Today we are going to introduce a new word: Catallactics. In this lesson we are going to describe what Catallactics is and how can we use it. In following lessons we are going to apply this methodology.
The word Catallactics is specific to Praxeology and it refers to the theory about how prices (or exchange ratios) are achieved. In other words, today we are going to talk about prices and markets, markets being the relations between people trading for mutual benefit. Therefore Catallactics = Markets = what Mainstream Economics (ME) studies. Nothing unusual here except for the new word.
Technically speaking, Catallactics is the study of the origins, processes and results of all phenomena going on within markets.
Exchangeable and non-exchangeable goods and services
There is a crucial difference between how ME studies markets and how Catallactics do it. Praxeology is based on human action and mainstream economics is based on mathematical equilibriums or dis-equilibriums. What this means is that Catallactics will study the process of exchanging goods and services and how these processes determine prices but it will also study how human action affects those prices.
When we consider the price of a good and service that we exchange we take into consideration the capacity of this good or service to solve a physical problem. For example if we are hungry we will price foods based on their capacity to quench our hunger. If we are cold, we will price clothing based on their capacity to provide warmth and so on. These goods and services are all "exchangeable". What this means is that if we provide money we get something in return which is physical in nature. We can exchange this stuff. This is the classic view of ME. But ME attempted many times before to quantify objectively these exchangeable goods and services and failed miserably. There were attempts to price work in terms of expended Watts (a measurement of power) or food in terms of Calories. However, when these attempts were compared to real life markets, they always came back in error. Markets do not operate in this manner.
In order to account for what is missing, Catallactics also takes into consideration non-exchangeable goods and services. We may assign a price to food A if we are hungry, but we may price higher a different food (B) with the same calories as A if we like B more than A. We may be cold and need a jacket, thus assigning a price to jacket A based on insulation capacity. But we have another option, jacket B. This jacket has the same insulation capacity than A but A is red and B is blue and we like blue better therefore the price we are willing to pay for B is higher. These properties to which we assign value and therefore price -but are not physical in nature- are non-exchangeable goods and services.
Therefore Catallactics takes into consideration exchangeable and non-exchangeable goods and services in order to account for what is really going on in the market.
Catallactics operates within Praxeology and needs Praxeological insight to work properly but we must also understand Catallactics within the realm of Praxeology and not within the realm of ME because ME is so limited.
For example, when Catallactics speaks about people always preferring a low price over a high price, we must understand this statement in terms of exchangeable and non-exchangeable goods (i.e. the holistic view). But the value of any good (exchangeable and non-exchangeable) is personal and subjective. Therefore the concept of "low price" in Catallactic terms is a purely subjective notion which is valid for one person in one specific circumstance only. For example, person A may consider 1 Yen to be a cheap price for chewing gum. This is so because this person lives in Japan and this gum is plentiful and common. But person B may consider 100 Yen to be cheap for the same chewing gum because this person lives in South Africa and this person collects "exotic" Japanese chewing gums. Both, A and B bought the same chewing gum at the "lowest price". This is so because although both chewing gums are identical they were purchased in dissimilar circumstances which altered their value.
Another example. A person is in a hurry and wishes to access the Internet. This person may go to a Cyber Café or this person may go to a Long Distance Shop. Both facilities offer the same PC and bandwidth to access the internet. But the service in the Cyber Café is more expensive than the one in the Long Distance Shop. As this person likes the environment of the Cyber Café more than the environment of the Long Distance Shop, this person purchases the service from the Cyber Café. In this person's eyes the price paid was the "cheapest" because there is an added benefit in the Cyber Café; this person feels more comfortable in it.
What we are saying is that people always maximize gains or profits but when they do so they always take into consideration exchangeable and non-exchangeable properties. These latter considerations are purely subjective and they include:
- Ethical, Moral or Religious precepts
- Habits or traditions
- Peer pressure
As ME only takes into consideration exchangeable properties its predictions do not match market behaviours.
Catallactics will attempt to explain human action related to markets. But because Catallactics operates within Praxeology it cannot quantify or run experiments as other natural sciences would do. Thus, we must find a different way to do so. The most expedient (and clear) way to apply Catallactics is through the creation of imaginary constructs and then proceed to apply deductive logic. This is the very same process that Einstein created when studying quantum mechanics and it is also known as "thought experiments".
The way a thought experiment is set-up is as follows:
- First, the Praxological scientist extracts from actual markets the most basic parameters or characteristics under study and creates a simple thought scenario with them.
- Second, the scientist imagines the effect on the markets should one or more of those parameters be removed or,
- Third, the scientist attempt to deduce the exact consequence of those parameters being present.
These imaginary scenarios or constructs are used by any other economic theory and are not unique to Praxeology.
The first scenario we are going to study using imaginary constructs is the scenario where free people acting freely exchange goods and services without fear of violence or property theft. This scenario is called a "free market".
Once we understand how ideal free markets operate we are going to begin adding modifications to it in order to understand what those modifications are doing. This process is not unique to Praxeology as it is widely used in Physics and it is known as Perturbation Theory or Perturbation Method. These modifications will be of two kinds. The first one is the introduction of new parameters in order to make market scenarios more complex. The second type is the un-voluntary modifications (or forced modifications) to certain parameters which represent government action when they attempt to "manage" markets.
Note: please see the Glossary if you are unfamiliar with certain words.