Front Page Titles (by Subject) The Purely Formal Concept of Exchange - The Economic Point of View
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The “Purely Formal” Concept of Exchange - Israel M. Kirzner, The Economic Point of View 
The Economic Point of View: An Essay in the History of Economic Thought, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed Andrews McMeel, 1976).
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The “Purely Formal” Concept of Exchange
The catallactic view of economic affairs may be interpreted to refer to yet another aspect of exchange. Like that discussed in the preceeding paragraphs, this view ignores exchange as a peculiarly motivated human act and focuses attention on the consequences of the act. But instead of gaining its significance from the advantages arising from the social cooperation involved in exchange, the idea of exchange is now to be assigned importance as the means whereby “economic quantities” are changed. An exchange of goods alters the configuration of goods in the economy. An exchange of productive resources alters the arrangement of those factors of production. If the exclusive object of interest is the transfer of the goods themselves, then exchange is significant merely as involving the simultaneous variation of several sets of “economic quantities.” A purchase of a consumer good has re- sulted in a reduction both in the inventory of the seller and the cash holdings of the purchaser. The act of exchange is the event that has altered these economic quantities and has generated the ratio of their variations, viz., the phenomenon of price.
The most ambitious attempt to expound this conception of exchange is contained in Schumpeter’s 1908 definition of the scope of economics in terms of the exchange relationship.22 His concept of economy is coincident with this concept of exchange. Perhaps the most arresting and widely discussed implication of Schumpeter’s concept of exchange is its application to the Crusoe economy. If an act of exchange is significant only as the simultaneous alteration in stocks of goods, then the idea of exchange may easily be extended to the activity of a single individual. When Crusoe shoots game, in Schumpeter’s example, he is merely exchanging shot and energy for food. This use of the idea of exchange has been considered by critics as an arbitrary and unfruitful piece of mental gymnastics, but has, at the same time, earned grudging respect as “never to be forgotten subtlety.”23
Schumpeter’s outlook is, of course, consistent with his wish to ignore human behavior as a factor in economics. Leaving human behavior to the psychologists, the economist is merely to examine the results of behavior in terms of related variations in the quantities of goods and prices. From a less positivistic point of view, Schumpeter’s extension of exchange to the isolated economy may, in fact, be seen, not as an extension, but as a restriction, of the interpersonal concept of exchange. With the recognition of the purposive element in human action, exchange is simply the sacrifice of the satisfaction of lesser, for the sake of satisfying more urgent, needs. Interpersonal exchange is significant as reflecting the possibility of simultaneous actions on the part of two purposeful human beings, each intent on attaining that position which he prefers among all the alternatives open to him. And, of course, this element of exchange can be pointed out in the isolated economy as well. It requires neither special subtlety nor mental gymnastics to see that Crusoe is exchanging one satisfaction for another whenever he forgoes the first in order to secure the second. In the words of Seligman, “Crusoe exchanges in his mind apples and nuts in estimating their value to him.”24 But when Schumpeter considers Crusoe to exchange, not by forgoing one pleasure for the sake of another, but because the quantities of the various resources at his command undergo simultaneous variation, then he has effectively robbed the concept of exchange of all but its barest externals. There is little real difference, on this view, between the case where A exchanges his horse for B’s cow and the case where A’s horse and B’s cow have exchanged places and refuse to budge. Nothing is added to the exposition of related variations of economic quantities by explaining that these variations constitute Tausch. Something of this seems to have been felt by Schumpeter himself in writing that his conception of all activity as exchange is “purely formal.”25 The Schumpeterian exchange relationship is best understood when it is denoted by the alternative term that Schumpeter uses for it, “price.”26 Price to Schumpeter meant simply a parameter governing the simultaneous variations in the quantities of goods. The Tausch-relation meant nothing more. The definition of economics in terms of Schumpeter’s exchange relationship merely conveyed in different terms his “mechanical” definition of the subject noticed in an earlier chapter, centering around changes in “economic quantities.”
[]Schumpeter's definition of economics in terms of exchange was set forth in his Das Wesen und der Hauptinhalt der theoretische Nationalökonomie (Leipzig, 1908); see especially pp. 55, 582. For Schumpeter's maturer view of exchange, see his History of Economic Analysis (1954), p. 911. For what seems to be a change in Schumpeter's appraisal of Whately's stress on catallactics, see Wesen und Hauptinhalt, p. 50 n., and History of Economic Analysis, p. 536 n.
[]See A. Amonn, Objekt und Grundbegriffe der theoretischen Nationalökonomie (1st ed., 1911), p. 128; L. Robbins, Nature and Significance of Economic Science (2nd ed.), p. 21 n.
[]E. R. A. Seligman, “Social Elements in the Theory of Value,” Quarterly Journal of Economics, May, 1901, p. 327. See also L. Mises, Socialism (English ed., London: Jonathan Cape, 1936), pp. 114, 117.
[]J. A. Schumpeter, Wesen und Hauptinhalt, p. 53.
[]Op. cit., p. 49.