Key Concepts in Economics – 2 – The Action Axiom

One of the most fundamental concepts in the study of Economics is the concept “human action”. It forms the bedrock on which all economic theory is developed. It is a premise so self-evident that it is considered an axiomatic concept.

What is an axiomatic concept?

Any line of reasoning has to start with some premises. For instance, when you advise a friend to work hard in order to achieve success, you are starting with the premises that

  1. your friend desires success
  2. you have understood the kind of success your friend desires
  3. that working hard is possible at all given the kind of success your friend desires
  4. that working hard is necessary for the kind of success your friend desires

An axiomatic concept is a premise in a line of reasoning. It is a given for the line of reasoning. It is a premise that is self-evident. It can only be recognized and not validated or invalidated. In fact, even an attempt to invalidate it has to necessarily and implicitly accept its validity.

Consider the concept “existence”. It represents everything that exists. If you ask the question “What is existence?”, the answer can only be a sweep of the hand accompanied by the statement “All this”. An attempt to define “existence” can only lead to the statement “that which exists”. Any attempt to demonstrate that the concept is invalid will have to be performed by a person who himself has to exist in the first place and is hence part of existence. To say existence does not exist, one has to implicitly smuggle the concept “existence” or “that which exists” into the statement and make the self-contradictory statement “That which exists does not exist”. Thus, a denier of the validity of existence has to implicitly acknowledge the validity of the concept “existence”.

The Action Axiom

In the science that studies human action, the concept “action” is axiomatic. “Action” means the purposeful striving towards ends. An attempt to deny the axiomatic nature of the concept “action” has to itself be a purposeful action. It becomes the purposeful striving to prove that the concept purposeful striving is invalid. Thus, it has to implicitly acknowledge the validity of the action axiom even to attempt to invalidate the action axiom. It is also independent of experience. One cannot “perceive” that an action is taking place. The understanding of an observation as “action” presupposes an understanding of the concept “action”. Thus, we see that “action” is an axiomatic concept.

Action and Time

Purpose means a preference for a particular state. It could be the very state the acting human is in. It could be a state different from the present one. Whatever the case, it is clear that the desired state is sought to be attained at a time later than the present moment. In other words, all action is aimed at attaining a particular state in the future. One also sees that doing nothing is also as much action as doing something.

Whenever we talk of action, there are 3 aspects of time involved.

  1. The start time of the action
  2. The duration of the action
  3. The end of the action or the time when the purpose is to be achieved

For instance, if a person decides to grow food for consumption, he has to start a process which begins with identifying a place to grow food in and engage in a sequence of activities over a considerable period of time before the food is ready for consumption. Even decide to decide to consume an apple growing on a tree, you will have to walk up to the tree, pluck the apple, wash it if necessary and then eat it. There is thus a start time, a duration and an end-time which coincides with the attainment (or even non-attainment) of the end, i.e., consuming the apple.

Ends and Means in the context of Action – Concept of “Preference”

Achieving ends requires the application of means towards the same. For instance, a person who sees an apple on a tree and wishes to consume it has to apply his scarce resources, labour and time, to reach up to the other scarce resource, the apple, and pluck it before he may consume it. The end sought to be achieved is “consuming an apple” and the means applied towards it are the scarce resources “labour”, “time” and “the apple on the tree”. A person who has the following scarce means – a few slices of bread, vegetables, cheese – and wishes to consume a sandwich will have to apply further scarce means – his labour, his time, a table, kitchen implements, his kitchen – to transform the scarce means into something that in itself serves the end desired – consumption of a sandwich.

Acting man, in the process of applying scarce means to achieve his ends, expresses his “preference” for one means over another. Faced with the choice of 2 apples, a person who plucks one expresses a “preference” for it over the other. This “preference” is a subjective one and is an expression of his subjective assessment of the usefulness of each of the means available towards achieving his ends. In economics, this subjective preference expressed for different means is called “value”. Please note that this subjective “value” is different from the equally common usage of the word “value” to denote the price or the estimated price of a good.

The understanding that value is a subjective preference was a major advance in the field of economics. It was a big step away from other theories of value that existed till that date. Until Carl Menger proposed the concept of subjective value, economists used to subscribe to either the objective or intrinsic theory of value (which was the idea that the value of a means is embedded in the means itself) or the labour theory of value (which was the idea that the value of a means is dependent on the labour that went into it).

The main advance in economic thought that came about as a result of the subjective value hypothesis, the understanding that value is a preference, is the understanding that value is an ordinal and not a cardinal number. This means that it is only possible to rank a person’s preferences on a scale of values. One can only value one thing over another. One cannot talk of how much one prefers one thing over another. You can say “I prefer A to B” but not “I prefer A 30% more than I prefer B”. The point that value is subjective means that it is not possible to compare the value scales of different individuals. You cannot say “This is of higher value to A than it is to B”.

The analysis above is as true of ends as it is of means. That man acts means that he chooses to pursue some ends and hence that he chooses them over others. Thus, we see that ends are also ranked on an ordinal scale of value. There are more valued ends and less valued ends. What we cannot do is talk of how much more valuable one end is over another or how much more valuable an end is for one individual than it is to another individual.

The Action Axiom and the concepts of Utility and Marginal Utility

The point that means are applied to serve ends tells us that the means provide for the satisfaction of the ends for otherwise the means would not be applied towards achieving the ends. This satisfaction that a means provides is called the “utility” of the means to the acting human. It is a subjective concept and an ordinal number just like value. Just as one can talk of being more or less satisfied but not of how much more or less satisfied, one can talk of higher or lower utility but not of how much greater or lesser utility. This is the ordinal nature of utility. One can only place different means on an ordinal scale of utility. Further, no one can ever know or claim to know how much utility a means provides a particular acting individual. Hence, it is a subjective concept and one cannot compare the utility of a means across different individuals. An example of this is the folly of saying that Rs. 1000 has far greater utility for the poor man than it has for the millionaire.

The other important point that derives from the action axiom is that action is never on classes of means but on particular units of the means. Man does not compare all the water in the universe with all the gold in the universe to express a preference for one over the other. Rather, he expresses a preference for a certain number of units of each means. It is fallacious to ask the question “Is gold more valuable than water?”. The correct question to ask would be “Do you value 1000L of water over 1 gram of gold?”. Here, the unit of the means “water” is 1000L and that of the means “gold” is 1 gram.

This important concept explains why exchange happens. If the utility of Rs. 56 is lower to you than that of a cappuccino, you are ready to forego Rs.56 to consume the cappuccino. At the same time, it is because for the owner of the coffee shop, the cappuccino has lower utility than the Rs. 56 has that he is ready to sell you his cappuccino at the price of Rs. 56.

A further implication of the understanding that utility is for units of a means is the concept “marginal utility”. To understand this concept, let us remind ourselves of some basic concepts. Means are applied to achieve ends. Means are scarce. Ends are themselves ranked on a value scale. In the context of the above 3, one is forced to infer that acting humans have a need to economise on scarce means, i.e., they need to apply every additional unit of a means to the highest ranked and hitherto unsatisfied end that it can satisfy. This means that every additional unit of a means goes to satisfy ends ranked lower than the ends satisfied by the already available supply of means. Thus, we see that the additional unit of the means has a lower utility to the acting human than any existing unit of the means.

Another dimension of the concept marginal utility is the concept “total utility”. This concept refers to the total satisfaction provided by the entire supply of means available. Clearly, if a supply of means is used to satisfy the most valued ends, the total satisfaction provided by a greater supply of a means has to be greater than the total satisfaction provided by a smaller supply of the means as the former always makes it possible to achieve additional ends in comparison to the latter. This is the principle of total utility.

Conclusion

The action axiom is the most important and fundamental concept in economics. It is the most fundamental premise of the entire line of deductive reasoning that we call economic thought. It leads us unerringly to such important concepts as value, utility, the subjective and ordinal nature of the above two concepts, marginal utility and total utility that form the pillars of our understanding of economics. It is the first principle that any serious student of economics must strive to grasp.

Key Concepts in Economics – 2 – The Action Axiom
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6 thoughts on “Key Concepts in Economics – 2 – The Action Axiom

  1. Rajeshwari Mohan

    The concepts are explained very well and the conclusion is a crisp summary that enabled me to establish my comprehension of the different terms.

    Under the concept of preference would it have been better to have talked about an apple and orange than 2 apples? or is it to say that I choose one apple so that I can reserve my 2nd option for a better Total utility?

    Nor am I able to understand how one can refute the greater value of Rs1000/- for a poor man compared to a millionaire?

    Reply
  2. Bala Post author

    “Under the concept of preference would it have been better to have talked about an apple and orange than 2 apples? or is it to say that I choose one apple so that I can reserve my 2nd option for a better Total utility?”

    It could be either and it could differ from person to person at the same time and even for the same person at different points in time. The reason I chose 2 apples was to show that even if the apparent physical object is the same, they could be different economic goods depending on the other factors that go into making them goods ready for consumption.

    “Nor am I able to understand how one can refute the greater value of Rs1000/- for a poor man compared to a millionaire?”

    The point is that it is meaningless to even try to compare because utility is ordinal and subjective. Only if you can measure the utility of every individual can you talk of comparing utilities of different individuals. This, incidentally, is the folly committed by modern economics under the name econometrics.

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  3. Kashyap

    “Nor am I able to understand how one can refute the greater value of Rs1000/- for a poor man compared to a millionaire?”

    Say a man has a crore of rupees. The first few thousands would be spent on that which he values the highest. As he goes lower down his value preferences, the marginal utility of Rs. 1000/- is much less to him, but it still contributes to maximising his total utility. The same is the case with the poor man. However, we cannot compare the total utility obtained by each man in quantitative terms, and hence we cannot say that Rs. 1000/- has greater value to one man than to another.

    What we can say is, the first Rs. 1000/- a man spends has more utility to him (as it satisfies greater needs) than the last Rs. 1000/- he spends, on needs lower down his value scale. But we cannot compare the utility provided by the last Rs. 1000/- a rich man spends and the first Rs. 1000/- a poor man spends.

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  4. Karthik

    In theory it is true that there is no such thing as absolute utility (across people), utility is merely a relative preference among various “desirables” for a given person in other words how many cows he/she will give up for 1 horse etc.
    But, isn’t it also true that when different individuals interact in a (presumed) free market, the exchange ratios of goods actually exchanged…effectively indicates my utility preference?
    Example I may “value” 1 cow the same as 2 horses(all other things constant), and nobody knows it but me. I go to a market, with 1 cow, and someone offers me 3 horses in exchange for my cow, I accept the offer. My utility of horses to cows is no more than 3:1 (in other words, my value of horses to cows cannot be 4:1 now that I consented to the above transaction..the completion of the consensual transaction indicates a non-negative utility by virtue of the transaction).

    ‘how one can refute the greater value of Rs1000/- for a poor man compared to a millionaire?’
    Say there’s a poor man with no money. You offer him 1000 Rs in exchange for some work that he has the ability to do. He ‘really values’ the 1000 Rs, so he takes the offer and works hard with his skill set for his 1000Rs.
    Now let’s rewind, and make the same offer to a millionaire. He has *a different set of skills*, and you offer him 1000Rs based on his skill set. He accepts the offer, and works hard with his skill set for his 1000 Rs.
    How can you bring the 2 to a common frame of reference? The skills the poor man has are not the same as the skills the rich man has. Utility is a an individual perception of value, a comparison of utilities across people is like comparing how much you love your family relative to someone else….no matter how you approach it, you eventualy hit the boundary of frame of reference.

    Reply
    1. Bala Post author

      “But, isn’t it also true that when different individuals interact in a (presumed) free market, the exchange ratios of goods actually exchanged…effectively indicates my utility preference?”

      While it does “indicate”, it does not equal. The exchange ratio has no connection to the value or utility of either set of objects being exchanged. It only indicates that to each party to the transaction, the received set is higher on their hierarchy of values than the given set. Nothing more can be said.

      “My utility of horses to cows is no more than 3:1 (in other words, my value of horses to cows cannot be 4:1 now that I consented to the above transaction.”

      False for many reasons. The most basic is that you cannot even talk of utility being “more than 3:1″ or any such ratio. You can only say that to you, the utility of 3 horses is GREATER THAN the utility of 1 cow while for the person who sold you the cow, the utility of 1 cow is GREATER THAN the utility of 3 horses. That’s the reason you engaged in the exchange in the first place.

      A second reason is that to talk of utilities being equal either means that you are talking of two different units of the same good or you are running afoul of the action axiom. Indifference (a meaningless concept taught to many students of Economics) is impossible to acting man. The action axiom rules out the possibility of equality of utilities.

      ” my value of horses to cows cannot be 4:1 now that I consented to the above transaction.”

      False because you cannot talk of value of horses to value cows being 4:1. Ratios imply cardinal values while value is ordinal. You can only say value of 4 horses is more than value of 1 cow. Frankly, it might be in this case, but the fact that you agreed to the transaction means that the value of 3 horses is greater than that of 1 cow. Adding a horse will only mean greater total utility though it would mean lower marginal utility for the 4th horse.

      Reply
  5. Karthik

    But even in my example, indifference exists.
    Today, I was offered 3 horses for 1 cow. I liked the deal, I accepted it.
    Rewind,I come back to the market with 1 cow from the same state (all other things constant), and someone offers me 2.5 horses (assuming 2.5 has meaning here) for the cow. Maybe I still like the deal, maybe not.
    Rewind, repeat experiment. There is an exchange ratio at which I start saying NO. That is the indifference point. The meaning of the indifference point is,
    1.I had a perception of value for horses and cows
    2.Based on my perception, all other things (in my basket of possessions) constant, I was *willing* to exchange 1 cow for 3 horses, 1 cow for 2.5 horses, 1 cow for 2 horses…but NOT 1 cow for 1.99 horses.
    Of course, the data for the above experiments is not available in reality: you don’t have 4 experiments, you have just 1 transaction. But the fact that good 1 is considered as a fair substitute for good 2, and the individual has a value perception based on quantities exchanged, IMPLIES the existence of an indifference point for value perceived.

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