This is part two of my summary of Man, Economy and State, by Austrian Economist Murray Rothbard. You can read part one here.
In my summary of chapter one, I talked about Praxeology being the study of human action, and about how humans act, by making use of certain means to achieve ends. Those means, I mentioned, are called goods. Goods need to be produced and it would be inefficient for a man to have to produce all the goods that he would like to utilize.
Chapter two focuses on the direct exchange of goods. Jim might have a product he has no use for, and would like to exchange it for a product owned by James. James, coincidentally, has no use for the good that Jim is seeking, which makes the trade beneficial for both parties.
By stating that each party has no use for the good he is trading, I am obviously simplifying things. In reality, what is required for such an exchange to take place is for each party to value what he is gaining more than what he is giving up. Some might incorrectly assume that in order for two goods to be fairly traded, they have to be worth the same. This is not accurate however, since the value of a good is subjective. If the value of both goods about to be traded were the same in the minds of both the buyer and the seller, no trade would ever take place, because there would be no benefit to the trade. As we know, humans act in order to end up in a better state than they previously were in.
If I have thirty gallons of water and have no bread, I would gladly trade two of my gallons for some bread. This does not mean I value bread more than water. It means taking into consideration the gallons of water that I already have, the marginal value of the gallons of water that I would be giving up is less than the marginal value of the bread that I would be acquiring, since the bag of bread would be my first and would, thus, have a very high marginal value.
Division of Labor
It would be very inefficient for each person to have to produce all the goods that they need. It would not make much sense for me to make my own clothes, grow my own food, create my own computers, cell phones and TVs. Having to produce all the goods that I want to consume would mean I would be unable to consume very much because I would not have enough time or expertise to be able to produce everything I need. Instead, a better idea is for a person to focus on producing a lot of what he is very good at producing, and then to exchange those goods for other goods, which are produced by others, also for the purpose of exchanging them. This is called Division of Labor, and it allows for each person to specialize in the production of certain goods while still being able to enjoy the consumption of goods he does not produce.
Prices and Value Scales
The price of a good is nothing more than the quantity of a good that needs to be exchanged for it. To understand monetary theory, it is very important to start thinking of money as just a good that is exchanged for another good.
All things being equal, the buyer of a good will always prefer the lowest price possible, and the seller of a good will always prefer the highest price possible. A trade between two people can occur if the maximum buying price of a buyer is higher than the lowest price that the seller is willing to sell his good for. How much a person is willing to sell or buy something for depends on that person’s scale of values–how much value the person attaches to the good. Keep in mind that a person always wishes to maximize his psychic revenue. It might not always be about material gain. I might be willing to sell my car at a cheaper price if I am selling it to a family member. Helping out a family member might provide enough of a satisfaction to cause me to turn down a better offer in terms of the physical goods that I would be obtaining in return.
The demand of a good is the amount that buyers are willing to purchase at different prices. The supply of a good is the amount that sellers are willing to sell at different prices. The equilibrium price is the price where the number of units that sellers are willing to sell equals the number of units that buyers are willing to buy. If a seller is currently trying to sell a particular good above the equilibrium price, it means he will have a surplus of units because he will not find enough people willing to buy all the units that he would like to sell. This causes the seller to have to lower his price, until the price equals the equilibrium price, at which point he will be able to sell all his goods.
In order for someone to trade a good, one has to own it. How does a person become the owner of a good? I mentioned in my summary of chapter one that all goods can be traced back to nature and labor. Someone, in the beginning, took nature-available goods and mixed them together by using labor, which is also a good, to come up with the final product. The nature-available goods become owned by the person who first put them to use, by mixing his labor with it. The creator of a beer, for example, becomes the owner of the water used to create that beer because he took the unused water and mixed it with his labor, to create another good which also becomes his.
Summary of chapter 3: Indirect Exchange >>
- Prices and Consumption: Summary of “Man, Economy and State,” Chp. 4
- Fundamentals of Human Action: Summary of “Man, Economy and State,” Chp. 1
- Indirect Exchange: Summary of “Man, Economy and State,” Chp. 3