The history of economic thought, like that of other disciplines, reveals a mixture of systems of thought that have been separated into particular schools of ideas. This method of categorizing the ideas of different thinkers concentrates on the likenesses of certain groups while overshadowing their differences. The French Physiocrats who rose to prominence during the second half of the eighteenth century represent the first modern school of economic thought. Classical economic thought, Marxism, and socialism subsequently followed.

Calculations in Kind in a Primitive Economy

The task of economizing is as applicable to an isolated, self-sufficient person like Robinson Crusoe as it is to someone who lives in a society characterized by extensive division of labor and complex exchange transactions. Robinson Crusoe’s task was to employ the means available to him in ways that he hoped would generate the greatest satisfaction. A process of deciding and choosing was essential to his welfare.

The Role of the Price System

It has been shown that the essence of social cooperation is specialization and the division of both labor and knowledge. This fact has two significant implications for the purposes of this study. The first is that social cooperation results in the production of such a wide range of intermediate and final products that calculations in kind will not allocate scarce resources effectively. A common denominator is indispensable.

Satisfaction and Valuation

The explanation of all economic activity that takes place in the market economy ultimately rests on the subjective theory of value. The value of various consumer goods and services does not reside objectively and intrinsically in the things themselves, apart from the individual who is making an evaluation. His valuation is a subjective matter that even he cannot reduce to objective terms or measurement.

The Nature of the Market

The tendency to ascribe to the market economy the characteristic of being something other than the events caused by the choices and actions of individuals is incorrect. The market arises as a result of the willingness of individuals to interact. Every development in the market is the outcome of purposive actions on the part of individuals who are seeking to improve their own state of affairs.

We must now explain how scarce resources are allocated in the production of various consumer goods in the market economy. The generation of consumer goods, as will be shown, is a complex process in which the production of numerous goods used to make other goods, often called capital goods, plays an essential role. Production requires the creation of capital goods to be used in further production as well as the final goods designed to please the consumer.

In an evenly rotating economy, the problem of resource allocation would be easily solved. Knowledge of future preferences, resources, and techniques of production would be the result of a world without change. Equipped with this knowledge, market participants would be able to devote resources to their most satisfying lines of use without friction and inconsistent planning. Units of factors of production would be priced equal to their discounted marginal value product, thereby permitting investor-producers to earn only an interest return.

Thus far all explanation of the market system has been predicated on the assumption that there is no inflation problem and no erratic business pattern of intermittent general expansion followed by general recession or depression. The market system has been shown to operate through the price mechanism, which induces adaptive and complementary actions on the part of the market participants in the face of ever-changing market conditions.

Thomas C. Taylor is professor of the School of Business and Accountancy at Wake Forest University.