Austrian Economics Part Four – Exchange

Matthew John Hayden

Value is the sentiment we place upon the utility we will or will not gain by achieving certain possible states, such as cuddling with a lover, having a long soak in a hot bath, taking a walk, playing a video-game, or the act of wandering from shop to shop buying things as retail therapy. This makes value bigger than utility, though it includes utility. Utility is actual satisfaction arising from the change of state from less satisfying to more satisfying that we achieve by acting. It is entirely a mental phenomenon. It exists only in the mind and thus is subjective to the individual. If this seems offensive to any Marxist or other objective value theory advocates, sorry, but reality dictates that value is subjective. It’s over.

Everything we’ve covered in previous articles can apply to one individual living completely alone without human contact. This is called Crusoe economics after Robinson Crusoe of fictional marooning fame. But now we come to how humans will actually act in encounters with each other to create value, that is, the promise of satisfying their most pressing wants. The form this interaction takes is exchange. Exchanges themselves would be the units of economics if economics had units. Exchange is very simply Person A giving something to Person B while Person B in turn gives something to Person A. That’s it! When does exchange take place, and when is exchange not exchange?

Economic exchange is called trade because both parties get more than they give. Yep, you read that right. Voluntary trade between consenting parties adds value for both of those parties. How do we know this? Because if you value potential purchases equally to or less than the money in your wallet, you wouldn’t bother to exchange that money for any of those goods. This is because if the state offered by, say, a Gillette razor is no more satisfying than a present state without said razor, then I ain’t buying one. So as party to an exchange I take part only because I will gain a greater capacity to satisfy my wants than I will without the exchange.

So, we act to get from a less satisfying present to a more satisfying future, on which we place more value than its alternatives. Trade is a form of action in which two people exchange with other while both seeking to gain value. This value-added is a prerequisite to and good or service being recognised in business as a product, because it is something that creates value for purchasers by satisfying wants, and adds value to its sellers by adding money which offers opportunity to engage in future trades.

Refuting the subjective value of exchange explained above is an exercise in futility because if the actions being taken by the two parties are not entirely consensual – one is coercing or deceiving the other – then by definition what is taking place is not a trade. It’s assault, theft, murder or rape, depending on the action involved. If it looks at the time like a trade but one party later finds out they’ve been played it was fraud, which is a subset of theft. QED trade is voluntary exchange between consenting parties and represents added value in both of their lives, just making both people a little richer after than they were before, and thus causing all the social progress whose fruits we of the late 20th and 21st Centuries have enjoyed since we were born.


2 thoughts on “Austrian Economics Part Four – Exchange

  1. There are three basic principles in “Austrian School” economics (or in any correct economics – one can find them even in future Archbishop Richard Whately’s Oxford work in the 1820s, or in some of the Scholastic writers of centuries before). Methodological individualism (not to be confused with straw-man “atomistic” individualism), the universality of economic law (that economic principles are NOT different in different countries or “historical periods”), and the subjective nature of economic value – not to be confused with thinking that everything is subjective.

    Whether one is influenced by Aristotelians such as Franz Branteno, as Carl Menger was, or one is influenced by Kantians such as Ernst Cassier, as Ludwig Von Mises, was – these principles are the same.

    For example – price controls that reduce the legal price of something below the market price will, if enforced, eventually produce a shortage – this is true whether one is in the ancient Roman Empire, or a space colony on Mars in the year 2100.

    Wage controls that increase the legal wage of people above the market wage will, if enforced, eventually produce unemployment – again it does not matter if one is in the ancient Roman Empire, or a space colony on Mars in the year 2100.

    Lending must be from REAL SAVINGS (actual sacrifice of consumption) – credit expansion (“cheap money”, “low interest rates” – whatever) is, contra J.M. Keynes NOT “saving – as real as any form”. Efforts to lend more “money” than was ever really saved will produce a bubble – regardless of country or “historical period”. A “boom” that must end in “bust”.

    For further examination of economic principles and their practical application – see Ludwig Von Mises “Human Action”.

    • Price comes next! Should go up either tomorrow or Thursday. Thanks for the historical context. As much as I have read on arguments over method, I am unfamiliar with the particulars of who influenced whose outlook. All cool stuff.


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