All Commentary
Friday, October 1, 1999

The Love of Economics

Economics Is Focused on Human Choice

I attended a lecture recently on romantic relationships, and some in the audience became agitated when the speaker invoked economics in his analysis. Beyond the obvious financial issues, many people just did not understand what economics has to do with dating and marriage. This points to an unfortunate feature of many people’s understanding of economics.

Economics is not primarily about money and stock markets. Those are topics within economics. Economics is the study of certain implications and consequences of human action; hence the title—Human Action—of Ludwig von Mises’s magnum opus.

“Human action is purposeful behavior,” Mises writes at the start of his treatise. We can identify a long series of facts about human action without doing “research.” This is what distinguishes economics from physics. In economics the unit of analysis is the individual, which we know from the inside, so to speak. As human beings we can observe introspectively the features of action. In contrast, when we observe stars or molecules, we are outsiders. We can make repeated observations and experiments to discover the principles and relationships of entities, but we cannot have the same intimate knowledge that we can have about human action.

We can all readily see that when we act, certain things must be true. An action consists in the pursuit of an objective, or end, using means perceived as appropriate to its accomplishment. This has many implications. Acting is choosing. To pursue an end is to choose it from an array of alternatives, including the option of “doing nothing.” To embark on a course of action intended to obtain an end is a form of exchange. The actor opts for the intended state of affairs over the future circumstances envisioned in the absence of the action. Implicit in the necessity of choice is the idea of scarcity. All means, beginning with time, are scarce. You can’t choose A and non-A at the same time and in the same respect. You can’t “have it all.”

Opportunity Cost

If action entails choosing one thing rather than another, all action requires giving something up, namely, the most highly valued alternative not pursued. The alternative forgone is the cost of the action, more precisely, the opportunity cost. We can say with certainty that when we act, we value the satisfaction from achievement of the end sought more highly than the satisfaction expected from the highest value forgone. (Anticipated satisfaction can’t be measured or subjected to mathematical operations; nor can it be compared person to person.)

Some have criticized this Misesian approach as mere tautology, true by definition. But clearly it is more than that. One’s action demonstrates a preference for the chosen objective over anything else one could have aimed at. Hence, Murray Rothbard’s term “demonstrated preference.” This is not an empty tautology; it is a truth that underlies and makes sense of our observations of the human world. An attempt to refute it is a self-contradiction: the attempt requires action. Thus, these principles of human action have the status of an axiom.

The focus on the individual’s selection of goals does not presume egoism or any other ethical category. Nor does it presume that the goal must be money or any other material good. These principles held true for Mother Teresa as well as for John D. Rockefeller. Each chose objectives and suitable (in their judgment) means. Mother Teresa wished to be efficient in ministering to the poor in India, just as Rockefeller wished to be efficient in producing kerosene from crude oil. Their particular ends dictated what “efficiency” meant, but the framework was conceptually the same. Economics is concerned with neither why people choose as they do or nor what they ought to choose. Those matters are left to psychology and ethics.

Marginal Utility

A further implication of human action is the law of diminishing marginal utility. We act to attain values, in effect, according to a scale of descending importance. As we obtain successive units of a good, we devote them to lower priorities. Any one unit is only as important as the lowest priority. For example, I have three cups of water and plan to devote them to these three objectives ranked in descending importance: quenching my thirst, quenching my dog’s thirst, watering my rhododendron. If as I begin to drink I accidentally drop the cup, I do not forgo quenching my thirst and devote the remaining cups to the other objectives. Rather, I move the remaining cups up the scale, leaving the least important objective unfulfilled. (Sorry, rhododendron.) In other words, the value to me of any one unit of a good is determined by the value to me of the least important end that good can serve. The utility of the marginal unit (the last one or next one obtained) diminishes as I acquire more.

This all applies to the individual acting in isolation, what Mises calls “autistic exchange.” But the principles apply to exchange between individuals too, which preoccupies most of economics. Things get more complicated—money eventually evolves from barter, long structures of production emerge—but the broad outline is the same. Exchange between two people entails some necessary truths. Each party intends to achieve a value through the exchange. Each ranks what he is willing to give up lower than what he will receive. Why exchange otherwise? Each therefore comes out ahead. There’s a “surplus” on each side. The same amount of stuff is there; it’s only changed hands. Yet each has “more” than he started with. (Either party, being fallible, can err and regret the exchange. But each enters the relationship anticipating gain.)

This is a good time to raise the idea of subjectivism, a concept much misunderstood. The economic meaning of subjectivism differs from its meaning in ethics. In ethics subjectivism means that human beings can arbitrarily determine what is good for them. In economics it means that to understand market phenomena such as prices, the focus must be on subjects—acting beings—not objects. (Thus, there is no conflict on this count between Mises and Ayn Rand.) What we observe in markets grows out of the choices people make about things based on their beliefs and intentions, not out of anything intrinsic to those things. The price of a slow-acting lethal poison might rise as people erroneously come to believe it is nutritious. But the poison will still kill them.

Once economics is seen as focused on human choice, it is no great leap to grasp its relevance to other areas of life not usually thought of in economic terms, such as dating and marriage. This is not to say that economics is all that is relevant, only that the laws of human action apply.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.