Study Guide to Human Action, Chapter IV
1. Ends and Means
The end (or goal or aim) is the result sought by an actor. The means is whatever is used to attain the end. Ends and means do not exist in the physical universe, but rather are the product of a valuing mind as it surveys its physical environment.
Praxeology does not concern itself with an idealized actor who has noble ends and knows the best means to achieve any end. On the contrary, praxeology takes an actor's goals, and his beliefs on how to satisfy them, as the starting point of analysis. If people erroneously believe that a certain root possesses medicinal properties, it will command a price on the market. The economist must take people as they are to explain market phenomena.
The common distinction between free goods and economic goods is unhelpful, for a "free good" isn't scarce and is better classified as a general condition of human well being. Goods that directly satisfy human wants are consumers' goods or (in Mengerian terminology) goods of the first order. Goods that only satisfy wants indirectly, with the assistance of other goods, are classified as producers' goods, or factors of production, or (following Menger) goods of higher order. One can conceptually arrange the higher order goods according to their remoteness from the ultimate end; the second orders goods cooperate to yield the first order (consumer) good, while the third order goods are used to produce second order goods and so forth.
Nonmaterial goods are called services.
2. The Scale of Value
An actor has competing ends, but in any given action he must satisfy some wants while leaving others unfulfilled. The praxeologist interprets this behavior by saying that the satisfied end was higher on the scale of value that the others. Value resides not in objects but in the minds of actors who rank those objects as either directly desirable or as means to some other, more ultimate end.
3. The Scale of Needs
Although other disciplines (such as physiology) may usefully distinguish between "real" versus "conditioned" or artificial needs, economics has no need of such a scheme. All of economics can be built on the subjective scale of values possessed by actual individuals.
4. Action as an Exchange
An action is an attempt to substitute a more satisfactory situation for a less desirable one. In this sense, all actions are voluntary exchanges. That which is abandoned is the price of the action, while the costs of the action are the value of the price paid. Another way to express this is to say that the cost of an action is the value placed on satisfaction that must be foregone in order to achieve the chosen end.
The difference between the value of the price (i.e. the costs) of an action, and the goal attained, is the gain or profit or net yield of the action. In this sense profit is a purely subjective category, and is immeasurable, for an increase in happiness is a psychic phenomenon that defies quantitative treatment. Actions can only rank ends in an ordinal fashion, i.e. first, second, third, etc. An exchange only demonstrates that which is preferred, not "how much" it is preferred.
Actors are fallible, and often an action will not achieve the end sought. However, if the attained outcome is still preferable to the original situation, then the actor still enjoys a profit (though a smaller one than originally hoped). But if the actual outcome is more unsatisfactory than what was sacrificed in carrying out the action, then the actor suffers a loss.
WHY IT MATTERS
This relatively short chapter seems simple enough, but it is truly extraordinary and deserves careful study. For this is where Mises finally links his "philosophical tangents" with "real economics." In particular, Mises shows that the concept of action implies the concepts of value, price, costs, profit, and loss. These are not simply offshoots of an organized market where goods trade against money, but are actually fundamental categories that would exist even for an isolated actor who engages in "barter" with Nature.
In this chapter Mises also lays the framework for the "Austrian" approach to the capital structure, with the hierarchy of goods in terms of their remoteness from the final act of consumption.
Praxeology neither assumes that people have enlightened value scales, nor that they are omniscient in their pursuit of their aims. This stands in sharp contrast to the approach in mainstream economics, where authors quite explicitly assume that the agents in their models are superhuman calculators capable of solving complex optimization problems.
Mises points out (p. 94) that the purpose of the Mengerian hierarchy of production is purely for conceptual clarity. The economist in practice never needs to determine whether the consumer's good is "really" the loaf of bread at the grocery store, versus the sandwich as it is being lifted to someone's mouth during lunch at home. The important point is that, once an end point is specified (however arbitrarily), all higher order goods derive their value from the value of that stipulated consumer good.
When Mises writes that the "only source from which our knowledge concerning these [value] scales is derived is the observation of a man's actions" (p. 95), the reader is liable to underestimate the claim. Mises does not simply mean that it is impossible for the outside observer to see another man's value scale, and so must be content to view the man's actions as a proxy. No, Mises believes the much deeper claim, that the value scale is itself a mental construct that only exists in the context of the means-end framework ascribed to an individual. So it is not that the value scale exists and generates an action, but the poor praxeologist can only see the action. Rather, Mises claims that the very decision to classify particular physical events as an action implies the notion of a value scale for the identified actor.
Although it is ambiguous, it appears that Mises may have conceded more to the cardinalists than Rothbard does (e.g., in his discussion in "Toward a Reconstruction of Utility and Welfare Economics" where he talks of degrees of ordinal rankings, such as a man mildly preferring steak to hamburger but strongly preferring hamburger to rat poison for dinner). When discussing psychic profit Mises writes, "There is a more or less in the removal of uneasiness felt; but how much one satisfaction surpasses another one can only be felt; it cannot be established and determined in an objective way" (p. 97).
Indeed it might seem that this concession is necessary, for later on Mises argues that an action could yield a profit though a "smaller one than that expected" (p. 98). On the face of it, this possibility seems to admit that it is coherent to say that two outcomes are both better than a third, but that one of them is "more better" than the third.
A purist could respond that really such a case just means that the actor ranked the outcomes in terms of 1st, 2nd, and 3rd, where the status quo was the 3rd outcome, the desired end was 1st, and the action actually yielded the 2nd state of affairs. With this interpretation, we could still insist that rankings are purely ordinal and do not represent a measurement of anything.
1. Ends and Means
- What do we call the result sought by an action? What does it relieve? What are means? What distinguishes a thing from a means? How can a thing become a means?
- What is economics about?
- How do economists deal with prices?
- Why are means necessarily limited?
- Which goods are objects of human action?
- Which goods are defined as "consumers' goods"?
- Which goods are defined as "producers' goods"?
- Which goods are called services?
2. The scale of value
- In which way does the scale of value manifest itself? Is it a constructed thing?
- What roles are played by the terms perversity and abnormality in economics? Why?
- What is value? How do we perceive values?
3. The Scale of Needs
- What does action aim at in the first place?
- What does Mises mean by saying, "Economics must explain the prices as they are, not as they would be under different conditions"?
4. Action as an Exchange
- What is action?
- How is exchange defined?
- What are costs?
- What is profit?
- Why is the cardinal approach erroneous?
- What happens when action doesn't attain the aim sought?