Human Action Archives - Hunter Hastings

If you read about or think about economics, whether you find your content in textbooks, business books, or business magazines or on news sites and programs or blog sites or via popular writers, you’ve probably come across the terms micro-economics and macro-economics.

If you explore, you can find multiple definitions for each of these terms:

The International Monetary Fund defines macroeconomics as “how the overall economy works”, typically at the national level, and via the study and analysis of “aggregate variables” such as overall employment and money supply. Microeconomics, according to the IMF is concerned with a single market such as the automobile market or the oil market and how these are “driven by supply or demand changes”.

Investopedia, to take just one alternative source, describes macroeconomics as “the decisions of countries and governments” and microeconomics as “the study of individuals and business decisions”.

These are just two samples of the definitions available to searchers on the internet. They are clearly very different in import and meaning.

The confusion would not be a surprise to Economics Professor Richard E. Wagner. In fact he says, in a book entitled Politics As A Peculiar Business, that the distinction between micro- and macroeconomics is “incoherent” and “non-informative”: it can’t tell us anything.

The established and institutionalized distinction between microeconomics and macroeconomics is incoherent in Wagner’s explanation, because

it treats some types of interaction as macro while treating other types as macro, based on nothing more than the size or the extent of the interaction. Hence, the division of firms into distinct industries is to create micro entities, while their aggregation is to create a macro entity. This is nothing but incoherence, for all firms beyond proprietorships involve collective phenomena and are products of interaction.

Rather than the micro/macro classification, Wagner proposes the distinction between individual action and social interaction. He presents two very fancy terms for these two classifications: praxeology and catallaxy. Praxeology pertains to individual action, catallaxy pertains to interaction between individuals in society. Economic reasoning begins with praxeology, but most of the phenomena that are analyzed by economists are catallactical.

Prices, firms and markets are treated in the traditional economics as micro objects, to distinguish them from aggregate variables. But if micro pertains to individual action, then prices, firms and markets are macro objects because they pertain to interaction. Hence the accusation of incoherence.

What’s so important about individual action in economics? Wagner stipulates that societies change only through individual action inside those societies, with those actions spreading within the society according to the receptivity of other members of society to those changes. All change originates at the action, i.e. individual, level. Individual action matters; there is no such thing as social action.

Individuals interact through their connections to other individuals. If we think of society or the economy, it must be as a network of such connections. If we talk of social structures, we must talk of a network of connections between individuals who are constantly seeking better states of affairs within their own spheres of interest.

These choices of better states are subjective. As Wagner puts it, “Sentiment proposes objects for reason to think about”. In other words, economists can’t know why people do what they do.

But modern economics can shed light on the implications of individual action and interaction. Systems theory establishes the basis for understanding interactions based on subjective value, and modern techniques of computational modeling of systems can show how theories play out. A frequent result of the action and interaction of individuals s “emergent” outcomes: patterns of system behavior that are not predictable from the behavior of individuals, yet are the result of it. Adam Smith recognized these outcomes as the results of human behavior but not of human design, brought about by the invisible hand of the market.

These emergent outcomes can mean economic flourishing for all because, in commercial societies, individuals choose actions that provide services to others that those others are willing to pay for. This is market-based action, continuously refined by the feedback loop of profit and loss, and the reciprocal relationship of choice and cost. All these actions, choices and costs occur at the micro level, the level of the individual.

Macroeconomics, on the other hand, is a mirage, a fallacy. It’s a made-up concept designed to justify government policy to “manage” a macro-level idea of the economy. If economists can aggregate data at the level of the economy, they can propose policies that claim to have the potential to induce changes in the aggregates. But since there is no such phenomenon as action at the aggregate level, or even interaction – people don’t interact with aggregates, but with other people – this entire scenario is invalid. Or, as Wagner would say, incoherent.

Why do the claims for the efficacy of policy persist? As Wagner also explains, the realm of economics and the realm of politics are now entangled. Actions in one realm can not be disentangled from action in the other. When individual action in the economic realm brings about flourishing, there will always be a politician or a federal agency to intervene to attempt to change the outcome. It is unlikely that we can disentangle ourselves from politicians and their macroeconomics any time soon, despite the incoherence.

It is preposterous to assume what customers say is more important than where they place their feet and the price they pay for products or services. The customer’s mind is still elusive and challenging for entrepreneurs. If understanding the mind of the customer were easy, everyone would do it!

The insights of the Austrian School of economics tell us that people act purposefully toward future betterment. That is, customers and entrepreneurs both act to attain better future situations than their current situations compared to if they had not acted at all. Customers operate on a value scale, an important insight developed by Carl Menger, elucidating that value is in customers’ minds. In this regard, Menger urged entrepreneurs to “reduce the complex phenomena of human economic activity to the simplest elements”.[1] I echo the sentiments of Carl Menger, but some do not. For example, a recent article titled, 2 Simple Steps For Testing If Your First Customers Like Your Product recommends surveys and the search for “moments of truth” and “tipping points”. The only simple way of ascertaining customers’ product sentiment is through the market itself.

The market process provides excellent insights into customers’ unspoken motives and whether they like your products and services. The best way to figure out if your customer likes your products is to turn to market phenomena. That is, the market price, as reflected by customers’ subjective valuation and competitors’ offerings. Different opinions about the value of a product or service are drawn out through this process. The real test, the market signals, shows how much and to what extent customers are willing to sacrifice to attain your product or service offering.

The customer wants the product with high use value, intended for whatever purposes to help them reach their end. The value of any product is in the customer’s eye, the same way that beauty is in the beholder’s eye! We never truly know to what extent a customer chooses your product over a competitor’s. That is to say, the only reliable data on customer sentiments are that customers have purchased your products – the more, the merrier. Ludwig von Mises in Human Action expressed that, “It is ultimately always the subjective value judgments of individuals that determine the formation of prices.”[2] Market prices and exchanges alert the entrepreneur whether the product is more or less valuable to the customer than the forgone opportunity to withhold their cash holdings. Money measures prices, and prices measure value. Buying and selling or market abstention determine prices. As such, prices are what customers are willing to pay for a product based on their subjective valuation, keeping in mind their future benefit from that product.

In his salient book, Economics for Real People, Gene Callahan agreed that “only real market prices convey information on the freely chosen values of acting man.”[3]

Therefore, it is sensible to observe market price signals as a means of analyzing customer sentiments. Customer dissatisfaction and loyalty occur when product or service incongruities exist. Market incongruities also exist between the entrepreneurs’ perceptions of changing market realities. The entrepreneur’s function is to address any market incongruities in which the customer, because of market changes, is better off than they were before. The market is in constant movement, which means customer preferences are in perpetual motion.

Retention of customers is a less complicated phenomenon that an entrepreneur might observe. Only individuals act in concert with one another in a spontaneous way to reach their goals in any given market. As the author of the cited article proposes, the concept of customer retention is somewhat misguided because retention relates to competitors’ actions and their substitutable products. The question should be, how many substitutable products exist in my ecosystem? Are other entrepreneurs doing the same that I am not doing?

First, the customer is the holder of the perception of value. Secondly, the customer making future choices is the cornerstone of the basic axiom of action. While taste preferences change over time, so do the market actions of your customers and your competitors. The first axiom of praxeology is that people act; they act to pursue a better situation based on the choices they are presented with. Mises reminds us of this in his work titled, Human Action. What the customer says and the action customers take are two different things, because it is the customers’ action that provides market signals to the entrepreneur. As long as you satisfy the customer’s needs and wants, profits will ensue, and losses decrease.

You strive to get rewarded for the risks involved with bringing new products to the market. Your competitors are seeking the same market reward.

Some do not understand how competition works as a signal of incongruities, leading to profits or losses. Indeed, competition exists so long as customers have market choices and can exercise them. The reality is that customers vote with their dollars and feet. They may voice their liking of your products, but at the same time, are enthralled with a competitors’ quality, service, and price of their product. Competition, therefore, acts as the entrepreneurs’ light post, guiding them toward market opportunities that may go unrealized or deterring them from those that are unfit.

Competition, in the Austrian view, is aimed at who can serve the customer best. Providing the best quality and product to the customer is the leading role of entrepreneurial competition. Competition is not and should not be insidious – rather, it should be productive and dynamic. If entrepreneur A wants to enter a market with capital to prove he or she can do things better than entrepreneur B, that should be his or her choice. Entrepreneur B will come to realize they missed many market opportunities only because that knowledge appears as a result of the competitiveness of entrepreneur A. For example, customers may choose the products of entrepreneur A one day and B the next.

It is not what customers say, but what they do. Entrepreneurial insight about the market and the changes that will occur should be the guiding light for entrepreneurs. Entrepreneurs have to ascertain how people will respond to changes. Customer purchases, retention, a likeness of products or services, and loyalty are results of entrepreneurial market observation, and not causes.

[1] Carl Menger Principles of Economics

[2] Ludwig von Mises: Human Action

[3] Gene Callahan: Economics for Real People

Posts

The Division Of Economics Into Macro And Micro Is Incoherent. Individual Action And Interaction Are The Two Levels On Which To Focus.

The Importance Of Behavioral Data: It Is Not What Customers Say, It Is What They Do.