2. What Is Economics?

2. WHAT IS ECONOMICS?

SUGGESTED ACTIVITIES

1. The teacher might start the first class by asking the students to answer some or all of the questions appearing on pp. 7-9. Make it clear that this is not a test of any kind. The teacher may hold on to the papers and be guided by them in deciding what to emphasize. At the end of the course, ask the same questions over again, and then compare and discuss with the students their two sets of answers.

2. Each student might talk with at least two adult friends, relatives or neighbors who studied economics in school. Ask what they remember about the subject. Has their study of economics proved helpful? Student reports on their surveys could be another indication of what deserves special attention in this course.

3. This first Unit deals with very deep philosophical concepts which may be difficult for average high school students to grasp. Thus, the teacher may choose to deal only briefly with this Unit. Point out simply that economics is the study of how every individual, every single one of us, tries to use the resources available to him to satisfy as best he can at any moment as many of his various wants, material and non-material, as possible. Refer to the several readings relative to this Unit to discuss the general subject matter and method of economics.

4. Exceptional students may be interested in exploring more deeply the fundamental philosophical concepts introduced here. They should be encouraged to study the additional readings recommended. Have them consult the glossary and also regular dictionaries and encyclopedias for definitions of such terms as “axiom,” “postulate,” “theory,” “induction,” “deduction,” “a priori” and “a posteriori.”

NOTE: Mises Made Easier: A Glossary for Ludwig von Mises’ HUMAN ACTION, prepared by Percy L. Greaves, Jr. (Dobbs Ferry, New York 10522: Free Market Books, 1974) should be especially helpful in explaining these theoretical terms.

Some students may have encountered these concepts in other classes, geometry for instance. Let them ponder the six a priori postulates cited in this Unit, pp. 13-14. Are they really self-evident concepts, concepts each of us understands simply because we are human beings, living, breathing and acting in accordance with our inherent nature? Or must they be learned through observation, experience, study? Contrast a priori knowledge with a posteriori knowledge, i.e., knowledge acquired through observation, experience and learning. Can the students formulate other postulates that might be considered a priori? Discuss some of the theories that may be deduced from basic a priori assumptions.

EXPLANATORY TEXT

This first Unit deals with very deep philosophical concepts. After reviewing them as they are presented here, the teacher may choose not to deal with this Unit at length in the classroom. Read the text that follows and let your judgment be your guide.

1. What is the relationship of economics to other fields of knowledge? In order to simplify the learning process, knowledge is subdivided into “disciplines” or subjects, each of which may then be studied separately. Yet each of these subjects is really a part of knowledge as a whole. Each attempts to explain some aspect of the universe and life within it, as well as the changes that take place over time. “Economics” is the name given to that particular branch of knowledge which deals with people, individuals, human beings, specifically with reference to their choices, preferences and conscious actions undertaken in the attempt to attain their various goals. In brief, economics is the study of human action, conscious, purposive human action.

2. How does economics differ from other studies concerning the action of individuals? It should be stressed that economics is the study of the conscious, purposive, intentional actions of individuals. Economics is not the study of unconscious (chemical and physiological) changes within the body—for instance, the digestive process or the functions of heart or lungs. This field is studied by chemists, physiologists and doctors. Economics is not the study of subconscious influences or of the reasons for mental and emotional attitudes. Psychologists and psychoanalysts try to explain why people act one way and not another. Physical and chemical actions and reactions, as well as mental and emotional attitudes, certainly do influence individuals and thus their ideas and actions. Economists recognize this, to be sure. However, the field of economics is limited to studying only the conscious, purposive, intentional actions individuals take in the attempt to accomplish the various goals they want.

Historians also deal with the actions of individuals. However, history reports and interprets the past actions of individuals as specific, particular, unique events, in a certain historical setting at a definite point in time. Economics, on the other hand, describes and interprets human actions from the point of view of the characteristic all such actions have in common—their purposiveness, the fact that they are undertaken by human beings who are consciously trying to attain some definite end or goal. By explaining the consequences of the purposive actions men take, economists help people choose those actions most likely to have the results desired and so enable them to plan more successfully for the future.

3. What is the “economic point of view”? Economics deals with the actions of individuals acting alone, as well as when many individuals act together, in cooperation or in competition with one another. It is the purposiveness of an action that makes it an economic action. Thus, the “economic point of view” is the consideration of actions from the point of view that they are consciously, purposively and intentionally aimed at goals.

Even though Robinson Crusoe was completely alone on an island, he acted “economically,” for he acted consciously, purposively and intentionally to attain various goals. Crusoe couldn’t satisfy all of his various wants at once, of course. He had to seek them as best he could, one by one, each according to its relative urgency to him under the circumstances. He was continually having to reassess his situation, cope with some new complication and take care of the most urgent problem at any moment, before setting out to accomplish anything else. Throughout his entire adventure on the island, Crusoe strove consciously, purposively to attain various goals. Thus, he was “economically” motivated, just like every other human being. It is the purposiveness of any action that makes it “economic.”

4. How does economics help to explain complex economic phenomena? The actions and choices of a Robinson Crusoe are relatively simple to understand and explain. Yet most actions involve many persons. Situations become more complicated when large numbers of individuals are involved so that their actions inevitably intertwine and influence one another.

The various actions of individuals become interconnected and interrelated with one another through the market. Even when individuals act independently, they make decisions in the light of what others are doing. Everyone’s ideas, choices and actions are influenced by the actions of others, and his actions in turn, impinge upon (affect) everyone else. The more people involved, the more complex and intricate become the consequences of their actions. In a large populous area, such as the United States where many people live and work together, the effects of any economic activity become widespread and inextricably intertwined. Thus, the worldwide network of interconnecting actions is extremely complicated.

It is the task of economists to unravel complex economic phenomena and show how they evolved out of countless human actions. Economists try to trace economic consequences back to the economic unit, i.e., back to the individual actor and his individual actions. This approach to economics is called the “micro-economic” approach. Interpreting complex interrelationships in this way calls for serious study and careful analysis. However, this method is the only way to understand how economic phenomena come about, what actions lead to what consequences and what practices and policies will be best to follow in the future.

5. How does this “micro-economic” approach contrast with “macro-economics’? Nowadays when most people talk about economics, they think of monetary statistics, figures on total production, averages, prices and so on. To obtain these data, they seek information on the quantities of physical goods and services produced and consumed in a community, total the dollar prices asked for these goods on the market and paid for the services rendered, etc. They call these statistical studies “macro-economics.”

All economic statistics of this type are based on past actions. They are historical data. They relate to specific economic events of the past at certain times and places, but they do not explain how they came about. To understand what economic statistics represent, they must be interpreted in the light of micro-economics. They must be explained in terms of the economic units from which they derive, i.e., the individual actions of individual actors. They must be explained as the outcomes of the ideas, choices and conscious actions of many individuals. Just as physical scientists must study the chemicals, cells and organs in the human body to explain how it functions, so must economists study the micro units of which macro-economic data are composed to understand how the economy operates. Only by showing how the individual actions of many persons are interconnected and lead in time to elaborate interpersonal relationships on the market is it possible to make complex economic phenomena intelligible.

6. How do people know things? Before dealing more specifically with the discipline of economics, it might be well to spend some time discussing the origin of any knowledge. For centuries, philosophers have debated and pondered where knowledge comes from. How do we know anything? How can we be sure that something is really true? After serious consideration, thinkers have come to the conclusion that basically there are two kinds of knowledge—a priori and a posteriori.

A priori Knowledge

A priori knowledge or understanding is self-evident in nature. It is what people know “naturally,” without even having to try to learn. It is the type of knowledge or understanding which precedes the learning experience. In other words, a priori knowledge is what individuals know almost instinctively, without having to experience or figure it out for themselves.

A priori knowledge helps us improve our anticipation of the things people are likely to do. We may use a priori concepts just sitting in an armchair and thinking logically to develop more complex ideas and theoretical knowledge. Using reason and logic in this way to derive (deduce) theories from self-evident a priori axioms, definitions, propositions is called “deduction.” Deduction might be called the “armchair method” of acquiring knowledge.

A posteriori Knowledge

A posteriori knowledge is knowledge derived from observation, experience, study of the past and controlled experiments as in the laboratory. This is also called empirical knowledge. A posteriori or empirical knowledge is something we learn. We are not born with this kind of knowledge. It is not intuitive, instinctive or innate in human nature. We may acquire a posteriori knowledge by several methods: (a) experience or the method of trial and error; (b) observation; (c) controlled experiments such as are conducted in laboratory study; and (d) historical study and analysis of past events. Our interest in these inductive methods is primarily to distinguish them from the method of economics we shall be using in this syllabus—deduction, i.e., reasoning logically, step by step, from basic a priori assumptions.

7. What are the categories of a priori knowledge? A priori categories may be described as the mental equipment by which men think, reason, interpret experience and acquire knowledge. A priori categories are necessary for people to think, reason, learn, profit from experience, and take conscious purposive action. No person could make any plan or accomplish anything in the absence of these basic a priori assumptions. We may list these fundamental categories as follows:

a. Regularity—Men expect to find order and consistency in the world. An object will always react in the same way, under the same conditions, to the same stimulus. For instance, water will always boil if placed over a hot enough flame for long enough. Animals tend to respond in the same way to the same influences. Individuals also demonstrate a certain regularity in their behavior. Our world is part of an ordered universe where actions may be taken in the reasonable anticipation of certain definite results. Human life and purposive action are inconceivable in the absence of regularity.

b. Logic—The logic men use, the way they reason from an accepted proposition, assumption, axiom or postulate, using deduction to reach a conclusion, is the same for all men throughout the world. The discipline of geometry follows the method of logic—from axioms, via deductions or syllogisms to a theorem. Similarly, economic reasoning is based on a priori axioms and develops its theories deductively, step by step. Human life and purposive action are inconceivable in the absence of logic.

c. Causality—One thing leads to another. Actions have consequences. Causes have effects. Conversely, when something happens, we expect that it had a cause and look for the factor responsible. This concept too is fundamental if men are to act in anticipation of improving their respective situations. Human life and purposive action are inconceivable in the absence of causality.

d. Time—In this world as we know it, events take place over time. Men realize that they cannot bring about changes all at once. It takes time for the consequence of any event or action to appear, even those which, like bomb explosions, seem to occur almost instantaneously at the moment of impact. Human life and purposive action are inconceivable in the absence of time.

e. Change—This is a world of change. It seems self-evident that conditions are always in flux. In the absence of change, there would be no reason for men to act and no purposive actions for economists to explain. Human life and purposive action are inconceivable in the absence of change.

f. Value—People are not neutral with respect to their environment. They recognize some conditions which they prefer to others. They have values, wants and goals which vary from person to person, from place to place, from time to time. When individuals are seeking to attain the various things—material and non-material—that they value more than the things they already have, they are acting purposively. Thus, human life and purposive action are inconceivable in the absence of value.

8. Is economics based on “a priori” or “a posteriori” knowledge? The subject of economics, the science of human action, rests on a priori truths, principles which are fundamental to the way men act. An a priori principle must appear to be practically self-evident, so fundamental that we cannot conceive of life in this world under other conditions. In the absence of these a priori principles, life would be a different sort of existence from that we now know here on earth and people would be different kinds of creatures from what they are. In the absence of these a priori principles, there would be no conscious, purposive human action of the type economists study.

NOTE: The teacher should, of course, be alert to the fact that philosophers still debate whether or not any knowledge is truly a priori, or whether even the most elementary understanding really develops as a result of some experience or other. However, we can leave this dispute to the philosophers. The primary concern in using any word is to define it. A posteriori and a priori will be used in this syllabus in accordance with the definitions set forth here.

GLOSSARY WORDS

(For definitions, see glossary, pp. 223ff.)

Action

Aggregate

A posteriori Knowledge

A priori Knowledge

Deduction

Economic goods

Economics

Empirical Knowledge

Free Goods

History

Human Action

Induction

Macro-economics

Micro-economics

Free Market Economics: A Syllabus