that the activities of the entrepreneur may result in the production not only of goods for the consumer, but also of produced goods that can provide productive services with which other producers may produce goods or services for the consumers. The Austrian economist Menger introduced the concept of the “order” of a good to express this kind of complexity. A good demanded for consumption is a good of “lowest order.” The goods required for the production of goods of lowest order are goods of second order, those required for the production of second order goods are the third order goods, and so on. The point is that entrepreneurial activity will be possible wherever there are two “vertically adjacent” markets; one market for a particular good, and another market in the goods of higher order with which the particular good can be produced. The complex vertical structure of a developed market system can now be glimpsed more fully. There are not merely the two markets whose relationship is indicated in Figure 2-1; there are likely to be numberless markets related vertically to each other in such a way. Between each pair of adjacent markets, there will be entrepreneurial activity. The entrepreneur will buy in the one market, produce, and sell in the market “below” it. (Here again, incidentally, the entrepreneurial role is closely integrated with that of resource owner. The initial decision to buy and sell in the different markets is an entrepreneurial one; but once the entrepreneurial decision has been made, and the good of higher order has been produced, the entrepreneur finds himself selling in the “lower” market just as any other resource owner.)
Moreover, although the vertical relationship between two markets may appear to stamp one of them as being “higher” than the other, there may be some other equally valid point of view from which the order of relationship is reversed. For example, iron ore is used in the production of steel which in turn is used in the production of equipment which plays a part in the mining of iron ore. The decisions of entrepreneurs buying iron ore in order to produce steel will be influenced in part by the decisions of those to whom they sell; that is, the entrepreneurs engaged in the production of mining equipment. But these latter decisions will clearly be partly influenced by the decisions of those buying this equipment—the miners of iron ore.
There are certainly strands of a vertical relationship existing between the market for iron ore, and the market for mining equipment, where the latter market is the higher; but there are, no less clearly, other strands of a vertical relationship between the two markets where the market for iron ore is the higher.
THE STRUCTURE OF THE MARKET SYSTEM: HORIZONTAL RELATIONSHIPS
Two markets may be said to bear a horizontal relationship with one another, either when the goods or services sold in each of the separate markets were both bought, in part (directly or indirectly), in the same “higher” market, or when the goods or services bought in each of the separate markets are to be sold (in combination with other resources) in the same “lower” market. Thus the market where washing machines are bought and sold is related horizontally to that where automobiles are bought and sold, since the entrepreneurs in either of these markets will be bidding against one another in the same higher market—that for steel. Similarly, the labor market is related horizontally to the market where labor-saving machinery is bought and sold, since buyers in each of these markets are likely to be selling their products in the same lower market. Or again, the market in skilled labor for the production of automobiles is related horizontally to that for steel, because the resources sold in both these markets are combined and sold jointly in the automobile market; and so on.
Clearly, the decisions of buyers or sellers in any such markets will have to be between alternatives that are conditioned, not only by the decisions of competing buyers or sellers in the same market, but also, in part, by the decisions of buyers or sellers in the horizontally related markets. The price of steel to producers of washing machines will be determined partly by the strength of the demand for automobiles; the price that a skilled automobile worker can obtain for his labor will be determined in part by conditions in the steel market; and so on.
It should be clear from our discussion of the complexity of vertical market relationships that horizontal relationships, too, may be far from straightforward. Two markets may be related by different strands of connectedness, some of which may be vertical, others horizontal, in character. For example, sellers in the iron-ore market and sellers in the steel market may both buy the services of unskilled labor in the same labor market.
Several points of great importance ought to be made at this stage concerning the division of the market system into separate “markets.” It must be recognized that any such division is quite arbitrary and is made by the market theorist only as a matter of convenience. Moreover, there are significant problems where the theorist finds it convenient to stress the lack of such watertight divisions. The fact is that in the most important sense, the entire market system is one market. Each market participant is a potential customer for each good offered for sale and a potential entrepreneur in the production of every conceivable product. There is interconnectedness between every single market decision and every other single market decision made in the system. The price paid for a shoeshine at one end of the country is connected, however tenuously, with the prices paid for the rental of high-speed computers at the other end of the country, so long as both points are within a single market system. Nevertheless, there are clearly various degrees of connectedness. The price of computer rentals is obviously more directly sensitive to changes in the attitudes of buyers and sellers of computers than to changes in the tastes or incomes of customers for shoeshines. Thus, the theorist finds it convenient to mark off arbitrarily different “markets” within which the connectedness of decisions is more direct than is the case between decisions in different markets. In pointing to various structural patterns between the markets that make up the market system, the theorist is indicating the less direct, more subtle—but over the long run no less powerful—influences that different markets exercise over one another.
THE ANALYSIS OF HUMAN ACTION IN THE MARKET: THE CONCEPT OF EQUILIBRIUM
With the mutual influences that may be operative between markets well understood, it is desirable to consider what goes on inside a market. This is, after all, the kernel of market theory—the logical tracing through of the consequences within a market of given sets of data that impinge upon it.
A market process can be defined as what goes on when potential buyers and potential sellers are in mutual contact. We have seen that the market system as a whole can be treated as a single market, or that it may be treated for convenience as consisting of a number of interconnected markets. Within any market, however conceived, the theorist recognizes that at any one time each participant has definite attitudes concerning what is being bought and sold. At a given point in time, each participant has a particular eagerness to buy or to sell; for each participant there is on his “scale of values” a unique position assigned to each quantity of the commodity to be bought or sold. When a large number of such potential market participants come into contact with one another, many find opportunities for gainful action. Some buy at the going price, others sell; some find it gainful to bid prices higher than those currently quoted; some find it gainful to offer prices lower than the current prices.
The theorist usually attacks the problem of market analysis in the following way. He takes the attitudes of the various market participants, as they are assumed for any one date, and imagines that these attitudes are maintained continuously over an indefinite period of time. He may then describe a pattern of actions for the various participants that, if actually adopted, would not have to be revised. For example, the theorist may suppose that milk suppliers come daily to market with a continuous and constant supply of milk (concerning which their selling attitude is assumed to continue unchanged), and that prospective milk consumers similarly maintain,
