Chapter IV. A First Analysis of the Category of Action
Summary
1. Ends and Means
“The end is the result sought by an actor. The means is whatever is used to attain the end. Ends and means do not exist in the physical universe but rather are the product of a valuing mind as it surveys its physical environment.”
Praxeology is not concerned with ends, but only with the means the actor is employing to achieve his end.
2. The Scale of Value
An actor would have many ends competing to be fulfilled. His action represents his desire to satisfy the most urgent end. Ends are organized in a scale of values or in an ordinal way, instead of a cardinal one where you assign a specific value to each end. By ordering in an ordinal way, you are only able to say that an end is preferred over other end, but not by how much.
3. The Scale of Needs
Some say that man is conditioned to satisfy his “needs” first, referring to the biological or physiological needs, but these are also organized in a scale of value, and thus are subjective to each individual.
4. Action as an Exchange
Every action is an exchange. By doing an action, I’m not making other action to satisfy other end. This is the opportunity cost. It means that the actor would evaluate his costs and profits in every action he makes in order to do the one that brings more satisfaction.
Why It Matters
This relatively short chapter seems simple enough, but it is truly extraordinary and deserves careful study. For this is where Mises finally links his “philosophical tangents” with “real economics.” In particular, Mises shows that the concept of action implies the concepts of value, price, costs, profit, and loss. These are not simply offshoots of an organized market where goods trade against money, but are actually fundamental categories that would exist even for an isolated actor who engages in “barter” with nature.
In this chapter, Mises also lays the framework for the “Austrian” approach to the capital structure, with the hierarchy of goods in terms of their remoteness from the final act of consumption.
1. Ends and Means
“The end is the result sought by an actor. The means is whatever is used to attain the end. Ends and means do not exist in the physical universe but rather are the product of a valuing mind as it surveys its physical environment.”
Praxeology is not concerned with ends, but only with the means the actor is employing to achieve his end.
2. The Scale of Value
An actor would have many ends competing to be fulfilled. His action represents his desire to satisfy the most urgent end. Ends are organized in a scale of values or in an ordinal way, instead of a cardinal one where you assign a specific value to each end. By ordering in an ordinal way, you are only able to say that an end is preferred over other end, but not by how much.
3. The Scale of Needs
Some say that man is conditioned to satisfy his “needs” first, referring to the biological or physiological needs, but these are also organized in a scale of value, and thus are subjective to each individual.
4. Action as an Exchange
Every action is an exchange. By doing an action, I’m not making other action to satisfy other end. This is the opportunity cost. It means that the actor would evaluate his costs and profits in every action he makes in order to do the one that brings more satisfaction.
Why It Matters
This relatively short chapter seems simple enough, but it is truly extraordinary and deserves careful study. For this is where Mises finally links his “philosophical tangents” with “real economics.” In particular, Mises shows that the concept of action implies the concepts of value, price, costs, profit, and loss. These are not simply offshoots of an organized market where goods trade against money, but are actually fundamental categories that would exist even for an isolated actor who engages in “barter” with nature.
In this chapter, Mises also lays the framework for the “Austrian” approach to the capital structure, with the hierarchy of goods in terms of their remoteness from the final act of consumption.
Chapter V. Time
Summary
1. The Temporal Character of Praxeology
Praxeology is a logical system and like mathematics and geometry, it’s out of time. Nevertheless, it contains change, causality, and the notions of sooner and later, thus the subject matter is related to time.
2. Past, Present, and Future
Action is related to time since it allows man to decide the order of his actions. An important point to remark is that the present in Praxeology is not considered only an instant between past and future, but an extended period of time.
3. The Economization of Time
Even if a person were immortal, he or she would be subject to the scarcity of time. This is because actions cannot be done simultaneously, and thus we must use our time wisely in order to satisfy our most urgent needs first.
4. The Temporal Relation Between Actions
The same as the section before, it refers to the non-simultaneous nature of actions, and thus we must decide what actions we would do first.
Why It Matters
There are several reasons why this chapter is important. First, time preference is a crucial component of the Misesian theory of interest, and so Mises would naturally want to estab- lish a special role for time in the early chapters when setting up the praxeological framework. Second, Mises wants to demon- strate that the dimension of time is different from the three dimensions of space; Mises uses what O’Driscoll and Rizzo have called Bergsonian time (see footnote 2 on page 100). Unlike space, there is something qualitatively different about time (because of its irreversibility) and this difference has tremen- dous relevance to action. Finally, this chapter is important because (as we discuss more in the “Technical Notes” below) it underscores the difference between praxeology and mainstream utility theory.
1. The Temporal Character of Praxeology
Praxeology is a logical system and like mathematics and geometry, it’s out of time. Nevertheless, it contains change, causality, and the notions of sooner and later, thus the subject matter is related to time.
2. Past, Present, and Future
Action is related to time since it allows man to decide the order of his actions. An important point to remark is that the present in Praxeology is not considered only an instant between past and future, but an extended period of time.
3. The Economization of Time
Even if a person were immortal, he or she would be subject to the scarcity of time. This is because actions cannot be done simultaneously, and thus we must use our time wisely in order to satisfy our most urgent needs first.
4. The Temporal Relation Between Actions
The same as the section before, it refers to the non-simultaneous nature of actions, and thus we must decide what actions we would do first.
Why It Matters
There are several reasons why this chapter is important. First, time preference is a crucial component of the Misesian theory of interest, and so Mises would naturally want to estab- lish a special role for time in the early chapters when setting up the praxeological framework. Second, Mises wants to demon- strate that the dimension of time is different from the three dimensions of space; Mises uses what O’Driscoll and Rizzo have called Bergsonian time (see footnote 2 on page 100). Unlike space, there is something qualitatively different about time (because of its irreversibility) and this difference has tremen- dous relevance to action. Finally, this chapter is important because (as we discuss more in the “Technical Notes” below) it underscores the difference between praxeology and mainstream utility theory.
Chapter VI. Uncertainty
Summary
1. Uncertainty and Acting
“Action implies uncertainty of the future. If the future were known, there would be no impetus to action.”
2. The Meaning of Probability
This section introduces the mathematical approach to face uncertainty. There are two fields of probability, class (used in natural sciences – causality) and case probability (used in social sciences – teleology; subjective).
3. Class Probability
In this case, we know how a class of events behaves but not how particulars behave (insurance).
4. Case Probability
In here, we know some factors that affect a particular event, but don’t know other factors that also influence the outcome (sporting event or political campaign, people’s actions).
5. Numerical Evaluation of Case Probability
This try to use numerical language to define certain event is meaningless since we are evaluating a particular event which we cannot know the outcome (particular’s actions).
6. Betting, Gambling, and Playing Games
· Betting: risking money when the actor knows some factors.
· Gambling: risking money when the actor only knows the frequencies of the class.
· Playing Games: this is a special type of action.
7. Praxeological Prediction
Praxeology can only make qualitative predictions about the future. It’s useless to predict quantitatively since it depends on the actions of individuals (change in demand and supply, prices, etc.)
Why It Matters
In this short chapter, Mises accomplishes several things. First, he establishes the necessary connection between action and uncertainty. Inasmuch as neoclassical economics ignored uncertainty for many decades, this alone is important. But beyond that, Mises shows the limitations of formal mathematical approaches to probability. This has continuing relevance because the mainstream economists answered the criticisms of “perfect information” by simply pushing the problem back one step; instead of assuming that the agents in their models knew the future perfectly, they assumed that their agents knew the exact probability distributions of random variables in the models, which in turn would determine future outcomes. (Israel Kirzner has written extensively on this nonsolution to the problem.) For a third contribution, Mises nonchalantly offers a brilliant approach to defining class probability itself, and as an aside points out the circularity in conventional mathematical treatments!
1. Uncertainty and Acting
“Action implies uncertainty of the future. If the future were known, there would be no impetus to action.”
2. The Meaning of Probability
This section introduces the mathematical approach to face uncertainty. There are two fields of probability, class (used in natural sciences – causality) and case probability (used in social sciences – teleology; subjective).
3. Class Probability
In this case, we know how a class of events behaves but not how particulars behave (insurance).
4. Case Probability
In here, we know some factors that affect a particular event, but don’t know other factors that also influence the outcome (sporting event or political campaign, people’s actions).
5. Numerical Evaluation of Case Probability
This try to use numerical language to define certain event is meaningless since we are evaluating a particular event which we cannot know the outcome (particular’s actions).
6. Betting, Gambling, and Playing Games
· Betting: risking money when the actor knows some factors.
· Gambling: risking money when the actor only knows the frequencies of the class.
· Playing Games: this is a special type of action.
7. Praxeological Prediction
Praxeology can only make qualitative predictions about the future. It’s useless to predict quantitatively since it depends on the actions of individuals (change in demand and supply, prices, etc.)
Why It Matters
In this short chapter, Mises accomplishes several things. First, he establishes the necessary connection between action and uncertainty. Inasmuch as neoclassical economics ignored uncertainty for many decades, this alone is important. But beyond that, Mises shows the limitations of formal mathematical approaches to probability. This has continuing relevance because the mainstream economists answered the criticisms of “perfect information” by simply pushing the problem back one step; instead of assuming that the agents in their models knew the future perfectly, they assumed that their agents knew the exact probability distributions of random variables in the models, which in turn would determine future outcomes. (Israel Kirzner has written extensively on this nonsolution to the problem.) For a third contribution, Mises nonchalantly offers a brilliant approach to defining class probability itself, and as an aside points out the circularity in conventional mathematical treatments!
Chapter VII. Action Within the World
Summary
1. The Law of Marginal Utility
Marginal utility refers to the satisfaction that that extra unit of something is going to give me. Man chooses action between the scale of values and by doing this he is assigning more value to the most urgent ends and less value to the less urgent ends. The law of decreasing marginal utility means that the additional units of a good would bring less satisfaction in the measure that we acquire them. For example, when you eat a Big Mc, the first one brings you more satisfaction that the second one, and the second one to the third, and so on.
2. The Law of Returns
Although we can’t classify our ends in a cardinal scale, we can assign a quantitative measure to the causal relations of the world. This refers to the production of goods and the means I’m going to use to make them. The law of returns says that there’s an optimum combination of resources to produce certain good and outside that optimum, my returns will decrease.
3. Human Labor as a Means
Man must choose the combination between labor and leisure. He works in order to have leisure later, so every unit of time man uses labor; it brings disutility and increases the value of leisure. Labor is the means to achieve the actor’s ends.
4. Production
*“Production is not creative; it rather transforms the given material objects of the universe into forms that are more pleasing to actors. The true creation occurs in the mind of the actor, who surveys the available means and conceives of a way to improve his condition.”
Why It Matters
Mises spends most of his time in section 1 guarding against the numerous fallacies and misconceptions regarding marginal utility. Mainstream economists often treated utility as a cardinal substance that could be manipulated mathematically; the utility of a stock of goods was seen as the integral of the utility of each infinitesimal unit. Other writers tried to explain decreasing marginal utility as an empirical regularity, and they pointed to the Weber-Fechner law, which demonstrated, e.g., that people need larger and larger increments of intensity in order to distinguish between brighter and brighter lights. Yet as Mises points out, the law of decreasing marginal utility is applicable to any actor, whether or not he (or it) has a body with sensory organs that operate like the typical human’s.
Mises accomplishes a great deal in the space devoted to labor. He first defines labor, and explains why it deserves special treatment from the modern economist. Having said that, he explodes numerous fallacies regarding labor and how it is allegedly different from other factors of production.
1. The Law of Marginal Utility
Marginal utility refers to the satisfaction that that extra unit of something is going to give me. Man chooses action between the scale of values and by doing this he is assigning more value to the most urgent ends and less value to the less urgent ends. The law of decreasing marginal utility means that the additional units of a good would bring less satisfaction in the measure that we acquire them. For example, when you eat a Big Mc, the first one brings you more satisfaction that the second one, and the second one to the third, and so on.
2. The Law of Returns
Although we can’t classify our ends in a cardinal scale, we can assign a quantitative measure to the causal relations of the world. This refers to the production of goods and the means I’m going to use to make them. The law of returns says that there’s an optimum combination of resources to produce certain good and outside that optimum, my returns will decrease.
3. Human Labor as a Means
Man must choose the combination between labor and leisure. He works in order to have leisure later, so every unit of time man uses labor; it brings disutility and increases the value of leisure. Labor is the means to achieve the actor’s ends.
4. Production
*“Production is not creative; it rather transforms the given material objects of the universe into forms that are more pleasing to actors. The true creation occurs in the mind of the actor, who surveys the available means and conceives of a way to improve his condition.”
Why It Matters
Mises spends most of his time in section 1 guarding against the numerous fallacies and misconceptions regarding marginal utility. Mainstream economists often treated utility as a cardinal substance that could be manipulated mathematically; the utility of a stock of goods was seen as the integral of the utility of each infinitesimal unit. Other writers tried to explain decreasing marginal utility as an empirical regularity, and they pointed to the Weber-Fechner law, which demonstrated, e.g., that people need larger and larger increments of intensity in order to distinguish between brighter and brighter lights. Yet as Mises points out, the law of decreasing marginal utility is applicable to any actor, whether or not he (or it) has a body with sensory organs that operate like the typical human’s.
Mises accomplishes a great deal in the space devoted to labor. He first defines labor, and explains why it deserves special treatment from the modern economist. Having said that, he explodes numerous fallacies regarding labor and how it is allegedly different from other factors of production.