there to begin with, he would achieve his desire immediately. He would be further advanced toward his goal without the necessity of further restriction of consumption. Thus, the role of capital is to advance men in time toward their objective in producing consumers' goods. This is true for both the case where new consumers' goods are being produced and the case where more old goods are being produced. Thus, in the previous case, without the stick, Crusoe was 25 hours away from an output of 500 berries; with the stick, he is only 10 hours away. In those cases where capital enables the acquisition of new goods—of goods which could not be obtained otherwise—it is an absolutely indispensable, as well as convenient, way station toward the desired consumers' good.

It is evident that, for any formation of capital, there must be saving—a restriction of the enjoyment of consumers' goods in the present—and the investment of the equivalent resources in the production of capital goods. This enjoyment of consumers' goods—the satisfaction of wants—is called consumption. The saving might come about as a result of an increase in the available supply of consumers' goods, which the actor decides to save in part rather than consume fully. At any rate, consumption must always be less than the amount that could be secured. Thus, if the harvest on the desert island improves, and Crusoe finds that he can pick 240 berries in 10 hours without the aid of a stick, he may now save 40 berries a day for five days, enabling him to invest his labor in a stick, without cutting back his berry consumption from the original 200 berries. Saving involves the restriction of consumption compared to the amount that could be consumed; it does not always involve an actual reduction in the amount consumed over the previous level of consumption.

All capital goods are perishable. Those few products that are not perishable but permanent become, to all intents and purposes, part of the land. Otherwise, all capital goods are perishable, used up during the processes of production. We can therefore say that capital goods, during production, are transformed into their products. With some capital goods, this is physically quite evident. Thus, it is obvious, for example, that when 100 pounds of bread-at-wholesale are combined with other factors to produce 100 pounds of bread at retail, the former factor is immediately and completely transformed into the latter factor. The using up of capital goods is dramatically clear. The whole of the capital good is used up in each production-event. The other capital goods, however, are also used up, but not as suddenly. A truck transporting bread may have a life of 15 years, amounting to, say, 3,000 of such conversions of bread from the wholesale to the retail stage. In this case, we may say that 1/3,000 of the truck is used up each time the production process occurs. Similarly, a mill converting wheat into flour may have a useful life of 20 years, in which case we could say that 1/20 of the mill was used up in each year's production of flour. Each particular capital good has a different useful life and therefore a different rate of being used up, or, as it is called, of depreciation. Capital goods vary in the duration of their serviceableness.

Let us now return to Crusoe and the stick. Let us assume that the stick will have a useful life of 10 days, and is so estimated by Crusoe, after which it wears out, and Crusoe's output reverts to its previous level of 20 berries per hour. He is back where he started.

Crusoe is therefore faced with a choice, after his stick comes into use. His "standard of living" (now, say, at 500 berries a day plus 14 hours of leisure) has improved, and he will not like the prospect of a reduction to 200 when the stick gives out. If he wishes to maintain his standard of living intact, therefore, he must, during the 10 days, work on building another stick, which can be used to replace the old one when it wears out. This act of building another stick involves a further act of saving. In order to invest in a replacement for the stick, he must again save—restrict his consumption as compared to the production that might be available. Thus, he will again have to save 10 hours' worth of labor in berries (or leisure) and devote them to investing in a good that is only indirectly serviceable for future production. Suppose that he does this by shifting one hour a day from his berry production to the labor of producing another stick. By doing so, he restricts his berry consumption, for 10 days, to 450 a day. He has restricted consumption from his maximum, although he is still much better off than in his original, unaided state.

Thus, the capital structure is renewed at the end of the 10 days, by saving and investing in a replacement. After that, Crusoe is again faced with the choice of taking his maximum production of 500 berries per day and finding himself back to a 200-per-day level at the end of 10 more days, or of making a third act of saving in order to provide for replacement of the second stick when it wears out.33

If Crusoe decides not to replace the first or the second stick, and accepts a later drop in output to avoid undergoing present saving, he is consuming capital. In other words, he is electing to consume instead of to save and maintain his capital structure and future rate of output. Consuming his capital enables Crusoe to increase his consumption now from 450 to 500 berries per day, but at some point in the future (here in 10 days), he will be forced to cut his consumption back to 200 berries. It is clear that what has led Crusoe to consume capital is his time preference, which in this case has led him to prefer more present consumption to greater losses in future consumption.

Thus, any actor, at any point in time, has the choice of: (a) adding to his capital structure, (b) maintaining his capital intact, or (c) consuming his capital. Choices (a) and (b) involve acts of saving. The course adopted will depend on the actor's weighing his disutility of waiting, as determined by his time preference, against the utility to be provided in the future by the increase in his intake of consumers' goods.

At this point in the discussion of the wearing out and replacement of capital goods we may observe that a capital good rarely retains its full "powers" to aid in production and then suddenly lose all its serviceability. In the words of Professor Benham, "capital goods do not usually remain in perfect technical condition and then suddenly collapse, like the wonderful ‘one-hoss shay.'"34 Crusoe's berry output, instead of remaining 500 for 10 days and then falling back to 200 on the 11th day, is likely to decline at some rate before the stick becomes completely useless.

Another method of maintaining capital may now prove available. Thus, Crusoe may find that, by spending a little time repairing the stick, breaking off weaker parts, etc., he may be able to prolong its life and maintain his output of berries longer. In short, he may be able to add to his capital structure via [repairs]/c/repairs).

Here again he will balance the added increase in future output of consumers' goods against the present loss in consumers' goods which he must endure by expending his labor on repairs. Making repairs therefore requires an independent act of saving and a choice to save. It is entirely possible, for example, that Crusoe will decide to replace the stick, and spend his labor on that purpose, but will not consider it worthwhile to repair it. Which course he decides to take depends on his valuation of the various alternative outputs and his rate of time preference.

An actor's decision on what objects to invest in will depend on the expected utility of the forthcoming consumers' good, its durability, and the length of his waiting-time. Thus, he may first invest in a stick and then decide it would not be worthwhile to invest in a second stick; instead, it would be better to begin building the axe in order to obtain a house. Or he may first make a bow and arrows with which to hunt game, and after that begin working on a house. Since the marginal utility of the stock of a good declines as the stock increases, the more he has of the stock of one consumers' good, the more likely he will be to expend his new savings on a different consumers' good, since the second good will now have a higher marginal utility of product to his invested labor and waiting, and the marginal utility of the first will be lower.

If two consumers' goods have the same expected marginal utility in daily serviceability and have the same period of waiting time, but one is more durable than the other, then the actor will choose to invest in production of the former. On the other hand, if the total serviceableness of two expected consumers' goods is the same, and their length of period of production is the same, the less durable good will be invested in, since its total satisfactions arrive earlier than the other. Also, in choosing between investing in one or the other of two consumers' goods, the actor will, other things being equal, choose that good with the shorter period of production, as has been discussed above.

Any actor will continue to save and invest his resources in various expected future consumers' goods as long as the utility, considered in the present, of the marginal product of each unit saved and invested is greater than the utility of present consumers' goods which he could obtain by not performing that saving. The latter utility—of present consumers' goods forgone—is the "disutility of waiting." Once the latter becomes greater than the utility of obtaining more goods in the future through saving, the actor will cease to save.

Allowing for the relative urgency of wants, man, as has been demonstrated above, tends to invest first in those consumers' goods with the shortest processes of production. Therefore, any given saving will be invested either in maintaining the present capital structure or in adding to it capital in more and more remote stages of production, i.e., in longer processes of production. Thus, any new saving (beyond maintaining the structure) will tend to lengthen production processes and invest in higher and higher orders of capital goods.

In a modern economy, the capital structure contains goods of almost infinite remoteness from the eventual consumers' goods. We saw above some of the stages involved in the production of a comparatively very simple good like a ham sandwich. The laborer in an iron mine is far removed indeed from the ham sandwich in Jones' armchair.

It is evident that the problems of measurement that arose in previous sections would be likely to pose a grave difficulty in saving and investing. How do actors know when their capital structure is being added to or consumed, when the types of capital goods and consumers' goods are numerous? Obviously, Crusoe knows when he has more or fewer berries, but how can a modern complex economy, with innumerable capital goods and consumers' goods, make such decisions? The answer to this problem, which also rests on the commensurability of different goods, will be discussed in later chapters.

In observing the increased output made possible by the use of capital goods, one may very easily come to attribute some sort of independent productive power to capital and to say that three types of productive forces enter into the production of consumers' goods: labor, nature, and capital. It would be easy to draw this conclusion, but completely fallacious. Capital goods have no independent productive power of their own; in the last analysis they are completely reducible to labor and land, which produced them, and time. Capital goods are "stored-up" labor, land, and time; they are intermediate way stations on the road to the eventual attainment of the consumers' goods into which they are transformed. At every step of the way, they must be worked on by labor, in conjunction with nature, in order to continue the process of production. Capital is not an independent productive factor like the other two. An excellent illustration of this truth has been provided by Böhm-Bawerk:

The following analogy will make it perfectly clear. A man throws a stone at another man and kills him. Has the stone killed the man? If the question is put without laying any special emphasis it may be answered without hesitation in the affirmative. But how if the murderer, on his trial, were to defend himself by saying that it was not he but the stone that had killed the man? Taking the words in this sense, should we still say that the stone had killed the man, and acquit the murderer? Now it is with an emphasis like this that economists inquire as to the independent productivity of capital. ... We are not asking about dependent intermediate causes, but about ultimate independent elements. The question is not whether capital plays a part in the bringing about of a productive result—such as the stone does in the killing of the man—but whether, granted the productive result, some part of it is due to capital so entirely and peculiarly that it simply cannot be put to the credit of the two other recognized elementary factors, nature and labor.

Böhm-Bawerk replies in the negative, pointing out that capital goods are purely way stations in the process of production, worked on at every possible stage by the forces of labor and land:

If, today, by allying my labor with natural powers, I make bricks out of clay, and tomorrow, by allying my labor with natural gifts, I obtain lime, and the day after that make mortar and so construct a wall, can it be said of any part of the wall that I and the natural powers have not made it? Again, before a lengthy piece of work, such as the building of a house, is quite finished, it naturally must be at one time a fourth finished, then a half finished, then three-quarters finished. What now would be said if one were to describe these inevitable stages of the work as independent requisites of house-building, and maintain that, for the building of a house, we require, besides building materials and labor, a quarter-finished house, a half-finished house, a three-quarters finished house? In form perhaps it is less striking, but in effect it is not a whit more correct, to elevate those intermediate steps in the progress of the work, which outwardly take the shape of capital, into an independent agent of production by the side of nature and labor.35

And this holds true regardless of how many stages are involved or how remote the capital good is from the ultimate consumers' good.

Since investment in capital goods involves looking toward the future, one of the risks that an actor must always cope with is the uncertainty of future conditions. Producing consumers' goods directly involves a very short period of production, so that the uncertainty incurred is not nearly as great as the uncertainty of longer processes of production, an uncertainty that becomes more and more important as the period of production lengthens.36

Suppose that Crusoe, while deciding on his investment in the stick, believes that there is a good possibility of his finding a grove where berries are in abundance, giving him an output of 50 or more berries per hour without the aid of a stick, and also where the berries would be so close as to render the stick useless. In that case, the more likely he thinks are the chances of finding the grove, the less likely he is to make the decision to invest in the stick, which would then be of no help to him. The greater the doubt about the usefulness the stick will have after it is ready, the less likelihood of investing in it, and the more likelihood of either investing in another good or of consuming instead of saving. We can consider that there is a sort of "uncertainty discount" on the expected future utility of the investment that may be so large as to induce the actor not to make the investment. The uncertainty factor in this case works with the time-preference factor to the disadvantage of the investment, against which the actor balances the expected utility of future output.

On the other hand, uncertainty may work as an added spur to making the investment. Thus, suppose that Crusoe believes that a blight may strike the berries very shortly and that if this happens, his unaided berry-output would dangerously decline. If the blight struck, Crusoe would be in great need of the stick to even maintain his output at the present low level. Thus, the possibility that the stick may be of even greater use to him than he anticipates will add to the expected utility of his investment, and the greater the chance of this possibility in Crusoe's view, the more likely he will be to invest in the stick. Thus, the uncertainty factor may work in either direction, depending on the specific situation involved.

We may explain the entire act of deciding whether or not to perform an act of capital formation as the balancing of relative utilities, "discounted" by the actor's rate of time preference and also by the uncertainty factor. Thus, first let us assume, for purposes of simplification, that Crusoe, in making the stick, forgoes 10 hours' worth of present goods, i.e., 200 berries, and has acquired 1,500 berries three days later as a result of the investment decision. If the 1,500 berries had been immediately available, there would be no doubt that he would have given up 200 berries to acquire 1,500. Thus, 1,500 berries in the present might have a rank of four on his value scale, while 200 berries have a rank of 11:

┌─   4   1,500 berries in the present
└─ 11   200 berries in the present

Now, how will Crusoe decide between 200 berries in the present and 1,500 berries three days from now? Since all choices have to be made on one value scale, Crusoe must grade the utility of 1,500 berries three days from now as against the utility of 200 berries now. If the former is greater (higher on his value scale) he will make the decision to save and invest in the stick. If the latter is greater, and his 200 berries forgone have a greater value than the expectation of 1,500 berries three days from now, then his time preference has conquered the increased utility of stock, and he will not make the saving-investment decision. Thus, the actor's value scale may be:

(a)┌─   4   1,500 berries in the present
├─ 11   200 berries now
└─ 12   1,500 berries three days from now

or it may be:

(b)┌─   4   1,500 berries in the present
├─   9   1,500 berries three days from now
└─ 11   200 berries now

In case (b) he will make the decision to invest; in case (a) he will not. We can say that the value of 1,500 berries three days from now is the present value of the future good. The expected future good is discounted by the actor according to his rate of time preference. The present value of his expected future good is compared to the present value of the present good on the actor's value scale, and the decision to save and invest is made accordingly. It is clear that the higher the rate of discount, the lower the present value of the future good will be, and the greater the likelihood of abstaining from the investment. On the other hand, the lower the rate of discount, the higher the present value of future goods will be on the actor's value scale, and the greater the likelihood of its being greater than the value of present goods forgone, and hence of his making the investment.

Thus, the investment decision will be determined by which is greater: the present value of the future good or the present value of present goods forgone. The present value of the future good, in turn, is determined by the value that the future good would have if immediately present (say, the "expected future value of the future good"); and by the rate of time preference. The greater the former, the greater will be the present value of the future good; the greater the latter (the rate of discount of future compared to present goods), the lower the present value.

At any point in time, an actor has a range of investment decisions open to him of varying potential utilities for the products that will be provided.37 He also has a certain rate of time preference by which he will discount these expected future utilities to their present value. How much he will save and invest in any period will be determined by comparing these present values with the value of the consumers' goods forgone in making the investment decision. As he makes one investment decision after another, he will choose to allocate his resources first to investments of highest present value, then to those of next highest, etc. As he continues investing (at any given time), the present value of the future utilities will decline. On the other hand, since he is giving up a larger and larger supply of consumers' goods in the present, the utility of the consumers' goods that he forgoes (leisure and others) will increase—on the basis of the law of marginal utility. He will cease saving and investing at the point at which the value of goods forgone exceeds the present value of the future utilities to be derived. This will determine an actor's rate of saving and investing at any time.

It is evident that the problem again arises: How can actors decide and compare time-preference rates for innumerable possible goods and in a complex, modern economy? And here too, the answer for a complex economy lies in establishing commensurability among all the various commodities, present and future, as will be discussed in later chapters.

Now, the uncertainty factors enter into the actor's decision in one way or the other. The delicate procedure of weighing all the various factors in the situation is a complex process that takes place in the mind of every actor according to his understanding of the situation. It is a decision depending purely on the individual judgment, the subjective estimates, of each actor. The "best" decision cannot be exactly, or quantitatively, decided upon in advance by objective methods. This process of forecasting the future conditions that will occur during the course of his action is one that must be engaged in by every actor. This necessity of guessing the course of the relevant conditions and their possible change during the forthcoming action is called the act of entrepreneurship. Thus, to some extent at least, every man is an entrepreneur. Every actor makes his estimate of the uncertainty situation with regard to his forthcoming action.

The concepts of success or failure in entrepreneurship are thus deducible from the existence of action. The relatively successful entrepreneur is the one who has guessed correctly the changes in conditions to take place during the action, and has invested accordingly. He is the Crusoe who has decided not to build the stick because his judgment tells him that he will soon find a new grove of berries, which he then finds. On the other hand, the relatively unsuccessful entrepreneur is the one who has been badly mistaken in his forecast of the relevant changes in conditions taking place during the course of his action. He is the Crusoe who has failed to provide himself with a stick against the blight. The successful actor, the successful entrepreneur, makes correct estimates; the unsuccessful entrepreneur is the one who makes erroneous estimates.

Suppose now that an investment has already been made, and capital goods have already been built with a goal in view, when changing conditions reveal that an error has been made. The actor is then faced with the problem of determining what to do with the capital good. The answer depends on the convertibility of the capital good. If the good becomes worthless in the use for which it is intended, the actor, though having made an error in investing in it in the first place, now has it on his hands and has to make the best of it. If there is another use to which the actor can conveniently transfer the capital good, he will do so. Thus, if Crusoe finds that a new grove has rendered his stick useless for berry-picking, he may use it as a walking stick. He would not have invested in it originally if he had known it would be useless for berry-picking, but now that he has it, he turns it to its most urgent available use. On the other hand, he may feel that it is hardly worthwhile to spend time replacing the stick, now that it is usable only for walking purposes. Or, after working 50 hours and building an axe, he may find a house left by some previous inhabitant. The axe, however, may be convertible to use in something just a bit lower in value—say, building a bow and arrows for hunting or building a boat for fishing. The axe may be so valuable in these uses that Crusoe will still work to replace and maintain it in operation.

It is clear that the accumulated stock of capital goods (or, for that matter, durable consumers' goods) imposes a conservative force on present-day action. The actor in the present is influenced by his (or someone else's) actions in the past, even if the latter were to some extent in error. Thus, Crusoe might find an axe already available, built by a previous inhabitant. It might not be the sort of axe that Crusoe would consider the best available. However, he may decide, if it is a serviceable axe, to use it as a capital good and to wait until it wears out before replacing it with one of his choosing. On the other hand, he may feel that it is so blunt as to be of little use, and begin immediately to work on an axe of his own.

The conservatism of the past exercises a similar influence on the question of location, another aspect of the same problem. Thus, Crusoe may already have built his house, cleared a field, etc., in one portion of the island. Then, one day, in walking around the island, he might find a section at the other end with far greater advantages in fishing, fruits, etc. If he had not invested in any capital goods or durable consumers' goods, he would immediately shift his location to this more abundant area. However, he has already invested in certain capital goods: some, such as the axe, are easily convertible to the new location; others, such as the cleared field and the house, cannot be converted in their location. Therefore, he has to decide on his value scale between the advantages and disadvantages of moving: the more abundant fish and fruits versus the necessity of working to build a new house, make a new clearing, etc. He might decide, for example, to stay in the house and clearing until they have worn down to a certain point, without working on a replacement, and then shift to the new location.

If an actor decides to abandon nonconvertible capital, such as the stick or the cleared field, in favor of producing other capital and consumers' goods, he is not, as some may think, wasting his resources by allowing the emergence of "unused capacity" of his resources. When Crusoe abandons his clearing or stick or house (which may be considered in this connection as equivalent to capital), he is abandoning nonconvertible capital for the sake of using his labor in combination with natural elements or capital goods that he believes will yield him a greater utility. Similarly, if he refuses to go deep into a jungle for berries, he is not "wasting" his nonconvertible supply of land-and-berries, for he judges doing so of far less utility than other uses that he could make of his labor and time. The existence of a capital good not in use reveals an error made by this or by some previous actor in the past, but indicates that the actor expects to acquire a greater utility from other uses of his labor than he could obtain by continuing the capital good in its originally intended use or by converting it to some other use.38

This discussion provides the clue to an analysis of how actors will employ the original nature-given factors of production. In many cases, actors have their choice among the varying elements provided by nature. Thus, suppose that Crusoe, in his explorations of the island, finds that among the possible locations where he can settle, some are abundant in their output of berries (setting aside their production of other consumers' goods), some less so, and some useless and barren. Clearly, other considerations being equal, he will settle on the most fertile—the "best" land—and employ this factor as far as is determined by the utility of its product, the possibility of investing in useful capital goods on the land, the value he places on leisure, etc. The poorer areas of land will remain unused. As stated above, this development is to be expected; there is no reason to be surprised at such evidence of "unused resources." On the other hand, if the better areas are used up, then Crusoe will go on to utilize some of the next best areas, until the utility of the supply produced fails to exceed the utility of his leisure forgone. ("Next best" includes all the relevant factors, such as productivity, convenient access to the best land, etc.)

Areas of potential use, but which the actor chooses not to bring into use because it would not "pay" in terms of utilities forgone, are called submarginal areas. They are not objects of action at the moment, but the actor has them in mind for possible future use.

On the other hand, Crusoe's island may be so small or so barren that all his available useful land or water areas must be pressed into use. Thus, Crusoe might have to explore the whole island for his daily output of 200 berries. In that case, if his resources are such that he must always employ all the possibly useful nature-given factors, it is obvious that the actor is pretty close to the bare survival level.

In those cases where nature-given factors are worked on, "improved," and maintained by human labor, these are, in effect, thereby changed into capital goods. Thus, land that has been cleared, tilled, plowed, etc., by human labor has become a capital good. This land is a produced good, and not an originally given good. Decisions concerning whether and how much to improve the soil, or whether to maintain it or extract the maximum present consumers' goods at the expense of future losses ("erosion"), are on exactly the same footing as all capital-formation decisions. They depend on a comparison of the expected utility of future production as against the utility of present consumers' goods forgone.

It is clear that capital formation and the concomitant lengthening of the period of production prolong the period of provision of the actor. Capital formation lengthens the period in the future for which he is providing for the satisfaction of wants. Action involves the anticipation of wants that will be felt in the future, an estimate of their relative urgency, and the setting about to satisfy them. The more capital men invest, the longer their period of provision will tend to be. Goods being directly and presently consumed are present goods. A future good is the present expectation of enjoying a consumers' good at some point in the future. A future good may be a claim on future consumers' goods, or it may be a capital good, which will be transformed into a consumers' good in the future. Since a capital good is a way station (and nature-given factors are original stations) on the route to consumers' goods, capital goods and nature-given factors are both future goods.

Similarly, the period of provision can be prolonged by lengthening the duration of serviceableness of the consumers' goods being produced. A house has a longer durability than a crop of berries, for example, and Crusoe's investment in a house considerably lengthens his period of provision. A durable consumers' good is consumed only partially from day to day, so that each day's consumption is that of a present good, while the stock of the remainder is a future good. Thus, if a house is built and will last 3,000 days, one day's use will consume 1/3,000 of it, while the remainder will be consumed in the future. One three-thousandth of the house is a present good, while the remaining part is a future good.39

It may be added that another method of lengthening the period of production is the simple accumulation of stocks of consumers' goods to be consumed in the future instead of the present. For example, Crusoe might save a stock of 100 berries to be consumed a few days or a week later. This is often called plain saving, as distinguished from capitalist saving, in which saving enters into the process of capital formation.40 We shall see, however, that there is no essential difference between the two types of saving and that plain saving is also capitalist saving in that it too results in capital formation. We must keep in mind the vital fact that the concept of a "good" refers to a thing the units of which the actor believes afford equal serviceability. It does not refer to the physical or chemical characteristics of the good. We remember our critique of the popular fallacious objection to the universal fact of time preference—that, in any given winter, ice the next summer is preferred to ice now.41 This was not a case of preferring the consumption of the same good in the future to its consumption in the present. If Crusoe has a stock of ice in the winter and decides to "save" some until next summer, this means that "ice-in-the-summer" is a different good, with a different intensity of satisfaction, from "ice-in-the-winter," despite their physical similarities. The case of berries or of any other good is similar. If Crusoe decides to postpone consuming a portion of his stock of berries, this must mean that this portion will have a greater intensity of satisfaction if consumed later than now—enough greater, in fact, to overcome his time preference for the present. The reasons for such difference may be numerous, involving anticipated tastes and conditions of supply on that future date. At any rate, "berries-eaten-a-week-from-now" become a more highly valued good than "berries-eaten-now," and the number of berries that will be shifted from today's to next week's consumption will be determined by the behavior of the diminishing marginal utility of next week's berries (as the supply increases), the increasing marginal utility of today's berries (as the supply decreases), and the rate of time preference. Suppose that as a resultant of these factors, Crusoe decides to shift 100 berries for this purpose. In that case, these 100 berries are removed from the category of consumers' goods and shifted to that of capital goods. These are the sort of capital goods, however, which, like wine, need only maturing time to be transferred into consumers' goods, without the expenditure of labor (except the possible extra labor of storing and unstoring the berries).

It is clear, therefore, that the accumulation of a stock of consumers' goods is also saving that goes into capital formation.42 The saved goods immediately become capital goods, which later mature into more highly valued consumers' goods. There is no essential difference between the two types of saving.

10. Action as an Exchange

We have stated that all action involves an exchange—a giving up of a state of affairs for what the actor expects will be a more satisfactory state.43 We may now elaborate on the implications of this truth, in the light of the numerous examples that have been given in this chapter. Every aspect of action has involved a choice among alternatives—a giving up of some goods for the sake of acquiring others. Wherever the choice occurred—whether among uses of durable consumers' goods, or of capital goods; saving versus consumption; labor versus leisure; etc.—such choices among alternatives, such renouncing of one thing in favor of another, were always present. In each case, the actor adopted the course that he believed would afford him the highest utility on his value scale; and in each case, the actor gave up what he believed would turn out to be a lesser utility.

Before analyzing the range of alternative choices further, it is necessary to emphasize man must always act. Since he is always in a position to improve his lot, even "doing nothing" is a form of acting. "Doing nothing"—or spending all of his time in leisure—is a choice that will affect his supply of consumers' goods. Therefore, man must always be engaged in choosing and in action.

Since man is always acting, he must always be engaged in trying to attain the greatest height on his value scale, whatever the type of choice under consideration. There must always be room for improvement in his value scale; otherwise all of man's wants would be perfectly satisfied, and action would disappear. Since this cannot be the case, it means that there is always open to each actor the prospect of improving his lot, of attaining a value higher than he is giving up, i.e., of making a psychic profit. What he is giving up may be called his costs, i.e., the utilities that he is forgoing in order to attain a better position. Thus, an actor's costs are his forgone opportunities to enjoy consumers' goods. Similarly, the (greater) utility that he expects to acquire because of the action may be considered his psychic income, or psychic revenue, which in turn will be equal to the utility of the goods he will consume as a result of the action. Hence, at the inauguration of any action, the actor will believe that this course of action will, among the alternatives, maximize his psychic income or psychic revenue, i.e., attain the greatest height on his value scale.

Appendix A
Praxeology and Economics

This chapter has been an exposition of part of praxeological analysis—the analysis that forms the body of economic theory. This analysis takes as its fundamental premise the existence of human action. Once it is demonstrated that human action is a necessary attribute of the existence of human beings, the rest of praxeology (and its subdivision, economic theory) consists of the elaboration of the logical implications of the concept of action. Economic analysis is of the form:

  1. Assert A—action axiom.
  2. If A, then B; if B, then C; if C, then D, etc.—by rules of logic.
  3. Therefore, we assert (the truth of) B, C, D, etc.

It is important to realize that economics does not propound any laws about the content of man's ends. The examples that we have given, such as ham sandwich, berries, etc., are simply illustrative instances, and are not meant to assert anything about the content of a man's goals at any given time. The concept of action involves the use of scarce means for satisfying the most urgent wants at some point in the future, and the truths of economic theory involve the formal relations between ends and means, and not their specific contents. A man's ends may be "egoistic" or "altruistic," "refined" or "vulgar." They may emphasize the enjoyment of "material goods" and comforts, or they may stress the ascetic life. Economics is not concerned with their content, and its laws apply regardless of the nature of these ends.

Praxeology, therefore, differs from psychology or from the philosophy of ethics. Since all these disciplines deal with the subjective decisions of individual human minds, many observers have believed that they are fundamentally identical. This is not the case at all. Psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should men value? Praxeology and economics deal with any given ends and with the formal implications of the fact that men have ends and employ means to attain them. Praxeology and economics are therefore disciplines separate and distinct from the others.

Thus, all explanations of the law of marginal utility on psychological or physiological grounds are erroneous. For example, many writers have based the law of marginal utility on an alleged "law of the satiation of wants," according to which a man can eat so many scoops of ice cream at one time, etc., and then becomes satiated. Whether or not this is true in psychology is completely irrelevant to economics. These writers erroneously concluded that, at the beginning of the supply, a second unit may be more enjoyable than the first, and therefore that marginal utility may increase at first before declining. This is completely fallacious. The law of marginal utility depends on no physiological or psychological assumptions but is based on the praxeological truth that the first unit of a good will be used to satisfy the most urgent want, the second unit the next most urgent want, etc. It must be remembered that these "units" must be of equal potential serviceability.

For example, it is erroneous to argue as follows: Eggs are the good in question. It is possible that a man needs four eggs to bake a cake. In that case, the second egg may be used for a less urgent use than the first egg, and the third egg for a less urgent use than the second. However, since the fourth egg allows a cake to be produced that would not otherwise be available, the marginal utility of the fourth egg is greater than that of the third egg.

This argument neglects the fact that a "good" is not the physical material, but any material whatever of which the units will constitute an equally serviceable supply. Since the fourth egg is not equally serviceable and interchangeable with the first egg, the two eggs are not units of the same supply, and therefore the law of marginal utility does not apply to this case at all. To treat eggs in this case as homogeneous units of one good, it would be necessary to consider each set of four eggs as a unit.

To sum up the relationship and the distinctions between praxeology and each of the other disciplines, we may describe them as follows:

  • Why man chooses various ends: psychology.

  • What men's ends should be: philosophy of ethics. also: philosophy of aesthetics.

  • How to use means to arrive at ends: technology.

  • What man's ends are and have been, and how man has used means in order to attain them: history.

  • The formal implications of the fact that men use means to attain various chosen ends: praxeology.

What is the relationship between praxeology and economic analysis? Economics is a subdivision of praxeology—so far the only fully elaborated subdivision. With praxeology as the general, formal theory of human action, economics includes the analysis of the action of an isolated individual (Crusoe economics) and, especially elaborate, the analysis of interpersonal exchange (catallactics). The rest of praxeology is an unexplored area. Attempts have been made to formulate a logical theory of war and violent action, and violence in the form of government has been treated by political philosophy and by praxeology in tracing the effects of violent intervention in the free market. A theory of games has been elaborated, and interesting beginnings have been made in a logical analysis of voting.

The suggestion has been made that, since praxeology and economics are logical chains of reasoning based on a few universally known premises, to be really scientific it should be elaborated according to the symbolic notations of mathematical logic.44 This represents a curious misconception of the role of mathematical logic, or "logistics." In the first place, it is the great quality of verbal propositions that each one is meaningful. On the other hand, algebraic and logical symbols, as used in logistics, are not in themselves meaningful. Praxeology asserts the action axiom as true, and from this (together with a few empirical axioms—such as the existence of a variety of resources and individuals) are deduced, by the rules of logical inference, all the propositions of economics, each one of which is verbal and meaningful. If the logistic array of symbols were used, each proposition would not be meaningful. Logistics, therefore, is far more suited to the physical sciences, where, in contrast to the science of human action, the conclusions rather than the axioms are known. In the physical sciences, the premises are only hypothetical, and logical deductions are made from them. In these cases, there is no purpose in having meaningful propositions at each step of the way, and therefore symbolic and mathematical language is more useful.

Simply to develop economics verbally, then to translate into logistic symbols, and finally to retranslate the propositions back into English, makes no sense and violates the fundamental scientific principle of Occam's razor, which calls for the greatest possible simplicity in science and the avoidance of unnecessary multiplication of entities or processes.

Contrary to what might be believed, the use of verbal logic is not inferior to logistics. On the contrary, the latter is merely an auxiliary device based on the former. For formal logic deals with the necessary and fundamental laws of thought, which must be verbally expressed, and logistics is only a symbolic system that uses this formal verbal logic as its foundation. Therefore, praxeology and economics need not be apologetic in the slightest for the use of verbal logic—the fundamental basis of symbolic logic, and meaningful at each step of the route.45

Appendix B
On Means and Ends

It is often charged that any theory grounded on a logical separation of means and ends is unrealistic because the two are often amalgamated or fused into one. Yet if man acts purposively, he therefore drives toward ends, and whatever route he takes, he must, ipso facto, employ means to achieve them. The distinction between means and ends is a necessary logical distinction rooted in all human—indeed, all purposive—action. It is difficult to see the sense in any denial of this primordial truth. The only sense to the charge concerns those cases where certain objects, or rather certain routes of action, become ends in themselves as well as means to other ends. This, of course, can often happen. There is no difficulty, however, in incorporating them into an analysis, as has been done above. Thus, a man may work at a certain job not only for the pay, but also because he enjoys the work or the location. Moreover, any desire for money is a desire for a means to other ends. The critics of praxeology confuse the necessary and eternal separation of ends and means as categories with their frequent coincidence in a particular concrete resource or course of action.

  1. For further reading on this topic, the best source is the epochal work of Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), pp. 1–143, and passim↩︎

  2. Cf. ibid., p. 11; F.A. Hayek, "The Facts of the Social Sciences," in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 57–76; Hayek, The Counter-Revolution of Science (Glencoe, Ill.: The Free Press, 1952), pp. 25–35; and Edith T. Penrose, "Biological Analogies in the Theory of the Firm," American Economic Review, December, 1952, pp. 804–19, especially 818–19. ↩︎

  3. Cf. Aristotle, Ethica Nicomachea, Bk. I, especially ch. vii. ↩︎

  4. This chapter consists solely of a development of the logical implications of the existence of human action. Future chapters—the further parts of the structure—are developed with the help of a very small number of subsidiary assumptions. Cf. Appendix below and Murray N. Rothbard, "Praxeology: Reply to Mr. Schuller," American Economic Review, December, 1951, pp. 943–46; and "In Defense of 'Extreme Apriorism'," Southern Economic Journal, January, 1957, pp. 314–20. ↩︎

  5. There is no need to enter here into the difficult problem of animal behavior, from the lower organisms to the higher primates, which might be considered as on a borderline between purely reflexive and motivated behavior. At any rate, men can understand (as distinguished from merely observe) such behavior only in so far as they can impute to the animals motives that they can understand. ↩︎

  6. To say that only individuals act is not to deny that they are influenced in their desires and actions by the acts of other individuals, who might be fellow members of various societies or groups. We do not at all assume, as some critics of economics have charged, that individuals are "atoms" isolated from one another. ↩︎

  7. Cf. Hayek, Counter-Revolution of Science, p. 34. Also cf. Mises, Human Action, p. 42. ↩︎

  8. Cf. Talcott Parsons, The Structure of Social Action (Glencoe, Ill.: The Free Press, 1949), pp. 44 ff. ↩︎

  9. Some writers have unfoundedly believed that praxeology and economics assume that all action is cool, calculating, and deliberate. ↩︎

  10. The common distinction between "economic goods" and "free goods" (such as air) is erroneous. As explained above, air is not a means, but a general condition of human welfare, and is not the object of action. ↩︎

  11. The term "land" is likely to be misleading in this connection because it is not used in the popular sense of the word. It includes such natural resources as water, oil, and minerals. ↩︎

  12. We shall not deal at this point with the complications involved in the original learning of any recipe by the actor, which is the object of human action. ↩︎

  13. Cf. Carl Menger, Principles of Economics (Glencoe, Ill.: The Free Press, 1950), pp. 51–67. ↩︎

  14. For each actor, then, the period of production is equivalent to his waiting time—the time that he must expect to wait for his end after the commencement of his action. ↩︎

  15. Time preference may be called the preference for present satisfaction over future satisfaction or present good over future good, provided it is remembered that it is the same satisfaction (or "good") that is being compared over the periods of time. Thus, a common type of objection to the assertion of universal time preference is that, in the wintertime, a man will prefer the delivery of ice the next summer (future) to delivery of ice in the present. This, however, confuses the concept "good" with the material properties of a thing, whereas it actually refers to subjective satisfactions. Since ice-in-the-summer provides different (and greater) satisfactions than ice-in-the-winter, they are not the same, but different goods. In this case, it is different satisfactions that are being compared, despite the fact that the physical property of the thing may be the same. ↩︎

  16. It has become the custom to designate consumer goods with a longer duration of serviceableness as durable goods, and those of shorter duration as nondurable goods. Obviously, however, there are innumerable degrees of durability, and such a separation can only be unscientific and arbitrary. ↩︎

  17. Accordingly, the numbers by which ends are ranked on value scales are ordinal, not cardinal, numbers. Ordinal numbers are only ranked; they cannot be subject to the processes of measurement. Thus, in the above example, all we can say is that going to a concert is valued more than playing bridge, and either of these is valued more than watching the game. We cannot say that going to a concert is valued "twice as much" as watching the game; the numbers two and four cannot be subject to processes of addition, multiplication, etc. ↩︎

  18. An example of suffering a loss as a result of an erroneous action would be going to the concert and finding that it was not at all enjoyable. The actor then realizes that he would have been much happier continuing to watch the game or playing bridge. ↩︎

  19. A large part of this book is occupied with the problem of how this process of value imputation can be accomplished in a modern, complex economy. ↩︎

  20. This is the solution of a problem that plagued writers in the economic field for many years: the source of the value of goods. ↩︎

  21. Cf. Ludwig von Mises, The Theory of Money and Credit (New Haven: Yale University Press, 1953), p. 46. ↩︎

  22. Also cf. T.N. Carver, The Distribution of Wealth (New York: Macmillan & Co., 1904), pp. 4–12. See below for a further discussion of the influences on man's valuation of specific units resulting from the size of the available stock. ↩︎

  23. This would not be true only if the "good" were not a means, but a general condition of human welfare, in which case one less unit of supply would make no difference for human action. But in that case it would not be a good, subject to the economizing of human action. ↩︎

  24. On the whole subject of marginal utility, see Eugen von Böhm-Bawerk, The Positive Theory of Capital (New York: G.E. Stechert, 1930), pp. 138–65, especially pp. 146–55. ↩︎

  25. For algebraic proof, see George J. Stigler, The Theory of Price (New York: Macmillan & Co., 1946), pp. 44–45. ↩︎

  26. For further reading on this subject, see Böhm-Bawerk, Positive Theory of Capital, pp. 170–88; and Hayek, Counter-Revolution of Science, pp. 32–33. ↩︎

  27. This is the first proposition in this chapter that has not been deduced from the axiom of action. It is a subsidiary assumption, based on empirical observation of actual human behavior. It is not deducible from human action because its contrary is conceivable, although not generally existing. On the other hand, the assumptions above of quantitative relations of cause and effect were logically implicit in the action axiom, since knowledge of definite cause-and-effect relations is necessary to any decision to act. ↩︎

  28. Cf. Mises, Human Action, p. 131. ↩︎

  29. Ibid., p. 132. ↩︎

  30. Leisure is the amount of time not spent in labor, and play may be considered as one of the forms that leisure may take in yielding satisfaction. On labor and play, cf. Frank A. Fetter, Economic Principles (New York: The Century Co., 1915), pp. 171–77, 191, 197–206. ↩︎

  31. Cf. L. Albert Hahn, Common Sense Economics (New York: Abelard-Schuman, 1956), pp. 1 ff. ↩︎

  32. In this sense, the stick might be called a "labor-saving device," although the terminology is misleading. It is "labor-saving" only to the extent that the actor chooses to take the increased productivity in the form of leisure. ↩︎

  33. It is necessary to emphasize that independent acts of saving are necessary for replacement of goods, since many writers (e.g., J.B. Clark, Frank H. Knight) tend to assume that, once produced, capital, in some mystical way, reproduces itself without further need for acts of saving. ↩︎

  34. Cf. Frederic Benham, Economics (New York: Pitman Publishing, 1941), p. 162. ↩︎

  35. Böhm-Bawerk, Positive Theory of Capital, pp. 95–96. Also see Mises, Human Action, pp. 480–90, and pp. 476–514. ↩︎

  36. This uncertainty is a subjective feeling ("hunch" or estimate) and cannot be measured in any way. The efforts of many popular writers to apply mathematical "probability theory" to the uncertainty of future historical events are completely vain. Cf. Mises, Human Action, pp. 105–18. ↩︎

  37. That such a range of investment decisions enabling him to achieve greater future output must always be open to him is a fundamental truth derived from the assumption of human action. If they were not open to him, it would mean that man could not (or rather, believed that he could not) act to improve his lot, and therefore there would be no possibility of action. Since we cannot even conceive of human existence without action, it follows that "investment opportunities" are always available. ↩︎

  38. On the "unused capacity" bogey, see Benham, Economics, pp. 147–49. ↩︎

  39. Cf. Böhm-Bawerk, Positive Theory of Capital, pp. 238–44. ↩︎

  40. Plain saving is not to be confused with an earlier example, when Crusoe saved stocks of consumers' goods to be consumed while devoting his labor to the production of capital. ↩︎

  41. See note 15 above. ↩︎

  42. The period of production will be equal to the time difference between the act of saving and the act of future consumption, as in all other cases of investment. ↩︎

  43. See page 19 above. ↩︎

  44. Cf. G.J. Schuller, "Rejoinder," American Economic Review, March, 1951, p. 188. For a reply, see Murray N. Rothbard, "Toward a Reconstruction of Utility and Welfare Economics" in Mary Sennholz, ed. On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (Princeton, N.J.: D. Van Nostrand, 1956), p. 227. Also see Boris Ischboldin, "A Critique of Econometrics," Review of Social Economy, September, 1960, pp. 110–27; and Vladimir Niksa, "The Role of Quantitative Thinking in Modern Economic Theory," Review of Social Economy, September, 1959, pp. 151–73. ↩︎

  45. Cf. René Poirier, "Sur Logique" in André Lalande, Vocabulaire technique et critique de la philosophie (Paris: Presses Universitaires de France, 1951), pp. 574–75. ↩︎