1. The Delimitation of the "Economic"

Investigations concerning the money prices of goods and services constituted the historical starting point of the reflections that led to the development of economic theory. What first opened the way to success in these inquiries was the observation that money plays “merely” an intermediary role and that through its interposition goods and services are, in the last analysis, exchanged against goods and services. This discovery led to the further realization that the theory of direct exchange, which makes use of the fiction that all acts of exchange are conducted without the intervention of any medium, must be given logical priority over the theory of money and credit, i.e., the theory of indirect exchange, which is effected by means of money.

Still further possibilities were disclosed when it was realized that acts of interpersonal exchange are not essentially different from those which the individual makes within his own household without reaching beyond it into the social sphere. Hence, every allocation of goods—even those in the processes of production—is an exchange, and consequently the basic law of economic action can be comprehended also in the conduct of the isolated farmer. Thus, the foundation was laid for the first correct formulation and satisfactory solution of the problem of the delimitation of “economic” action from “noneconomic” action.

This problem had been approached previously in two different ways, each of which necessarily rendered its solution considerably more difficult. Classical economics had not succeeded in overcoming the difficulties posed by the apparent paradox of value. It had to construct its theory of value and price formation on the basis of exchange value and to start from the action of the businessman, because it was not able to base its system on the valuations of the marginal consumers. The specific conduct of the businessman is directed toward the attainment of the greatest possible monetary profit. Since the classical economists beheld in this phenomenon the essence of economic conduct, they had to distinguish accordingly between “economic” and “noneconomic” action. As soon as the transition was made to the subjective theory of value, this distinction, because it contradicts the basic thought of the whole system, could not but prove totally unserviceable and indeed nothing short of absurd. Of course, it took a long time before it was recognized as such.

If the distinction between the “economic” and the “noneconomic” proved untenable when formulated in terms of the motives and immediate goals of the actor, the attempt to base it on differences among the objects of action fared no better. Material things of the external world are exchanged not only against other things of this kind; they are exchanged also against other—”immaterial”—goods like honor, fame, and recognition. If one wishes to remove these actions from the province of the “economic,” then a new difficulty arises. For a great many of the acts in which material goods are exchanged serve one or both parties to the transaction merely as a preliminary means for the attainment of such “immaterial” satisfactions. However, every attempt to draw a sharp distinction here necessarily led to barren scholastic discussions which entangled themselves in immanent contradictions?discussions such as the successors of the classical economists devoted to the related endeavors to delimit the concepts of a “good” and “productivity.” But even if one wished to disregard this problem completely, one could not ignore the fact that human action exhibits an indissoluble homogeneity and that action involving the exchange of material goods against immaterial goods differs in no significant respect from action involving the exchange of material goods alone.

Two propositions follow from the subjective theory of value that make a precise separation between the “economic” and the “noneconomic,” such as the older economics sought, appear impracticable. First, there is the realization that the economic principle is the fundamental principle of all rational action, and not just a particular feature of a certain kind of rational action. All rational action is therefore an act of economizing. Secondly, there is the realization that every conscious, i.e., meaningful, action is rational. Only the ultimate goals—the values or ends—at which action aims are beyond rationality and, indeed, always and without exception must be. It was no longer compatible with subjectivism to equate “rational” and “irrational” with “objectively practical” and “objectively impractical.” It was no longer permissible to contrast “correct” action as “rational” to “incorrect” action, i.e., action diverted through misunderstanding ignorance, or negligence from employing the best means available to attain the ends sought. Nor was it henceforth possible to call an action irrational in which values like honor, piety, or political goals are taken into consideration. Max Weber’s attempt to separate rational action from other action on the basis of such distinctions was the last of its kind. It was necessarily doomed to failure.1

If, however, all conscious conduct is an act of rational economizing, then one must be able to exhibit the fundamental economic categories involved in every action, even in action that is called “noneconomic” in popular usage. And, in fact, it is not difficult to point out in every conceivable human—that is, conscious—action the fundamental categories of catallactics, namely, value, good, exchange, price, and costs. Not only does the science of ethics show this, but even everyday popular usage gives us ample demonstrations of it. One has only to consider, for example, how, outside the domain customarily designated as that of science, terms and phrases are used that have these categories as their specific denotation.

• 1Cf. above pp. 82 ff.