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.