The action axiom is the starting point of Mises’s economic method (praxeology). But it is far more than a place to start. It solves a seemingly intractable problem.
When Ludwig von Mises concretized economic thinking as praxeology, he himself held that it was merely a clarification of the pioneering theoretical work of Carl Menger. Menger in turn based his work on traditional logical economic reasoning. Mises himself did not anticipate the uproar that praxeology caused. It occurred chiefly among mainstream economists but also in the Austrian camp. As an example, Hayek was not fully on board.
Mises postulates that economic thinking starts with human action; we act purposefully rather than react instinctively. When humans act, we act with goals in mind. We attempt to achieve something. This something is not motivated chiefly by fight-or-flight instincts. Human action is often directed at achieving something which previously did not exist but that we have imagined to be achievable and of value to us.
Human action as purposeful behavior is the fundamental assumption of Misesian praxeology, and this has come to be known as the action axiom. From this axiom we can deduce a multitude of economic truths which together constitute a body of economic theory. The proposition is completely deductive, where the point of departure in itself is a true statement from which logical reasoning can establish other true statements. The method as such is neither noteworthy nor provocative. It is simply the same type of reasoning that economists and philosophers have used throughout the ages.
But the action axiom seems to rub people the wrong way. Why should economic thinking have to lift off from human action? Some claim that this is not necessary, or that the action axiom is a “choice” and an expression of Mises’s personal preferences. Others claim that it is lacking. But the criticism is wide of the mark. By identifying human action as a fundamental axiom Mises solves a multitude of problems which we would otherwise have had to contend with. Action is the missing link between value—a subjective experience—and the objective world, which is measurable.
All economists would publicly agree that value is indeed subjective, but it seems like most of them only pay lip service to this fact. Economists abound who behave counter to this fundamental truth. Subjective value is not measurable, because it is impossible to observe for anyone but the individual who actually perceives the value. Therefore it cannot be faithfully represented by variables in mathematical formulas or in statistical models. Economists who are not Austrians simply “assume” that it is possible to measure people’s utility functions, and from this they reason that one can compute how to maximize these utilities.
For Austrians this is an assumption that is both unrealistic and unnecessary. Subjective value can only be defined as a personal feeling of satisfaction. It is something we feel. Therefore Austrians say that value is something that appears in the act of consuming (using) goods and services. It is only when we feel the satisfaction of using something that we realize its value. In other words, the value of eating food can be to evade hunger or to simply survive. But what of the enjoyment of taste? The gratification of having earned a good steady meal? Perhaps with a drink, and in pleasant company? The whole experience is of value, in a completely personal sense. It is impossible to measure and cannot be assigned a dollar value no matter how much one would wish that to be the case.
For something to have value, something more is required than mere satisfaction on the part of the consumer. The thing that is being enjoyed also has to be scarce. There has to be less of it than we could make use of. In fact: satisfaction is directly related to this scarcity. You can bet your bottom dollar that ribeye steak would not be as highly appreciated if it were as commonplace as pretzels. Would we decorate ourselves in pearls if they regularly fell from the sky?
A century and a half ago, Carl Menger made it clear in his foundational magnum opus that value is subjective, and that for anything to be considered by anyone to have subjective value it must both contribute to satisfaction (or more precisely: it must be expected to satisfy wants) and it must exist in lower quantities than we would like to make use of (it must be scarce). This is why we economize. We choose to use resources in the best way we can fathom so that we can get as much satisfaction (value) as possible out of them.
The issue here is of course that we are still talking about personal feelings of satisfaction. But in an economy we produce goods for, and trade with, each other. In advanced economies we also make use of money to indirectly procure goods that we value more highly.
How do we make our way from a discussion of individual feelings, which cannot be measured, to a market with goods and services that are bought and sold using money? This is where the Misesian action axiom provides an ingenious solution.
The Missing Link
The action axiom solves this problem since human action must direct energy outward: actions make use of that which nature provides and create objective changes in nature as a result. After all, an action is defined as that which we do in order to attain some goal which we believe we can manifest in the physical world.
Human action is to make use of objective means in an attempt to manifest an expected or imagined state wherein we satisfy perceived wants—and thereby we create purely subjective well-being. If we are cold, we can act in order to lessen our suffering, by creating clothes or shelter.
The value of what we have created lives only in our minds. And the precise value we are striving to attain is based on our own, also purely subjective, ranking of different possibilities. But the action as such, which aims to achieve subjective value for the individual, is manifested in the objective world. Things that happen only in the world of the mind are not human action—they are but dreams. Dreams are separate from reality. This does not take away from the fact that we can dream of a better future and then act in order to realize it.
Nothing guarantees that actions as such result in what was intended. The opposite is often true: actions lead to unintended consequences. Missing is the rule rather than the exception, and it depends on a multitude of factors, from a complete misunderstanding of the situation to having chosen the wrong means—and even the wrong goal. But it is nonetheless in action that we discover and communicate ways in which we can reach intended goals, or beneficial unintended ones. It is also how we learn not to do things.
Austrians do not claim that every single action has intended consequences. Austrians claim that humans act purposefully, in order to affect more or less articulated change in the objective world, and that it is action—and only action—that can reveal the world to us.
Action has—and must have—consequences in reality. The act in itself and its consequences are both observable and measurable. It is with action that we use scarce resources to produce goods and services.
The absolute genius of the action axiom is that it defines the link between subjective value and objective reality. Actions aim at changing reality and thereby creating a valuable situation. Actions use means which the actor deems useful in attaining the intended aim. Choices are made based on the subjective valuations that individuals internally compute. Animal pelts can be a means toward creating clothes in order to stay warm, but the pelts can also be used with lumber to form a shelter. Which choice results in the highest value, clothes or a windbreaker? And which of the two gives the highest value given the cost (pelts and lumber), clothes or shelter?
Our subjective valuations can be directly discovered by our economizing of objective resources. It is our actions, rather than our dreams, that mean something to our fellow human beings, because our actions create the means needed to satisfy valuable wants and our actions use resources that could have been used for something else.
In conclusion, it is through action that our subjective valuations are mapped onto objective reality. This is why the action axiom is an irreplaceable launch pad for economic thinking.