86 An Introduction to Economic Reasoning

WHY THERE IS NO CONTRADICTION

Fortunately for me, the two statements do not contradict each other. The first statement is categorical: it says that the ratio of exchange cannot be determined apart from the bargaining of the exchangers. The second statement, by contrast, is hypothetical: it says that if the demand and supply curves are given, then the price can be determined.

This enables us to escape contradiction. So long as the if-clause of the hypothetical is not realized, both statements can be true consistently.

Let’s go over this again. (If you don’t need to, feel free to omit this paragraph.) The hypothetical says what will happen if the demand and supply curves are given. It does not say that the curves are given. So long as the curves are not given, the statement makes no claim about how easy it is to determine the ratio of exchange. Thus it does not contradict the claim that the ratio is undetermined.

1.“But if the if-clause is never realized, the proposition is always false. Therefore, you have escaped contradiction only by withdrawing one of the statements you first made.” What is wrong with this argument?

?2. What would you have to add to the two statements to generate a contradiction?

3.Give other examples of two statements that (1) appear to be contradictory; (2) but in fact are not, because one of them is a hypothetical whose “if” clause is not realized.

Chapter 5: The Labor Theory of Value 87

DEMAND AND SUPPLY CURVES REVISITED

The solution to our paradox of course raises a new question. Why aren’t demand and supply curves given in the real world? To answer this is easy, once we remember how demand and supply curves are constructed. As you will recall, to get a demand or supply curve, you must first have a demand or supply schedule. Therefore, if the demand or supply schedule is not fixed, neither is the demand or supply curve.

But we now face a new question. Why aren’t the demand and supply schedules given in advance of bargaining? To answer this, we must return once more to praxeology. Remember what our aim is as students of economics. We are attempting to derive propositions from the axiom of action that illuminate our subject.

It does not follow from the action axiom that the demand and supply schedules must be fixed in advance. Perhaps you do know, before you start exchanging apples and oranges, how much of each good you will want at each price; but nothing requires this.

Can you see how this last remark requires a modification of what has gone before? It is not entirely right to say either that the ratio of exchange is indeterminate or that it is never the case that the demand and supply schedules cannot be fixed in advance. Rather, what we should say is that nothing requires these schedules to be fixed, from the standpoint of praxeology. We can then maintain, once more from the standpoint of praxeology, both of the statements we have insisted on: (1) the ratio of exchange is indeterminate (according to praxeology); and (2) if the supply and demand curves are given, the price is determined.

Another point reinforces our conclusion. Suppose you own peanuts, which you want to trade for my pictures of wrestling stars. (I’m tired of apples and oranges, aren’t you?) You may (or may not) have in mind a schedule of how many peanuts you will offer for

88 An Introduction to Economic Reasoning

pictures of various wrestling stars. Either is consistent with the action axiom. Similarly, I may or may not have a schedule of proposed trades in my mind. But you cannot determine, by praxeology, whether I have such a schedule. If you have one, it does not follow that I do; and if you do not, I may have one all the same.

In Austrian economics, the preferences that we are concerned with are those demonstrated in action. If I offer one picture of Hulk Hogan for ten peanuts, then I prefer ten peanuts to one picture of the Hulkster; my offer shows this. The relative rankings of other combinations are, from the point of view of praxeology, irrelevant. What counts are the preferences actually expressed on the market: the others, “like the flowers that bloom in the spring, tra-la/Have nothing to do with the case.”

Of course, you know whether you have a fixed preference scale, just as I know whether I have one. But neither scale is given, just by reasoning from the action axiom. From that point of view, one can just as well as assume that neither you nor I has a fixed scale of preferences.

Thus, all our talk of demand and supply curves is hypothetical. All that we are really given, strictly speaking, is the point at which the curves intersect: that is to say, the actual price in the purchasesale transaction. (A famous British economist, Sir Dennis Robertson, emphasized this.)

If the curves are hypothetical, why use them? You should know the answer by now. Hypothetical reasoning is often extremely useful in science; in economics it is indispensable.

We so far have stressed that the curves are not really “out there”: fixed preference scales, we have learned, need not exist. But we must not push the point too far. Some economists think that preferences do not exist except at the moment of action. (James Buchanan, a Nobel laureate in economics, holds this view.) We are not committed to it.

Chapter 5: The Labor Theory of Value 89

EXTRA-CREDIT SECTION

There is a misunderstanding that is easy to fall into here. In fact, I fell into it myself. Fortunately, an eminent Austrian economist called this to my attention. Go back to the apparent contradiction on the first page of this chapter. Note that it concerns whether we can determine the rate of exchange to two commodities.

If, as was argued above, an outside observer cannot determine this rate, it does not follow that the rate is indeterminate. Instead, it may be the case that the rate is fixed; but outside observers cannot know this.

The eminent economist who pointed this out to me contends that at the moment a trade takes place, the preference scales of all individuals involved are fixed. In his view, an individual may himself be unaware of his latent preference scale.

I’m not sure whether this is right: but the argument in the text does not exclude this position. Even if preference scales latently exist, we can only observe the results of bargaining. These scales are inaccessible.

Can you see why not? Once more, praxeology does not require the denial of this position. The claim that preferences are not “in the mind” but are to be found only in behavior is a philosophical doctrine. Whether it is true is not our function as economists to determine. Once more, we want to know what follows from the action axiom. Controversial philosophical theories should be avoided.

1.Are market demand and supply curves also hypothetical?

	What argument shows this?	?
2.	“It doesn’t follow that action is always demonstrated in
	preference. Sometimes you do things, even though you

really don’t want to.” How would an Austrian respond to this contention?