THE ANALYSIS IN CHAPTER 1 WAS based on the logical implications of the assumption of action, and its results hold true for all human action. The application of these principles was confined, however, to “Crusoe economics,” where the actions of isolated individuals are considered by themselves. In these situations, there are no interactions between persons. Thus, the analysis could easily and directly be applied to n number of isolated Crusoes on n islands or other isolated areas.

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.

In describing the conditions that must obtain for interpersonal exchange to take place (such as reverse valuations), we implicitly assumed that it must be two different goods that are being exchanged. If Crusoe at his end of the island produced only berries, and Jackson at his end produced only the same kind of berries, then no basis for exchange between them would occur.

Before analyzing the problem of the terms of exchange, it is well to recall the reason for exchange—the fact that each individual values more highly the good he gets than the good he gives up. This fact is enough to eliminate the fallacious notion that, if Crusoe and Jackson exchange 5,000 berries for one cow, there is some sort of “equality of value” between the cow and the 5,000 berries. Value exists in the valuing minds of individuals, and these individuals make the exchange precisely because for each of them there is an inequality of values between the cow and the berries.

One22 of the most important problems in economic analysis is the question: What principles determine the formation of prices on the free market? What can be said by logical derivation from the fundamental assumption of human action in order to explain the determination of all prices in interpersonal exchanges, past, present, and future?

This chapter has been an exposition of part of praxeological analysis—the analysis that forms the body of economic theory. This analysis takes as its fundamental premise the existence of human action. Once it is demonstrated that human action is a necessary attribute of the existence of human beings, the rest of praxeology (and its subdivision, economic theory) consists of the elaboration of the logical implications of the concept of action. Economic analysis is of the form:

It is often charged that any theory grounded on a logical separation of means and ends is unrealistic because the two are often amalgamated or fused into one. Yet if man acts purposively, he therefore drives toward ends, and whatever route he takes, he must, ipso facto, employ means to achieve them. The distinction between means and ends is a necessary logical distinction rooted in all human—indeed, all purposive—action. It is difficult to see the sense in any denial of this primordial truth.

With the nature-given elements limited by his environment, and his labor restricted both by its available supply and its disutility, there is only one way by which man can increase his production of consumers’ goods per unit of time—by increasing the quantity of capital goods. Beginning with unaided labor and nature, he must, to increase his productivity, mix his labor energy with the elements of nature to form capital goods.

We have stated that all action involves an exchange—a giving up of a state of affairs for what the actor expects will be a more satisfactory state.43 We may now elaborate on the implications of this truth, in the light of the numerous examples that have been given in this chapter.