Human Action and Economics

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Human Action

The science of economics deals with the production, distribution, and consumption of goods and services that can be quantified in money prices. It so happens that in our world today human beings play a vital role in all of these processes. Henceforth, human action is the foremost determinant for their outcome. Economics is nothing but a subset of the general science of all human action.

As Mises puts it:

"First we must realize that all actions are performed by individuals. A collective operates always through the intermediary of one or several individuals whose actions are related to the collective as the secondary source. It is the meaning which the acting individuals and all those who are touched by their action attribute to an action, that determines its character. It is the meaning that marks one action as the action of an individual and another action as the action of the state or of the municipality. The hangman, not the state, executes a criminal. It is the meaning of those concerned that discerns in the hangman's action an action of the state. A group of armed men occupies a place. It is the meaning of those concerned which imputes this occupation not to the officers and soldiers on the spot, but to their nation. If we scrutinize the meaning of the various actions performed by individuals we must necessarily learn everything about the actions of collective wholes. For a social collective has no existence and reality outside of the individual members' actions. The life of a collective is lived in the actions of the individuals constituting its body. There is no social collective conceivable which is not operative in the actions of some individuals. The reality of a social integer consists in its directing and releasing definite actions on the part of individuals. Thus the way to a cognition of collective wholes is through an analysis of the individuals' actions." (Mises, Human Action, Part 1, Chapter II)

What influences human action?

I will leave the exact analysis of human nature to people who understand it much better than I do. Remarkable work has already been conducted in this fascinating field of science.

For our purposes, the most important cornerstones of human nature are the following:

• Humans strive for an improvement of their current situation until they are satisfied
• Every human being decides for him/herself what he/she considers an improvement of his/her current situation
  
• A human being is first and foremost concerned about his/her own well-being ( humans act selfishly)

A human conducts an action in order to get from status A to status B. The action is performed because he/she perceive status B as more favorable than status A. The desire to improve ones
status must inevitably stem from a certain degree of uneasiness. As Mises puts it: "The incentive that impels a man to act is always some uneasiness. A man perfectly content with the state of his affairs would have no incentive to change things. He would have neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care." (Mises, Human Action)

All human action and economic activity aims at improving ones status, "gaining profit".

For every human being, an action is preceded by an idea. Ultimately it is an idea that determines what the action is going to be.

Every idea is influenced by and refined based on constraints.

To sum it up: Human beings permanently try to improve their status until they are satisfied. The attempt to improve a status is conducted by performing an action. An action is the outcome of an idea which is conceived and refined under certain constraints.

It is this basic behavior that determines production, distribution, and consumption of goods and services and therefore the state of the economy.

Examples:

• I see a report on how kids are starving in Brazil and how they can't even afford the most basic things. This makes me feel uncomfortable. I want to improve my status from this feeling of uncomfort to something better. My idea is to sign up with an organization that supports these kids and pay money on a regular basis. I have constraints of a certain disposable income per month. Based on that I make my decision on how much getting rid of this feeling of uncomfort is worth to me and take an action by signing up for the charity organization. I now feel much better than before and have improved my status according to my selfish human needs. (On more information about welfare in the unhampered free market, please read Mises, Human Action, Part 6, Chapter XXXV, "The Welfare Principle Versus The Market Principle")
  

• I am hungry. I know that I can improve my situation by getting from the status "hungry" to the status "content" by eating something. So my broad idea would be to obtain some food. Let's assume I am under the following constraints: my neighbor has a warehouse piled up with bread that he produced himself, also there is no other food within 50 square miles. I could refine my idea as follows: I could sneak into my neighbors warehouse, steal some bread and consume it. However I happen to know that he recently injured a guy who sneaked into his house to steal and that he is guarding his property. I am facing the constraint of a potential black eye, maybe more. Based on the possibility of transitioning to a status "starving and hurting" which is even worse than my current status "starving only" I discard that idea refinement. However, I have a better idea: I happen to be well versed and experienced in crafting wooden furniture and among other things have produced an extra table that I don't have any need for and that I am willing to exchange for 10 loafs of bread. The 10 loafs of bread are worth more to me than the table, simply by the virtue of the fact that I don't have any need for the table but at the same time am in dire need for food. My neighbor happens to have demand for a table because it helps him bake more bread. Hence, I perform an action: I go to my neighbors house and make him the according offer. He agrees and a transaction takes place. I consume the bread I obtained and have improved my status from hungry to consent. I have "gained profit" by exchanging something I perceive as less valuable for something I perceive as more valuable. How much that profit exactly is is not measurable yet because in this barter economy money has not been invented yet.

• I produce and sell wooden furniture. Every week I sell 5 pieces at 2 loafs of bread each. I can survive by doing so but at times still feel hungry during the week. I would like to have some more bread improve my status and not feel hungry anymore. I would like to get from the status "10 loafs/week" to "20 loafs/week" My idea is to increase the price of a piece by 100% to 4 loafs of bread. I perform an action and change my terms of service accordingly. People start getting upset about my business practices. An entrepreneur sees an opportunity and starts offering wooden furniture at 3 loafs per piece. I am facing the constraint of competition. People start buying the competitor's furniture and the number of pieces I sell goes down to 2 pieces. My status has gone from "10 loafs/week" to "8 loafs/week". I need to refine my initial idea to get to a status better than 10 loafs/week. Instead of 4 loafs I also start demanding 3 loafs per piece. This increases the number of pieces per week to 4. This way I now make 12 loafs/week and have finally improved my status.

• I am now in competition with another furniture selling entrepreneur and I have realized, based on my initial action and the outcome of that action, that I can't just raise the price as much as I want and expect the same number of customers. However I still want to improve my status which is currently 12 loafs/week. I am wondering how I can sell more than 3 pieces of furniture per week without lowering the price. I understand that there are some complaints about the quality of furniture that both my competitor and I sell. Some tables move and occasionally some parts of my chairs break. I have an idea: I realize there is an opportunity to improve my furniture by refining the production process. I find someone who specializes in improving processes, a consultant. I hire the consultant, he demands 9 loafs of bread for the process optimization. I pay the consultant with 9 loafs, which means that I must have earned them but don't consume them, I save 9 loafs, and make an equal investment of 9 loafs. I perform an action and improve the quality of my furniture by applying a better production process from now on. My tables stop moving and my chairs don't break at all. I am now able to sell 5 pieces per week at a price of 3 loafs/piece. I am now at 15 loafs/week. My investment is paid off within three weeks and from now on I earn more bread per week. My status has improved.

In these three examples one can see how the subjects who are part of this economy take actions based upon ideas that are conceived under certain constraints with the ultimate objective to improve their status.

Please note that it is not only me who improves his status in these examples but ALL participants in the economy. Example: By producing better quality furniture me AND my customers benefit in the long run.

The examples also show how the natural constraints of the free market constantly give humans an incentive to improve their products and services.

Improvement of Status

In my three example I merely outlined one type of status improvement: The improvement of status via production and services.

In fact, there are three ways humans can improve their status:

• Production and Services: The production of goods and the rendering of services that are demanded by other people who in return provide other goods and services. Status is improved by exchanging goods or services that are less valuable to me for goods or services that are more valuable to me.
• Homesteading: The acquisition and usage of undiscovered land.
• Expropriation: The forceful obtainment of someone else's property.

All ideas that people conceive with the objective of improving their status and their subsequent actions must be derived from one of these three categories.


All economic activity is performed by human beings based on the simple rules I outlined in this article. I will use them as reference in future articles, especially when I analyze the actions that government officials take, the ideas they conceive and the constraints they find themselves under in democratic societies.

Big Government

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Up until about 200 years ago great accomplishments were made in the field of political liberation. The statist hegemonic bonds were broken up and governments were confined in exercising their power. Private ownership of the means of production has brought about unprecedented wealth and progress. The average American worker enjoys amenities for which Croesus, Crassus, the Medici, and Louis XIV would have envied him.

Ever since things have been heading in the other direction again. Governments have increased the tax burden on people (in relative as well as in absolute terms), increased public debt, created excess money and inflation, assumed more and more power, and driven up the number of wars and civil disorders to levels the world has never ever seen before.

Let's take for example the development of taxes and government spending in the United States over the past 50 years. (source: www.taxpolicycenter.org)

Total (Federal + State + Local) Tax Revenue As Percentages of GDP (1947 - 2003)




Total (Federal + State + Local) Government Expenses As Percentages of GDP (1947 - 2003)


I have not been able, as of yet, to find %age data that goes back to the 19th century. If anybody has something please let me know, I'd be happy to update these charts accordingly.

However, I believe that after looking at this we can all conclude: There haven't been any tax cuts. Maybe taxes went up and down a little bit within shorter periods, but overall the tax burden has increased over the past 50 years. This also means that there is no so-called "neoliberalism".

I assume that most people agree that, at least to a certain degree, something seems to be wrong in our political system today, and that there are problems that need to be fixed.

Taking into consideration the numbers and facts presented here, and applying pure common sense, I assume that most people would unanimously agree to at least the following:

We do NOT need any more taxes or bigger government to solve our economic policy problems. If, in fact, government keeps increasing in size and people keep accepting it, or even calling for it, these problems will only be aggravated.

Those of us who are not part of the governmental body and yet assert that we need government spending in order to ensure a sufficient supply of basic goods and services that the poor and unfortunate people couldn't afford in a free, unhampered market, are either walking around with blinkers, or have given in to statist welfare propaganda and lack the intellectual capacity to accept and process basic principles of human action and praxeology.

But the lack of aprioristic reasoning and conceptualization (praxeology) does not seem to be the only problem here. In addition to that we see a lack of ex-post understanding of history.

The belief in the necessity of government ensuring supply of basic (or so called public) goods would, if applied consistently, imply that we need government to take care of the production of basic goods, such as food and clothes in order to avoid shortages. It is commonly agreed that a human in modern society needs those goods at the very least in order to be able to survive.

Reading this, the welfare state proponent should pretty quickly notice that we actually appear to have a more than sufficient supply of those particular goods in our western societies and that government intervention doesn't seem to be necessary here.

Moving on, the welfare state proponent has to accept the fact that it is precisely in the domain of the so called "public goods", such as government schools, domestic security, and highways where we constantly see shortages. Kids are not properly educated in schools (especially in the poor areas), our cities are everything else but safe (again, especially in the poor areas) and we constantly complain about traffic jams. And what is the reason for these problems according to the welfare state propagandist? It is of course that the state does not have enough money and needs more of the same to provide its services in a sufficient manner. According to him, we have a "shortage" of public funds.

But haven't I shown in the beginning of this article that this clamor for more money has been more than constantly addressed over time? Is there any reason to believe that the welfare state propagandists will one day stop asking for more?

It is clear that this will never happen. I have never seen a government anywhere in the world that was content with its pecuniary affairs and had its finances under control. They will keep asking for more and, as long as taxpayers comply, will keep spending more and I can assure you one thing: It won't help a bit.

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Government

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What is government?

First of all, it is an organization. An organization is a group of people intentionally organized to accomplish an overall, common goal or set of goals.

In my article "Negative Impacts of Inflation" I described government using our simple 5 people economy. Government would be person A who provides services to all other participants of the economy. This in itself does not yet essentially distinguish A from the other participants in the economy, since they all provide services to each other.

What distinguishes A is the fact that he is granted the privilege to establish forceful rules that impact the freedoms of the other participants in the economy. In particular, A has the privilege to determine how much of the money that the participants in the economy earn, they need to pay to him on a regular basis.

This is indeed a notable distinction. A, as opposed to all other participants is granted the privilege to constantly force everyone else to follow his/her rules.

In fact, there is only one type of institution that has throughout history, by the virtue of law, had the ability to impose their force on people: government.

As far as this fact is concerned, I am not making any difference between dictatorships, communist, monopolist, democratic, fascist, Islamic or authoritarian governments or whatever other labels there are to attach to governmental institutions.

The extent to which governments exercise their power, impose their force upon people, and cause inefficiencies and misallocations differ from one to another in different systems. Also the ways governments get to power differ from one to another. However, what does not differ from one government to another is the basis of their existence: compulsion and coercion.

There is no other, publicly accepted, organization that can expropriate people by forcing them to pay money for services.

A company that provides services to an individual can stop providing those services once that person does not pay anymore. If that individual would like to resume consuming the company's services he would have to start paying again.

One could assume that if I really was in dire need for the services government provides and I were to stop paying taxes, government could just stop providing its services to me in order to make me pay again.

Which brings us back to my initial question:

What is government?

Government is the social apparatus of compulsion and coercion.

The means that different people pursue or have pursued in order to get in power and form governments differ significantly.

In ancient times, they used to do it by recruiting the clerical class and making the case for a "divine law" which they supposedly merely exercised in the name of god.
Some have done it or still do it by using force, guns, and military power.

Over time, people have fought countless struggles for liberty and freedom. The outcome of those is democratic government. In a perfect democratic society the social apparatus of compulsion and coercion is elected by the people. The people are the ultimate sovereign. Government shall ensure that society functions by figthting aggressors, viz. people who try to infringe on others' freedoms.

Government's operations need to be strictly confined by rules, bills of rights, and laws. This shall ensure that it doesn't abuse its power. All the benefits brought about by the struggles for liberty stem from the confinement of government meddling with the market economy.


As Mises puts it:

"Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom." (Mises, Human Action, Chapter XXVII, Part 2)

As Rothbard puts it:

"The State is a group of people who have managed to acquire a virtual monopoly of the use of violence throughout a given territorial area. In particular, it has acquired a monopoly of aggressive violence, for States generally recognize the right of individuals to use violence (though not against States, of course) in self-defense.5 The State then uses this monopoly to wield power over the inhabitants of the area and to enjoy the material fruits of that power. The State, then, is the only organization in society that regularly and openly obtains its monetary revenues by the use of aggressive violence; all other individuals and organizations (except if delegated that right by the State) can obtain wealth only by peaceful production and by voluntary exchange of their respective products. This use of violence to obtain its revenue (called "taxation") is the keystone of State power. Upon this base the State erects a further structure of power over the individuals in its territory, regulating them, penalizing critics, subsidizing favorites, etc. The State also takes care to arrogate to itself the compulsory monopoly of various critical services needed by society, thus keeping the people in dependence upon the State for key services, keeping control of the vital command posts in society and also fostering among the public the myth that only the State can supply these goods and services. Thus the State is careful to monopolize police and judicial service, the ownership of roads and streets, the supply of money, and the postal service, and effectively to monopolize or control education, public utilities, transportation, and radio and television." (Rothbard, War, Peace, and the State)