Playing a game can therefore be called an action. But it is not permissible to reverse this statement and to call every action a game or to deal with all actions as if they were games. The immediate aim in playing a game is to defeat the partner according to the rules of the game. This is a peculiar and special case of acting. Most actions do not aim at anybody’s defeat or loss. They aim at an improvement in conditions. It can happen that this improvement is attained at some other men’s expense. But this is certainly not always the case. It is, to put it mildly, certainly not the case within the regular operation of a social system based on the division of labor.
There is not the slightest analogy between playing games and the conduct of business within a market society. The card player wins money by outsmarting his antagonist. The businessman makes money by supplying customers with goods they want to acquire. There may exist an analogy between the strategy of a card player and that of a bluffer. There is no need to investigate this problem. He who interprets the conduct of business as trickery is on the wrong path.
The characteristic feature of games is the antagonism of two or more players or groups of players.3 The characteristic feature of business within a society, i.e., within an order based on the division of labor, is concord in the endeavors of its members. As soon as they begin to antagonize one another, a tendency toward social disintegration emerges.
Within the frame of a market economy competition does not involve antagonism in the sense in which this term is applied to the hostile clash of incompatible interests. Competition, it is true, may sometimes or even very often evoke in the competitors those passions of hatred and malice which usually accompany the intention of inflicting evil on other people. Psychologists are therefore prone to confuse combat and competition. But praxeology must beware of such artificial and misleading equivocations. From its point of view there exists a fundamental difference between catallactic competition and combat. Competitors aim at excellence and preeminence in accomplishments within a system of mutual cooperation. The function of competition is to assign to every member of a social system that position in which he can best serve the whole of society and all its members. It is a method of selecting the most able man for each performance. Where there is social cooperation, there some variety of selection must be applied. Only where the assignment of various individuals to various tasks is effected by the dictator’s decisions alone and the individuals concerned do not aid the dictator by endeavors to represent their own virtues and abilities in the most favorable light, is there no competition.
We will have to deal at a later stage of our investigations with the function of competition.4 At this point we must only emphasize that it is misleading to apply the terminology of mutual extermination to the problems of mutual cooperation as it works within a society. Military terms are inappropriate for the description of business operations. It is, e.g., a bad metaphor to speak of the conquest of a market. There is no conquest in the fact that one firm offers better or cheaper products than its competitors. There is strategy in business only in a metaphorical sense.
7. Praxeological Prediction
Praxeological knowledge makes it possible to predict with apodictic certainty the outcome of various modes of action. But, of course, such prediction can never imply anything regarding quantitative matters. Quantitative problems are in the field of human action open to no other elucidation than that by understanding.
We can predict, as will be shown later, that—other things being equal—a fall in the demand for a will result in a drop in the price of a. But we cannot predict the extent of this drop. This question can be answered only by understanding.
The fundamental deficiency implied in every quantitative approach to economic problems consists in the neglect of the fact that there are no constant relations between what are called economic dimensions. There is neither constancy nor continuity in the valuations and in the formation of exchange ratios between various commodities. Every new datum brings about a reshuffling of the whole price structure. Understanding, by trying to grasp what is going on in the minds of the men concerned, can approach the problem of forecasting future conditions. We may call its method unsatisfactory and the positivists may arrogantly scorn it. But such arbitrary judgments must not and cannot obscure the fact that understanding is the only appropriate method of dealing with the uncertainty of future conditions.
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1. John Stuart Mill, A System of Logic Ratiocinative and Inductive (new impression, London, 1936), p. 353.
2. In life insurance the insured’s stake spent in vain consists only in the difference between the amount collected and the amount he could have accumulated by saving.
3. “Patience” or “Solitaire” is not a one-person game, but a pastime, a means of escaping boredom. It certainly does not represent a pattern for what is going on in a communistic society, as John von Neumann and Oscar Morgensten (Theory of Games and Economic Behavior [Princeton, 1944], p. 86) assert.
4. See below, pp. 273–277.
VII. ACTION WITHIN THE WORLD
1. The Law of Marginal Utility
ACTION sorts and grades; originally it knows only ordinal numbers, not cardinal numbers. But the external world to which acting man must adjust his conduct is a world of quantitative determinateness. In this world there exist quantitative relations between cause and effect. If it were otherwise, if definite things could render unlimited services, such things would never be scarce and could not be dealt with as means.
Acting man values things as means for the removal of his uneasiness. From the point of view of the natural sciences the various events which result in satisfying human needs appear as very different. Acting man sees in these events only a more or a less of the same kind. In valuing very different states of satisfaction and the means for their attainment, man arranges all things in one scale and sees in them only their relevance for an increase in his own satisfaction. The satisfaction derived from food and that derived from the enjoyment of a work of art are, in acting man’s judgment, a more urgent or a less urgent need; valuation and action place them in one scale of what is more intensively desired and what is less. For acting man there exists primarily nothing but various degrees of relevance and urgency with regard to his own wellbeing.
Quantity and quality are categories of the external world. Only indirectly do they acquire importance and meaning for action. Because every thing can only produce a limited effect, some things are considered scarce and treated as means. Because the effects which things are able to produce are different, acting man distinguishes various classes of things. Because means of the same quantity and quality are apt always to produce the same quantity of an effect of the same quality, action does not differentiate between concrete definite quantities of homogeneous means. But this does not imply that it attaches the same value to the various portions of a supply of homogeneous means. Each portion is valued separately. To each portion its own rank in the scale of value is assigned. But these orders of rank can be ad libitum interchanged among the various portions of the same magnitude.
If acting man has to decide between two or more means of different classes, he grades the individual portions of each of them. He assigns to each portion its special rank. In doing so he need not assign to the various portions of the same means orders of rank which immediately succeed one another.
The assignment of orders of rank through the valuation is done only in acting and through acting. How great the portions are to which a single order of rank is assigned depends on the individual and unique conditions under which man acts in every case. Action does not deal with physical or metaphysical units which it values in an abstract academic way; it is always faced with alternatives between which it chooses. The choice must always be made between definite quantities of means. It is permissible to call the smallest quantity which can be the object of such a decision a unit. But one must guard oneself against the error of assuming that the valuati
on of the sum of such units is derived from the valuation of the units, or that it represents the sum of the valuations attached to these units.
A man owns five units of commodity a and three units of commodity b. He attaches to the units of a the rank-orders 1, 2, 4, 7, and 8, to the units of b the rank-orders 3, 5, and 6. This means: If he must choose between two units of a and two units of b, he will prefer to lose two units of a rather than two units of b. But if he must choose between three units of a and two units of b, he will prefer to lose two units of b rather than three units of a. What counts always and alone in valuing a compound of several units is the utility of this compound as a whole—i.e., the increment in wellbeing dependent upon it or, what is the same, the impairment of wellbeing which its loss must bring about. There are no arithmetical processes involved, neither adding nor multiplying; there is a valuation of the utility dependent upon the having of the portion, compound, or supply in question.
Utility means in this context simply: causal relevance for the removal of felt uneasiness. Acting man believes that the services a thing can render are apt to improve his own wellbeing, and calls this the utility of the thing concerned. For praxeology the term utility is tantamount to importance attached to a thing on account of the belief that it can remove uneasiness. The praxeological notion of utility (subjective use-value in the terminology of the earlier Austrian economists) must be sharply distinguished from the technological notion of utility (objective use-value in the terminology of the same economists). Use-value in the objective sense is the relation between a thing and the effect it has the capacity to bring about. It is to objective use-value that people refer in employing such terms as the “heating value” or “heating power” of coal. Subjective use-value is not always based on true objective use-value. There are things to which subjective use-value is attached because people erroneously believe that they have the power to bring about a desired effect. On the other hand there are things able to produce a desired effect to which no use-value is attached because people are ignorant of this fact.
Let us look at the state of economic thought which prevailed on the eve of the elaboration of the modern theory of value by Carl Menger, William Stanley Jevons, and Léon Walras. Whoever wants to construct an elementary theory of value and prices must first think of utility. Nothing indeed is more plausible than to assume that things are valued according to their utility. But then a difficulty appears which presented to the older economists a problem they failed to solve. They observed that things whose “utility” is greater are valued less than other things of smaller utility. Iron is less appreciated than gold. This fact seems to be incompatible with a theory of value and prices based on the concepts of utility and use-value. The economists believed that they had to abandon such a theory and tried to explain the phenomena of value and market exchange by other theories.
Only late did the economists discover that the apparent paradox was the outcome of a vicious formulation of the problem involved. The valuations and choices that result in the exchange ratios of the market do not decide between gold and iron. Acting man is not in a position in which he must choose between all the gold and all the iron. He chooses at a definite time and place under definite conditions between a strictly limited quantity of gold and a strictly limited quantity of iron. His decision in choosing between 100 ounces of gold and 100 tons of iron does not depend at all on the decision he would make if he were in the highly improbable situation of choosing between all the gold and all the iron. What counts alone for his actual choice is whether under existing conditions he considers the direct or indirect satisfaction which 100 ounces of gold could give him as greater or smaller than the direct or indirect satisfaction he could derive from 100 tons of iron. He does not express an academic or philosophical judgment concerning the “absolute” value of gold and of iron; he does not determine whether gold or iron is more important for mankind; he does not perorate as an author of books on the philosophy of history or on ethical principles. He simply chooses between two satisfactions both of which he cannot have together.
To prefer and to set aside and the choices and decisions in which they result are not acts of measurement. Action does not measure utility or value; it chooses between alternatives. There is no abstract problem of total utility or total value.1 There is no ratiocinative operation which could lead from the valuation of a definite quantity or number of things to the determination of the value of a greater or smaller quantity or number. There is no means of calculating the total value of a supply if only the values of its parts are known. There is no means of establishing the value of a part of a supply if only the value of the total supply is known. There are in the sphere of values and valuations no arithmetical operations; there is no such thing as a calculation of values. The valuation of the total stock of two things can differ from the valuation of parts of these stocks. An isolated man owning seven cows and seven horses may value one horse higher than one cow and may, when faced with the alternative, prefer to give up one cow rather than one horse. But at the same time the same man, when faced with the alternative of choosing between his whole supply of horses and his whole supply of cows, may prefer to keep the cows and to give up the horses. The concepts of total utility and total value are meaningless if not applied to a situation in which people must choose between total supplies. The question whether gold as such and iron as such is more useful and valuable is reasonable only with regard to a situation in which mankind or an isolated part of mankind must choose between all the gold and all the iron available.
The judgment of value refers always only to the supply with which the concrete act of choice is concerned. A supply is ex definitione always composed of homogeneous parts each of which is capable of rendering the same services as, and of being substituted for, any other part. It is therefore immaterial for the act of choosing which particular part forms its object. All parts—units—of the available stock are considered as equally useful and valuable if the problem of giving up one of them is raised. If the supply decreased by the loss of one unit, acting man must decide anew how to use the various units of the remaining stock. It is obvious that the smaller stock cannot render all the services the greater stock could. That employment of the various units which under this new disposition is no longer provided for, was in the eyes of acting man the least urgent employment among all those for which he had previously assigned the various units of the greater stock. The satisfaction which he derived from the use of one unit for this employment was the smallest among the satisfactions which the units of the greater stock had rendered to him. It is only the value of this marginal satisfaction on which he must decide if the question of renouncing one unit of the total stock comes up. When faced with the problem of the value to be attached to one unit of a homogeneous supply, man decides on the basis of the value of the least important use he makes of the units of the whole supply; he decides on the basis of marginal utility.
If a man is faced with the alternative of giving up either one unit of his supply of a or one unit of his supply of b, he does not compare the total value of his total stock of a with the total value of his stock of b. He compares the marginal values both of a and of b. Although he may value the total supply of a higher than the total supply of b, the marginal value of b may be higher than the marginal value of a.
The same reasoning holds good for the question of increasing the available supply of any commodity by the acquisition of an additional definite number of units.
For the description of these facts economics does not need to employ the terminology of psychology. Neither does it need to resort to psychological reasoning and arguments for proving them. If we say that the acts of choice do not depend on the value attached to a whole class of wants, but on that attached to the concrete wants in question irrespective of the class in which they may be reckoned, we do not add anything to our knowledge and do not trace it back to some better-known or more general knowledge. This mode of speaking in terms of class
es of wants becomes intelligible only if we remember the role played in the history of economic thought by the alleged paradox of value. Carl Menger and Böhm-Bawerk had to make use of the term “class of wants” in order to refute the objections raised by those who considered bread as such more valuable than silk because the class “want of nourishment” is more important than the class “want of luxurious clothing.”2 Today the concept “class of wants” is entirely superfluous. It has no meaning for action and therefore none for the theory of value; it is, moreover, liable to bring about error and confusion. Construction of concepts and classification are mental tools; they acquire meaning and sense only in the context of the theories which utilize them.3 It is nonsensical to arrange various wants into “classes of wants” in order to establish that such a classification is of no avail whatever for the theory of value.
The law of marginal utility and decreasing marginal value is independent of Gossen’s law of the saturation of wants (first law of Gossen). In treating marginal utility we deal neither with sensuous enjoyment nor with saturation and satiety. We do not transcend the sphere of praxeological reasoning in establishing the following definition: We call that employment of a unit of a homogeneous supply which a man makes if his supply is n units, but would not make if, other things being equal, his supply were only n — 1 units, the least urgent employment or the marginal employment, and the utility derived from it marginal utility. In order to attain this knowledge we do not need any physiological or psychological experience, knowledge, or reasoning. It follows necessarily from our assumptions that people act (choose) and that in the first case acting man has n units of a homogeneous supply and in the second case n — 1 units. Under these conditions no other result is thinkable. Our statement is formal and aprioristic and does not depend on any experience.
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