Front Page Titles (by Subject) Exchange and the Economic System - The Economic Point of View
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Exchange and the Economic System - 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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Exchange and the Economic System
The final aspect of exchange that may make it of significance for defining the scope of economics is its importance in the visualization of an economic system. It is primarily this aspect that is concerned in the second group of definitions mentioned at the beginning of the chapter, which use the idea of an economic system or organization as their criterion. The recognition that, expressed in the anarchy of numberless, seemingly haphazard transactions of economic life, there is a system that relates apparently disconnected actions and organizes them to achieve social “ends” is an achievement of economic science. But the discovery of the existence of such a system clears the way for a fresh conception of the nature of economic science itself. The existence of a system offers a new object for investigation, viz., the system itself. The system may concern wealth, the selfish behavior, or the propensity to truck, of a variety of economic men; but it does provide an independently unique phenomenon in its organization, its structure, and its operation.
The system has been described variously as the exchange system, the price system, the market, and so on. These terms reflect possibly varying outlooks on the character of the system, but all of them imply the phenomenon of exchange. The description of the subject matter of economics as exchanges may thus imply the entire system of exchanges. In the words of one writer: “Economics studies the market as political science studies the state. Appreciation of this analysis seems to me to be fundamental to the catallactic point of view.”27 Undoubtedly this aspect of exchange is akin to that described in a previous section, in which exchanges secure the advantages of specialization and the division of labor, but the two are quite distinct. There the act of exchange was seen as bringing to a focus the possibilities for mutual benefit that are opened up for men by the division of labor, and the aggregate of all such acts of exchange measured the maximum of specialization and effective social cooperation attained. Here the relevant aspect is the relationship between all the acts of exchange themselves, the structural pattern of these acts, and the way in which they all together succeed in “delivering the goods.”28
When the success of the system in achieving generally prized results is not considered, then a description of the system reduces to a positive statement of the functional relationships among the sets of variables within it. And the totality of these relationships may have no special interest independently of the various sets of relationships themselves. This is the standpoint of Schumpeter’s definition in terms of exchange and the other “mechanical” formulations discussed in this and the previous chapter. But if the whole body of interrelationships is considered in its unity, and the existence of such a unity is considered significant in itself, then the idea of a system may assume a prominent place in economics.
Bastiat is an example of an economist who, stressing the exchange point of view, did see the prime interest of his subject as existing in the exposition of such a system. And it seems likely that at least part of the criticism aimed at his work arises from a misunderstanding of Bastiat’s self-assigned scope of investigation. Bastiat is often characterized as a shallow optimist content to bestow lyric praise on the laissez-faire economy. Cairnes attacked Bastiat as unscientific. Bastiat, Cairnes complained, considers it his task as an economist, not only to discuss the phenomena of wealth in a laissez-faire economy, but also to demonstrate that this system is the optimum one.29 This, Cairnes declares, is to assert that the results of political economy are a foregone conclusion, and if this is the case, then it is not a science at all, because “science has no foregone conclusions.” By attempting to justify rather than explain the facts of wealth, Bastiat is departing from the impartiality of science.
Cairnes’ insistence on the disinterested character of scientific inquiry in general, and of economics in particular, is a classic statement of a jealously guarded tenet of scientific economics. Bastiat’s enthusiasm for the innate harmonies of a free economy did produce passages in his writings that are vulnerable to the type of criticism levelled by Cairnes. Nevertheless, it seems that Bastiat’s conception of his subject was sufficiently different from that of Cairnes to exculpate him from at least part of the blame imputed to him in the latter’s reproaches. Bastiat was impressed by the comparative smoothness with which the tremendously complicated machinery of economic endeavor succeeded in fulfilling the wants of consumers. His classic passages in the opening chapter of Harmonies économiques,30 in which he describes how a humble carpenter is served, in exchange for his skilled labor, with commodities brought from the four corners of the earth and how each day the great city of Paris is provided with colossal quantities of food and other articles, have been echoed in subsequent economics textbooks again and again. One would be closing one’s eyes to the light, Bastiat observes, if one failed to recognize that all this is the product of a “prodigiously ingenious mechanism.” “This mechanism is the object of study of political economy.”
Clearly, then, Bastiat felt some justification for assuming beforehand that the system to be studied by political economy was one that worked. After all, it was this successful operation of the system—a success that Bastiat felt to be grounded on observation—that was the object of the study. For Cairnes, who considered economics a dispassionate study of the phenomena of wealth, any predilections towards one system in particular must be unscientific. For Bastiat, what invited explanation was precisely the large degree of efficiency empirically evinced by the system, a phenomenon of which the recognition hardly deserves the suspect position of a “foregone conclusion.”
Be this as it may, Bastiat is typical of a fairly numerous group of writers stressing the organization of the economy as the focus of economic attention and seeing the significance of exchange primarily in this connection. Two eminent twentieth-century economists may be cited as examples of the popularity of this view.Hawtrey writes:
...when the perfect cooperation which would be the ideal of reason is denied us, we turn back to...the whole apparatus of human motives, instinctive, habitual, or other. If each member of society can be induced or impelled to do his allotted task by associating it with some motive that appears to him adequate, then he need never know how he is contributing to the real end, and need not even be aware of the end at all. It is this problem of organization that we shall call the Economic Problem. It is in fact the real subject matter of political economy.31
And Hayek writes:
...the spontaneous interplay of the actions of individuals may produce...an organism in which every part performs a necessary function for the continuance of the whole, without any human mind having devised it....The recognition of the existence of this organism is the recognition that there is a subject matter for economics. It is one of the causes of the unique position of economics that the existence of a definite object of its investigation can be realized only after a prolonged study...32
[]Carl E. Parry, “A Revaluation of Traditional Economic Theory,” American Economic Review (Supplement, 1921), p. 125.
[]“If economic theory is interpreted as a critique of the competitive system of organization, its first and most general problem is that of determining whether the fundamental tendencies of free contractual relations under competitive control lead to the maximum production of value as measured in price terms.” (F. H. Knight, “Fallacies in the Interpretation of Social Cost,” Quarterly Journal of Economics, 1924, reprinted in The Ethics of Competition, p. 218.)
[]J. E. Cairnes, “Bastiat,” reprinted in his Essays in Political Economy (London, 1873), pp. 312 f.
[]F. Bastiat, Harmonies économiques (8th ed.; Paris, 1881), pp. 25–28.
[]R. G. Hawtrey, The Economic Problem (London: Longmans, Green & Co., 1925), p. 3.
[]F. A. v. Hayek, “The Trend of Economic Thinking,” Economica, May, 1933, pp. 130–131. For similar passages stressing the economic organization for the purposes of definition, see R. T. Bye, “The Scope and Definition of Economics,” Journal of Political Economy, October, 1939, p. 626; K. E. Boulding, The Skills of the Economist (Cleveland, 1958), p. 8. See also F. Oppenheimer, “Alfred Amonn's ‘Objekt und Grundbegriffe,’” Weltwirtschaftliches Archiv. Bd. 27 (1928), I, Literatur, p. 170.