The Market Process Is Indivisible and Logically-Interdependent

In the science of human action, the effects of erroneous notions of the market process, most particularly as they pertain to policy-making decisions, are not to be underestimated. The economist can not remain indifferent to these in an era in which the appeals of interventionism and government expansion increasingly hold sway in the domain of public policy. Put differently, we cannot deny how economic and social policies rooted in mistaken views of the market’s process—affect the decisions of consumers who are intent on employing the market as a means towards the satisfaction of their most urgent needs. This is of general significance given that policies, when unsuitable to chosen ends, primarily result in either or both of the following outcomes:

(a) Some groups in society becoming better-off at the expense of other groups;

(b) Some gains being obtained in the short term at the cost of greater impairment of welfare in the future.

Virtually every economic policy is theory-laden, and at the root of each economic theory lies a fundamental notion of the market as either an “interdependent system of logically necessary relations” or an “aggregation of autonomous events.” This article attempts to highlight the comparative implications of these concepts of the market—as they manifest in choices of policies, which ultimately result in either furthering social cooperation or hampering cooperation in the market.

The Oneness of the Market Process—From Consumer Valuation to Satisfaction of Need

The market is indivisible and logically coherent. This is easily ascertained in the peculiar way in which it tends to foster the harmony of rightly understood interests of various participants despite the absence of conscious design by a planner.

Say the consumer is currently dissatisfied with present conditions of his well-being and desires to remove his uneasiness by acting to substitute a more favorable condition in the future with the present condition. He arranges his values according to an ordinal scale of importance; this he makes by preferring the satisfaction of his present need to the satisfaction of competing needs. He seeks to have at his disposal definite quantities of the first-order good whose properties render capable of being brought into causal connection with the satisfaction of this urgent need, consequently attributing a higher value to this good.

The entrepreneur, in his ongoing alertness to opportunities for profit-making, discovers the existence of the consumer’s need for the first-order good in question, imputing the consumer’s valuation to the total complex of complementary goods of higher orders that combine to bring about the first-order good. He makes the necessary economic calculations and speculates about the future price at which consumers would be willing to pay for the final product. With due allowance made for time preference, if the sum of prices of the complementary goods of higher-orders is less than the speculated price of the final product, he proceeds with the venture; otherwise, he disembarks.

However, if he reckons the venture as potentially profitable, and given the inexorable conditions of scarcity in which the productive factors are subject, a state of affairs arises in which the entrepreneur competes with other entrepreneurs to outbid one another for these productive factors which always have alternative uses. Hence, the owners of these scarce factors—workers, landowners, and capitalists—voluntarily give up their resources to the highest bidder, who in turn pays them according to the limit set by the anticipated price of the marginal product. If at the end of the day the consumers, in line with their initial valuations, proceed to pay the anticipated price of the final product or more—depending on the unique circumstances surrounding supply—then the entrepreneur’s anticipation of the future conditions of the market is validated. Profit is made. On the other hand, if the consumer abstains from buying, he incurs losses.

Conceptually, it is possible to delineate the logically-coherent chain of necessary relations—the series of interdependent actions and reactions—starting from the valuation of consumers to actual satisfactions of their most urgent needs. Of course this may appear somewhat simplistic, it only serves to show how logically interconnected the actions of different market participants are to one another.

The obvious implication to be deduced from this interdependence is that attempts to target a segment of the market for local interventions would be arbitrary and disruptive of the entire array of human action that constitutes the market.

The Analytical Heuristic of Theoretical Economics and the Potential Effect of Hyper-Specialization in the Science of Economics 

For the purpose of theoretical exposition, economists often resort to the analytical heuristic of classifying various instances of human action, within the context of the market, into distinct categories. To the untrained mind, unaccustomed to the chains of reasoning peculiar to an understanding of the market process, the various economic categories are autonomous and thus potentially subject to isolated interventions that never redound to the rest of the system. But this is a mistaken view of the market’s process. As Mises remarks in Human Action,

The market process is coherent and indivisible. It is an indissoluble intertwinement of actions and reactions, of moves and countermoves. But the insufficiency of our mental abilities enjoins upon us the necessity of dividing it into parts and analyzing each of these parts separately.

Economists often contribute to the spread of the erroneous view of the compartmentalization of the market in their arbitrary division of the science into sub-disciplines of specialized knowledge. Joseph T. Salerno, in criticizing the new orthodoxy of “neoclassical synthesis” which descended upon economics after World War II, puts it as follows in his introduction to the second edition of Murray Rothbard’s classic Man, Economy, and State:

This new orthodoxy also promoted hyper-specialization and a corresponding disintegration of economic science into a clutter of compartmentalized sub-disciplines. Even the theoretical core of economics was now split into “microeconomics” and “macroeconomics,” which had seemingly very little connection to each other.

This arbitrary disintegration of economics into autonomous sub-disciplines is not without practical consequences for potential policymaking. For it has the potential effect of leaving the uninitiated policymaker with a view of things reflecting these arbitrary subdivisions.

The False Disconnection of Productivity and Distribution of Income in the Market

The subject matter of distribution of income within the market economy is generally laden with connotations of injustice, exploitation, robbery, parasitism, and so on. It is a topic that easily invites prejudice and arbitrary value judgments. However, all these could be attributed to the false disconnection often made between the productivity of input factors and the distribution of income to the respective owners of these productive resources.

The enormity of significance attached to the preservation of this erroneous disconnection by socialist thinkers is not surprising, for the mere fact that socialism is essentially touted as a system of “just” distribution as opposed to capitalism’s allegedly “unjust” distributive criteria. A policymaker uninitiated in sound economics and for whom the market appears as a collection of autonomous events would easily fall into this error, consequently pursuing disastrous policies aimed at compelled equality and arbitrary redistribution of income, thus impairing economic productivity. In fact, at the roots of most policies of redistribution hailed as “progressive” today lie this false disconnection, which is otherwise an operative weapon in the series of socialist inroads into the income distribution framework of the market.

Contrary to erroneous implications deduced from this false disconnection, our description of the market process above easily showed that every participant in the production process is rewarded according to the value attached by the consumer to his contribution to the marginal product. For instance, wage-rate is set according to the discounted marginal value productivity of labor—that is, the present value of the contribution of an extra unit of labor to the extra unit of future product. Attempts to re-imagine this state of affairs by alluding to notions of inequality or injustice would only lead to the mistaken view of the market as an unjust system of exploitation as opposed to its social role as a mechanism of cooperation.

The outcomes of policies rooted in false notions of the market tend to be qualitatively different from those rooted in a coherent concept of the market. The policymaker is usually not indifferent to his fundamental view of the market’s structure as either a system of logically-necessary relationships, or a fragmented system of isolated events —more often than not, his decisions about policies pertaining to the market process tend to follow from this fundamental view.

 

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Originally Posted at https://mises.org/

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