Just go to previous post for part one.
The story thus far: Mises states that all the planners of The Way Things Should Be were stunned to discover that they cannot set up whatever society they want, because there are laws of economics that decree certain things impossible. [One example that he will talk about in the book is the impossibility of Socialism, no matter how perfect and well meaning everyone is]. That was the first splash economics made in the world. He goes on [and all italics are quotes]:
For more than a hundred years, however, the effects of this radical change in the methods of reasoning were greatly restricted because people believed that they referred only to a narrow segment of the total field of human action, namely, to market phenomena. The classical economists met in the pursuit of their investigations an obstacle which they failed to remove, the apparent antinomy of value.
DA: Antinomy? That’s a a silvery-white metal that breaks easily and that is used especially in alloys.
SD: Nope, that’s antimony. Mises is talking about antinomy, which means contradiction.
DA: What’s so contradictory about value?
SD: Basically, the problem is that the usefulness and importance of something is not the same as its market price. The classic example is the contrast between water and Curt Schilling’s bloody sock. Without water, you die. Without Curt Schilling’s bloody sock, you really aren’t missing much. And yet the market price for water is pennies. But the bloody sock worn by Curt Schilling while pitching in the 2004 World Series was sold for $92,613.
DA: Indeed, what’s up with that?
SD: As Mises explains, the problem is that the early economists forgot about the human element:
Their theory of value was defective, and forced them to restrict the scope of their science. Until the late nineteenth century political economy remained a science of the “economic” aspects of human action, a theory of wealth and selfishness. It dealt with human action only to the extent that it is actuated by what was—very unsatisfactorily— described as the profit motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines.
SD: In other words, their picture of a market was of people trying to make as much money as possible. That was the only goal of the actors in their model of the economy, to rake in the moolah. If people do something for any other reason than to make money, that something is not part of economics, they said. Which was their big mistake.
DA: Why is that?
SD: Because they forgot that people spend money, too, and on the most frivolous things. People who do foolish things with their money are also part of the economy. And of course, they are the secret behind Curt Schilling’s sock.
The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice.
SD: In other words, the value of Object X is not something inherent in the object, like how vital it is, or how much labor went into making it, or what color it is, or anything else. The price a very personal thing, different for every person. In other words, the question is not “What value does this have?”, but rather “What value do this have, in my opinion, to me, right now?” In other words, the value [to me] is how much I am willing to pay for it, for whatever reasons I may have.
DA: So everything people want, for whatever reason, has gotten into economics through the back door, as it were. Because what people want, they will pay for. Thus their wants are part of the economy, and cannot be separated from any study of economics.
SD: Well, yes and no. After all, only the last part of the story enters into the market, the part when someone shows up, with cash, looking for Curt Schilling’s sock. But economics does not have to go into the back story, about why he wants that sock, why it is important to him, what need does it fulfill for him, and so forth.
DA: Which is what Mises meant when he wrote later on that psychology is not relevant to economics.
SD: So that was stage two of mankind’s economic understanding. Stage one was grasping that there are economic laws. Stage two was realizing that economics is not just about things. It’s about people buying and selling, and what those people think about things is what determines the price of the things. And then there came Stage three:
For a long time men failed to realize that the transition from the classical theory of value to the subjective theory of value was much more than the substitution of a more satisfactory theory of market exchange for a less satisfactory one. The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill. It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being.
DA: But Dave, I’ve been reading Reisman’s Capitalism, and he kinda disagrees here.
SD: Tell you what, we’ll end with Mises’s take on what economics is about, and next article we’ll hopefully discuss Reisman’s objections.
[Economics] is the science of every kind of human action. Choosing determines all human decisions. In making his choice man chooses not only between various material things and services. All human values are offered for option. All ends and all means, both material and ideal issues, the sublime and the base, the noble and the ignoble, are ranged in a single row and subjected to a decision which picks out one thing and sets aside another. Nothing that men aim at or want to avoid remains outside of this arrangement into a unique scale of gradation and preference.
The modern theory of value widens the scientific horizon and enlarges the field of economic studies. Out of the political economy of the classical school emerges the general theory of human action, praxeology.1 The economic or catallactic problems2 are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.
DA: Praxeology? Catallactics? Is that even English?
SD: That’s why we’re translating, Devil.
The other parts of this epic attempt can be found here: https://smilingdavesblog.wordpress.com/2014/07/26/human-action-smiling-dave-style-toc/