One of the core tenets of the Neoclassical view of competition and monopolies is market power. Taking an example from a run-of-the-mill mainstream economics textbook, it reads:
“You may recall that a market is competitive if each buyer and seller is compared to the size of the market and, therefore, has little ability to influence market prices. By contrast, if a firm can influence the market price of the good it sells, it is said to have market power.” (pg. 280 Mankiw, Principles of Economics, Sixth Edition)
According to this view, those firms in a market with the control over the prices they charge have “market power”. However, those within the Austrian School have long remained critical of this view of the nature of market competition. In Man, Economy, and State, Rothbard writes:
“The pure-competition theory, however, is an utterly fallacious one. It envisages an absurd state of affairs, never realizable in practice, and far from idyllic if it were. In the first place, there can be no such thing as a firm without influence on its price.” (pg. 721)
Rothbard attacks the Neoclassical definition of market price, stating that every firm has at least some control over its price, as even if it is one among a thousand other firms, it still has that one-thousandth market share. As a result, it makes no sense for us to distinguish between those firms that have control over the prices they charge and those that do not.
Many other Austrians have followed Rothbard in his critique, agreeing that the idea of “market power” is ill-defined. But even if it is ill-defined, it does seem to have some definition, even if we can only grasp at it. When we imagine a firm with large amounts of “market power”, we all have similar images come to mind: a town with only one grocery store that everyone has to shop at, a company so big that everyone in a rural area is employed by them, etc. This uniform colloquial understanding of “market power” suggests that it does mean something. How can Austrians reconcile this with their arguments against the idea of “market power”?
In order to understand this definitional dilemma, we must return back to economic foundations, specifically, the distinction between Praxeology and Thymology. Unfortunately, these are not terms that all — or even the majority — of economists are familiar with, but understanding and appreciating the roles and the differences between them is crucial vital to a thorough and coherent view of economics. Praxeology — derived from the root word “praxis” — is the science of human action. Economics proper is the study of the actions of individuals as it relates to markets and exchange, so for us to understand action in these spheres, we must first understand action more broadly. Ludwig von Mises writes in Human Action:
“The economic or catallactic problems are embedded in a more general science, and can no longer be severed from this connection. No treatment of economic problems proper can avoid starting from acts of choice; economics becomes a part, although the hitherto best elaborated part, of a more universal science, praxeology.” (pg. 3)
Praxeology as a science starts from the action axiom: the self-evident statement that “humans act”. From there, it unwinds all of the logically deductive conclusions that are contained within that singular statement. Among these are the economically-relevant conclusions of the Law of Demand, Law of Diminishing Marginal Utility, etc. These laws — along with all the other conclusions of Praxeology — are necessarily true and binding, as human beings are necessarily action-based creatures. All of the categories of Praxeology are logically-deduced necessary categories of action, and thus, of human beings in general as well.
Praxeology concerns the necessary features of action. Its corollary, Thymology, is concerned instead with the particular actions that an individual takes. Specifically, it examines the value judgements that motivate the actions that people take. The most obvious application of Thymological investigations is in the field of history. Why did Caesar cross the Rubicon to march on Rome? To give an answer, we have to dive into the various value judgements that Caesar may have had and the circumstances he was in and give our best approximation as to why Caesar acted the way that he did.
Thymology, in contrast to Praxeology, is not a science of necessity. It has no laws or logically deduced principles. Every Thymological investigation, of examining why someone acted in a particular manner in the past or might act in the future is its own unique and individual question. This doesn’t mean that we can’t recognize patterns or use understanding of our own action to view the actions of others, but we can never formulate these into constant laws or modes of behavior.
Praxeology and Thymology are essentially two sides of the same acting coin. One concerns that necessary features of action, and the other concerns the particular features of action. Praxeology is the arena in which all action takes place and Thymology is just the individual events happening on the field, so to speak. The two cannot be separated without destroying the value of both. If we only have Praxeology, then we have no way of practically applying our knowledge. If we only have Thymology, then we have no way to interpret the seemingly chaotic world of acting around us. As Roderick Long (appropriating Kant’s famous phrase) states, “Praxeology without Thymology is empty, Thymology without Praxeology is blind.” (Wittgenstein, Austrian Economics, and the Logic of Action: Praxeological Investigations pg. 50)
Let’s return back to the issue of market power. As we stated above, the Austrian critiques of market power show that the concept does not stand up to the scrutiny of economic logic. It simply doesn’t make sense to distinguish between firms that have control over their price and those that do not. We can’t make sense of this concept from an economic — or as we might say, Praxeological — perspective. Even so, we can understand it from a Thymological perspective. As stated above, we can all intuitively understand having to make a choice between two options, neither or which is particularly attractive. These might include choosing between having only one employer or being unemployed, shopping at only one grocery store or not shopping at all, etc. Praxeology makes no distinction between whether or not you really wanted to act the way you did; such notions can only be understood from a Thymological perspective.
This exclusively Thymological status of market power explains why the concept cannot be grounded economically, even if we all colloquially recognize it. Generally speaking, buying groceries at a store you don’t like because it is the only store in town is preferable to not having groceries at all. Acting on one’s value judgements in this way can be understood through our own recognition of encountering similar situations in our own lives. Our recognition of this phenomenon is empathetic, not economic.
In many ways, understanding the distinction between Praxeology and Thymology is the key to doing good economics. If we ignore our economic foundations, then we run the risk of creating a monstrous half-breed of economics. As the concept of market power shows, many things that might appear to belong in economics are actually just well-dressed imposters. The usage and application of Praxeology separates the sheep from the goats, however, and ensures that we don’t muddy the waters with unsound economic theory.
Unfortunately, this warning often goes unheeded, as illustrated by the methodological choices of many Neoclassical economists, who utilize and advocate the usage of empiricism in economics. This results in various empirically derived results being placed alongside of economic theory as both important parts of a united pursuit of truth. Such beliefs inevitable result in an epistemological gumbo where everything is thrown together all in one pot. The conclusions of empirical studies can never stand equal with foundational economic theory, as evidenced by the superiority of mathematical theorems to laboratory results.
What must be grasped is that any empirically derived “facts” of action derived from outside of Praxeological reasoning reside on a qualitatively different epistemological level than those of pure economics. Even if one can find a litany of empirically “proven” constant features of action, these findings are not necessarily true in the way that the categories of Praxeology are necessarily true. They might represent a genuine trend or a consistent finding, but they are not necessary, and as such, they are not part of economics proper. This does not mean that such findings are not useful. They may be useful to the historian, who may wish to record those findings, or to the entrepreneur, who may see them as an opportunity for a successful business venture. However, they are not useful to the economist.
The question of market power, and the related subjects of Praxeology and Thymology, are another lesson in the importance of economic foundations. Far too often, economics classes and textbooks skip past foundational principles and move right to graphs and charts. This is a common and understandable, but dangerous mistake. Errors in our economic foundations don’t stay there; they reverberate into all of our economic conclusions. If we fail to understand the difference between Praxeology and Thymology, then our economic theory is bunk, and the rest, as they say, will be history.
