Mises on Action
In my previous article, "Mises on Mind and Method," I organized Ludwig von Mises's epistemological doctrines, drawing from several of his works, into a single exposition. In the present article, I do the same with Mises's teachings on the most fundamental praxeological insights. Those insights are threaded throughout Mises's great work, Human Action. Herein, I gather them together and attempt to explain them and how they interrelate, using the technique of "Crusoe Economics."
"Man is a social animal": thus Aristotle's famous dictum is often translated. Ludwig von Mises believed that man could not have acquired the ability to act had his forebears lived in complete isolation. And John Donne said, "No man is an island."
Society is so central to the human condition that writers have, for millennia, used isolation as a dramatic Herculean challenge for their heroes to overcome. From the ancient Egyptian Story of the Shipwrecked Sailor, to the Arabian Sinbad, to Robinson Crusoe, to Tom Hanks's character in the movie Castaway, the idea of island isolation has horrified and fascinated us. In the hands of the economist, it has also come to instruct us.
It makes sense that the notion of an isolated individual can be instructive for economic reasoning. As propounded by Mises, sound economic reasoning is the discovery of necessary truths about special modes of action, by deducing the logical implications of both (a) our a priori understanding of the meaning of action (purposeful behavior) and (b) the conditions that characterize the special modes of action in question.
The special modes of action that actually occur in the real world are so complex and inaccessible to inquiry that it is impossible for the human mind to apprehend them fully enough to derive any general economic laws from them.
Instead, the economist must consider modes of action simple enough for his finite mind to grasp. Since such simple sets of conditions do not occur in the real world, the economist must conceive them in his mind. He must formulate imaginary constructions (or "thought experiments"), in which the modes of action are defined by assumptions. These assumptions are chosen for the purpose of describing the essential effects of factors that in real life are too hidden amid the static and din of the effects of other factors, but that in the mind can be isolated and described.
The specific method of economics is the method of imaginary constructions. … The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present in actual action. Then we are in a position to grasp the hypothetical consequences of the absence of these conditions and to conceive the effects of their existence.
Since economics is by definition about human action, the simplest imaginary construction in economics is that of a single, isolated human actor: a "Robinson Crusoe." A key merit of "Crusoe praxeology" is that by simplifying things to the extreme, the praxeologist can get at what is logically necessary about all human action. He can do this by "assuming away" (or "abstracting from") conditions until he gets to a point where assuming away anything more will result in something that can no longer be considered action.
Thus we conceive the category of action by constructing the image of a state in which there is no action.
The praxeologist can then discover more specific praxeological laws by progressively adding more assumptions.
Let us see what Crusoe can teach us about action.
But first, do we even need Crusoe, or anyone else in our imaginary construction? Can one even conceive of action without an actor? If not, then one must consider the existence of an actor to be a necessary prerequisite of action.
Let us say Crusoe awakens, stranded on an island after having floated unconscious onto the shore on a piece of flotsam. The first thing that enters his consciousness is a sharp pain in his hand, which is being caused by a large splinter. He wants to alleviate the pain, and prevent any infection the splinter might cause. The matter is especially urgent, because he feels he is about to pass out in a few moments, and he is worried that infection could set in while he is unconscious.
The incentive that impels a man to act is always some uneasiness.
In this case, Crusoe has an uneasiness concerning the pain that he feels and the damage his body might suffer.
An important distinction is that the praxeological uneasiness is not the pain itself. Praxeology is not psychology, and economics does not posit acting man as necessarily a purely hedonistic (pleasure-pursuing and pain-avoiding) creature. It is conceivable that a person with a splinter in his hand is a masochist and that he feels pain but no uneasiness about the presence of that pain and thus no desire to remove the splinter.
By assumption, Crusoe happens not to be a masochist, and the pain involved happens to be one of the factors (along with the possible damage involved) that causes him to be uneasy about the splinter. But, whatever the cause may be, what is important for praxeology is that Crusoe regards the state of affairs involving the splinter in his hand as imperfect.
It is easy to imagine action without pain, but is it even possible to coherently imagine action without prior uneasiness? No, argued Mises:
A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care.
It is inconceivable for a being to intervene in a state of affairs that he already regards as perfect. Intervention implies perceived imperfection. Uneasiness, therefore, is a necessary prerequisite of action. The presence of an uneasiness can also be referred to as a want or desire, and the removal of an uneasiness can be referred to as the satisfaction of a want or desire.
Crusoe now has a goal in mind (an end): to relieve (remove) his uneasiness concerning the splinter's deleterious effects.
The end, goal, or aim of any action is always the relief from a felt uneasiness.
An end is the most obvious prerequisite of action (purposeful behavior), because "end-seeking" is synonymous with "purposeful."
Already processes have begun in Crusoe's body that may alleviate the deleterious effects of the splinter. For example, the flesh of his hand around the splinter has become inflamed, which is part of the human body's healing process. This process can be seen to have a biological "quasi purpose." And Crusoe may find this process to be advantageous regarding his conscious purposes. But the biological process is not truly "end-seeking."
Conscious or purposeful behavior is in sharp contrast to unconscious behavior, i.e., the reflexes and the involuntary responses of the body's cells and nerves to stimuli.
Image of a More Satisfactory State of Affairs
Crusoe imagines himself in a future in which, by virtue of his own intervention, he has no splinter in his hand. He considers that future to be more satisfactory than the future that would eventuate without any intervention on his part, because it would achieve his end: i.e., to remove the uneasiness he has about the splinter's deleterious effects.
Acting man is eager to substitute a more satisfactory state of affairs for a less satisfactory. His mind imagines conditions which suit him better.
Try to imagine an action in which the actor does not have any "image of a more satisfactory state." It is inconceivable. Without such an image, an actor would have no idea as to why his action would remedy his uneasiness.
The Action Itself
Crusoe can relieve his uneasiness by carefully removing the splinter using his other hand.
For Crusoe to try to pull the splinter out, it is necessary for him to anticipate the possibility of the action being successful.
[T]he expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness. In the absence of this condition no action is feasible. Man must yield to the inevitable. He must submit to destiny.
Hope, therefore, is a universal implication of action.
This action would involve the expenditure of Crusoe's personal energy, which is the means Crusoe would use toward the end of relieving the uneasiness associated with his pain.
A means is what serves to the attainment of any end, goal, or aim.
A means can also be referred to as a good.
Try to imagine action with only an end, but no means by which the end is achieved. It cannot be done.
Crusoe's forethought regarding pulling out the splinter, and his actual pulling out of the splinter, is future-oriented (however immediate that future may be), and thus involves the passing of time.
The idea of time is a praxeological category.
Action is always directed toward the future; it is essentially and necessarily always a planning and acting for a better future. Its aim is always to render future conditions more satisfactory than they would be without the interference of action. The uneasiness that impels a man to act is caused by a dissatisfaction with expected future conditions as they would probably develop if nothing were done to alter them. In any case action can influence only the future, never the present that with every infinitesimal fraction of a second sinks down into the past.
Crusoe must use time to remove the splinter. Time is a necessary means for any action.
Removing the splinter is not the only thing Crusoe could expend his personal energy on in his few remaining moments of consciousness. He could also conceivably just lie there, try to ignore the pain, and rest. However, he cannot do both at the same time. His personal energy and time are scarce with regard to his ends.
There are elements in Crusoe's environment that contribute to his welfare but which are not now scarce with regard to his ends. Nonscarcity is also called "superabundance."
For example, the air he breathes contributes to his welfare. But it is immediately available to him in such abundance that he does not need to take any action with regard to it.
However, this was not the case an hour ago, when, immediately after his shipwreck, he was drowning. At that time, air was not abundant. It was scarce. So he had to take action with regard to it. He had to purposefully swim to the surface of the water and take hold of a piece of flotsam in order to get air. At that time air was an object of action.
But now on the island, air is superabundant (nonscarce), and so it requires no action. Therefore, it is not a means (good). Superabundant things are "not the object of any action. They are general conditions of human welfare."
However, Crusoe's personal energy and time are scarce, and therefore they are means (goods) and objects of human action.
Means are necessarily always limited, i.e., scarce with regard to the services for which man wants to use them. If this were not the case, there would not be any action with regard to them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action.
The hypothetical scenario of general superabundance (nonscarcity) is frequently referred to by Mises as the "land of Cockaigne," which, according to Wikipedia,
is a medieval mythical land of plenty, an imaginary place of extreme luxury and ease where physical comforts and pleasures are always immediately at hand and where the harshness of medieval peasant life does not exist.
Crusoe can conceivably devote his personal energy in his remaining conscious moments toward pulling out the splinter or resting, but not both. In undertaking one alternative, he is implicitly renouncing the others.
Action always involves a scarcity of means with regard to ends. Thus, there are multiple possible ends to which an actor can dedicate any single means. Therefore, action always involves alternatives.
The undertaking of one alternative is an implicit renunciation of another. Thus, action always involves choices and decisions, even when they are "no-brainer" or "snap" decisions. Choice regarding the dedication of scarce means to some ends, and not to others, is called economization. Another way of saying this is that economization is the selective allocation of scarce means to ends. Furthermore, to choose one alternative and renounce another is to prefer one over the other. Thus, action always involves preference.
Acting man chooses between various opportunities offered for choice. He prefers one alternative to others.
Now Crusoe becomes aware of another uneasiness. He feels a sharp pain in his back, because he is lying on a sharp rock. Besides the pain, he is also concerned that if he were to pass out while lying on the rock, his spine could become damaged. There is now even more scarcity of means with regard to his ends, because he cannot expend his personal energy on dragging himself off the rock, removing the splinter, and resting at the same time. In fact, he anticipates he only has time to do one of the three things before he passes out.
Let us say Crusoe chooses to roll off the rock, and thus renounces the opportunity to pull out the splinter or to rest. By doing so, he would be demonstrating that the wants satisfied by rolling off the rock are more urgent than the wants satisfied by either of the other two alternatives. This is necessarily true, because action is always undertaken for the achievement of ends (relief of uneasiness, satisfaction of wants).
The only kind of preference praxeology is concerned with is demonstrated preference: preferences demonstrated by action, not merely expressed in speech or considered in reflective thought.
For example, Crusoe might prefer not to be stranded on an island at all. He may prefer to be magically whisked back home. But as long as this preference has no bearing on action, it is not an object of praxeology.
Action is not simply giving preference. Man also shows preference in situations in which things and events are unavoidable or are believed to be so. Thus a man may prefer sunshine to rain and may wish that the sun would dispel the clouds. He who only wishes and hopes does not interfere actively with the course of events and with the shaping of his own destiny. But acting man chooses, determines, and tries to reach an end. Of two things both of which he cannot have together he selects one and gives up the other. Action therefore always involves both taking and renunciation.
Furthermore, Crusoe may think to himself that he prefers to rest. But if his actions belie that thought, and he actually rolls off of the rock instead of resting, then, to the praxeologist, he did not really prefer to rest.
To express wishes and hopes and to announce planned action may be forms of action in so far as they aim in themselves at the realization of a certain purpose. But they must not be confused with the actions to which they refer. They are not identical with the actions they announce, recommend, or reject. Action is a real thing. What counts is a man's total behavior, and not his talk about planned but not realized acts.
A choice observed by an economic historian in real life only demonstrates that which is chosen, and it does not demonstrate with certainty what was renounced. However, in an imaginary construction (thought experiment), a praxeologist can make assumptions in order to work out the logical implications of those assumptions. And so a praxeologist can assume what alternative would have been chosen had the top alternative not been available. Furthermore, he can assume what alternative would have been chosen had the top two alternatives not been available, and so on.
For example, we can assume that if there had been no rock in his back, Crusoe would have instead devoted his personal energy to removing the splinter, and that if there had been no rock or splinter, he would have rested. These assumptions can be visualized in a list of the actor's alternatives, in order of descending preference.
- Rolling off the rock
- Removing the splinter
To prefer one alternative over another is to value one alternative more highly than another. Thus, the above ranking can be called a scale of values. Implied in the above assumptions is that the wants satisfied by removing the rock are more urgent than the wants satisfied by removing the splinter, which are in turn more urgent than the wants satisfied by resting.
Thus the above assumptions can also be visualized in a "scale of wants," a list of the actor's wants ranked in the order of descending urgency. In the example above, the following would be Crusoe's scale of wants:
- Avoiding the deleterious effects of the rock.
- Avoiding the deleterious effects of the splinter.
- The salutary effects of resting.
Since an alternative is evaluated according to the ends it serves, an alternative's ranking in an actor's scale of values is determined by the relative urgency of the wants it would satisfy, as visualized in the actor's scale of wants.
But this requires a reminder about the reality of action:
one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. … Every action is always in perfect agreement with the scale of values or wants because these scales are nothing but an instrument for the interpretation of a man's acting.
Psychic Yield/Cost and Psychic Profit/Loss
If Crusoe is successful in rolling off of the rock, he has attained the result he sought. The perceived benefit involved in attaining his goal can be called the psychic yield of the action.
Every action involves a choice. And as explained above, and to quote St. Thomas Aquinas, "every choice is a renunciation." That which is given up (renounced) for the sake of another thing is the psychic cost of the thing.
Is Crusoe's personal energy the psychic cost of avoiding the deleterious effects of the rock on his back? No, his personal energy is a means, not an end in itself. What he is really giving up is the opportunity to use his personal energy for alternative ends: either removing the splinter or resting. For praxeology, all psychic costs are thus opportunity costs. His psychic cost is the alternative want-satisfaction he is implicitly giving up when he makes his choice.
So, then, does the opportunity cost of his action consist of giving up the want-satisfaction of both removing the splinter and resting? No, compounding the renounced alternatives in this way does not make sense. If he could not roll off of the rock, he would not then be able to both remove the splinter and rest. He would only be able to undertake the one alternative that satisfies the want that had previously been second highest on his scale of wants: removing the splinter. The want-satisfaction associated with removing the splinter is what he is truly giving up, and therefore represents his opportunity cost.
Costs are the value attached to the most valuable want-satisfaction which remains unsatisfied because the means required for its satisfaction are employed for that want-satisfaction the cost of which we are dealing with.
When Crusoe awakens, he may momentarily reflect on the outcome of his action (rolling off of the rock). Perhaps he succeeded in getting off of the rock, and thus succeeded in protecting his spine. Fortunately, his splinter did not cause an infection, although its continued presence has caused him to wake up in a great deal of pain.
He is, on balance, pleased with his choice. Another way of saying this is that he considers the psychic yield (the benefit of rolling off of the rock) to be superior to the psychic cost (the foregone benefit of removing the splinter) of the action. We can then say he has made a psychic profit.
Counterfactually, perhaps either he did not have sufficient energy to get off the rock — and so his spine was damaged anyway — or a deadly infection did set in because of his splinter.
In either of these unfortunate cases, he may very well regret his action. This is to say that he considers the psychic yield to be inferior to the psychic cost of the action. Such a situation could be characterized as a psychic loss.
Profit, in a broader sense, is the gain derived from action; it is the increase in satisfaction (decrease in uneasiness) brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment; it, in other words, yield minus costs. To make profit is invariably the aim sought by any action. If an action fails to attain the ends sought, yield either does not exceed costs or lags behind costs. In the latter case the outcome means a loss, a decrease in satisfaction.
Mises here uses words that convey a sense of quantifiability ("increase," "decrease," "difference," "minus," etc). But he meant them in a figurative sense only. They can easily be replaced by ordinal terms (as with my use of "superior"/"inferior" instead of "more"/"less"). Mises was careful to avoid any literal interpretation of these words by making the following important point:
Profit and loss in this original sense are psychic phenomena and as such not open to measurement and a mode of expression which could convey to other people precise information concerning their intensity. A man can tell a fellow man that a suits him better than b; but he cannot communicate to another man, except in vague and indistinct terms, how much the satisfaction derived from a exceeds that derived from b.
The psychic profit and loss that is present in even simple isolated action can only ever be ordinal, unmeasurable, and incalculable phenomena. "Profit" and "loss" in the usual sense (which is distinct from, although ultimately derived from, psychic profit and loss) as cardinal, measurable, and calculable phenomena is only present in the reckoning of a individual member of a market economy utilizing money prices.
Praxeology and Economics
A crucial insight of Mises's is that the social system of production known as the market economy (or capitalism) is only possible with, and is characterized by, the existence of economic calculation, which in turn depends on the existence of cardinal and calculable profit and loss, which in turn depends on the existence of money prices.
Mises regards economics proper (or "catallactics") to be the subfield of praxeology that deals with the market economy, which again is distinguished by the existence of calculable action.
The field of catallactics or of economics in the narrower sense is the analysis of the market phenomena. This is tantamount to the statement: Catallactics is the analysis of those actions which are conducted on the basis of monetary calculation.
Therefore, Crusoe "economics" and the study of barter exchanges (which can only ever be ad hoc, and never be an integrated part of a social system of production) are not really part of economics, in the strict Misesian sense (which again is the study of the market economy), but instead are part of praxeology in general.
Some Austrian scholars and students prefer Murray Rothbard's distinction between praxeology and economics, which preserves the status of barter analysis as part of economics. However, as always, Mises's distinctions are not to be lightly cast aside. Mises eloquently explained why the distinction between noncalculable and calculable action is the most important distinction in the science of human action.
Every action can make use of ordinal numbers. For the application of cardinal numbers and for the arithmetical computation based on them special conditions are required. These conditions emerged in the historical evolution of the contractual society. Thus the way was opened for computation and calculation in the planning of future action and in establishing the effects achieved by past action. Cardinal numbers and their use in arithmetical operations are also eternal and immutable categories of the human mind. But their applicability to premeditation and the recording of action depends on certain conditions which were not given in the early state of human affairs, which appeared only later, and which could possibly disappear again.
It was cognition of what is going on within a world in which action is computable and calculable that led men to the elaboration of the sciences of praxeology and economics. Economics is essentially a theory of that scope of action in which calculation is applied or can be applied if certain conditions are realized. No other distinction is of greater significance, both for human life and for the study of human action, than that between calculable action and noncalculable action. Modern civilization is above all characterized by the fact that it has elaborated a method which makes the use of arithmetic possible in a broad field of activities.
What has been the primary concern of economists since the earliest days of the science has been the elucidation of market phenomena. And, because of its paramount importance described by Mises above, and its distinct scientific challenges, if anything deserves to be ascribed a subscience of its own, it is the momentous realm of calculable action.
The possibility of Crusoe suffering a psychic loss exemplifies the ever-present reality of uncertainty in the realm of action. Uncertainty too is a necessary prerequisite of action.
The uncertainty of the future is already implied in the very notion of action ….to acting man the future is hidden. If man knew the future, he would not have to choose and would not act. He would be like an automaton, reacting to stimuli without any will of his own.
Action as Exchange
To give up (renounce) one thing for the purpose of acquiring another can be characterized, in a manner of speaking, as an exchange. Therefore, since every action is a choice, and every choice is a renunciation, every action is also an exchange.
Action always is essentially the exchange of one state of affairs for another state of affairs. If the action is performed by an individual without any reference to cooperation with other individuals, we may call it autistic exchange.
Other things being equal, satisfaction is preferred sooner rather than later. This universal feature of acting man is called "time preference." Time preference can even be seen in the behavior of children, as in the seminal "marshmallow experiment" conducted at Stanford University.
As reported in the New Yorker,
In the late nineteen-sixties, Carolyn Weisz, a four-year-old with long brown hair, was invited into a "game room" at the Bing Nursery School, on the campus of Stanford University. The room was little more than a large closet, containing a desk and a chair. Carolyn was asked to sit down in the chair and pick a treat from a tray of marshmallows, cookies, and pretzel sticks. Carolyn chose the marshmallow. Although she's now forty-four, Carolyn still has a weakness for those air-puffed balls of corn syrup and gelatine. "I know I shouldn't like them," she says. "But they're just so delicious!" A researcher then made Carolyn an offer: she could either eat one marshmallow right away or, if she was willing to wait while he stepped out for a few minutes, she could have two marshmallows when he returned. He said that if she rang a bell on the desk while he was away he would come running back, and she could eat one marshmallow but would forfeit the second. Then he left the room. …
Most of the children were like Craig. They struggled to resist the treat and held out for an average of less than three minutes. "A few kids ate the marshmallow right away," Walter Mischel, the Stanford professor of psychology in charge of the experiment, remembers. "They didn't even bother ringing the bell. Other kids would stare directly at the marshmallow and then ring the bell thirty seconds later." About thirty per cent of the children, however, were like Carolyn. They successfully delayed gratification until the researcher returned, some fifteen minutes later. These kids wrestled with temptation but found a way to resist.
In struggling with "temptation," these children were actually deliberating over an "autistic exchange." (Obviously the researchers would not really count as interested "parties" in the exchange.) They were deciding over an exchange concerning two different goods: a present good (the one treat laid out before them) in exchange for a quantitatively greater future good (two treats in 15 minutes).
By virtue of their closeness in time, present goods always have a premium in relation to future goods, other things being equal. This premium is called time preference, and it varies from person to person. Another way of saying the same thing is that, by virtue of their remoteness in time, future goods always have a discount in relation to present goods, and this discount varies from person to person.
Craig and the other children who did not wait exhibited a higher time preference than Carolyn and the other children who did wait. In other words, they placed a higher premium on "now," or a higher discount on "later."
Going back to Crusoe, the fact that resting now would involve satisfaction that is immediate gives that alternative a slight additional appeal, while the fact that removing the rock or splinter mostly provides more remote satisfaction (enjoying the benefits of living without an injured back or hand after he wakes up) slightly lessens the appeal of those options. Of course, for everyone aside from the most ridiculous procrastinators, the degree to which the appeal of avoiding injury would be lessened by time preference in such a situation would be extremely negligible, and would not make any difference in his choice.
However, in daily life, time preference is a major factor in decisions. And, whether it "tips the scales" of a particular choice or not, time preference is nonetheless always present.
Time preference is a categorial requisite of human action. No mode of action can be thought of in which satisfaction within a nearer period of the future is not — other things being equal — preferred to that in a later period. The very act of gratifying a desire implies that gratification at the present instant is preferred to that at a later instant. He who consumes a nonperishable good instead of postponing consumption for an indefinite later moment thereby reveals a higher valuation of present satisfaction as compared with later satisfaction. If he were not to prefer satisfaction in a nearer period of the future to that in a remoter period, he would never consume and so satisfy wants. He would always accumulate, he would never consume and enjoy. He would not consume today, but he would not consume tomorrow either, as the morrow would confront him with the same alternative.
Not only the first step toward want-satisfaction, but also any further step is guided by time preference. Once the desire a to which the scale of values assigns the rank 1 is satisfied, one must choose between the desire b to which the rank 2 is assigned and c that desire of tomorrow to which — in the absence of time preference — the rank 1 would have been assigned. If b is preferred to c, the choice clearly involves time preference. Purposive striving after want-satisfaction must needs be guided by a preference for satisfaction in the nearer future over that in a remoter future.
Action as Production
If Crusoe succeeds in pulling the splinter out, he can be said to have produced the new state of affairs in which his ends (removing the deleterious effects of the splinter) are achieved.
Focusing on the cause-and-effect aspect of action, all action can be seen as production.
Action, if successful, attains the end sought. It produces the product.
To analyze Crusoe's actions as production, let us present him with a new challenge. Let us say Crusoe chose to drag himself off the rock. He then passed out, and when he woke up, he removed the splinter. Fortunately he did not get an infection. Then he relaxes for a few moments. While relaxing, another want (uneasiness) arises. He feels a sharp hunger in his belly. And so Crusoe has another end he wants to achieve: to eat.
In the prior thought experiments, Crusoe only had to use, as a means, his own personal energy to satisfy his most pressing wants (most urgent uneasinesses). But to alleviate his hunger, he would need to use means from outside of himself.
Fortunately he sees a coconut on the beach. This coconut is a good (a means).
It is important to note that praxeology (and economics) concerns the meaning that the mind of man gives to the world around him, not to the intrinsic properties of the outside world itself. The day before Crusoe's shipwreck, the coconut laying on the island was not a good. It was just a thing. For an outside scientific observer studying the scenario on the island, it was an object of botany and topography, but not of economics. It was only when Crusoe cast his eyes upon it and judged it to be potentially useful for achieving his ends that it became a good. In other words, the coconut derives its character as a good ("goods-character") from its perceived usefulness in achieving ends.
Praxeological reality is not the physical universe, but man's conscious reaction to the given state of this universe. Economics is not about things and tangible material objects; it is about men, their meanings and actions. Goods, commodities, and wealth and all the other notions of conduct are not elements of nature; they are elements of human meaning and conduct. He who wants to deal with them must not look at the external world; he must search for them in the meaning of acting men.
The coconut happens to have somehow been smashed open and is inches away from his face. Crusoe can just shove his face into the coconut and start eating immediately. The open coconut is directly serviceable for Crusoe. Directly serviceable means are called consumers' goods, or goods of the first order.
Unfortunately, the coconut has very little meat, and so afterward he is still ravenously hungry.
But Crusoe sees another coconut. However, this one is not busted open. It is not directly serviceable. He thinks about trying to rip it open with his bare hands. Only after opening it would the coconut be a consumers' good. While it is still unopened, it is not directly serviceable. It is only potentially indirectly serviceable, because Crusoe can use the unopened coconut in combination with his personal energy (ripping it open) to produce an open coconut.
Indirectly serviceable means are called factors of production or producers' goods. Producers' goods that directly produce consumers' goods (goods of the first order) are called goods of the second order. Producers' goods that directly produce goods of the second order are called goods of the third order, and so on. As we progress in this manner, we move from lower-order goods to higher-order goods.
Crusoe does not need to produce the unopened coconut; he just found it in nature. Such factors of production that are themselves not produced, but are instead taken directly out of nature, are often called land.
Personal energy used as a factor of production is called labor.
Since neither land nor labor is "produced" in the usual sense of the word, they are often termed "original factors of production."
So combining land (the unopened coconut) and labor (his own effort) Crusoe can try to produce a consumers' good (the opened coconut).
However, Crusoe finds that he is too weak to rip open the coconut with his bare hands. But he has the idea of using a nearby flint rock to smash open the coconut. The flint rock is a good now too (a factor of production), and since it was found in nature it would be characterized as land.
The flint rock's goods-character is derived from the goods-character of the open coconut it helps produce, just as the open coconut in turn derives its goods-character from the satisfaction it provides.
Unfortunately, Crusoe finds that the rock, the unopened coconut, and his labor are still not enough to produce the opened coconut: the coconut husk is just too solid.
So he has another idea: using a cobblestone to break off flakes from the flint rock to make it sharp, and then using the sharp rock to cleave open the coconut.
He uses the cobblestone, labor, and the dull flint rock to produce something new: a sharp flint rock.
This sharp flint rock is not land, because it was not simply found in nature; it was produced. But it is still a factor of production (not a consumers' good), since it is only indirectly serviceable (via creating the open coconut). It is a produced factor of production. Produced factors of production are often called capital goods.
The cobblestone derives its goods-character from the sharp rock, the sharp rock from the opened coconut it helps produce, and the open coconut from the satisfaction it provides.
Thus we have the classical triad of factors of production: land, labor, and capital goods.
It is important to note that Mises did not think the land, labor, and capital triad was useful for value and price theory, and thus he downplayed the importance of the land/labor (original factors of production) vs. capital good (produced factor of production) distinction, especially as less important than the "orders of goods" scheme.
So let us analyze Crusoe's situation using that scheme.
The desired open coconut is a good of the first order. The sharp flint rock used to open the coconut is a good of the second order. And the cobblestone used to sharpen the rock is a good of the third order. Analyzed physically, higher-order goods cause lower-order goods. But analyzed teleologically, causation flows in the reverse direction (backward through time in the mind of the individual): the goods-character of lower-order goods cause the goods-character of higher-order goods.
The goods-character of a good is directly derived from the good(s) of the next-lower order it directly helps to produce. But the goods-character of every good is ultimately derived from the first-order good(s) it indirectly (or directly) helps produce. This is true of even the most lengthy chains of production.
In the above hypothetical acts of coconut production, Crusoe had to deploy factors of production according to certain methods in order to try to produce a consumers' good. The technical knowledge of such methods of deployment are called recipes. All production requires recipes.
Producer and Consumer as Functions
Since even before Adam Smith, functional analysis has been a crucial method in economic science. This method reached maturity in the "functional distribution" approach of John Bates Clark, which was adopted and perfected by Mises.
The underlying notion of functional distribution goes back to Aristotle, who explains the concept quite well: "a man who is a doctor might cure himself. Nevertheless it is not in so far as he is a patient that he possesses the art of medicine: it merely has happened that the same man is doctor and patient."
In other words a doctor who obeys the call to "heal thyself" cures in his capacity as a doctor ("qua doctor"), and is cured in his capacity as a patient ("qua patient").
Taking this approach, there are two ways of looking at Crusoe with regard to his action regarding the coconut. There is the aspect of Crusoe as a possessor of ends to be accomplished, a felt uneasiness that is to be removed. This is Crusoe in his function as a consumer.
There is also the aspect of Crusoe as a deployer of means (factors of production). This is Crusoe in his function as a producer.
Just as means are always deployed for the sake of ends, production is always for the sake of consumption, and never the other way around. "Crusoe the coconut opener" is always (and by definition) at the service of "Crusoe the eater," so to speak. "Crusoe the consumer" is "sovereign" over "Crusoe the producer."
This "consumer sovereignty" (a term coined by William H. Hutt and adopted by Mises) is not just present in autistic exchange. As can be discovered in an exploration of economics proper, it also carries over into barter exchange and into even the most complex market economy. Through social cooperation, the means-ends coordination present in the actions of an individual isolated actor is extended to the market society as a whole.
However, the way in which this occurs involves complicated and subtle processes. This complexity and subtlety sufficiently confuses many people to the extent that, based on their confusion, they propose fundamentally absurd economic doctrines.
For example, there are the syndicalist and corporativist fallacies, which in effect try to make consumption for the sake of production.
And there are the Keynesian and other underconsumptionist fallacies, which, at bottom, are just as absurd as thinking that Crusoe could become richer in consumers' goods by consuming more in order to stimulate his own production. There is a great deal that Mr. Crusoe could teach Mr. Krugman, if the arch-Keynesian would only deign to spend some quality time with him.
As the great Frederic Bastiat wrote, "How happy will nations be when they see clearly how and why what we find false and what we find true of man in isolation continue to be false or true of man in society!"
To fully spell out why most of the economic doctrines that dominate present-day policy are absurd and destructive, we must eventually leave our little island. However, the path toward economic understanding can be followed much more easily if we walk the first mile in Crusoe's sea-soaked shoes.
 The imaginary construction of Crusoe on his island has been used since long before Mises rigorized the methodology of theoretical economics, which goes to support Mises's contention that economics, no matter how muddled it has been at times, has always been a priori and theoretical in the soundness of its core.
 The theological implications of this are interesting to say the least.
 Incidentally, a production process almost identical to this is adopted by Tom Hanks's character in the film Castaway.