Exchange
Mises refers to two kinds of exchange. The first he calls “autistic exchange,” which is exactly the same thing as the category of human action. But now he says we “exchange” one possible state for another rather than just choosing one rather than the other. This is an incredibly odd and idiosyncratic use of the word “exchange.” The second type of exchange for Mises is the “interpersonal exchange,” which is exactly what normal people mean by exchange.
The difference can be illustrated in graphs. The graph for autistic exchange is the same one as the one for the category of human action:
(Note: I made a change to hopefully make the graph clearer.)
The graph for interpersonal exchange looks quite a bit different:
Notice the entirely different shape of the graph. In autistic exchange, two lines diverge from a single point. In interpersonal exchange, the two lines begin at different points. In fact, interpersonal exchange really doesn’t concern “action” because it is not about choosing between alternatives. An interpersonal exchange is something that is chosen or can be chosen. An autistic exchange is simply the form of choice (with an end in view).
But the most interesting thing here is not that Mises derives exchange from action, but that he derives action from exchange. In interpersonal exchange, an object is at one point here and only at a later point over there. Thus, interpersonal exchange involves a movement through time. When trying to derive human action from this objective phenomena, one could end up with the wrongheaded view that action is somehow causative of movement through time—that the time is being exchanged in the same way that the spatial possession of the object is. When exchanging objects, one indeed prefers to have the one he is going to get over the one he currently has. Thus, when we consider the possession of the objects only, we might be able to say that one is better off after the trade than before. Even this, however, is not necessarily true. It’s quite possible to prefer the first object in the first time period, and prefer the second object in the second time period.
Production—actualization of possible states considered in relation to itself through time—is in fact more fundamental. It is not production that is a subset of exchange, but in fact exchange that is a subset of production.
An instructive example of the role of exchange in Austrian (and neoclassical) economics can be found in R. A. Radford’s account of a market economy that arose in a POW camp during World War II (see PDF). I had first heard of this fascinating article during an exchange that occurred between anthropologist David Graeber and Austrian economist Robert Murphy over the origins of money. In his book Debt: the First 5000 Years, Graeber argued that the account of the origins of money given by Adam Smith and Carl Menger was (more or less) wrong. Smith and Menger (and Mises) had maintained that money had originated from barter. But Graeber noted that primitive peoples rarely engaged in barter, but instead operated on an informal system of credit. According to Graeber, money originated in bureaucratic institutions—the state and its predecessors. The state would demand taxes to be paid in a certain commodity, and the universal need for this commodity created by taxation would create markets and turn this commodity into “money.” Part of Murphy’s response to Graeber was to point out Radford’s account of the prison economy and how money arose there from barter exactly in the way Menger described. It turns out that many other prisons also exhibit the same phenomena of money emerging from barter. Graeber’s response to this point was rather unfortunate. He argued that the prisoners reinvented money because they came from a society that used it. He should have pointed out a particular characteristic of prisons that make them unique as a form of society—that in a prison, the production of goods essentially does not occur.
The prison therefore is the perfect model of Misesian economics because it reduces all economic activity to the form of exchange. Scarcity takes the form of material scarcity and is thus alienated from its true basis in the temporality of human action. Scarcity appears as a given quantity of something—a quantity determined purely externally, without any relation to the activities of the economizing individuals, and without any apparent relation to the concept of time. Human action appears as consumption, and exchange exists for consumption, as the means for consumption. Value, which is determined by human action in relation to time, therefore takes the form of marginal consumption, or marginal utility. Outside of the prison, it is clear that things are different. Commodities do not simply exist in fixed quantity, but are converted into quantities by the specific quality of human action as it operates in the duration of time. In the prison economy, commodities are only obtained through human action by the means of exchange. But outside it, one can also obtain commodities by the means of production.
In the prison, price is determined by the tension between the opposing means of obtaining the same commodity. In this case, the opposing means are both forms of exchange. The fact that one can “buy” the same commodity from more than one “seller” forces the price down as the sellers compete with each other. But since the buyer’s “money” is also a use-value, a commodity—in Radford’s case, cigarettes—competition among buyers also forces the price in the other direction. Thus, the use-value as it enhances the temporal duration of consumption is opposed to the sheer quantity of goods in existence. One values one commodity over the other due solely to the gain it brings to the singular duration of consumption that the use of either commodity would occupy. In other words, “supply creates its own demand.”
Outside of the prison, price is also determined as a tension between the differing means of obtaining a commodity. But here the competing means are not only forms of exchange, but also forms of production. Thus one is faced with the choice: do I trade for the commodity or do I produce it myself? In the same manner as the competition between sellers, this tension too functions to drive the price down. Scarcity no longer appears as the pure quantity of an existing commodity whose being originates externally. Scarcity can now only refer to the effort—as the negative preference over parallel temporal states—needed to produce the commodity. Here one doesn’t merely choose between the relative merits of different periods of consumption but also between periods of production—both in relation to other periods of production and in relation to periods of consumption. In the prison economy, the price that a seller demands for a commodity is increased as the commodity increases his preference of the period of consumption of that commodity versus that same period with a different commodity. Outside of the prison, the price of the seller’s commodity increases as the buyer’s preference over the period of production of the commodity he sells exceeds the preference over the (ultimately unrealized for him) period of production of the commodity that he buys.
In summary, Mises forces the ideal abstractions of an exchange-only economy onto the real economy of production through the transformation of human action into exchange as “autistic exchange.” Thus, the inconsistencies that I noted earlier in Mises’s conception of human action in its purity do not stem from accidental mistakes. We see that human action is not the true starting point of Mises’s analysis but rather a result of its false beginnings in exchange (and—as we shall see—“profit”). So, for example, wages are explained—and justified—on the grounds that the laborer is exchanging “future” goods for “present” goods. The act of production is entirely abstracted away from the analysis. The fact that the laborer spends most of his time not consuming present goods but producing future ones is all but forgotten. Future goods are seen to be “gifts” from a divine prison warden who allocates them in equal share to each prisoner. It’s simply assumed “a priori” that the real world fits this ideal construction of an exchange-only economy. Even Austrian economists tacitly admit that there is something fundamentally different about the prison economy that allows it to fit their ideal models better than the actual economy that they’re supposed to explain. One “Austrian” laments with double irony that “Only Criminals Use Honest Money!”