Market Theory and the Price System. Israel M. Kirzner
5 in interpreting individual allocation of income. In Chapter 6 the analysis is extended to cover the demand for particular commodities as expressed by the market as a whole and as it reacts to given changes. The analysis will be built on the basis of understanding the individual demand behavior of which market demand is itself the resultant. In Chapter 7 we apply our analysis to a market process that might develop in an economy where only consumer goods are bought and sold.
The fundamental premise the theory of demand (and, therefore, also market theory in its entirety) is built upon is that men do not consider all their desires to be of equal importance. Each of us wishes to enjoy the services of innumerable types of commodities, to achieve a variety of cherished goals. For the analysis of human action, it is of the first moment that we rank these inclinations and desires as either more or less urgent. Whenever we are forced to choose between the satisfaction of two inclinations, one of them takes precedence over the other.
That men are able to arrange their preferences in order of importance is inherent in the nature of man himself; that men are forced to make such a ranking is imposed by the brute fact of scarcity that places man constantly in the position of being unable to satisfy all his desires. It is this scarcity that thrusts on man the necessity to choose. And it is in the act of choice that man does, in fact, rank the available alternatives. The renounced alternatives, by their very renunciation, are declared less urgent than the alternative that is chosen.
At any given time, a man finds himself possessed of a multitude of desires. He would like to eat, drink, read, walk, or simply sleep. The foundation of the theory of demand is the recognition that all his desires, all the goals he deems worthy of achievement, may be considered as making up a scale of values, arranged in their order of importance. This ordered array is set up, for any number of man’s desires, whenever he is forced to choose between them. When man eats, then he pronounces the goal of eating to be superior on the value scale of this moment to any of the other activities he might have engaged in. When, at another time, he goes on a hike, then it is this form of recreation that has been set aside as more urgently desired at the moment than other forms of activity.1
Acting man, at every moment of his consciousness, is forced to choose among a number of possible courses of action. It is of the essence of action that it aims at encompassing the fulfillment of as many of the actor’s desires as is possible, in the order of their urgency. That is, a man always acts to ensure that no desire is satisfied at the expense of the satisfaction of some more important want. This, after all, is only a different way of expressing the fact that man is intent on successfully achieving his goals. “Achieving one’s goals” means renouncing the achievement of a specific goal should it interfere with the achievement of a goal considered more important.
In the actuality of the everyday world, human beings are able to satisfy their wants only through directing their efforts toward appropriate means for such satisfaction. A man who wishes to eat may purchase food, cook food, or simply put on a hat and coat and go to a restaurant. His actions have been intermediary to the goal of eating. “Eating” is the end of his present endeavors; the means that he adopts for the attainment of his end can be an act of purchase, cooking, or walking to the restaurant. It is rare indeed that any act a man undertakes can be considered only an end in itself; in most cases actions are aimed at some goal that, upon examination, proves to be only intermediate to the attainment of some more “ultimate” purpose; and so on.
For our purposes it is not so much the distinction between ends and means that is of importance. Rather it is desired to emphasize that when men act to obtain the means necessary to fulfill their more ultimate goals, they are actuated by the same kind of calculation as when they aim at their goals directly. In particular, it is noted that the very considerations that constrain man to arrange his desires in order of their importance force him to make an identical arrangement among the means necessary to the fulfillment of these desires. In his attempts to obtain the means for the satisfaction of his wants, man directs his first efforts to the attainment of those means that minister to ends highest on the value scale. When forced, as in fact he constantly is forced, to choose between alternative bundles of “means,” man places the means in their appropriate rankings within the value scale. He is careful not to follow any course of action that would secure him the means of satisfying any desire, where this would be at the expense of items higher on the value scale—that is, at the expense of wants (or means for the satisfaction of wants) considered more urgent.
It is this complete scale of values that man at once sets up and follows, whenever he is called upon to choose. Man’s actions are invariably carried out under the constraint of some such value scale. Our analysis of demand theory is built on the logical consequences of the existence of such a scale—of the fact that man’s desires and the means to the satisfaction of these desires are not of equal “significance.” By “significance” we mean simply “importance,” judged by the yardstick set up by a man’s value scale. The terms “significance,” “importance,” “urgency,” and the like are used throughout demand theory to allow the idea of value ranking to embrace all objects and courses of action that man considers as desirable or worthy of attainment. A man may be in a position where he must choose between quite heterogeneous objects or values. He may be forced to choose whether to rush over his breakfast or to miss his train; whether not to tell the truth or to lose his job; whether to increase his costs by granting a salary increase to an employee or to risk being labeled a “skinflint.” No matter how unmatched the relevant alternatives may appear, the very fact that he is called upon to choose between them means that man must somehow rank them on the same scale. Thus, this scale must be far wider than one intended merely to rank values as more physically pleasurable or less, as more morally acceptable or less, as more esthetically appealing or less; it must, or more accurately, does rank objects and courses of action as simply more worthy of action or less. An item higher on the value scale, for action, is more “significant” than an item below it.
In the theory of demand, the term utility is to be understood as denoting simply “significance,” in the sense set forth in the previous section. As such the utility concept is fundamental to the theory of demand and to the understanding of the determination of prices. In this and in the next chapters we use the utility concept to analyze the actions of the consumer and the way his actions are adjusted to changes in basic market data. Our discussion begins with an illustration of the notion of marginal utility as it is reflected in a simple exchange transaction between two men and then proceeds to use marginal utility as a tool in the subsequent analysis.
Imagine two men A and B. Each possesses a quantity of both fish and fruit. However, A would gladly give up some of his fish if this would secure him more fruit; B is ready to give up some of his fruit if this will increase his supply of fish. When A and B become aware of this situation, exchange ensues. We will suppose that A gives 3 lbs. of his fish to B and obtains 10 lbs. of B’s fruit in exchange. Let us restate this simple case using utility terminology, from A’s point of view.
Both fish and fruit have utility for A; A would prefer, other things being equal, to have more fish than less fish and more fruit than less fruit. However, the utility to A of the 10 lbs. of fruit that he obtains from B is greater than that of the 3 lbs. of fish that A yields in exchange. For B, of course, the case is the reverse. The utility to him of the 3 lbs. of fish that he obtains is greater than that of the 10 lbs. of fruit that he yields.
Now, it must be noticed, that when we compare for A the utilities of fruit and fish, we are not comparing the significance of fruit-in-general