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NOTE 5.01. Some Fundamental Principles of Action

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Chapter 5. Production. The Structure.

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1. Some Fundamental Principles of Action.

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The analysis of production activities, the actions that eventually result in the attainment of consumers' goods,

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is a highly intricate one for a complex monetary market economy.

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It is best, therefore, to summarize now some of the most applicable of the fundamental principles formulated in Chapter 1.

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In that chapter, we applied those principles to a Crusoe economy only.

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Actually, however, they are applicable to any type of economy, and are the indispensable keys to the analysis of the complex modern economy.

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Some of these fundamental principles are

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1. Each individual acts so that the expected psychic revenue or achievement of utility from his action will exceed its psychic cost.

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The latter is the foregone utility of the next best alternative that he could adopt with the available means.

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Both the psychic revenue and the psychic cost are purely subjective to the individual,

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Since all action deals with units of supply of a good, we may refer to these subjective estimates

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as marginal utility and marginal cost, the marginal signifying action in steps.

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2. Each person acts in the present instant, on the basis of present value scales,

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to obtain anticipated end results in the future.

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Each person acts, therefore, to arrive at a certain satisfactory state in the future.

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Each has a temporal horizon of future dates toward which his actions are directed.

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He uses present given means, according to his technological ideas, to attain his ends

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in the future.

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3.

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Every person prefers and will attempt to achieve the satisfaction of a given end in the present

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to the satisfaction of that end in the future.

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This is the law of time preference.

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4.

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All goods are distributed by each individual in accordance with their utility to him.

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A stock of the units of a good is allocated first to its most highly valued uses, then

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The definition of a good is that it consists of an interchangeable supply of one or more units.

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Therefore, every unit will always be valued equally with every other.

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If a unit of a stock is given up or disposed of, the least highly valued use for one unit will be the one given up.

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and up. Therefore, the value of each unit of the supply of a good is equal to the utility

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of the least highly valued of its present uses. This marginal utility diminishes as

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the stock of each good increases. The marginal utility of addition of a unit to the stock

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equals the utility of a unit in its next most highly valued use, that is, the most highly

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5.

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In the technical combination of factors of production to yield a product, as one factor

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varies and the others remain constant, there is an optimum point, a point of maximum average

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product produced by the factor.

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This is the law of returns.

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It is based on the very fact of the existence of human action.

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6.

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And we know from chapter 2 that the price of any good on the market will tend to be

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uniform throughout the market.

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The price is determined by supply and demand schedules, which are themselves determined

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and by the value scales of the individuals in the market.