Market Theory and the Price System. Israel M. Kirzner
while we make no other assumptions concerning the nature of the actions of individual members, we are assuming that no activity is expended with the sole purpose of replacing the market system by some system of societal organization governed by conditions substantially different from those outlined here. The system is thus consistent with the existence of the political and coercive apparatus associated with government, only to the extent necessary to ensure the maintenance of the conditions of a market system.
A society based on these conditions, starting from a previous state of individual autarky, without any specialization or exchange, can be seen as rapidly developing into an intricate exchange system. For such a successful development to occur it is however necessary that some commodity emerge in the market which is a generally accepted medium of exchange. With exchange confined to direct barter of goods or services for other goods or services, there can be only a limited scope for market activity. It can be confidently assumed however that the existence of market activity, even if limited, will create numerous opportunities for individuals to improve their positions by engaging in indirect exchange. An individual would give goods or services in return for goods that he does not himself desire, in hope of being able to exchange these goods later on for others that he does desire (but that cannot be had in exchange for his original goods or services). Widespread activity involving such indirect exchange can in turn aid the emergence of a commodity generally accepted as a medium of exchange.
Individuals will readily accept this commodity (money) in exchange for their goods or services, having complete confidence in their ability to use this commodity whenever they wish, to buy other goods or services at prices (in terms of the money commodity) more or less definitely known in advance.
For the purposes of the market system analysis undertaken in this book, we may assume that the system’s history includes the evolution of a fully developed monetary machinery. The market has become completely adjusted to a system of money; all economic calculation is carried out in terms of money values, all prices are money prices, and all market transactions are exchanges of goods or services against money. (Nevertheless, for our purposes, we assume that the market operates exactly as it would operate without the existence of a money supply, but simply enjoys freedom from the inconveniences connected with direct barter. In other words money is assumed to succeed in lubricating the wheels of exchange, without itself actively directing exchange activity into channels other than those that would in principle be used in the absence of money.)1
With the conditions governing the market system firmly in mind, we may turn to observe the different roles within the market process that can be filled by individual market participants.
Classification of roles as carried out by the economic theorist is quite different from classifications carried out from other points of view. A difference between two individuals is significant for the theorist only as it corresponds to a difference in market function. Market theory is organized within a conceptual framework that recognizes distinctly several such market functions.
1. Consumers. At the root of the whole matter lies the concept of action. Human beings act, we have seen, to improve their positions, so far as they believe themselves able to do so. Individuals participate in the market only with this final goal of improving their positions. An individual may find it necessary to undertake many different activities within the market, but the ultimate purpose of all these activities will always be to purchase (or obtain the power to purchase) goods and services whose possession enables him to enjoy directly an “improvement in his position.” Such goods and services are spoken of as being purchased for consumption. The primary role of every participant in the market, is thus that of consumer.
The consumer enters the market with money to purchase goods and services for consumption. This money has come into his possession as a result of his activities in the market (in some other role). In his role of consumer, each individual chooses between alternative patterns of consumption spending. He finds numerous opportunities to buy different kinds and quantities of consumer goods and services, each at its announced price. His means are clearly insufficient to make it possible to take advantage of more than a few of these opportunities. As a consumer, he must choose between the alternatives available to him. In analyzing the market behavior of men in their roles of consumers, market theory primarily focuses attention on the way consumers react to different possible patterns of available alternatives.
2. Resource Owners. Consumption goods and services, as a rule, are not directly available in nature for the taking. They must be produced from available resources. Raw materials may have to be transformed. Different materials may have to be combined. Goods may have to be transported to where they are to be consumed. All these productive activities are in general necessary; all such activities have something in common. They invariably involve the planned combination of the productive services of many different resources. The various possible ways of classifying resources will be considered in a later chapter.2 Here it is sufficient to notice that in order to produce it is necessary to combine, say, the services of raw materials, manmade tools and equipment, physical space, human labor of a number of different varieties, and so on. In a system based on private property, it is likely that most, if not all, productive resources are the private property or are under the control of individual members of the system. These individuals are resource owners.
They are owners of raw materials, men with labor services to sell, and so on. Resource owners have an obvious role in the market system. All productive activity must begin with the purchase of the services of the necessary productive resources. These purchases are made from resource owners. Market theory analyzes the way resource owners respond to the alternative opportunities of resource sale presented to them by the market and to changes in these opportunities.
3. Entrepreneurs. Under the heading “resources,” we have included everything whose services are necessary to obtain products. There is no productive service necessary for the production of any desired good or service that can be purchased from anyone other than the proper resource owner. And yet there still remains one further role in the market system, without whose successful fulfillment production would be hopelessly inefficient. This is the role of the entrepreneur. The entrepreneur’s role is to decide what resources should be used, and/or what goods and services should be produced; he makes the ultimate production decisions. These decisions must involve speculation concerning an uncertain future, since in its pure form an entrepreneurial decision is an act of purchase followed by a subsequent act of sale of what was previously purchased.
Among market roles, the entrepreneurial role is the least simple to grasp. The source of its elusiveness lies in the fact that some element of the entrepreneur’s speculative function is exercised whenever human beings act. In fact we must recognize that in theorizing about the making of decisions, we may be concerned with two analytically distinct kinds of decisions. First, there is the decision between definite alternatives. Here the adoption of any one definitely known objective is accompanied by the sacrifice of a no less precisely known set of alternative potential objectives. This kind of decision making is clearly never possible in the real world of uncertainty (in which we wish our market system to have its setting). In a world of uncertainty men must invariably make a second kind of decision, one choosing between courses of action whose outcomes are quite uncertain, being susceptible to numerous possible unforeseeable modifications by external events. Although we can never expect to find actual instances of the first kind of decision, we may sometimes theorize concerning decisions of the second kind by temporarily reasoning as if the outcomes were not clouded by uncertainty. In reasoning in such a way the economist is abstracting from the speculative or “entrepreneurial” element in the making of the particular decision.
In speaking, however, of a distinct entrepreneurial role to be filled by hypothetical agents to whom we assign the name entrepreneurs, we are drawing attention to a unique class of decisions that it is essential for market theory to distinguish. In a system where specialization and division of labor have been carried to a fairly advanced stage, there is room