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2. Direct Exchange

2. Types of Interpersonal Action: Voluntary Exchange and the Contractual Society

From this point on, we shall develop an analysis of the workings of a society based purely on voluntary action, entirely unhampered by violence or threats of violence. We shall examine interpersonal actions that are purely voluntary, and have no trace of hegemonic relations. Then, after working out the laws of the unhampered market, we shall trace the nature and results of hegemonic relations—of actions based on violence or the threat of violence. We shall note the various effects of violent interference with voluntary actions and shall consider the consequences of approaches to a regime of total hegemony, of pure slavery or subjection. At present, we shall confine our discussion to an analysis of actions unhampered by the existence of violence of man against man.

The major form of voluntary interaction is voluntary interpersonal exchange. A gives up a good to B in exchange for a good that B gives up to A. The essence of the exchange is that both people make it because they expect that it will benefit them; otherwise they would not have agreed to the exchange. A necessary condition for an exchange to take place is that the two goods have reverse valuations on the respective value scales of the two parties to the exchange. Thus, suppose A and B are the two exchangers, and A gives B good X in exchange for good Y. In order for this exchange to take place, the following must have been their value scales before making the exchange:

(Parentheses around the good indicate that the party does not have it in his stock; absence of parentheses indicates that he has.) A possesses good X, and B possesses good Y, and each evaluates the good of the other more highly than his own. After the exchange is made, both A and B have shifted to a higher position on their respective value scales.

Thus, the conditions for an exchange to take place are that the goods are valued in reverse order by the two parties and that each of the parties knows of the existence of the other and the goods that he possesses. Without knowledge of the other person's assets, no exchange of these assets could take place.

It is clear that the things that must be exchanged are goods, which will be useful to the receiving party. The goods may be present or future goods (or claims to future goods, which may be considered as equivalent to future goods), they may be capital goods or consumers’ goods, labor or nature-given factors. At any rate, the objects of an exchange must be scarce means to human ends, since, if they were available in abundance for all, they would be general conditions of human welfare and not objects of human action. If something were a general condition of human welfare, there would be no need to give something up to acquire it, and it would not become the object of exchange.

If the goods in question are unique goods with a supply of one unit, then the problem of when exchanges will or will not be made is a simple one. If A has a vase and B a typewriter, if each knows of the other's asset, and if A values the typewriter more highly, and B values the vase more highly, there will be an exchange. If, on the other hand, either A or B values whatever he has more highly than what the other has, then an exchange will not take place. Similarly, an exchange will not take place if either party has no knowledge that the other party has a vase or a typewriter.

On the other hand, if the goods are available in supplies of homogeneous units, the problem becomes more complex. Here, in determining how far exchanges of the two goods will go, the law of marginal utility becomes the decisive factor.8 If Jones and Smith have certain quantities of units of goods X and Y in their possession, then in order for Jones to trade one unit of X for one unit of Y, the following conditions have to be met: To Jones, the marginal utility of the added unit of Y must be greater than the marginal utility of the unit of X given up; and to Smith, the marginal utility of the added unit of X must be greater than the marginal utility of the unit of Y given up. Thus:

(The marginal utilities of the goods to Jones and to Smith are, of course, not comparable, since they cannot be measured, and the two value scales cannot be reduced to one measure or scale.)

However, as Jones continues to exchange with Smith units of X for units of Y, the marginal utility of X to Jones increases, because of the law of marginal utility. Furthermore, the marginal utility of the added unit of Y continues to decrease as Jones’ stock of Y increases, because of the operation of this law. Eventually, therefore, Jones will reach a point where, in any further exchange of X for Y, the marginal utility of X will be greater than the marginal utility of the added unit of Y, so that he will make no further exchange. Furthermore, Smith is in a similar position. As he continues to exchange Y for X, for him the marginal utility of Y increases, and the marginal utility of the added unit of X decreases, with the operation of the law of marginal utility. He too will eventually reach a point where a further exchange will lower rather than raise his position on his value scale, so that he will decline to make any further exchange. Since it takes two to make a bargain, Jones and Smith will exchange units of X for units of Y until one of them reaches a point beyond which further exchange will lead to loss rather than profit.

Thus, suppose that Jones begins with a position where his assets (stock of goods) consist of a supply of five horses and zero cows, while Smith begins with assets of five cows and zero horses. How much, if any, exchanges of one cow for one horse will be effected is reflected in the value scales of the two people. Thus, suppose that Jones’ value diagram is as shown in Figure 5. The dots represent the value of the marginal utility of each additional cow, as Jones makes exchanges of one horse for one cow. The crosses represent the increasing marginal utility of each horse given up as Jones makes exchanges. Jones will stop trading after the third exchange, when his assets consist of two horses and three cows, since a further such exchange will make him worse off.

On the other hand, suppose that Smith's value diagram appears as in Figure 6. The dots represent the marginal utility to Smith of each additional horse, while the crosses represent the marginal utility of each cow given up. Smith will stop trading after two exchanges, and therefore Jones will have to stop after two exchanges also. They will end with Jones having a stock of three horses and two cows, and Smith with a stock of three cows and two horses.

It is almost impossible to overestimate the importance of exchange in a developed economic system. Interpersonal exchanges have an enormous influence on productive activities. Their existence means that goods and units of goods have not only direct use-value for the producer, but also exchange-value. In other words, goods may now be exchanged for other goods of greater usefulness to the actor. A man will exchange a unit of a good so long as the goods that it can command in exchange have greater value to him than the value it had in direct use, i.e., so long as its exchange-value is greater than its direct use-value. In the example above, the first two horses that Jones exchanged and the first two cows surrendered by Smith had a greater exchange value than direct use-value to their owners. On the other hand, from then on, their respective assets had greater use-value to their owners than exchange-value.9

The existence and possibilities of exchange open up for producers the avenue of producing for a “market” rather than for themselves. Instead of attempting to maximize his product in isolation by producing goods solely for his own use, each person can now produce goods in anticipation of their exchange-value, and exchange these goods for others that are more valuable to him. It is evident that since this opens a new avenue for the utility of goods, it becomes possible for each person to increase his productivity. Through praxeology, therefore, we know that only gains can come to every participant in exchange and that each must benefit by the transaction; otherwise he would not engage in it. Empirically we know that the exchange economy has made possible an enormous increase in productivity and satisfactions for all the participants.

Thus, any person can produce goods either for his own direct use or for purposes of exchange with others for goods that he desires. In the former case, he is the consumer of his own product; in the latter case, he produces in the service of other consumers, i.e., he “produces for a market.” In either case, it is clear that, on the unhampered “market,” it is the consumers who dictate the course of production.

At any time, a good or a unit of a good may have for its possessor either direct use-value or exchange-value or a mixture of both, and whichever is the greater is the determinant of his action. Examples of goods with only direct use-value to their owner are those in an isolated economy or such goods as eyeglasses ground to an individual prescription. On the other hand, producers of such eyeglasses or of surgical instruments find no direct use-value in these products, but only exchange-value. Many goods, as in the foregoing example of exchange, have both direct and exchange-value for their owners. For the latter goods, changing conditions may cause direct use-value to replace exchange-value in the actor's hierarchy of values, or vice versa. Thus, if a person with a stock of wine happens to lose his taste for wine, the previous greater use-value that wine had for him will change, and the wine's exchange-value will take precedence over its use-value, which has now become almost nil. Similarly, a grown person may exchange the toys that he had used as a child, now that their use-value has greatly declined.

On the other hand, the exchange-value of goods may decline, causing their possessors to use them directly rather than exchange them. Thus, a milliner might make a hat for purposes of exchange, but some minor defect might cause its expected exchange value to dwindle, so that the milliner decides to wear the hat herself.

One of the most important factors causing a change in the relationship between direct use-value and exchange-value is an increase in the number of units of a supply available. From the law of marginal utility we know that an increase in the supply of a good available decreases the marginal utility of the supply for direct use. Therefore, the more units of supply are available, the more likely will the exchange-value of the marginal unit be greater than its value in direct use, and the more likely will its owner be to exchange it. The more horses that Jones had in his stock, and the more cows Smith had, the more eager would they be to exchange them. Conversely, a decrease in supply will increase the likelihood that direct use-value will predominate.

The network of voluntary interpersonal exchanges forms a society; it also forms a pattern of interrelations known as the market. A society formed solely by the market has an unhampered market, or a free market, a market not burdened by the interference of violent action. A society based on voluntary exchanges is called a contractual society. In contrast to the hegemonic society based on the rule of violence, the contractual type of society is based on freely entered contractual relations between individuals. Agreements by individuals to make exchanges are called contracts, and a society based on voluntary contractual agreements is a contractual society. It is the society of the unhampered market.

In a contractual society, each individual benefits by the exchange-contract that he makes. Each individual is an actor free to make his own decisions at every step of the way. Thus, the relations among people in an unhampered market are “symmetrical”; there is equality in the sense that each person has equal power to make his own exchange-decisions. This is in contrast to a hegemonic relationship, where power is asymmetrical—where the dictator makes all the decisions for his subjects except the one decision to obey, as it were, at bayonet point.

Thus, the distinguishing features of the contractual society, of the unhampered market, are self-responsibility, freedom from violence, full power to make one's own decisions (except the decision to institute violence against another), and benefits for all participating individuals. The distinguishing features of a hegemonic society are the rule of violence, the surrender of the power to make one's own decisions to a dictator, and exploitation of subjects for the benefit of the masters. It will be seen below that existing societies may be totally hegemonic, totally contractual, or various mixtures of different degrees of the two, and the nature and consequences of these various “mixed economies” and totally hegemonic societies will be analyzed.

Before we examine the exchange process further, it must be considered that, in order for a person to exchange anything, he must first possess it, or own it. He gives up the ownership of good X in order to obtain the ownership of good Y. Ownership by one or more owners implies exclusive control and use of the goods owned, and the goods owned are known as property. Freedom from violence implies that no one may seize the property of another by means of violence or the threat of violence and that each person's property is safe, or “secure,” from such aggression.

What goods become property? Obviously, only scarce means are property. General conditions of welfare, since they are abundant to all, are not the objects of any action, and therefore cannot be owned or become property. On the free market, it is nonsense to say that someone “owns” the air. Only if a good is scarce is it necessary for anyone to obtain it, or ownership of it, for his use. The only way that a man could assume ownership of the air is to use violence to enforce this claim. Such action could not occur on the unhampered market.

On the free, unhampered market, a man can acquire property in scarce goods as follows: (1) In the first place, each man has ownership over his own self, over his will and actions, and the manner in which he will exert his own labor. (2) He acquires scarce nature-given factors either by appropriating hitherto unused factors for his own use or by receiving them as a gift from someone else, who in the last analysis must have appropriated them as hitherto unused factors.10 (3) He acquires capital goods or consumers’ goods either by mixing his own labor with nature-given factors to produce them or by receiving them as a gift from someone else. As in the previous case, gifts must eventually resolve themselves into some actor's production of the goods by the use of his own labor. Clearly, it will be nature-given factors, capital goods, and durable consumers’ goods that are likely to be handed down through gifts, since nondurable consumers’ goods will probably be quickly consumed. (4) He may exchange any type of factor (labor service, nature-given factor, capital good, consumers’ good) for any type of factor. It is clear that gifts and exchanges as a source of property must eventually be resolved into: self-ownership, appropriation of unused nature-given factors, and production of capital and consumers’ goods, as the ultimate sources of acquiring property in a free economic system. In order for the giving or exchanging of goods to take place, they must first be obtained by individual actors in one of these ways. The logical sequence of events is therefore: A man owns himself; he appropriates unused nature-given factors for his ownership; he uses these factors to produce capital goods and consumers’ goods which become his own; he uses up the consumers’ goods and/or gives them and the capital goods away to others; he exchanges some of these goods for other goods that had come to be owned in the same way by others.11,12 These are the methods of acquiring goods that obtain on the free market, and they include all but the method of violent or other invasive expropriation of the property of others.13

In contrast to general conditions of welfare, which on the free market cannot be subject to appropriation as property, scarce goods in use in production must always be under someone's control, and therefore must always be property. On the free market, the goods will be owned by those who either produced them, first put them to use, or received them in gifts. Similarly, under a system of violence and hegemonic bonds, someone or some people must superintend and direct the operations of these goods. Whoever performs these functions in effect owns these goods as property, regardless of the legal definition of ownership. This applies to persons and their services as well as to material goods. On the free market, each person is a complete owner of himself, whereas under a system of full hegemonic bonds, he is subject to the ownership of others, with the exception of the one decision not to revolt against the authority of the owner. Thus, violent or hegemonic regimes do not and cannot abolish property, which derives from the fundamentals of human action, but can only transfer it from one person or set of people (the producers or natural self-owners) to another set.

We may now briefly sum up the various types of human action in the following table:

          HUMAN ACTION

I. Isolation (Autistic Exchange)
II. Interpersonal Action
     a. Invasive Action
          1. War
          2. Murder, Assault
          3. Robbery
          4. Slavery
     b. Noninvasive Action
          1. Gifts
          2. Voluntary Exchange

This and subsequent chapters are devoted to an analysis of a noninvasive society, particularly that constituted by voluntary interpersonal exchange.

  • 8. Strictly, the law of marginal utility is also applicable to the case where the supply is only one unit, and we can say that, in the example above, exchange will take place if, for A, the marginal utility of good Y is greater than the marginal utility of good X, and vice versa for B.
  • 9. On use-value and exchange-value, see Menger, Principles of Economics, pp. 226–35.
  • 10. Analytically, receiving a factor from someone as a gift simply pushes the problem back another stage. At some point, the actor must have appropriated it from the realm of unused factors, as Crusoe appropriated the unused land on the island.
  • 11. On self-ownership and the acquisition of property, cf. the classic discussion of John Locke, “An Essay Concerning the True Original Extent and End of Civil Government, Second Treatise” in Ernest Barker, ed., Social Contract (London: Oxford University Press, 1948), pp. 15–30.
  • 12. The problem of self-ownership is complicated by the question of children. Children cannot be considered self-owners, because they are not yet in possession of the powers of reason necessary to direct their actions. The fact that children are under the hegemonic authority of their parents until they are old enough to become self-owning beings is therefore not contrary to our assumption of a purely free market. Since children are not capable of self-ownership, authority over them will rest in some individuals; on an unhampered market, it would rest in their producers, the parents. On the other hand, the property of the parents in this unique case is not exclusive; the parents may not injure the children at will. Children, not long after birth, begin to acquire the powers of reasoning human beings and embody the potential development of full self-owners. Therefore the child will, on the free market, be defended from violent actions in the same way as an adult. On children, see ibid., pp. 30–38.
  • 13. For more on invasive and noninvasive acts in a free market, see section 13 below.