WEBVTT NOTE Driving the Market Process: Why Entrepreneurial "Alertness" Trumps "Creative Destruction" 1 00:00:00.000 --> 00:00:12.000 Well, I'm afraid this paper grew beyond my intention as I was writing it, and so there's no way I can read it to you, but I will read a little bit of it and intersperse with a summary. 2 00:00:12.000 --> 00:00:20.000 I changed the title a bit. It's now titled, Driving the Market Process, Entrepreneurial Alertness Versus Creative Destruction. 3 00:00:20.000 --> 00:00:35.000 The paper argues that Israel Kirzner's theory of entrepreneurial action as the driving force of the market, an extension and further development of Ludwig von Mises' theory of entrepreneurship, contributes to a fundamental understanding of the market process. 4 00:00:35.000 --> 00:00:41.440 In contrast, Joseph Schumpeter's theory that entrepreneurship is the agent of creative destruction 5 00:00:41.440 --> 00:00:46.040 of an ongoing state of general equilibrium, as well as being the internal force for the 6 00:00:46.040 --> 00:00:52.480 economic development of any economy, market or non-market, is argued to be spurious and 7 00:00:52.480 --> 00:00:57.440 to reveal his profound lack of understanding of both the market process and of the economics 8 00:00:57.440 --> 00:01:00.040 of non-market economies. 9 00:01:00.040 --> 00:01:04.360 The next section of the paper, the second section of the paper summarizes Schumpeter's 10 00:01:04.360 --> 00:01:10.480 concept of entrepreneurship and his use of it as a Deus ex machina, god of the machine, 11 00:01:10.480 --> 00:01:12.440 for economic development. 12 00:01:12.440 --> 00:01:16.000 Kirzner's concept of entrepreneurial alertness as the driving force of the market process 13 00:01:16.000 --> 00:01:18.400 is explained in the third section. 14 00:01:18.400 --> 00:01:23.000 The fourth section compares and contrasts the two visions and section five presents 15 00:01:23.000 --> 00:01:29.600 the conclusion that Kirzner's concept of coordinating alertness trumps Schumpeter's entrepreneurial 16 00:01:29.600 --> 00:01:33.680 Entrepreneurial Creative Destruction, although it is argued that much additional work is 17 00:01:33.680 --> 00:01:39.560 required to complete the theory of entrepreneurial action. 18 00:01:39.560 --> 00:01:45.440 We start with Sean Pater and his 1911 theory of economic development. 19 00:01:45.440 --> 00:01:50.240 His concept of the entrepreneur there is that the entrepreneur is a leader, a person, a 20 00:01:50.240 --> 00:01:56.940 man of action, driven by the pleasure provided by creative construction, and he strives to 21 00:01:56.940 --> 00:02:00.540 to acquire goods to gain social power. 22 00:02:00.540 --> 00:02:07.340 He forces his products onto the market because the masses can't be persuaded to cooperate 23 00:02:07.340 --> 00:02:10.420 for development, so they have to be forced. 24 00:02:10.420 --> 00:02:16.740 In non-market economies, the entrepreneurial force is direct authority in physical coercion. 25 00:02:16.740 --> 00:02:21.100 Whereas in a market economy, the entrepreneurial force is exerted through the use of money 26 00:02:21.100 --> 00:02:25.720 to create a new combination of existing goods and innovation. 27 00:02:25.720 --> 00:02:31.040 The entrepreneur is the cause of economic development, because he creates change of 28 00:02:31.040 --> 00:02:36.800 the economy out of the economy itself, says Schumpeter. 29 00:02:36.800 --> 00:02:40.960 So what Schumpeter's created is this god of the machine to drive the process of economic 30 00:02:40.960 --> 00:02:42.200 development. 31 00:02:42.200 --> 00:02:49.320 There is neither a reason nor a historical explanation of why or how entrepreneurship 32 00:02:49.320 --> 00:02:53.160 is exerted by such a unique man of action. 33 00:02:53.160 --> 00:02:57.840 The right innovational choices are done with, says Schumpeter, quoting him, without any 34 00:02:57.840 --> 00:03:03.520 particular deliberation, unconsciously and without precisely identifying his reasons 35 00:03:03.520 --> 00:03:04.520 to himself. 36 00:03:04.520 --> 00:03:09.800 Now, I have to admit, before I wrote this paper, I had never read anything of Schumpeter's 37 00:03:09.800 --> 00:03:11.960 except his history of economic analysis. 38 00:03:11.960 --> 00:03:13.760 So all of this was new to me. 39 00:03:13.760 --> 00:03:19.880 I had heard such complimentary things said about Schumpeter that as I read through what 40 00:03:19.880 --> 00:03:25.400 And he actually wrote, I was astonished. 41 00:03:25.400 --> 00:03:31.920 And I urge you to read Schumpeter so that you will be astonished. 42 00:03:31.920 --> 00:03:36.800 The economic context for the man of action or entrepreneur is a temporarily existing 43 00:03:36.800 --> 00:03:43.120 static circular flow of economic activity in his theory of economic development. 44 00:03:43.120 --> 00:03:47.520 Development in its deepest character, says Schumpeter, constitutes a disturbance of the 45 00:03:47.520 --> 00:03:51.440 and the Existing Static Equilibrium. 46 00:03:51.440 --> 00:03:54.520 So what we have here is theoretical dualism. 47 00:03:54.520 --> 00:03:58.400 He's got two theories, the theory of the static state, which as we're going to find out in 48 00:03:58.400 --> 00:04:04.600 his business cycle book is Volresian General Equilibrium, and a theory of economic development 49 00:04:04.600 --> 00:04:08.280 which is driven differently by your entrepreneur. 50 00:04:08.280 --> 00:04:13.960 He revised his theory of economic development in 1926 and recast his vision. 51 00:04:13.960 --> 00:04:18.840 Now it's new firms that introduce the innovations. 52 00:04:18.840 --> 00:04:25.040 He now views entrepreneurship as a type of conduct or a characteristic created by, as 53 00:04:25.040 --> 00:04:30.720 he says, quoting, aptitudes differing in kind and not only in degree from those of mere 54 00:04:30.720 --> 00:04:32.720 rational behavior. 55 00:04:32.720 --> 00:04:38.920 It's the result of an intuition that leads to an effort of will, he says. 56 00:04:38.920 --> 00:04:47.400 In 1928, he wrote another article, or he wrote it actually in 26, and it was printed and 57 00:04:47.400 --> 00:04:51.920 published in 1928 in the Hohenwerder Buch des Staatswissenschaften. 58 00:04:51.920 --> 00:04:57.380 It was titled The Entrepreneur, and in it he said that whether an economy is a socialist 59 00:04:57.380 --> 00:05:04.000 or an exchange economy, their essential economic principles and results are analogous. 60 00:05:04.000 --> 00:05:09.920 The modern enterprise, he says, actually approaches the character of a public administration. 61 00:05:09.920 --> 00:05:14.440 From the entrepreneur as a unique sort of person, he's moved to viewing entrepreneurship 62 00:05:14.440 --> 00:05:21.200 as a unique social function imposed somehow by special circumstances that present new 63 00:05:21.200 --> 00:05:24.160 possibilities. 64 00:05:24.160 --> 00:05:27.960 Then we have his business cycle book that was published in 1939. 65 00:05:27.960 --> 00:05:32.060 I'm still recovering from that cold lunch down at Chipotle. 66 00:05:32.060 --> 00:05:41.060 It was colder inside than it was outside, and I can't get enough hot coffee. 67 00:05:41.060 --> 00:05:45.760 What he does in the business cycle since 1939 is he presents a model of the economic process 68 00:05:45.760 --> 00:05:50.360 that begins and ends in a Volrasian general equilibrium. 69 00:05:50.360 --> 00:05:56.760 And this is hardly surprising given that Schumpeter said in his history of economic analysis that 70 00:05:56.760 --> 00:06:03.820 The Walrasian General Equilibrium concept is the Magna Carta of economic theory, and he 71 00:06:03.820 --> 00:06:11.000 asserted that so far as pure theory is concerned, Walras is the greatest of all economists. 72 00:06:11.000 --> 00:06:17.800 Innovation, says Schumpeter, is the outstanding fact in the economic history of capitalist 73 00:06:17.800 --> 00:06:18.800 society. 74 00:06:18.800 --> 00:06:21.960 It's a change in the production function. 75 00:06:21.960 --> 00:06:26.640 It disrupts the Walrasian General Equilibrium. 76 00:06:26.640 --> 00:06:28.280 And where do the innovations come from? 77 00:06:28.280 --> 00:06:37.400 They come from what Schumpeter calls the new men that start these firms. 78 00:06:37.400 --> 00:06:41.860 The achievements of capitalism and industrial organization, he says, and I quote, undermines 79 00:06:41.860 --> 00:06:46.860 the social institutions which protect it and will inevitably lead to its decomposition 80 00:06:46.860 --> 00:06:53.640 and replacement by a state socialist economic order, a centrally planned economy. 81 00:06:53.640 --> 00:07:01.200 As he sees it, the fact is that progress is becoming mechanized. Innovation is routine. 82 00:07:01.200 --> 00:07:07.400 Economic progress is depersonalized and automated. He said this in the 1930s. If capitalism is 83 00:07:07.400 --> 00:07:14.520 inevitably to yield to state socialism, can the planned economy work? Of course it can, 84 00:07:14.520 --> 00:07:20.260 quoting Schumpeter, he claims. Against Mises, Mises cites specifically, Schumpeter reveals 85 00:07:20.260 --> 00:07:26.420 tells his utter ignorance of the gist of Mises' arguments against socialist planning. 86 00:07:26.420 --> 00:07:32.540 He does so by claiming that production is nothing but the rational combination of existing 87 00:07:32.540 --> 00:07:35.060 factors. 88 00:07:35.060 --> 00:07:37.740 This guy is called an Austrian economist. 89 00:07:37.740 --> 00:07:44.540 He was Austrian, that's true, by nationality. 90 00:07:44.540 --> 00:07:56.620 And this leads of course to his capitalism, socialism and democracy and is the theory 91 00:07:56.620 --> 00:08:05.140 that capitalism basically is so successful that it destroys itself. 92 00:08:05.140 --> 00:08:08.580 Before we get to Kirzner, I have to say a couple of words about Mises. 93 00:08:08.580 --> 00:08:13.100 Mises defines and uses the word entrepreneur in three different ways. 94 00:08:13.100 --> 00:08:17.100 His first concept of the entrepreneur is one of an ideal type. 95 00:08:17.100 --> 00:08:26.580 He says that you use it to get an historical understanding of economics. 96 00:08:26.580 --> 00:08:33.060 The entrepreneurial function is his second concept of the entrepreneur, and this is the 97 00:08:33.060 --> 00:08:35.780 function in catalactic theory. 98 00:08:35.780 --> 00:08:41.540 It's necessarily performed by all actors in a market economy, said Mises. 99 00:08:41.540 --> 00:08:46.700 It's acting man exclusively seen from the aspect of the uncertainty that is inherent 100 00:08:46.700 --> 00:08:48.880 in every action. 101 00:08:48.880 --> 00:08:53.320 And it's restricted to the context of the market economy because it involves the economic 102 00:08:53.320 --> 00:08:59.260 calculation of profit and loss, and the action is taken with a view towards future profit. 103 00:08:59.260 --> 00:09:05.100 So there's no entrepreneur, according to Mises, in planned economies. 104 00:09:05.100 --> 00:09:10.620 It requires the theoretical context of market disequilibrium because there's no money profits 105 00:09:10.620 --> 00:09:31.140 Entrepreneurian Mises, Entrepreneur Promoters 106 00:09:31.140 --> 00:09:37.580 He focuses on designating individuals as entrepreneur-promoters rather than on the functional entrepreneurship 107 00:09:37.580 --> 00:09:43.480 of acting man, and this makes it descriptive rather than theoretical and I think makes 108 00:09:43.480 --> 00:09:47.680 it akin to the ideal type concept. 109 00:09:47.680 --> 00:09:52.740 What is regarded as a particular market, of course, is purely a matter of analytical convenience. 110 00:09:52.740 --> 00:09:57.980 The theory of the market process concerns the understandings of the workings of the 111 00:09:57.980 --> 00:09:59.380 entire market economy. 112 00:09:59.380 --> 00:10:09.380 Now turning to Kirzner. Kirzner presents the basic theory in his, actually in his textbook that he published back in 1963 titled Market Theory in the Price System. 113 00:10:09.380 --> 00:10:18.380 He presents the basic theory of the market economy that he later uses both to refine and extend Mises' explanation of functional entrepreneurship. 114 00:10:18.380 --> 00:10:24.380 Kirzner conceptualizes all participants in the market process as being purposive individuals. 115 00:10:24.380 --> 00:10:31.380 Interaction between the decisions made by all participants in a market is what he means by the market process. 116 00:10:31.380 --> 00:10:36.380 What is regarded as a particular market is merely a matter of analytical convenience. 117 00:10:36.380 --> 00:10:41.380 The theory of the market process concerns the understandings of the workings of the whole market economy. 118 00:10:41.380 --> 00:10:45.380 Particular markets in that economy are assumed always to be in disequilibrium, 119 00:10:45.380 --> 00:10:50.380 although the activities of their participants are unintentionally equilibrating in their effects. 120 00:10:50.380 --> 00:11:02.380 The responses of individuals to failures of their particular plans are to revise those plans so that further actions taken tend to be more consistent with the decisions and actions of others. 121 00:11:02.380 --> 00:11:11.380 The result is greater overall consistency. If you offer a price for something and nobody takes it, then you raise your price until you get to the point where somebody is willing to take it. 122 00:11:11.380 --> 00:11:17.380 And that's what he means by consistency in the actions of the participants. They become more consistent. 123 00:11:17.380 --> 00:11:25.780 Constant changes in the basic data of the market preclude any final market equilibrium. 124 00:11:25.780 --> 00:11:31.720 Every participant in the market process acts as an entrepreneur in some aspect of their 125 00:11:31.720 --> 00:11:34.580 decisions and subsequent actions. 126 00:11:34.580 --> 00:11:41.580 The entrepreneurial aspect of all decision-making is the speculative one, as Kirzner says, for 127 00:11:41.580 --> 00:11:44.000 which uncertainty is of the essence. 128 00:11:44.000 --> 00:11:51.080 In particular, the awareness of a difference in prices and the search for profit is a search 129 00:11:51.080 --> 00:12:03.440 for misallocation of resources. 130 00:12:03.440 --> 00:12:08.080 In Competition and Entrepreneurship, which he published in 1973, Kirzner talks about 131 00:12:08.080 --> 00:12:13.880 pure entrepreneurship, it's an aspect of consciousness possessed by any market participant. 132 00:12:13.880 --> 00:12:19.200 of being alert to changing buying and selling possibilities. 133 00:12:19.200 --> 00:12:24.800 The result is that the market process itself becomes an essentially entrepreneurial one. 134 00:12:24.800 --> 00:12:33.200 Entrepreneurial actions still analytically reduce, says Kirzner, to arbitrage. 135 00:12:33.200 --> 00:12:38.400 After competition and entrepreneurship, he wrote a number of other papers that further 136 00:12:38.400 --> 00:12:41.720 clarified his concepts of entrepreneurship that were published in a series of books all 137 00:12:41.720 --> 00:12:49.800 Kirzner adapted Hayek's argument, in particular, that the dispersed knowledge and particular 138 00:12:49.800 --> 00:12:54.740 intentions of market participants are brought into agreement by the market process. His 139 00:12:54.740 --> 00:13:03.600 adaptation is a claim that it is entrepreneurial alertness that provides this mechanism for 140 00:13:03.600 --> 00:13:09.360 market participants to discover useful information and revise their plans. 141 00:13:09.360 --> 00:13:18.080 So that makes Kirzner, Hayek thought that this view of knowledge and how it is people's 142 00:13:18.080 --> 00:13:21.560 knowledge improves was an empirical question. 143 00:13:21.560 --> 00:13:28.160 Kirzner says it's theoretical because entrepreneurial function is part of acting man. 144 00:13:28.160 --> 00:13:32.660 The discovery of new information must be a spontaneous movement out of ignorance into 145 00:13:32.660 --> 00:13:37.800 the knowledge as a result of entrepreneurial alertness. 146 00:13:37.800 --> 00:13:43.640 Kirzner fleshed out his concept of alertness as the motivated propensity of man to formulate 147 00:13:43.640 --> 00:13:49.640 an image of the future in these later writings and in fact create the future for which his 148 00:13:49.640 --> 00:13:52.760 present acts are designed. 149 00:13:52.760 --> 00:13:56.080 The motivation is that of pure profit seeking. 150 00:13:56.080 --> 00:14:02.480 His later work expanded the concept of entrepreneurship to include innovation. 151 00:14:02.480 --> 00:14:06.860 The incentive of pure profits brings this forth and he added an emphasis on competition 152 00:14:06.860 --> 00:14:24.700 as a Stimulant to the Exercise of Entrepreneurial Alertness. 153 00:14:24.700 --> 00:14:28.760 Sean Pater argues that entrepreneurial activity is disruptive of existing production functions 154 00:14:28.760 --> 00:14:31.820 and is the primary source of disequilibrium. 155 00:14:31.820 --> 00:14:36.220 Its sources are power-seeking behavior and the desire to create new orders of production. 156 00:14:36.220 --> 00:14:41.260 Its primary means to those ends is innovation. Kirzner argues that entrepreneurial activity 157 00:14:41.260 --> 00:14:47.060 is a coordinator of human action and analytically reduces basically to acts of arbitrage. It 158 00:14:47.060 --> 00:14:51.660 is stimulated by the discovery of profit opportunities. Its primary means to this end is a state of 159 00:14:51.660 --> 00:14:57.140 alertness to the possibility of such discoveries. Both Schumpeter and Kirzner see entrepreneurship 160 00:14:57.140 --> 00:15:02.700 as the driving force of a socioeconomy, but Schumpeter endows it with a grander role. 161 00:15:02.700 --> 00:15:06.860 He applies it to all economies, whether market or non-market, and presents it as a force 162 00:15:06.860 --> 00:15:12.220 of transformation that shatters existing production and consumption relations, and drives the 163 00:15:12.220 --> 00:15:16.500 economic development of economies to ever higher levels of wealth. 164 00:15:16.500 --> 00:15:20.740 Kirzner views entrepreneurship as a human action that begins in one market of a market 165 00:15:20.740 --> 00:15:25.660 exchange economy, with its effects eventually spreading throughout the whole economy. 166 00:15:25.660 --> 00:15:29.600 The market economy itself is viewed as a process of adjustment of human action so that the 167 00:15:29.600 --> 00:15:34.300 The increased coordination among market participants created by entrepreneurship better enables 168 00:15:34.300 --> 00:15:37.560 participants to achieve their separate goals. 169 00:15:37.560 --> 00:15:41.360 Whether the results are higher levels of wealth or the transformation of production and consumption 170 00:15:41.360 --> 00:15:44.480 is not really germane to Kirzner's theory. 171 00:15:44.480 --> 00:15:48.880 Nevertheless, the individual striving to better his condition through exchange relations produces 172 00:15:48.880 --> 00:15:54.280 the betterment of all in Kirzner's theory just as unintentionally as does the undertaker 173 00:15:54.280 --> 00:15:59.560 in Adam Smith's Invisible Hand metaphor for wealth creation through production. 174 00:15:59.560 --> 00:16:03.680 Schumpeter's theory of entrepreneurship is radically different from that of Kirzner's. 175 00:16:03.680 --> 00:16:07.200 It is particularly apparent in Schumpeter's argument that entrepreneurial activity is 176 00:16:07.200 --> 00:16:12.640 characteristic of both market and non-market economies and drives their development. 177 00:16:12.640 --> 00:16:17.460 He thus reveals his moorings in conventional neoclassical microeconomic theory rather than 178 00:16:17.460 --> 00:16:20.520 in Austrian school market process theory. 179 00:16:20.520 --> 00:16:25.440 There are several serious flaws in Schumpeter's theory of entrepreneurship. The Walrasian 180 00:16:25.440 --> 00:16:30.240 general equilibrium model on which he bases his theories of development and business cycles 181 00:16:30.240 --> 00:16:34.840 profoundly misrepresents the market process for reasons that are extensively treated elsewhere, 182 00:16:34.840 --> 00:16:40.400 particularly by Mises and other Austrian school theorists. Schumpeter's entrepreneurial 183 00:16:40.400 --> 00:16:47.080 God of the Machine as a disruptor of general equilibrium lacks reasoned motivation. It's 184 00:16:47.080 --> 00:16:52.560 He's a Prometheus without a first cause, a mere pragmatic device to get things going. 185 00:16:52.560 --> 00:16:57.360 He also posits innovations as acts of entrepreneurship without an explanation of the source of the 186 00:16:57.360 --> 00:17:00.860 new possibilities that are used in innovation. 187 00:17:00.860 --> 00:17:04.100 He denies that they are found or created by entrepreneurship. 188 00:17:04.100 --> 00:17:09.520 They just come into existence, somehow lie about for a while, and are stumbled upon and 189 00:17:09.520 --> 00:17:10.860 get applied. 190 00:17:10.860 --> 00:17:16.120 His perfect knowledge assumption for a general equilibrium to exist in a market economy removes 191 00:17:16.120 --> 00:17:21.120 and Any Reason Source of Entrepreneurship Kirzner's theory of entrepreneurship has obvious and 192 00:17:21.120 --> 00:17:25.680 substantial moorings in Austrian school market process theory, as it has developed through 193 00:17:25.680 --> 00:17:27.760 the work of Menger, Mises and Hayek. 194 00:17:27.760 --> 00:17:32.020 His extensive development of the specifics of the entrepreneurial aspect of human action 195 00:17:32.020 --> 00:17:36.800 has added significantly to our understanding of it, in sharp contrast to Schumpeter. 196 00:17:36.800 --> 00:17:40.560 Nevertheless, there are discordant elements in Kirzner's vision. 197 00:17:40.560 --> 00:17:46.120 To find the essence of entrepreneurship and alertness to profit opportunities is insightful, 198 00:17:46.120 --> 00:17:48.100 but there must be more to it than that. 199 00:17:48.100 --> 00:17:52.980 It takes an act of will to be alert and a further act of will to decide to do something 200 00:17:52.980 --> 00:17:54.320 about it. 201 00:17:54.320 --> 00:17:59.860 The capacity to be alert to opportunities and to strive to profit from them is gutsy 202 00:17:59.860 --> 00:18:03.760 and not always present all the time or in all people. 203 00:18:03.760 --> 00:18:08.080 Further, Kirzner's own comparison of the concept of entrepreneurship with that of Schumpeter 204 00:18:08.080 --> 00:18:13.440 is inadequate, in that he accedes to Schumpeter's view of the entrepreneur as an ideal type, 205 00:18:13.440 --> 00:18:20.240 rather than being, as Kirzner himself recognizes, an aspect of human consciousness present in 206 00:18:20.240 --> 00:18:23.520 exchange relations. 207 00:18:23.520 --> 00:18:27.360 He does this when he characterizes the difference between their respective views as one between 208 00:18:27.360 --> 00:18:32.160 that of the entrepreneur as disrupter versus that of equilibrator, thus leaving out the 209 00:18:32.160 --> 00:18:37.840 ignorance, uncertainty and purposefulness that give rise to the entrepreneurial aspect 210 00:18:37.840 --> 00:18:41.720 of Human Action only in the market process. 211 00:18:41.720 --> 00:18:45.240 It's also difficult to separate innovation from entrepreneurship if entrepreneurship 212 00:18:45.240 --> 00:18:51.880 is entwined with boldness, self-confidence, creativity and innovative ability, as Kirzner 213 00:18:51.880 --> 00:18:53.840 says it is. 214 00:18:53.840 --> 00:18:58.760 Expanding the definition of arbitrage to include innovation seems more like a sleight of hand 215 00:18:58.760 --> 00:19:00.600 than an argument. 216 00:19:00.600 --> 00:19:05.500 A focused alertness to possible market profit opportunities of whatever sort and the will 217 00:19:05.500 --> 00:19:09.820 To be able to pursue them seems a necessary part of the concept of entrepreneurship. Kirzner's 218 00:19:09.820 --> 00:19:14.860 later writings appear to concede this. And lastly, it may be time to drop the use of 219 00:19:14.860 --> 00:19:21.300 the words equilibrium and disequilibrium from economics. The market process is not about 220 00:19:21.300 --> 00:19:28.060 attaining equilibrium, whether temporary or terminal. It's about purposive individuals 221 00:19:28.060 --> 00:19:32.940 seeking to achieve personal goals through exchange with others in a context of ignorance 222 00:19:32.940 --> 00:19:36.580 and uncertainty that requires speculation. 223 00:19:36.580 --> 00:19:41.220 Market exchange is just one of the means for the peaceful pursuit of human ends. 224 00:19:41.220 --> 00:19:45.780 The language of classical mechanics provides inappropriate metaphors for the explanation 225 00:19:45.780 --> 00:19:47.720 of the process of exchange. 226 00:19:47.720 --> 00:19:53.340 The first law of thermodynamics applies only to physical science phenomena, not to catallactics, 227 00:19:53.340 --> 00:19:58.940 which is a science of human action in which value is created rather than equilibrated 228 00:19:58.940 --> 00:20:02.140 or merely not lost.