INTRODUCTION TO ECONOMICS

Hugo Lozano Cano

Human Action
Economics is the science that studies the process of creation and transmission of
entrepreneurial knowledge. It basically consits in creating, discovering, seeking out and
identifying.
In a broad of general sense, entrepreneurship coincides with human action, and human action
is any deliberate conduct to accomplish ends. In this respect, it could be said that any person
who acts to modify the present and achieve his objectives in the future exercises of
entrepreneurship.
Enterprise or “Empresa” derives from the Latin verb in prehendo-endi-ensum (to discover, to
see, to perceive or realize something), it is the origin of the term “enterprise”. In French, the
term entrepreneur originally designated the person in charge of carrying out an important
action. Nowadays, entrepreneur means the same in French as it does in English and Spanish.
The conception of an enterprise as an action is necessarily and inexorably linked to an
enterprising attitude, which consists of a continual eagerness to seek out, discover, create, or
identify new ends and means.
Human actions can be acts of omission, and it is not objectively observable. In addition, not all
can be called human action. When you don’t have the capability to decide or know what you
are doing, then, that can’t be called a human action.
For example: reflexes, animals or sleepwalkers can’t be considered human actions. Animals
keep on doing the same thing for thousands of years, but human beings create new ideas in
order to accomplish the ends they pursue.
In order to accomplish ends, it’s necessary to mention the means, which could be anything that
plays an important role in this process.
For example, imagine you want to get good grades in your university degree, you will need to
attend class, and to do so you will have to take the subway to university, in this case, the
subway is your means for your end which is getting good grades in your university degree.

Elements of Human Action

All of the elements of human action are subjective, which means that each of them are
different for everyone, therefore, on the economic point of view we can't judge if some action is
moral or not.
 1st Element: The first essential element is the concept of an objective, a goal or an end.
The end is what the actor wants to achieve with his or her action. Why do we achieve
ends? Why do we want to achieve things?

 2nd Element: Value is the subjective appreciation the actor assigns to his or her end.
Human beings pursue ends which we discover have value to us. Valuations are subjective
because they are determined by the subject within the context of his or her action and
cannot be measured from the outside. We can compare the physical intensities of our
valuations, but we can’t measure or quantify them.
 3rd Element: Means, a mean is anything the actor subjectively believes will permit him
to achieve his end. The means is like a bridge that will take us to the end we are looking
toward to.

 4th Element: Utility is the subjective appreciation the actor assigns to the means,
depending on the value of the end which the actor believes the means will enable him to
accomplish.

 5th Element: Scarcity: the actor believes that the means available to him are
insufficient to achieve his ends the perception of limited resources when there is not
enough to fulfill human needs and wants. Without scarcity there is no human action. The
set of scarce goods is not given. Human beings act to produce what we consider scarce, and
to do this, we need the allocation of property rights, and the market.

(A “free good” is a good that is not scarce, or conditions of human wellbeing that are given
or taken for granted. People do not consider these goods when acting).

 6th Element: Plan of Action: The plan is the prospective mental picture the actor
conjures up of the different stages, elements, and circumstances which may have a
bearing on his action. Therefore the plan consists of a personal arrangement of the
practical information the actor possesses and progressively discovers within the context of
each action. The issue is not if to plan or not. Planning is essential to all human action,
the question is, who should plan, whether the individual actor (the one who possesses the
necessary information) or someone else.

 7th Element: Act of Will: movement in pursuit of and end, it can not be measured
because it’s an impulse that makes us execute a plan.

 8th Element: Time: All human action takes place in time in the subjective sense , time,
which the actor perceives and experiences within the context of each action. It’s the feeling
we have when time passes. The more tasks that you have, the more responsibilities you
have, therefore, your perception of time changes, the more responsible you are, the time
speeds up. That's why when you are doing for example domestic chores, you feel how time
becomes faster than when you are bored in your bed. In a subjective sense, time must be
made, not like objective or chronological time. How do we make the future? By figuring
out in the form of expectations.
Expectations are recombined memories projected into the future. Concrete predictions
about the future in economics are impossible. The events that will take place tomorrow
depend on entrepreneurial knowledge which today has not been created yet. We, human
beings, are rebelling against our own creative nature. The creative nature is what makes the
future uncertain.
Uncertainty means that the future is open to all man’s creative possibilities , and thus
each actor faces it with permanent uncertainty. The actor will tend to accomplish those
ends he values more, and then those who are relatively less important to him.
There are two means that help us face the uncertainty of the future:
Human Action (the correct exercise of entrepeneurship): when we pursue an end, we
tend to approach it. If the actor acts, then, there are more possibilities of approaching the
pursued end.
 Institutions: patterns or rules of behavior human beings follow to achieve their ends.
Institutions emerge in a spontaneous, evolutionary manner from the practical knowledge
generated via entrepreneurship over the course of history by a huge number of people.
Institutions reduce uncertainty and increase dynamic efficiency. Some expamples of
institutions are:
- Language.
- Religion.
- Morality and Private Law.
- Money: is the quintessential social institution, it permits economic calculation and
significantly increases exchanges.
The actor is not conscious of every possible alternative or case, there could be other
means to achieve the same end. There are two reasons that make the actor not get rid
of total uncertainty:
- The actor only posseses certain subjective beliefs or convictions. What Mises calls
“case probability of unique events” or single events, are historically unrepeatable
events, things that only happen once. Each unique event is the only member of its
class, probability among these events does not exist.

- On the contrary when we talk about “class probability”, the behaviour of the class is
known. It’s when the action itself brings about or creates the event , it’s unrepeatable
and is created by human beings, who are creative.
Events caused by human action are not insurable, because they are unique. You can’t
predict what is going to happen in a human action event like in science.
In the world of natural sciences, there is objective knowledge, and we seek to acquire it, if
only in probabilistic terms. But the world of human action, each entrepreneurial discovery
changes by surprise our entire “map” of knowledge.
There are two entirely different instances of probability; we may call them class probability,
and case probability. The field for the application of the former is the field of the natural
sciences, entirely ruled by causality; the field for the application of the latter is the field of
sciences of human action, entirely ruled by teleology.
Serendipity is the capacity to entrepreneurially recognize opportunities which emerge by
surprise and to act to take advantage of them.
 9th Element: Cost: Is the subjective value the actor attaches to the ends, giving up certain
means when discovering other ones. Ends and valuations are the subjective creations of
human beings. They are not given, and therefore, costs are not given either.

(↑) Entrepreneurial Profits: Is the subjective gain acquired through human action. Of all
the ends we discover, we always pursue the one from which we expect to obtain the
greatest value. If the actor believes the value of the achieved end is greater than the value of
the alternative end he or she had to give up (cost), then he or she has obtained
entrepreneurial profit.
- Means devoted to the most highly valued ends.
- The value of the achieved end exceeds the value of alternative ends (cost).
(↓) Entrepreneurial Losses: Selecting or choosing certain ends or means without
noticing the existence of others that are more valuable.
 - Means are put to poor use.
- The value of the achieved end is lower than the value of the alternative end (cost).
(↑↓) Entrepreneurial Profits and Entrepreneurial Losses are indispensable to us as guides
to our actions. We all pursue profit (the ends we subjectively value the most).

(⚠) Entrepreneurial Error: The actor discovers new means after using other ones.
If the actor believes he has suffered an entrepreneurial loss, because he has incurred costs
that exceed the value of his end, then he has committed a pure entrepreneurial error. In a
context of uncertainty, rationality is compatible with entrepreneurial errors.
In an entrepreneurial view, every action a human takes is rational, because even though he
or she doesn’t think about it, it is looking of an end.
Human action as an ultimate given. The essentially subjective character of the
components of human action (ends, means and costs) is precisely what gives economics
complete objectivity, in that it is a theoretical science with conclusions that are applicable to
any sort of action.
Classical Economics did not focus on real human beings but on the homo economicus
(portrayal of humans as agents who are consistently rational and narrowly self-interested,
and who pursue their subjectively defined ends optimally). Austrian Economics focus on real
humans and says that the man is an acting being.

Entrepreneurship
Entrepreneurship is the innate capacity of every human being to recognize the profit
opportunities which arise in his or her environment and to act accordingly to take advantage
of them.
When a human being acts entrepreneurially he or she discovers or creates an end, we tend to
achieve the ends we set for ourselves. This is the essential principle of entrepreneurship.
To recognize something is to create an idea in our minds which was not there before. The
exercise of entrepreneurship requires a special alertness.
An entrepreneur tries to anticipate costumer’s future desires. He or she must be an alert
speculator.
There is a similarity between a historian, a person who tries to interpret important past events
which interest him, and the alertness an entrepreneur must show concerning the events he
believes will occur in the future.
When an entrepreneur discovers a profit opportunity, he creates in his mind information that he
didn’t have before. So, therefore new information or knowledge is created, is the subject that
gains knowledge by trying to achieve the action.
The value of our objective motivates us to entrepreneurially seek out means to achieve it.
Entrepreneurship implies the creation and transmission of information and the spontaneous
coordination of society.
Entrepreneurs detect other people’s neccesities to produce an item or provide a service to
sell it.
Entrepreneurship creates pure profits from nothing. If there is a “Supreme Creator” who made
us in his own image and likeness, then we would be like him when we exercise entrepreneurship
and create new ends and means. The cause of the greatest happiness in man is to recognize
and reach his objectives (which implies action and the exercise of entrepreneurship).
Every human being is an entrepreneur. The ubiquity of entrepreneurship:
- We act entrepreneurially as consumers.
- A capitalist is someone who saves part of what he or she earns, so we are also entrepreneurs
as capitalists.
The entrepreneurial act coordinates, but it algo creates and transmits information that changes
people's perception of ends and means and gives rise to new maladjustment.

Entrepreneurial Knowledge
Entrepreneurial knowledge is the most important type of knowledge with respect to achieving
our ends. It’s practical or traditional, is dispersed knowledge in the sense that is spread throw
out the mind of different human beings, tacit knowledge, deals with “unique events” which are
historically unrepeatable.
1. It is subjective and practical, rather than scientific knowledge. Practical knowledge is
any that can’t be represented in a formal manner, and that is instead progressively acquired
by the subject through practice.

2. It is exclusive or private knowledge. When any human being acts in pursuit of his own
particular ends within a set of historically unrepeatable circumstances, he generates in his
mind information that is different from that which any other person possesses. Each
human being is unique.

3. It is dispersed throughout the minds of all human beings and can’t be centralized.
Maladjustement or Discoordination is when one person has a resource, yet doesn’t take
advantage of it, while another person needs the same resource and doesn’t have it.
The information human beings generate about ends and means is discoordinated in most
cases. The market process encourages entrepreneurial creativity and tends to spontaneously
detect and coordinate maladjusted behaviors.
A pursues X, A is not happy because he needs a resource (means) “R”, to achieve his end. B
pursues Y, B has the resource R, but he doesn't need it, so he wastes it and A could have
taken profit of it.

4. It is inarticulate, tacit, and can’t be formalized. The actor learns how to perform certain
actions. Later he or she acquires certain practical habits of behavior but doesn’t come to
know the scientific basis for each element of his or her action. Institutions are standards of
patterned behavior which help us to face the ineradicably uncertain future. They evolve
and consist of tacit, inarticulate knowledge generated through entrepreneurship.

5. It is created from nothing “created ex nihilo”, through the exercise of entrepreneurship.

A simple realization of a state of maladjustment or discoordination in enough to
immediately spark an opportunity for pure entrepreneurial profit. Every maladjustment
emerges as a latent opportunity for profit, and such an opportunity acts as an incentive
for people to entrepreneurially discover this maladjustment and eliminate it. The profit
 motive drives human beings, as they seek for profit, to detect and eliminate social
maladjustments. The entrepreneurial act is creative and coordinating.

Maybe A thinks in asking help to B for achieving his end, or B wants to sell his R. A third
person could be “C”, which has a realization of a “profit opportunity”.B is wasting his
resources, A needs resources. C has to be alert, he needs a special alertness. C will buy
resources to B (3 euros), and sell it to A (10 euros), so B is happy and A is happy.

6. It can be transmitted through extremely complex social processes, which are the object
of research in economic science.
The market process is the adjustment of the individual actions of the various members of
the market society to the requirements of mutual cooperation. The market prices tell the
producers what to produce, how to produce and in what quantity.
Social maladjustments manifest themselves as profit opportunities which entrepreneurs,
motivated by the search for profit, seek out and take advantage of this coordinating
society.
- Arbitrage: Entrepreneurship exercised all in the same moment in time, as perceived
by the actor. Does not take place all at exactly the same moment in time either. People
buy low and sell high in the present, with no major changes occurring.
- Speculation: Entrepreneurship exercised between different moments in time, as
perceived by the actor. People buy a piece of land today with the idea that it will
become very valuable in five year, based in the future.
Information is created in both cases, whether “new” information (speculation) or “existing”
information that was not known to exist (arbitrage).
The exercise of entrepreneurship requires that the parties involved comply with certain
established rules of behaviour.
- Law is the set of behavioral guidelines which gather relationships between human
beings. It is an evolutionary institution which emerges from the market process and
drives it.
The most important institutions are money and property rights, because they make
economic calculation possible.
- Economic calculation is the entrepreneurial estimate, in monetary units of the results
of different courses of action. (Cost: Is the subjective value the actor attaches to the
ends, giving up certain means when discovering other ones).
The institutions that are more important in our lives (money, law, language…) are not
deliberate creations. They spontaneously emerge through an evolutionary, customary
process to which a very large number of people throughout history have contributed
practical knowledge and entrepreneurial creativity to the extent that human beings are
able to freely exercise entrepreneurship we tend to achieve the ends we set for ourselves.
We can’t be conscious of everything which restrictions on entrepreneurship prevents us
from creating.
7. The entrepreneurial process is always competitive. Competition is the concurrence of
multiple requests for the same thing which must be assigned and owner.
 There are rival entrepreneurs who contend with each other to discover and seize profit
opportunities (maladjustments) before they disappear because someone else has taken
advantage of them.
Society is a process (a dynamic structure) which is spontaneous (not consciously designed
by anyone), very complex (billions of creative people participate in it) and composed of
human interactions (mainly exchanges that are subjects to rule of behaviour and are often
reflected in monetary prices).

Such interactions are fueled by the force of entrepreneurship (the creation or discovery
of information, the transmission of information, and the competitive coordination of actors
maladjusted plans), which makes the spread of human life possible.

To sustain a growing volume of entrepreneurial knowledge, an increase in population

is essential. The development of society requires:

- The spread and deepening of practical knowledge.

- A growing population specialized according to relative comparative advantage.
- Free exchanges of the results of entrepreneurial production.
Our mental capacity is limited. We are not omniscient. To sustain a growing volume of
entrepreneurial knowledge, an increase in the population is essential because:

- Resources limit the population of animals.

- The number of human beings limits the production of resources.

The Epistemological Problems of the Science of Human Action

Materialistic determinism leads to a static view of the economy, however, the approach of
Hayek and Misses leads us to view the economy as a dynamic process.
Hayek’s Hypotesis explains the hierarchical classification of orders or phenomena
according to their degree or complexity. The low part is less complex and as we move up, the
complexity grows.
Methodological Differences Between Natural and Social Sciences
Natural Sciences – 🌐 WORLD 1
1. The focus is on a simple phenomena.
2. The focus is on things. A rock, a plant, lab experiments, watching and analyzing things
external to us, external things from the outside world.
3. Things are directly observable. We can observe a rock, a galaxy, a moleculum.
4. Constant relationships exist between phenomena.
5. Ultimate causes are unknown. Relationships are functional in nature.

Social Sciences (The Sciences of Human Action) – 🌐 WORLD 2

1. The focus is on extremely complex phenomena.
2. The focus is on the ideas of human beings regarding their ends and means. We research
ideas that other people hold about what they do that is about their ends and their means.
3. Ideas are not observable. They can only be interpreted, and it is only in light of a theory
that we can interpret them. Example: the interpretation of a sales transaction.
4. Everything is variable. Our creative capacity constantly gives rise to new ideas. The
future is always ineradicably certain. We face an uncertain future with the help of
institutions and our entrepreneurial capacity. Institutions and our entrepreneurial capacity
helps us to achieve our ends. Language, for example, is a social institution.
5. Human Action is the ultimate cause. Relationships are genetic-causal in nature. In
economics, there are no functions, since functional correspondences (and the members of
each set) are continually changing and cannot be known (entrepreneurial creativity).
Economists find themselves in both a superior and an inferior position with respect to
natural scientists.

- Inferiority: The difficulty of studying phenomena which are not directly observable
(ideas). They cannot be measured; everything is variable.
- Superiority: We know the original cause of all phenomena, human action, which we can
study through introspection. Economists share the same nature as the human beings they
analyze.
There are two main branches of the sciences of human action: Praxeology (Theory) and
History.
- Theory: the formal, abstract, qualitative, and general study of the processes of human
interaction (the market).
- History: the systematic study of past events related to human action.

Aristotle: Matter and Form.

+ Understanding
THEORY ---------------------------------------------------- HISTORY (economic structure).
+ Feedback (from history to theory)

Theory: The study of the form of human interactions gives rise to economic theory.
History: The study of the matter of human interaction gives rise to history.
Theory and history are equally important, but are different. We cannot deduce economic
laws from a knowledge of history. To interpret history we need a prior theory. “Without
theory, there is no history”. - First we need theory to have history, all history facts are loaded
with theory, there is no history without theory. (Criticism of Historicism).

Understanding is needed by the historians, it’s the ability to determine the weight or influence
of each specific factor on human behaviour. Understanding is a certain knowledge historians
acquire with practice. History requires a prior theory and understanding.
Feedback: History can guide us in our theoretical studies.
From theory, new theories can be formulated about phenomena that have nor yet occurred, but
can be considered important for some reason.

THEORY + HISTORY = APPLIED ECONOMICS OR POLITICAL ECONOMY

A combination of theoretical and historical knowledge gives rise to what is called Applied
economics. The method of political economy is aprioristic and deductive.
Aprioristic means that we always begin with an axiom (a priori), this axiom is human action.
We use logical-deductive reasoning and theoretical assumptions so that it becomes increasingly
complex. Therefore, economic laws are valid as long as the corresponding assumptions are met.
Methodological Individualism: We must be able to trace any theory back to individual
human action. Human action is the central focus around which all economic science
revolves.
Criticism of Positivism
According to Hayek, Scientism: is the indiscriminate and undue application of the method of
natural science to the field of human action.
Reasons people succumb to positivism:
1) An inferiority complex with respect to natural scientists. Natural scientist have made big
achievements like the cure of illnesses or taking men to the moon, this makes economics
frustrated. All wars and conflicts come from this methodological error, for-ideas ultimately
drive the world.
2) A social demand for security. We rebel against our own creative entrepreneurial nature, the
uncertainty of the future makes us dizzy. We want guarantees, certainties, assurances. We
demand someone organize our lives from above.
According to Gregorio Marañón, scientifism is the main manifestation of positivism.
Positivists defend methodological monism (the use of the same method for the natural and the
social sciences) and criticize axioms. They describe axiomatic knowledge as unscientific.
They are determinists and materialists. The importance of recognizing the creative nature of
human beings.For them, in Hayek’s Hypotesis the relatonship grows from the bottom up, the
opposite as we think.

Criticism of Popper’s Falsifiability Criterion

Natural science starts with a hypothesis, something that is believed to happen, after this
hypothesis is tested in the real world we can see how consistent it is.
- If the real world/results are consistent with his hypothesis then he accepts it but
tentatively.
- If the results are not consistent with our hypothesis, we reject it as false.

Criticism of Popper’s Falsifiability Criterion Applied to Natural Sciences

Popper’s Falsifiability Criterion is guilty of two insoluble logical contradictions;
1) The falsifiability criterion is a proposition that can’t be empirically falsified, because it
cannot be tested in the real world.
2) Real world can’t be understood because there is no possibility of testing it.

Reasons Why the Methods of Empirical Testing are not Applicable to Economics
1. The objects of research in economics (ideas human beings create regarding their ends and
means) are not directly observable. (Ideas can only be interpreted, and it is only in light of
a prior theory that we can interpret them).
Ideas can only be interpreted and to interpret them we need a prior set of theoretical
weapons, a prior theory, the theory must be formulated by methodological procedures
other than empirical testing or consulting reality to see if it confirms the theory or not.
Economics does not deal with things, but with ideas.
2. Economics focuses on complex phenomena which cannot be isolated. Economics laws
are laws of tendency or ceteris paribus (other things being equal) laws. Such laws cannot be
empirically tested.
3. In the world of human action, there are no constant /functional relationships. Everything
is variable/ continually changing, and we cannot take measurements.
4. Mathematical models can describe only states of equilibrium, but the world of human
action is continually changing.
Conclusion: the method of economics is aprioristic and deductive.
There are two disciplines related with economy that are particularly harmful:
1) Statistics: the word “statistics” derived etymologically from “state” and originated from tax
purposes.
Statistics is a method of historical research, and like history, it does not permit us to
formulate economic theories. Why?
- Because statistics only permits us to gather information from the past,
- Only provides information about isolated elements of the formal structures of market
processes, but it doesn't provide information about the economic laws which govern
those processes.
There are statistically measurable concepts with no economic meaning.
The concepts which have economic meaning cannot be statistically measured.
2) Mathematics: is a highly formalized language which has emerged in human history to meet
the demands of mainly two disciplines, logic and physics.
Mathematics is the language of physics and logic: and describes phenomena between
which constant and immediate relationships exist.

- Economics focuses on creative human action, which implies both the non-existence
of constants and the existence of subjective time.

- Mathematics cannot account for such complex phenomena as human creativity and
subjective time.

- Verbal language is as precise as mathematical language and more flexible than

mathematical language, and verbal language encompasses entrepreneurial creativity
and the subjective passage of time. Verbal language is evolutionary.
 - The intermediate steps in mathematics have no economic meaning.

- Mathematical leads to circular reasoning:

Demand = F (price) or price = G (demand)

I value an end

I demand the means to achieve it

-
I negotiate a price

- Differential calculus makes no sense in economics. Human action takes discrete

realities into account. Example: See the discussion of price determination in an
isolated exchange. (Pretty woman).

- Econometrics involves all the errors of mathematics plus all those of statistics. The
method of political economy is aprioristic and deductive.

Rationalism – The Revolt Against Reason

We are going to speak from the perspective of Mises.
It derives etymologically from the term reason, in fact human reason is the most important tool
we have for getting along in life.
There are two types of rationalism:
1. False, erroneous, exaggerated, unscientific rationalism.
- Consisting of the assumption that the human mind is much more powerful than it really
is, it consists of the belief that through reason man can come to know much more
than human reason could ever tell him in reality.
- It exaggerates the capacity of reason and provides the foundation for scientism and
socialism. It is used in politics, it is used in socialism, communism for all
interventionism through the cohesive power of the state adherents of such rationalism
aim to create an utopia they assume all the need is to take the bad leaders and choose
some good and wise men, thinking that human mind is capable of organizing a much
better world, erroneous, exaggerated and false rationalism emerged. It exploded in
the french Revolution in 1789.
- Its adherents seek to redesign human institutions from above.
Hans Kelsen (legal positivism): everything that comes from a legislative body
constitutes law. Paul Samuelson. Economics must seek to answer three questions: what
produce, how to produce, and from whom to produce.
2. True or correct rationalism.
 - Its adherents acknowledge the limits of human reason, condemn scientism/positivism,
and recognize that institutions are spontaneous.

Criticism of Polylogism
One of the clearest manifestations of the attack on reason is polylogism. Is defined as the
doctrine of the logical structure of the human mind that varies according to:
1. Social class (Marxian polylogism).
- Varies depending on the social class.
2. Race (racial or Nazi polylogism).
- Varies depending on the race, the logical structure is different depending on the race,
asian, black or aryan race.
Why doesn’t Polylogism make sense?
1. There is no scientific definition of race or social class.
2. It doesn't explain how the structure of the mind changes.
3. It does not explain how mental structures differ from each other.
4. Why are there individuals whose thinking differs from others of their race or
class?
The only way to refute a theory is to provide evidence of its errors. The identity of its
author is irrelevant. Polylogism is a shield against criticism.

A First Analysys of the Category of Action, Relationship between Ends and Means
End (or goal): the result the actor intends to achieve with his action.
Means: anything the actor subjectively believes will permit him to achieve his ends.
Ends and means are always subjective. An end can be a means in a broder or general action.
Also, means can affect more general ends. There can be a conflict between ends.
Goods become means when an actor views them as scarce in the context of an action. If they
are not scarce, the actor does not take them into account when he or she acts. Example: the air.
Means must be scarce if not the actor does not take them into account when he or she acts.
When we view a good as scarce, we launch into entrepreneurial action to overcome the
scarcity. Example: the caves of Altamira 30000 years ago.
Today everything is scarce, and we are much richer. There is private property and everything
is divided. The allocation of property rights is essential.
If you want a scarce resource to flourish you must privatize it, bring in entrepreneurial creativity
and permit its economic allocation.
There are two types of economic goods (means):
A. Consumer goods (first-order economic goods).
 - By themselves, they directly satisfy human needs. These ends are satisfied directly
and inmediately.They permit an actor to achieve an end of value to him or her.

Example: My head hurts so I take an aspirin and the pain goes away.

B. Factors of production (higher-order economic goods).

- These are goods which only indirectly, in connection with other goods, and following a
process that takes time, permit the fulfillment of human needs.

- Factors of production always require the additional involvement of other goods

and a production processes that take time until they eventually develop into a
consumer good.

- There are economic goods of different order: higher order, second order, third order,
fourth order and so on. The higher the order, the further a good is from the final
stage of consumption.

Example: I’m hungry so I cook a fried egg, but at the point I'm about to eat it’s a
consumer good. Before having the egg cooked there was another stage: the frying pan,
oil, egg and salt are high order economic goods.

- Higher order economic goods require the involvement of other goods, they oil is not
enough you also need the egg, the salt etc.

The production process comprises a series of stages and culminates in a consumer

good. The price of productive factors is determined based on the price of the final
consumer good these factors produce.

Services: Non-material economic goods which are simultaneously produced and consumed.
It makes no sense to distinguish between material goods and services. We value material
goods for the services they provide.

Action within the World

We begin by studying individual human action.
The Law of Marginal Utility:
Explains how the value of the consumer goods is determined. Example: The value a man
gives to a water bottle in the dessert rather than in a normal environment.
1. Means are scarce, so we apply them to the ends we value the most. We allocate scarce
means for our most highly valued ends.
2. We only consider the utility of the unit of means that is relevant when we act.
Value: the psychic appreciation the actor assigns to his or her end.
Utility: the physic appreciation the actor assigns to the means.
3. This law is valid when the actor considers the relevant units fully interchangeable with
each other.
The Law of Marginal Utility is universally valid, thus it is already implied in the category
of action.
The subjective value of each unit (which the actor considers relevant and fully interchangeable
in the context of his or her action) of a good is its marginal utility (the utility of the unit of the
good which enables the actor to achieve the least valued end).
The Law of Marginal Utility states that the value we attach to each (relevant and fully
intercangeable) unit of a good corresponds to the value we attach to the least valued unit of that
good on our value scale. The utility of each additional unit of a good is lower than the previous
unit.
The law of marginal utility is neither psychological nor empirical. It is praxeological (implicit
in the concept of human action).
The Law of Returns:
There are optimal proportions in which to use the factors of production to generate a
consumer good. This is a praxeological law. The consumer goods are the ones that directly
satisfy human needs.
For example:
Let us imagine a fixed factor of production, like a plot of land (A) where we wish to grow
potatoes, and a variable factor, like labor (B).

We will suppose that labor (B) is a homogeneous good, though in reality it is not, since
countless different jobs exist.
Factor (A) is fixed if we increase the number of labor (B) (farmers that work for us).
If we have a fixed factor of production (plot of land A) and we gradually increase the the
number of units of the variable factor (labor – farmers, workers, B). The law of returns tells us
that the output of final consumer goods (potatoes) initially rises more than
proportionally. One worker doesn’t do much but two will do more than
the double. But if we increase the workers there will be a point in which
there will be a less proportional increase.
It’s praxeological because if the law failed to hold true, there would be a
productive factor with unlimited productivity, and thus it would not be
considered a productive factor, since it would not be an economic good (a scarce resource), but
a free good.

Action within the Framework of Society

Society is a process (a dynamic structure), which is spontaneous (not consciously designed by
anyone), very complex (billions of creative people participate in it), and comprised of human
interactions (mainly exchanges that are subject to rules of behavior and are often reflected in
monetary prices).
Such interactions are fueled by the force of entrepreneurship (the creation or discovery of
information, the transmission of information, and the competitive coordination of actors’
maladjusted plans), which makes the spread of human life possible.
There are two important laws we must study when we introduce the concept of society:
1. The law of the division of labor or knowledge.
 - We all come out ahead if we specialize in the task in which we have a comparative
advantage and then we exchange the results. Increases in population reinforce the
process.
- Poverty comes from the obstruction of the process of social cooperation.
2. The law of association (Ricardo).
- Countries benefit if they specialize in the areas in which they have the greatest
relative comparative advantage, and then they exchange the results of their efforts.
- Human beings benefit if they specialize in the areas in which they have the greatest
relative comparative advantage, and then they exchange the results of their efforts.
- We all come out ahead in the market.

Exchanges in Society
Action always is essentially the exchange of one state of affairs for another state of affairs. If
the action is performed by an individual without any reference to cooperation with other
individuals, we may call it autistic exchange, or interpersonal exchange. Example: Robinson
Crusoe on an island or a hunter choosing what to hunt.
Within society cooperation substitutes interpersonal or social exchange for autistic
exchanges… Man serves in order to be served. The exchange relation in the fundamental
social relation.
All human interactions can ultimately be reduced to exchanges. Interpersonal exchanges can be
voluntary or coercive.
A society based on contractual ties rests on voluntary exchanges.
1) Social cooperation is based on contracts.
2) Symmetrical relationships. Both parties are on the same level. There is no coercion.
3) Each human being pursues his or her own ends.
4) Wealth is acquired by economic means (the focus of catallaxy).
5) The rule of law. Substantive law. Equality before the law.
6) Freedom means the absence of coercion.
A society based on hegemonic ties rests on coercive exchanges.
An exchange is coercive if, objectively speaking, physical violence is used or threatened.
Example: “Give me all your money or I’ll kill you”.
1) Social cooperation is based on command and subordination.
2) Asymmetrical relationships. One party coerces the other.
3) People pursue the ends of the one who commands.
4) Wealth is acquired by political means (violence).
5) The dictatorial/paternalistic state. Commands and regulations.
6) Freedom means the power to do something.

Economic Calculation
How do prices arise from exchanges which are driven by subjective valuations that cannot be
quantified? It is possible if money and voluntary exchanges are present.
 Internal realm
Subjective / Valuations Comparisons, this realm is ordinal.

Money and Voluntary Exchanges

External realm
Prices / Economic Calculation, this realm is cardinal.

o Internal realm – Subjective / Valuations Comparisons, this realm is ordinal.

Value: the physic appreciation the actor assigns to an end. Valuations cannot be measured,
they can only be compared.

o Money and Voluntary Exchanges

Money: a commonly and generally accepted medium of exchange. The existence of money
increases exponentially the chances of making exchanges. Money is the quintessential
social institution.

o External realm – Prices / Economic Calculation, this realm is cardinal.

Price: A historical ratio of exchange expressed in monetary units.

There are two institutions that make possible economic calculation, understood as the bridge
that connects the internal realm of subjective valuations with the external realm of
computations are on the one hand money and on the other hand voluntary exchanges.
If there is no money, or if voluntary exchanges are prevented, or if both conditions exist at
the same time the bridge which connects the realm of our subjective valuations with the
internal realm is destroyed and with it economic calculation. That is the impossibility of
socialism. Without prices, it is impossible to calculate the result of different courses of action.
There are two types of voluntary exchanges:
- Direct exchange (bartering): Goods and services are exchanged directly (without money).
“Problem of the double-coincidence of wants”. Example: Cromos
- Indirect exchange: Goods and services are exchanged using money.
The existence of money increases exponentially the chances of making exchanges. Money is
the most important social institution. It multiplies human interactions, forms and refines the
other institutions, and furthers the advancement of civilization.
All voluntary exchanges result from an inequality in subjective valuations: each party
subjectively values what he receives more than what he gives.
Economic calculation is either an estimate of the expected outcome of a future action or
the establishment on the outcome of the past action.

Economic Calculation – Accounting

Accounting is a language (an evolutionary social institution) Accounting is embodied in two
statements:
1) A balance sheet (wealth at a given instant): goods, rights, and obligations at a given instant.
- Assets: The sum of the estimated value, at market prices, of the goods and rights of the
company.
- Liabilities: Obligations (debts).

Assets = Liabilities (Obligations) + Stockholder’s Equity

2) A profit and loss account: Income and expenses over a financial year.

- Debit: Expenses
- Credit: Income

To have a profit income must exceed expenses.

Debit Expenses + Profits (Credit Balance) = Income = Credit
 We have losses when expenses exceed income.
Debit = Expenses = Income + Losses (Debit Balance) = Credit

Accounting depends on the existence of market prices.

Monetary calculation is the guiding star of action under the social system of division of labor.
It is the compass of the man embarking upon production.
Exchange ratios are subject to perpetual change because the conditions which produce them
are perpetually changing. The value that an individual attaches both to money and to various
groups goods and services is the outcome of a moment’s choice.
Economic calculation cannot comprehend things which are not sold and bought against
money. Most exchanges are made using money, and therefore, they permit accounting and
economic calculation.

The Market
The specific method of economics is the method of imaginary constructions… An imaginary
construction is a conceptual image of a sequence of events logically evolved from the elements
of action employed in its formation.

 Market economy: a social system based on the division of knowledge, private property,
and contractual ties.
The state, if it exists, is responsible for safeguarding the proper functioning of the process.

 Minarchism: The defense of a minimal state to protect the system.

 Anarcho-capitalism: The existence of a state monopoly on security is unnecessary and
harmful.
The market is synonymous with society.
The market process is the adjustment of the individual actions of the various members of the
market society to the requirements of mutual cooperation. The market prices tell the producers
what to produce, how to produce and in what quantity . The market is the focal point to which
the activities of the individuals converge. It is the center from which the activities of the
individuals radiate.

The Market – Capital and Capital Goods

 Capital goods (economic goods of higher order, ot factors of production) satisfy human
needs only indirectly, in connection with other goods, and following a process that takes
time.
 The capital goods are those which are continually wearing out in the process of
production and which labor and land factors must work to replace. A capital good is a good
which only indirectly permits the fulfillment of human needs.
 Depreciation: The deterioration of a capital good, due to physical wear or technical
obsolescence. Natural resources do not depreciate; they last infinitely.
 Capital: The estimated value, at market prices, of capital goods.
 “Capitalism is the profit motive leads entrepreneurs to find and eliminate social
maladjustment, thanks to economic calculation”.
The concept of capital cannot be separated from the context of monetary calculation and from
the social structure of a market economy in which alone monetary calculation is possible.
As they (ideologies contrary to capitalism) neglect to bother about the problem of economic
calculation, they are not aware of the consequences which the abolition of the monetary
calculus is bound to bring about. The enemies of capitalism taught that capitalism is an unfair
system of exploitation sacrificing the vital interests of the majority of people for the sole benefit
of a small group of profiteers.
Gross income: The value at market prices, of what a capital good produces.
Net income: The portion of gross income which can be used without the loss of capital.
If I use less than my net income, I am saving, which will enable me to increase my capital and
be richer in the future. If I use more than my net income, I am destroying capital.
There is no capital in communist countries. (The concept of capital) makes no sense outside
the conditions of a market economy. It plays a role exclusively in the plans and records of
individuals acting on their own account in such a system of private ownership of the means of
production. Socialism forces us to pursue goals blindly (without the ability to calculate).

The Market – Advertising and its Characteristics

The consumer is not omniscient. He does not know where he can obtain at the cheapest price
what he is looking for. Very often he does nor even know what kind of commodity or service is
suitable to remove most efficaciously the particular uneasiness he wants to remove… To
convey to him information about the actual state of the market is the task of business
propaganda.
Besides informing us, we want businesspeople to convince us of the suitability of their
product, as happens in all spheres of life. The social process cannot operate without
advertising.
Characteristics:
It’s usuallly obtrusive, blatant, shrill, noisy, coarse, noisy, coarse, puffing. Because it needs
to attract attention, in order to succeed, advertising must be adjusted to the mentality of the
people courted. The bad taste of the public forces the advertisers to display bad taste in their
publicity campaigns.
The costs incurred by advertising are a part of a total bill of production costs. Advertising
permits experimentation.
Paul Joseph Goebbels the father of political propaganda. Political advertising is the most
dangerous type, because it does not permit experimentation and it is financed by taxes.

The Basic Law of Price Determination

Prices result from a social process led by flesh-and-blood human beings and fueled by
entrepreneurship.
Price determination in an isolated exchange
a) Isolated exchange (Only one potential buyer and only one potential seller):
A deal will be reached if, between the two parties, there is inequality in opposite valuations and
both parties become aware of the possibility of obtaining a profit. The price will lie between
the valuation the buyer makes and the one the seller makes. The price will be closer to the
valuation of the weaker negotiator.
An exchange takes place if, between the parties, there is inequality in opposite valuations and
both parties become aware of the possibility of obtaining a profit.

 Example:

Potential Buyer Potential Seller

The valuation of Mr.A The valuation of Mr.B

301 m.u. - horse - 300 m.u 100 m.u. - horse - 99 m.u

Mr.A values the horse at 300 m.u. Mr.B values the horse at 100 m.u.

A = 300, B= 100
The deal will be closed at a price between 100-300 m.u., depending on the negotiation ability.
100€ 300€

b) One-sided competition among buyers (Auction), (Only one potential seller and more
than one potential buyer).
Auctions make exchanges easier and favor the seller. The purchase price lies between the
valuation of the buyer, and the valuation of the outbid potential buyer with the greatest
capacity to make exchanges. The valuation of the seller is irrelevant. There are two types of
auction:
- English Auction: The price begins very low and rises until one buyer remains.
- Dutch Auction: The price begins very high and falls until someone buys

 Example:

Potential Buyers and Their Valuations Potential Seller and his or her
valuation
A 300 B 100
Ad 280
Ae 250
Ab 220

The purchase price lies between 300, the valuation of A, the buyer, and 280, the valuation of
Ad, the second highest buyer with the gratest capacity to make exchanges. The valuation of the
seller is irrelevant.
280€ 300€
c) One-sided competition among sellers, (Only one potential buyer and more than one
potential seller).
The price will lie between the valuation of the seller and the valuation of the potential
seller who asked the second-lowest price. The valuation of the buyer is irrelevant.
Competition among sellers benefits the buyer, Competition among buyers (auction) benefits the
seller. This process takes place in many institutional settings.

 Example:

Potential Buyer and his or her Potential Seller and their valuations
valuation

A 300 Ba 100
Bb 120
Bc 150
Bd 200
Be 250

The price will lie between the valuation of the seller (Ba – 100), and the valuation of the
potential seller who offered the second-lowest price (Bb – 120). The valuation of the buyer is
irrelevant.
100€ 120€

d) Two-sided competition, (More than one potential buyer and more than one potential
seller).
There is more than one potential buyer and one more potential seller. Subjective valuations are
not given.
This process pushes the price down toward the valuation of the seller willing to sell for the
lowest amount.
Marginal pair: The last successful buyer and the outbid seller with the greatest capacity to
manage exchanges.
Single-price companies seek the subjective valuations of the marginal pairs by trial and error
and thus avoid the need for haggling.
The only subjective valuations relevant to the determination of price are those of the
marginal pairs. This simplifies exchanges and protects the worst negotiators.
The most general case of an exchange is that of two-sided competition.
As the number of buyers and sellers increases, the price range determined by the subjective
valuations of the marginal pairs narrows.
In an economy with the division of labor, the marginal utility of goods produced is almost
null for the seller. In this case, the price is determined by the subjective valuation of the
marginal buyer.

 Example:
 Potential Buyers and their valuations Potential Sellers and their valuations

A 300 Ba 100
Ab 280 Bb 110
Ac 260 Bc 150
Ad 240 Bd 170
Ae 220 Be 200
Af 210 Bf 215
Ag 200 Bg 250
Ah 180 Bh 260
Aj 170
Ak 150

At 300 m.u., there are only eight goods for sale, but only one buyer. Potential sellers must
compete among themselves. This process pushes the price down toward the valuation of the
seller willing to sell for the lowest amount.
At 100 m.u., there is only one good for sale, but there are ten buyers. Potential buyers must
compete among themselves. This process pushes the price up toward the valuation of the buyer
willing to pay the highest amount.
The number of pairs making an exchange will be equal to the number of pairs in which, in
terms of quantity of the medium of exchange, the willing buyer places a higher valuation on
the commodity than does the seller.

Potential Buyers and their valuations Potential Sellers and their valuations

A 300 Ba 100
Ab 280 Bb 110
Ac 260 Bc 150
Ad 240 Bd 170
Ae 220 Be 200
Af 210 Bf 215
Ag 200 Bg 250
Ah 180 Bh 260
Aj 170
Ak 150

All buy and sell at the same price, which will lie within the valuations of the marginal pairs:
Marginal Pair: The last succesfull buyer and the outbid seller with the greatest capacity to
make exchanges (Bf-Ae: 215-220). At a higher price there would be more sellers than buyers).
Marginal Pair: The last succesfull seller and the outbid buyer with the greatest capacity to
make exchanges (Be-Af: 200-210). At a lower price, there would be more buyers than sellers.
200€ 210€
Who makes an exchange? – Those with the greatest capability for exchange: those
willing to buy at a higher price and those willing to sell at a lower price.
How many exchanges take place? – All those in which the valuation of the buyer
exceeds the seller’s.
At what price? – At the price determined by the subjective valuations of the marginal
pairs. All other valuations are irrelevant.

Criticism of the Functional Explanation of Price Determination

The “functional explanation” is invalid, since it implicitly starts from the premise
that the price is already known. The curves don't exist, because the information that
would be necessary to draw them does not exist.
The price is the result of the genetic-causal market process.
The price is not the independent variable. In economics there are no functions.

The individual
Subjectivedeterminants andofprice
Division
Valuations
There are of
two views: Labor Marginal Exchanges Prices
Endsof the demand: Utility
On the side
1) The number of demands for a good.

Other things being equal, the larger the number of demands for a good, the higher the price
will tend to be.

(+) Demand = (+) Price

2) The subjective valuation buyers make of the good.

Other things being equal, the higher the value (marginal utility) buyers place on a good, the
higher the price will tend to be.

3) The subjective value buyers place on the medium of exchange (money).

Other things being equal, the higher the subjective valuation on money, the lower the price
will tend to be.

On the side of supply:

1) The number of units of a good that are for sale.
 Other things being equal, the larger the number of units for sale, the lower the price will
tend to be.

2) The subjective valuation sellers make of the good.

Other things being equal, the higher the value (marginal utility) sellers place on the good,
the higher the price will tend to be. In a society with a division of labor, this valuation tends
toward zero.

3) The subjective value sellers place on the medium of exchange (money).

Other things being equal, the higher the subjective valuation of money, the lower the price
will tend to be.

The Law of Costs: Costs don’t determine prices. No one is guaranteed the ability to sell at a
price which exceeds the costs he or she has incurred.The law of cost is false. Prices determine
the costs.

Entrepreneurs estimate
Prices of Consumer the prices of tomorrow
Subjective Valuations Costs
Goods and demand prodyctive
factors today

Entrepreneurs compete for productive factors with those they think will make a profit,
that is, produce consumer goods which will command a selling price that exceeds costs. It is
this competition that determines the price of the factors of production.
The law of cost is false: if costs determined prices, any investment would invariably be
profitable.
Costs (the prices of productive factors) result from prices (the estimated future prices of
consumer goods).
Factors of production have a price (cost), because they are useful for producing consumer
goods people value and are willing to buy (price). No one incurs costs to produce goods
people do not value.

Prices
Valuation and Appraisement
- Entrepreneurs invest today to produce the goods they believe will be the most valued
tomorrow.

- Entrepreneurship does not consist of discovering nor anticipating a future that is already
given, but rather of creating a future in which we have available to us consumer goods
that better satisfy human needs.

- The entrepreneurs who are successful (those who manage to better satisfy the needs of
consumers) obtain a profit (due to sales prices which exceed costs).
 The consumers do not care about the investments made with regard to past market
conditions and do not bother about the vested interests of entrepreneurs, capitalists,
landowners…

The beneficiaries of entrepreneurs’ success are all of us human beings who, as consumers,
improve our standard of living.

The ultimate source of the determination of prices is the value judgments of the
consumers.

- Appraisement: is the anticipation of an expected fact. It aims at establishing what prices

will be paid on the market for a particular commodity.

Today Tomorrow
(moment = t) (moment = t+1)

Entrepreneurs buy productive factors The valuations of consumers will

according to their estimate of tomorrow’s determine the prices of consumer goods.
prices.

PRICES

The Calculation of Costs

Cost (opportunity cost): The subjective value the actor attaches to the end he or she
relinquishes, when undertaking an action.
In the calculation of the entrepreneur, costs are the amount of money required for the
procurement of the factors of production.

Possibilities:

1. Price (T + 1) > Cost (T) = PROFIT.

A profit Price (T + 1) > Cost (T) = PROFIT tells the entrepreneur he or she has acted
wisely. In other words, he or she has used the resources acquired yesterday to manufacture
goods which, once completed and offered for sale today, turn out to be the ones people
value the most

2. Price (T + 1) < Cost (T) = LOSS.

A profit Price (T + 1) < Cost (T) = LOSS tells the entrepreneur he or she has acted unwisely
and has diverted resources from the ends consumers value most.

If we wish to know whether we are acting wisely or not, we must compare prices and costs.
For these to form, there must be a free market for consumer goods and productive factors. We
need economic calculation to use resources or factors of production.
The General Cost Principle
Entrepreneurs use trial and error to try to find their optimal volume of output. There are no cost
functions. Human creativity constantly changes reality. The general cost principle is the law
that explains to what point entrepreneurs will tend to increase the output of a certain
good.
In economics, laws are marginal in nature (they refer to incremental units of a good), because
human decisions are always based on discrete quantities.
- Marginal cost increases: The cost of each additional unit of a productive factor increases
as the demand for it increases.

- Marginal revenue decreases: The price of each additional unit of a consumer good
produced decreases as the supply of it increases.
Entrepreneurs employ productive factors to manufacture consumer goods which they take
to the market.
Entrepreneurs tend to raise output unit marginal cost equals marginal revenue. At a higher
level of output, there would be a loss on the additional units. At a lower level of output,
more could be earned by increasing production.

Competition and Monopoly

Entrepreneurship is competitive.
Competition is a dynamic process in which entrepreneurs vie with each other to discover
and take advantage of profit opportunities (social maladjustments) before they disappear
because someone else has seized them.
Our view contrasts with the state of “perfect competition” that mathematical equilibrium
economists describe. Mathematical economists mistakenly define “perfect competition” as
a state in which many sellers offer exactly the same product at the same price.

- Monopoly: a static situation in which there is only one seller of a product.

According to mathematical economists, these monopolists could impose artificially high

prices, to the detriment of consumers.

- Oligopoly: a market or industry is dominated by a small number of large sellers or

producers. 
Monopoly exists whenever the free exercise of entrepreneurship is blocked in part of
society by the force of the state. The predominance of a company is not harmful to consumers.
It is a sign that the company is providing a good service.
The current antitrust laws are based on the (incorrect) mathematical concept of
competition. They portray monopoly as the presence of a lone seller, and they go after the
companies that best serve society.
- Charging more than one’s competitors is abuse of a dominant position.
- Charging less is unfair competition (dumping).
- Charging the same is a sign of collusion.
Competition consists of the free exercise of entrepreneurship, and it is already defended
by traditional legal principles. Antitrust laws rest on false concepts and these laws are harmful
to society, because they go after successful companies.

1-. Monopoly prices

Neoclassical economists disapprove when price > marginal value.

Neoclassical economists disapprove when price is more than marginal costs.

Neoclassical economists desire a situation in which price=marginal revenue, and to bring it
about, they propose to divide the company. However, they do not take into account that if the
company is divided, the cost curve increases.

Now consumers are not “exploited”, according to the neoclassicals. However the price has
skyrocketed.
Neoclassicals wish to prevent monopoly, because they believe the seller would benefit by
reducing the supply and increasing the price. Nevertheless these economists compare the
monopoly price with a perfect-competition price that does not exist.
 There is only one market price, and that is the price which emerges from voluntary
exchanges.

2-. Price discrimination on the part of the seller

The seller asks a different price depending on the purchasing power of each buyer.
Two necessary conditions for this to take place:
1. The seller must believe she or he benefits.
2. Resale must be impossible.
This sort of discrimination usually occurs in the sale of services, wich cannot be resold.
Situations in which resale is impossible are close to the case of an isolated exchange.

3-. The conexity of prices

Essential interconnections between goods:
- Connexity of complementary: demand and prices move in opposite directions.

Demand (shoes) Price (shoes)

Demand (laces) Price (laces)

- Connexity of substitution: demand and prices move in opposite directions.

Demand (coffee) Price (coffee)

Demand (tea) Price (tea)

In the market, the relationship par excellence is that of complementarity.

4-. The illusion of monopoly price.

Definitions of monopoly:
1. There is a monopoly when a company “controls” its price. This definition is invalid,
because it is confusing and absurd.
 There is no direct control over price because price is a mutual phenomenon. On the other
hand, each person has absolute control over his own action and therefore over the price
which he will attempt to charge for any particular good.
2. Monopoly is a situation when there is only one seller of a good.The definition is not valid
because it is static and unobjective.
To use this definition, we must first objectively define what constitutes a good, a sector, and an
industry. It must be remembered that only consumers can decide if two commodities offered
on the market are one good or two different goods. If I expand my definition of a sector,
monopoly never exists.
Competition exists wherever there is free access to entrepreneurship.
The definition of Lord Coke offered in the seventeenth century: “A monopoly is an
institution or allowance by the king, by his grant, commision, or otherwise… to any person
or persons, bodies politic or corporate, for the sole buying, sellig, making, working, or using
anything, whereby any person or persons, bodies politic or corporate, are sought to be
restrained of any freedom or liberty that they had before, or hindered in their lawful trade”.
3. The legal-institutional definition (the correct one): a privilege the state grants, thus blocking
free access to entrepreneurship in certain areas of the social process, which are reserved
exclusively for the privileged.

4. Monopoly exists when someone achieves a monopoly price. “Monopoly price” is a price
which exceeds the “competitive” price and increases the profit of the “monopolist” by
decreasing supply. The competitive price is the one which emerges in a free market. There is
no other way to determine it.

“Cutthroat competition”: Competencia desleal. Refers to lowering the prices with the intention
of driving out competitors and the selling at monopoly prices. Laws against “unfair
competition” are promoted by those entrepreneurs who are the worst at serving consumers.