The nature and existence of economic law, and its manifestation in the interplay of market forces, must now be briefly traced back to the actions of the individual human being.
THE INDIVIDUAL AND ECONOMIC BEHAVIOR
The possibility of perceiving chains of cause and effect uniquely economic is due to the presence in human action of categories that have no parallel in the realm of physical laws. And because the mind of the individual investigating causation in economic affairs is capable of directly understanding these categories (since, as we shall see, they are self-evident to the human mind), he is capable of directly grasping the existence of economic laws. The human mind is immediately conscious of the fundamental and all-pervasive category embedded in the web of all conscious human action. This category is purpose. Actions are undertaken for specific purposes. We are aware of the purposive character of our own actions, and we understand that the conscious actions of other human beings also are purposive. However much we may either despise or fail to understand the particular purposes behind the actions of our fellows, we do not doubt that their actions aim at securing for themselves some situation that they prefer over what they expect to prevail in the absence of their actions.
Moreover, because we assume all action to be purposive, and because we live in a world which offers at each instant the possibility of many different kinds of action, we are immediately aware, too, that every human action must be the embodiment of a choice among alternatives. At each instant man must choose between the courses of action (including inaction) that are open to him. Any such adopted course, we understand, has been adopted as preferable to the rejected courses of action.
Thus, human action involves the categories of purpose, of alternatives, of choice among these alternatives, of the preferred (that is, the adopted) alternative, and of the rejected alternatives. These categories suffuse all transactions of men, both in isolation and in the market. They are the categories upon which economic theory depends for its very existence.
Economic theory approaches complex social and market phenomena by searching for the individual actions from which these phenomena arise. Any such individual action is understood as having involved the adoption of one alternative and the rejection of others. The adopted alternative is understood as having been compared with, and preferred over, the other alternatives; that is, it was considered as being either the means to the attainment of the most cherished possible purpose or the most efficient of the available means to the attainment of a specific purpose. Economic theory understands that each action inevitably involved a cost. The adopted alternative has been adopted at the expense of the rejected alternatives. The rejected alternatives, which in themselves may have been highly desirable, have been renounced for the sake of the adopted alternative. Economic theory “explains” individual actions, therefore, by tracing them to the circumstances that made them “profitable”; that is, to the circumstances that made the “costs” worthwhile. Changes in the patterns of human action are traced in this way either to changes in the terms on which alternatives are available relative to each other, or to changes in the framework of purposes within which the worthwhileness of the relevant costs are valued.
Market phenomena lend themselves readily to analysis in this way as soon as it is realized that the terms on which alternatives are offered to an individual are, in a market economy, determined in large part by the actions of other individuals rather than merely by natural events. It becomes illuminatingly possible to view every transaction in the market as, on the one hand, a consequence of the particular complex of alternatives presented to the individual by the market before the action was undertaken, and, on the other hand, as in some way affecting the complex of alternatives that will be subsequently faced by the individual market participants. Even the most intricately entangled web of market phenomena can be reduced to the elementary actions that they consist of. Systematic analysis of market phenomena in this way is able to yield propositions linking changing patterns in prices, qualities and quantities of output, of consumption, and the like, to logically prior changes in the “data.” These logically prior changes may be either in the circumstances (arising both inside and outside the market) affecting the alternative opportunities open to individuals pursuing their purposes, or in the structure of purposes with reference to which individuals appraise the relative usefulness of opportunities open to them.
To revert to an example mentioned several pages previously, a sharp decrease in the quantity of ice supplied to the market can easily be linked, by this kind of reasoning, to a subsequent price rise. As ice purchasers find the availability of ice sharply reduced (other things being unchanged), they find it necessary to restrict the obtainable limited quantities of ice to only the most important of the uses to which the previously larger quantity of ice had been put. Thus, any additional ice block that they contemplate to purchase after the decrease in supply involves the potential fulfillment of a purpose held more important than the purpose whose fulfillment, before the decrease in supply, depended on the purchase of an additional ice block. It follows that some of the alternatives that, before the decrease in supply, were more important than an additional ice block may now be less important than an additional ice block. An alternative whose sacrifice for the sake of an additional ice block had hitherto been considered as not worthwhile will now be considered, perhaps, as highly “profitable.” In other words, the cost that individuals will be prepared to incur (that is, the price that they will be willing to offer) for an additional block of ice, has risen. Further examination of the machinery of a competitive market would then readily explain the subsequent higher market prices for ice.
The simple causal chain shown thus to link a decrease in supply with a subsequent price rise has been adduced merely as an illustration of the concatenation of decisions that make up any period of market history, and of the kind of reasoning that can reveal the operation of economic law in this way. The theory of the market that we study in this book applies this kind of reasoning to the isolation of the principal types of causal chains that express themselves through market forces and that make up the skeleton of the market system of economic organization.
ECONOMIC THEORY AND ECONOMIC REALITY
Our ice block illustration, at the same time, is able to clarify the relationship between the world of economic theory and the world of economic reality. This relationship must be kept firmly in mind throughout what might otherwise appear as the unrealistic or abstract chapters that make up the bulk of this book.
Our theory of ice prices, it will be observed, did not depend upon the particular physical properties of ice. Although we may know what physical properties of ice make it an economic good, all that is required for our “ice price” theory is simply the fact that ice is an economic good—simply, that more of it is preferred to less of it. In fact, everything which we were able to conclude concerning the price of ice can be asserted with equal validity concerning economic goods in general.
Thus, abstractness and generality are the twin aspects of economic theory that emerge from our illustration. Economic theory is abstract, in the sense that the reasoning does not depend on the numerous particular properties of the data we are theorizing about. Economic reasoning throws light, for example, on situations that human beings associate with specific sensations. The demand for food has to do with feelings of hunger or of satiety; the demand for reading material has to do with the thrills of exploration, suspense, or learning; the supply of labor has to do with feelings of weariness and fatigue. It is emphasized that economic