Ludwig von Mises argued all action is aimed at creating value for the man or woman that is acting. This postulate is the starting point of analysis, which Mises referred to as “the axiom of Human Action.”
Humans act in order to attain or realize ends of value. We call these ends goods, since the acting person sees that they are good. Men and women come to discover rules that appear to govern the environment and take advantage of these regularities in order to bring about outcomes that they value most. Thus, Mises would say that all action is guided by human understanding of (belief about) the environment.
If our object of analysis was Chuck Noland – the character played by Tom Hanks in the movie Cast Away – Mises’ description would suffice to explain entrepreneurship. Chuck has an understanding of the island. Early on, Chuck’s understanding was the subject of development. We call this learning. But since the island does not change much, the period of learning is relatively short. By the time Chuck has been on the island for a year, he develops habits that do not need further development.
The story is complicated by the addition of another human being. In economics, we often tell the story of Robinson Crusoe (think Chuck Noland more than a century earlier) and Friday. Robinson Crusoe is stranded on an island and one day, he sees Friday.
The story goes that after Friday arrives, he and Robinson Crusoe decide to divide the daily tasks. Each specializes in producing goods that he has a comparative advantage in making. Both Friday and Robinson Crusoe are made better off as each is able to create more value by specializing and exchanging.
While this story helps us to better understand the benefits of trade, some difficult questions lurk in the background. How do Robinson Crusoe and Friday choose the tasks in which they will specialize? What if Friday and Robinson Crusoe do not speak the same language? How will they know how to specialize and exchange?
Communication is a key aspect of economic exchange and entrepreneurship. Without it, how can the island inhabitants promote economic coordination?
Suppose Robinson Crusoe notices that Friday is not specializing in the production of a good that he wants. He could get angry, hoping that raw expression of emotion helps guide Friday. More than likely, this will fail. If Robinson Crusoe is wise, he will work with Friday to develop cues to guide both of their efforts.
In a market, one such cue is price: that which is given up by a person with the expectation that he or she will receive something believed to be of greater value. Economic activity is facilitated by property rights and coordinated by prices paid in exchange of property.
We may think of such a pattern of actions as being a game – a language game to be precise (Koppl 2002; Bloor 1997). This concept, developed by F.A. Hayek’s second cousin, Ludwig Wittgenstein, describes interactions as being bound by implicit and explicit rules; many of which are prone to transformation, particularly when existing rules fail to promote equilibrium outcomes between the parties. That is, both players in the game must be content with the outcomes that the rules promote.
Property rights in the game of exchange represent rules that most participants believe to be fair. For example, if I own object X, you cannot take object X without my permission. Again, such permission may entail giving up another object, Y, in order to gain control of object X. The game of exchange is, of course, only one game among many interwoven games, but it is an especially important one.
If Robinson Crusoe wants Friday to produce a particular good, this will be reflected in the price of exchange. If Crusoe does not want the good that Friday is producing, the low price or low quantity demanded by Crusoe will act as a signal to Friday. Since this is a barter economy, this would be the same as Crusoe demanding a relatively high price from Friday.
Perhaps both Friday and Crusoe feel the same way. They will need to develop strategies in order to find value for the other. Maybe each ceases to specialize during the interim when he has yet to discover the preferences of the other.
If Friday was catching fish before coming to understand that Crusoe does not want fish, Friday could spend his time picking coconuts and bananas and catching crab. If Crusoe seems to like one of these, then Friday’s labors will yield higher returns than before.
Throughout this process, Friday and Crusoe must engage in a conversation, even if that conversation is only an implicit one. They are mutually developing a language game which serves as a medium to coordinate the actions of each in light of the other’s preferences. This game enables each to create value for the other and for themselves.
Meet the Author
James Caton is a fellow at the Center for the Study of Public Choice and Private Enterprise (PCPE) and an assistant professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.