Inescapable interdependence of market phenomena

Economics Economics Questions
1

In Human Action, Mises writes:

"all were fully convinced that there was in the course of social events no such regularity and invariance of phenomena as had already been found in the operation of human reasoning and in the sequence of natural phenomena. They did not search for the laws of social cooperation because they thought that man could organize society as he pleased. If social conditions did not fulfill the wishes of the reformers, if their utopias proved unrealizable, the fault was seen in the moral failure of man. Social problems were considered ethical problems. What was needed in order to construct the ideal society, they thought, were good princes and virtuous citizens. With righteous men any utopia might be realized.

The discovery of the inescapable interdependence of market phenomena overthrew this opinion. Bewildered, people had to face a new view of society." (http://mises.org/humanaction/introsec1.asp) Mine underline.

Is he advocating something like inexorable regularity of market phenomena?

I am asking this because Rothbard writes in Praxeology: The Methodology of Austrian Economics:

“It should be noted that for Mises it is only the fundamental axiom of action that is a priori; he conceded that the subsidiary axioms of the diversity of mankind and nature, and of leisure as a consumers’ good, are broadly empirical.” (

The law of demand, for example, is grounded on the empirically recognized fact (and likely mutable) that men don’t like to buy more expensive goods. If, in some time and place, men stop bothering about losing money, then the law of demand will be valid anymore, right? In this hypothetical condition, men will never bother about spending more money on goods–any good.
2

The law of demand is explained by (grounded by) the law of diminishing marginal utility

your hypothetical about people stopping to bother about losing money, should become a hypothetical about people stopping to bother about achieving their ends by employing their scarce means. it wont be tenable.

3

No, the law of demand is grounded in the action axiom itself, as an extension of marginal utility.

4

Right, right! Thank you very much!

So… are all conclusions of the austrian school related to the “regularity of the market phenomena” universal?

That Rothbard’s passage made me a little confused. If there is some conclusion based on an empirical fact (and probably mutable), then the conclusion can also be mutable, right?

Is there some austrian’ principle related to the market process that fits in this condition? Leisure as a consumers’ good, for example. Does this has something to do with labor supply? Can I say that if leisure is not regarded as a consumer’s good by people anymore, then labor supply becomes perfectly inelastic in relation to its price?

5

LMB:

This might be helpful:

“Economic laws describe inevitable implications. If the data they postulate are given, then the consequences the predict necessarily follow. …If, in a given situation, the facts are of a certain order, we are warranted in deducing with complete certainty that other facts which it enables us to describe are also present. …If the “given situation” conforms to a certain pattern, certain other features must also be present, for their presence is “deducible” from the pattern originally postulated. The analytic method is simply a way of discovering the necessary consequences of complex collocations of facts—consequences whose counterpart in reality is not so immediately discernable as the counterpart of the original postulates. It is an instrument for “shaking out” all the implications of given suppositions. Granted the correspondence of its original assumptions and the facts, its conclusions are inevitable and inescapable.” (Lionel Robbins, An Essay on the Nauture & Significance of Economic Science, p. 121-122)

Some non-economic examples I have used previously for illustrative purposes:

If we suppose a person walked 100 feet towards the west, we are “warranted” in deducing that he walked 100 feet away from the east.

If we suppose that a car has been made more fuel efficient by means of making its contour more aerodynamic, we are “warranted” in deducing that the car is now harder to bring to a stop. (more braking power than before must be applied to bring the car to a stop in a given distance)

The person who walks 100 feet toward the west, in so doing, may not pay attention to the fact that he is walking away from the east. Walking away from the east is logically entailed in walking toward the west. Similarly, a person may not pay attention to the fact that in making a car more aerodynamic (for better fuel efficiency), he is thereby making the car harder to stop. But the latter is logically entailed in the former.

This is what Robbins is getting at in writing that the analytic method is “an instrument for shaking out the implications of given suppositions.”

Then, we would consider the question whether or not a person did indeed walk toward the west, or whether a car has indeed been made more aerodynamic, an empirical question. This may be your “mutable,” and this may be Mises’s “thymological.” (i.e., the question of what is supposed—what “givens” we suppose, which givens entail logical co-presences)

The question of the logical entailments of a given supposition is not the same as the question of the presence or not of that supposition.

The two primary economic applications of this principle that come to mind can both be found on pages 14-15 of Hoppe’s Economic Science and the Austrian Method. The primary economic laws are related to and/or flow from the law of marginal utility. Hoppe lists both the law of marginal utiltiy and the law of supply and demand (which in my opinion is simply another form of the law of marginal utility). He also provides the example of minimum wage laws. (These three phenomena most likely are all manifestations of the same fundamental “means/ends” nature of action. For example, the higher the price of labor, other things being equal, the less of it that can be purchased. The “higher price of labor” is the new minimum wage law, and the “less of it that can be purchased” is the unemployment. And thus we have returned to a general statement to the effect that a supposed “increase” in human action, logically entails a co-present “decrease,” and thus an economic law.)

The controversial part is the epistemological basis or epistemological status of these laws. Maybe a topic for another day. : - )

6

Adam Knott, this was a very good answer. Thank you very much. I understood what you mean.

But I still have some doubts. For example, if the “altruist-ethics” (in Randian jargon [haha]) starts being fully accepted, and people adopt its ends as self-sacrifice and, in a hypothetical situation, an employer starts running into loss employing a worker, paying him a very high wage.

Because of this, the economic law that says that high wages (in relation to its free market equilibrium wage) causes unemployment, could be falsified. I am making some mistake?

7

Thank you LMB.

As far as I can tell, your example above brings to light the fact that the wage an employer is willing to pay an employee may be different than the wage that some economist declares is the ‘free market equilibrium wage.’

Your example says, in effect, if all employers are willing to pay employees $100 per hour, and some economist declares that the ‘free market equilibrium wage’ is $17 per hour, and if the legal minimum wage is increased to $22 per hour, then a supposed economic law stating: increasing the minimum legal wage above the ‘free market equilibrium wage’ must cause unemployment—will be falsified.

To me, this is simply a case of bad economic theory. The economic law is mis-conceived.

8

Only in the short run. In the medium to long run, the employer who runs at a loss in order to pay his employee a very high wage will go out of business. Then who will pay the high wages? =0

9

Why? If the law said only that high wages causes losses to the employer, it would be universal, inexorable. But if it says that, always, in every space and time, the employer will get rid of the employee, or will not employ the guy who is asking for a job because of the high wage, it presupposes that the employer doesn’t want to lose money (of course, this is highly probable, but not universal).

nirgrahamUK wrote here on this post: “your hypothetical about people stopping to bother about losing money, should become a hypothetical about people stopping to bother about achieving their ends by employing their scarce means. it wont be tenable.”

But, if people, as I said, start adopting self-sacrifice as its ends, losing money could become a mean to achieve this end. It isn’t impossible to happen.

10

I’ll elaborate on my idea: an employee of a retail sale store sells $300 of products per month, but the minimum wage is $500 per month. Economic law will say that the employer has the incentive to get rid of the employee - universally; any employer will always have the incentive to get rid of any employee who fits in this situation. But I say [ask] that this is not universal - as in the case of the “altruist morality”.

When I say “free market equilibrium wage,” I am adopting a principle that says that there’s some objective criteria of wage determination in a free market: that classical law that asserts that real wage equals to marginal productivity of labor [does the Austrians accept this law?].

11

Thank you LMB:

My reply would be #2 is correct, because #1 is mis-conceived. #1 is mis-conceived because of #3. Modern subjective economics is not the same as classical economics or neo-classical economics based on objective value or objectively measurable value.

As you are implying by your example, how much an employer is willing to pay an employee is a matter decided by the ‘subject’ (the employer). It is a ‘subjective’ choice or judgment. Thus, the question of when or how a minimum wage law necessitates unemployment, is related to the subjective judgment of each employer and how much he/she is willing to pay an employee. Again, as your example implies, if each employer is willing to pay his employee $100 per hour (willing to sacrifice other expenses, willing to sacrifice the profitability of his business, willing to sacrafice his credit rating, etc…), and, if the minimum wage is raised from $12 to $17, then a supposed economic “law” holding that an increase in the minimum wage must necessarily cause unemployment is simply a mis-conceived law.

Perhaps other Austrians would see things differently. My opinion is we run into trouble theoretically when we try to separate economic phenomena from the subjective choices or judgments of individual actors.

12

Thank you very much, Adam Knott, I think I understood now.

Before commenting on your latest post, I concluded (based on things you said) that the fact that the employer doesn’t care about losing money would be represented by a perfectly inelastic labor demand curve, right?

About objective value vs. subjective value, I think I expressed myself badly. Instead of “objective criteria of wage determination in a free market,” I should have said that there is a tendency to a objective condition (equilibrium), i.e., real wages equals marginal productivity of labor. I don’t think this condition has something to do with adopting objective values; I believe this condition comes from the tendency of profits toward zero that exists in markets that have competition between firms. Please, correct me if I am wrong.

13

Thank you LMB:

I’m not sure if this will help, but I would recommend Hayek’s essay “Economics and Knowledge.” (in his book Individualism and Economic Order)

For example:

“I have long felt that the concept of equilibrium itself and the methods which we employ in pure analysis have a clear meaning only when confined to the analysis of the action of a single person and that we are really passing into a different sphere and silently introducing a new element of altogether different character when we apply it to the explanation of the interactions of a number of different individuals.”

“…the concept of equilibrium has a clear meaning if applied to the actions of a single individual…”

“…the sense in which we use the concept of equilibrium to describe the interdependence of the different actions of one person does not immediately admit of application to the relations between the actions of different people.”

(my underlines)

This is Austrian methodological individualism which refers to the relations of actions of the individual. If we consider the individual the ‘subject’ and conceive that the relations of his actions are thus “subjective,” then in this sense, we are not referring to an objective condition of equilibrium, which is what you seem to be referring to in your post.

There are two conceptions of equilibrium as Hayek writes. One refers to the 'subjective" relations of the actions of an individual. The other refers to the ‘objective’ conditions of—for example–the market, or of society, etc… The kind of analysis that Menger initiated, and which Mises practiced, and which Hayek is writing about above, is based on the former concept.

As I mentioned previously, other Austrians may see things differently. In my opinion, the essence of Austrian economics and the Austrian approach to social phenomena generally, is based on strict adherence to methodological individualism.

I agree with Hayek’s sentiment when he writes: “But in the transition from the analysis of the action of an individual to the analysis of the situation in society [these concepts have] undergone an insidious change of meaning.”

14

Please, where can I read more about the law of demand originated through the law of marginal utility?

15

LMB:

If I may sketch some ideas here in this space.

I agree with the gist of what both JI and Nir are saying, though probably each thinker has his/her own particular explanation.

The law of marginal utility asserts a necessary relationship between a unit of an individual’s supply and the value attached to that unit by the individual.

Let’s agree that the law of supply and demand asserts a relationship between supply and demand conceived of in the aggregate. That is, here, the concept is not conceived to be in terms of individual action, but in terms of “society’s” supply and “society’s” demand.

In Austrian theory, only individuals act. And thus only individuals “demand” things and have “supplies.”

From this it follows that any supposed supply or demand ultimately refers to the supply(s) and demand(s) of individual actors.

Marginal utility says there is a relationship between supply and value.

The law of demand says there is a relationship between supply and demand.

But if both laws ultimately refer to individual action (as they must in Austrian theory, since only individuals act in Austrian theory), and if only individuals have supplies, then we might consider whether the “value” and the “demand” referred to in both laws is referring to the same phenomenon in human action.

I would say that when we assert there is a relationship between an individual’s supply and the value an individual attaches to that unit (or further units), and, when we assert there is a relationship between an individual’s supply and his demand for that unit (or further units…however we may conceive the situation), we are touching on the same essential phenomenon. We are conceiving that the individual’s attainment of something bears a logical relationship to an individual’s striving for something.

I think JI and Nir are saying essentially the same thing, or trying to express the same insight.

The law of demand, if that is conceived as a kind of aggregate supply and aggregate demand relationship, is an attempt to apply the law of marginal utility (an exact law of individual action) to “the situation in society.” (to use Hayek’s phrase)

The law of demand is an attempt to apply the law of marginal utility to a collective.

For reading on this general idea (but which may not answer your precise question), I would recommend the following short sections from The Ultimate Foundation of Economic Science (Mises):

The Pitfals of Hypostatization p.80-82

and On the Rejection of Methodological Individualism p.82-89

16

lol. at first I couldn’t find anything, and it made me feel weird and anxious that I could not source, but only make my own arguments…very strange since I knew I had read it and not constructed the knowledge independantly…

I wasted a good quarter of an hour, trying to word my own ‘response’ to the question, and then I had a brain flash and looked in David Gordon’s intro to Economic Reasoning, and its in there in the section “Law Of Demand” where he puts it together from first principles. Lucid and clear, just like you wanted.

I’m still somewhat surprised that I couldn’t (with trivial effort) find a section in Human action or MES on the join of the two concepts . yet i suppose Mises may have assumed it (a la he was writing for a specific readership’ ) and I think it must be in MES only my text search for ‘law of demand’ didn’t drop me at the relevant section…

but Gordon’s got it.. Hurray for Gordon