this chapter and in the next, we survey the market, its overall operations and achievements. Later we will analyze, separately, the different functional sectors that compose the market, and how these various sectors interact within the market. Here, we will contemplate the forest in its entirety, before scrutinizing the separate trees, and then examine the consequences for the other trees of the existence and growth of each separate tree.
THE CONDITIONS UNDER WHICH THE MARKET OPERATES
We are considering the theoretical operation of a market system. The model of the market we will be working with can be characterized by the set of ideal conditions governing the model, which we construct for the purpose.
In a market system each member of the society is free to act, within very wide limits, as he sees fit. Moreover, the system operates within a framework of law which recognizes individual rights to private property. This means that each individual is free at each moment to employ the means available to him for the purpose of furthering his own ends, providing only that this should not invade the property rights of others. At the same time each individual can plan his activities with the assurance provided by the law, first that the means available to him at any one time are secure against appropriation by others, and, then, that he will not be prevented by others from enjoying the fruits of his productive activities.
The system recognizes the rights of individuals to enter into arrangements with one another which they believe will be of mutual benefit. Individuals may act cooperatively either by pooling their resources to produce jointly, or by each agreeing to specialize in one kind of production and to exchange parts of their production, or by the one agreeing to furnish productive services to the other in return for finished products or their equivalent. Our ideal system may be thought of as, in one way or another, ensuring the smooth fulfillment of such cooperative arrangements. Contracts are made in good faith, and contractual obligations are fulfilled to the letter.
Members of the system, being human beings, at any one time have likes, dislikes, and preferences; each follows his own moral standards. Each member acts to fulfill “his own” purposes: but these purposes are not necessarily “selfish” ones and they may be directed toward alleviating the pain of others; and so on. Each member has more or less imperfect knowledge of the facts surrounding his field of action; each, in some degree, possesses curiosity, intelligence, determination; each has potential or actual talent for some or other activities, depending on his (natural or acquired) physical and other qualities.
Members of the system need not be aware of the entire scope of the market system or of the theory of its operation, but we may assume them to be generally content to seek to achieve their purposes within the framework of the system as they find it. In other words, 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
