Philip Wicksteed on the Common Sense of Choice and the Market Process

by Richard M. Ebeling

April 24, 2023

The British economist Philip H. Wicksteed began his most important work, The Common Sense of Political Economy (1910), with a motto taken from the famous German poet Johann Wolfgang von Goethe (1749–1832): "We all live it, but few of us know what we are living."

Contrary to the classical economists, who had argued that the market value of things was ultimately based on the objective quantity of human labor that had gone into their manufacture, Wicksteed argued that the value of things begins in the human mind, and from there brings about the prices of things bought and sold in the marketplace. At the same time, Wicksteed went on to explain in his Common Sense that the logic by which we value things is not something that needs to be learned and consciously adopted but rather is the way our own minds just work in a world in which scarcity exists. That is, a world in which the means that we discover and decide might be useful to apply in attempting to attain our desired ends are insufficient to achieve all the purposes we may have in mind. Hence, we all do it, but most of us are not consciously aware of what we are doing.

Philip Henry Wicksteed was born in October 1844 and died on March 18, 1927, at the age of 82. He followed in his father's footsteps and became a Unitarian minister and served in that capacity for over 20 years. But his other interests, and his somewhat unorthodox theological views, led him to resign his position in 1897. This enabled him to more fully devote his time to Medieval scholarship, especially the writings of Dante, about whom he was considered an expert, as well as to writing and lecturing on economics.

The inspiration and greatest influence on Wicksteed's own thinking on the fundamentals of economics was William Stanley Jevons, who (separately, though almost simultaneously, with the appearance of Carl Menger's Grundsätze der Volkswirtschaftslehre) formulated his theory of the concept of marginal utility in Theory of Political Economy (1871). Based on that theory, one of Wicksteed's earliest writings on economics, in 1884, was a critique of Karl Marx's labor theory of value, which led to an exchange with George Bernard Shaw, who attempted to defend the Marxian approach.

While often considered a "Jevonian," Wicksteed's "subjectivist" approach to the logic of economics, its universal applicability, and his theory of the market process have come to be identified more with the Austrian School, especially as developed in the twentieth century by Ludwig von Mises and Friedrich A. Hayek. Also, while not a strict economic liberal, the implications of his analysis of market processes usually led him to free-market conclusions on a good number of economic policy issues.

Wicksteed's first books were The Alphabet of Economic Science (1888) and The Coordination of the Laws of Distribution (1894). They were meant to articulate and clarify the principles of marginal utility and decision-making and to demonstrate that in a competitive free market, the market value of what is received for a product is "distributed" as income shares to the factors of production in a manner proportional to their respective marginal contributions.

But it is in The Common Sense of Political Economy that Wicksteed's most developed ideas on economics and the market economy are to be found. He wished to explain the common sense logic underlying all that men do in making evaluations, selections, and choices. An essential part of this was an analysis of the dynamic process of market coordination on the basis of individual subjective valuations under conditions of imperfect and limited knowledge.

In Wicksteed's view, the existence and necessity of human choice was seen in everything that was done by the individual. The housewife buying the weekly food on the market and her allocation of the supply among her family members were activities all cut from the same fabric:

Her doings in the marketplace and her doings at home are … parts of one continuous process of administration of resources, guided by the same fundamental principle, whether she is spending money, helping the potatoes, pouring out the cream, or exercising a more general vigilance over the bread and milk…. She is trying to make everything go as far as it will, or, in other words, serve the most important purpose that it can. She will consider that she has been successful if, in the end, no want which she has left unsatisfied appears, in her deliberate judgment, to have really been more important than some other want to which she attended in place of it.

The same applies to the man shivering in bed deciding whether to get up and secure another blanket that would relieve the cold, when the trade-off is a few moments of greater discomfort from the cold when he is out of bed getting the extra blanket versus the greater warmth for the rest of the night when he is trying to sleep. Or even a man faced with the trade-off of honor or disgrace, depending upon whether he decides to talk under torture.

What is critical in all of these circumstances was not the motive behind any decision but the "economic relation," as Wicksteed called it, that required a decision be made. All of them, he said, involved the necessity of "making a selection and choosing between alternatives." Therefore, he saw economics as "a study of the principle of administration of resources and selection between alternatives conceived without any formal or convention limitation."

Flowing from this view of choice was the concept of the margin.

The principle of marginal adjustment … runs through all the administration of our resources. Terms at which alternatives are offered and declining marginal significance as supply increases are the universal regulators of all our choices between alternatives. …. from first to last … the laws of economics are the laws of life, and consequently if a law declares itself to be paramount on the economic field, it proclaims itself by implication as a general law of life and conduct.

Thus, all of human life is comprised of comparisons and trade-offs between marginal benefits and marginal costs:

An ardent lover may decline a business interview in order to keep an appointment with his lady-love, but there will be a point at which its estimated bearing upon his prospects of an early settlement will make him break his appointment with the lady in favor of the business interview. A man of leisure with a taste for literature and a taste for gardening will have to apportion time, money, and attention between them, and consciously or unconsciously will balance against each other the differential significances involved. All these, therefore, are making selections and choosing between alternatives on precisely the same principle and under precisely the same law as those which dominate the transactions of the housewife in the market, or the management of a great factory or ironworks, or the business of a bill-broker.

Unlike a variety of the more mathematically focused economists, in Wicksteed's analysis of the on-going, ever-present choice process, there were no assumptions of any rigid quantitative precision, or exact and perfect marginal comparisons, or the absence of error or miscalculation. On the contrary, the lack of such perfections was part of the real world in which actual choices are made.

A person's scale of preferences (his ranking of desired ends) would take form and shape only within the actual process of choosing among possible alternatives at various relevant margins of choice. Even as these selections and choices are made, said Wicksteed, the individual "does not generally realize exactly what the consequences of buying [an item] will be, but has a vague sense of future inconvenience, privation, and possible regrets."

What beclouded "the margin" and created its rough and imprecise form was the pervasive uncertainty under which decisions are always made. The expected value of various choices never seemed far from Wicksteed's thoughts. "Action … will always be determined by anticipated results," he said.

The purchase and allocation of services to serve human ends, therefore, were always guided by their anticipated importance and value to the consumer. Yet, potential for error abounded. Unexpected requirements could materialize, actual uses for goods could turn out to be smaller than planned, or the usefulness of a commodity might be found to be different from what was originally hoped for.

If within the individual mind revisions and reevaluations were constantly occurring, then even more so was this true and necessary in what Wicksteed called the "economic nexus" of interpersonal exchange and trade. Here, too, as circumstances changed, demand for commodities would rise or fall, and supplies would have to be revalued and reallocated among different uses.

The Austrian economist Eugen von Böhm-Bawerk, in his exposition of the market process of price formation, had suggested a dynamic analysis of buyer decision-making in which buyers formed expectations concerning the anticipated importance of goods to themselves and the minimum prices at which sellers might be willing to relinquish their supplies for sale. Based on these subjective estimates of their own wants and the market conditions under which sellers might sell, the buyers would initially offer and then modify, if necessary, their pricing bids to would-be sellers. But in almost all modern market settings, buyers find prices already set by sellers; they respond in the face of these given prices by deciding the relative quantities of purchasable goods they will buy.

Wicksteed's particular contribution to an understanding of the market-pricing process was an analysis of the factors on the seller's side of the market and role of "cost" as a foregone alternative in the choices we make. Markets are the arena in which potential gains from trade can be consummated by transactors. But, Wicksteed emphasized, "this process will always and necessarily occupy time. The persons potentially constituting the market will not all be present at the same time." As a result, total market demands for alternative goods were "a matter of estimate and conjecture" at any moment in time. In Wicksteed's eyes, it falls upon the shoulders of the entrepreneurs and sellers to form such estimates and conjectures.

Expecting "a constant flow of potential customers throughout the day," the sellers "have a reserve price, not on their own account but in anticipation of the wants of others." Anticipating the demand for this good by future buyers who will enter his market later in the trading day, the seller prices the good so that the quantity at his disposal will tend to balance the entire stream of buyers over the entire selling period. The seller, therefore, is acting as the "reader of the public mind, anticipator of future wants, or the speculator as to the wants of the portion of the public not present in person."

As the owner of the existing supply of a good, the seller forms expectations for the product by potential consumers who might enter the market at a later time. "What the purchaser meets in the market," as Wicksteed expressed it, "is but a reflection of her own mind and that of her compeers thrown back from the mind of the seller. It is the collective mind of all the purchasers, then, as estimated by the sellers, that determines the prices set by the latter" that any one or group of buyers find when they enter the market. Thus, a "primary function" of the sellers is "to represent the whole body of consumers in his dealings with each individual consumer."

Potential for error abounds here as well. Each day, the sellers "form a general estimate, based partly on actual inspection of the market, partly on a variety of sources of information and grounds of conjecture which they commanded before entering" the market. But all the resulting prices remain speculative. When the buyers actually begin appearing in the market over the trading period, reality will confront anticipation. Traders who err on the downside and price their product too low in relation to the stream of buyers will see their stock too rapidly diminishing, while those who price their product too high would see sluggish demand relative to their available supply. Each seller will rectify his mistake by raising or lowering his price, respectively, with total demand tending toward a balance with the available stock.

An additional dynamic ingredient in Wicksteed's analysis was its full appreciation that error, itself, disrupts and modifies the equilibrium target toward which the economic system is gravitating. "Any actual transactions made in consequence of a mistake in estimating the equilibrium price at any given moment will theoretically alter the equilibrium price itself," Wicksteed said, by altering people's preferences and their endowments at each step of the economic sequence of trades. In other words, market outcomes are "path dependent," that is, the patterns of actual trades and the related buyer and seller reevaluations along the way influence the hypothetical longer-run end-state toward which the market is moving at any moment in time.

But the stocks of goods available at the retail stage need to be replenished. What applies to the given quantities on hand — that their value reflects the existing entrepreneurial expectations of the importance of the consumer ends they can serve — equally applies to the means of production. "No raw materials, no machine, no specialized talent, nor natural or artificial combination of things has any value," Wicksteed said, "except the derived value which it draws from its anticipated contribution to the ultimate service that shall be placed on the scale, tried, compared and appraised before the empirical throne of Human Demand."

What Wicksteed was saying is that as retail entrepreneurs discover errors they have made concerning the anticipated demand for their respect wares, they will reappraise the relative quantities of the goods they wish to restock on their shelves and the prices at which they might sell in the next trading period. This modifies their demands for these goods at the wholesale level, with the wholesalers adjusting the amounts of the goods they will want from their suppliers in the next rounds of business and the prices they are willing to offer to those suppliers in later stages of production. This, in turn, brings about changes in the demand for the various factors of production, including labor, at each of the production stages, all the way back to the raw materials stage and at the retail level, where the final goods will be sold.

In the process, the relative price and wage structures interconnecting all markets will adjust to the never-ending changing conditions of ultimate and final demand for and supply of those goods consumers want. But these constant adaptations in prices, wages, resource use, and allocations in the interrelated web of multitudes of markets is what ensures that the market system as a whole is always tending to move in the direction of overall coordination, even though the hypothetical end-states at which markets would be in balance (general equilibrium) are, themselves, constantly moving targets.

In this ongoing process, Wicksteed was also interested in clarifying what is the meaning of "costs" within the market process. Cost is the next best alternative that might have been pursued and attained with some of the scarce means that were used for a different purpose by the chooser, who ranked it of greater value or importance. The cost of any of our choices is the "pull" of an alternative demand that might have been satisfied if the means had been used to do something differently.

In a presidential address that Wicksteed delivered before the British Association in 1913 on "The Scope and Method of Political Economy," he "boldly and baldly declared" that the "supply curve" that is drawn on the blackboard and juxtaposed to a "demand curve," does not exist — "There is no such thing." The supply curve is, in fact, the demand curve(s) of whatever alternative would have to be sacrificed to meet some other particular demand. A demand curve is downward sloping to the right, because as additional units of any good are acquired by someone, the marginal utility or benefit of each one is less than the preceding ones acquired.

Likewise, a "supply curve" slopes upward to the right, because as more scarce means are shifted to increase the quantity of the first good, there are fewer resources remaining to continue to meet the demands of other goods, so as their quantities decrease, the marginal utility of each additional unit that has to be foregone is greater than the preceding ones no longer available. Thus, a supply curve is merely the demand curves of other goods diminishing in supply to satisfy a greater demand for something else.

Ultimately, therefore, both demand and supply are reflections of the subjective marginal valuations of market actors concerning the marginal utility or benefits from having more or less of one desired good compared to some other. For Wicksteed, this reinforced the insight that from beginning to end, it is the subjective (marginal) valuations of all those participating in the market that determine the prices and the "costs" of everything in that "economic nexus."

In Wicksteed's view, the market constitutes that vast and intricate "economic nexus" in which individuals participate in an increasingly complex and interdependent system of division of labor. Any person living in such a system is able to benefit from everything that others can do that he may not be able to do or which they can do better and less expensively than if he attempted to satisfy his wants through his own limited abilities. To the extent others devise ways to innovatively produce more or better or less expensive goods that he desires to acquire from them in trade, the greater the opportunity for improvements in his own life and circumstances. This represents the general betterment that all may receive from a system of specialization and exchange.

However, Wicksteed also highlighted how this system of interdependent specialization creates the conditions for some to turn to political means to benefit themselves at the expense of others. While we are the consumers of many goods, the better and less expensive provision of which we all gain from, we are also individually the producer of one or at most a small number of things. Unless we are successful in producing and selling what others want, we cannot earn the revenues we need and desire to reenter the market as a consumer with income to spend. Thus, our role as a producer of a particular good tends to be of more importance to us than our role as consumer of many other goods.

Thus, any decrease in the demand for our particular product or service, or anything competitively done by others that increases the supply of it and lowers its price is frequently dreaded and opposed by the individuals negatively affected in this way. Explained Wicksteed:

If the thing I supply becomes relatively more abundant, and ministers to a relatively less urgent need, my command of what I want declines just because your command of what I give increases. Hence the paradoxical situation that the advance in wellbeing, which we all desire and are pursuing becomes an object of dread to each one of us in that particular department in which it is our business to promote it….

Where there is an open competitive market, this desire for scarcity may remain a pious (or impious) wish, to which those who entertain it can give little or no effect…. But when we turn from the individualism of the open competitive market to the deliberate and concerted action of organized trades, or legislative assemblies, or to the general atmosphere of social ideals and aspirations by which they are supported or prompted, we see at once how fatally perverse this whole way of looking at things must be.

The perpetual danger, Wicksteed warned, is that any time economic progress brings about new, better, more, and less expensive goods from which many in society gain diffused benefits over time, there are likely to be some established producers and suppliers who will experience concentrated reduced market shares, lower revenues, and even losses due to the supply-wide successes of their innovative and successful market rivals.

The temptation will be for those negatively affected in this way to turn to political means through government to restrict markets, hamper their competitors, and artificially keep prices higher than they otherwise would be at the expense of consumers and those enterprisers who are prevented or hampered in their ability to better supply and serve the consuming public. It becomes a constant battle, Wicksteed emphasized, to oppose such special-interest politicking if the innovations and discoveries from which we all gain in the longer run are not to be hindered by politics at the expense of market freedom and rising standards of living.

For Philip Wicksteed, economics was not an analysis of a particular side of human activity but was the defining characteristic of all human activity where alternatives need to be weighed and choices made. In Wicksteed's analysis, people act and choose in a world of change, time, and uncertainty. Nowhere was this seen more than in his theory of the market process. Exchanges occur in sequential patterns through time. Expectations have to be formed on the part of entrepreneurs and sellers as to the volume and pricing of goods desired by consumers and the resources through which they may be manufactured. Errors and miscalculations can result in trades at incorrect, or "false," prices. Corrections and revisions of those prices send ripples of reevaluation throughout the production process.

In open and competitive markets, these adaptions and the resulting coordination of all that people can and may be doing freely and "spontaneously" is both possible and superior to any attempts to directly plan or regulate the market process through government intervention.

Wicksteed wished that everyone could just take the time to reflect on how amazing the market process is in placing at everyone's disposal the knowledge and abilities of multitudes of people that any one individual can and will never know, but whose market-guided cooperation makes all of our lives so much better:

It might be a valuable exercise for anyone who is "earning a living" to attempt to go through a few hours or even a few minutes of his daily life and consider all the exchangeable things which he requires as they pass, and the network of cooperation, extending all over the globe, by which the clothes he put on, the food he eats, the book containing the poems or expounding the science that he is studying, or the pen, ink, and paper with which he writes a letter, a poem, or an appeal, have been placed at his service, by persons for the furtherance of whose purpose in life he has not exercised any one of his faculties or powers.

Such an attempt would help us to realize the vast system of organized cooperation between persons who have no knowledge of each other's existence, no concern in each other's affairs, and no direct power of furthering each other's purposes, by which the most ordinary processes of life are carried on. By the organization of industrial society, we can secure the cooperation of countless individuals of whom we know nothing, in directing the resources of the world toward objects in which we have no interest. And the nexus that thus unites and organizes us is the [open market] business nexus.

But for its continuing success, it is necessary to have constant vigilance against those who would want to use political means for their short-run interests at the overall longer-run benefits and betterment of everyone, Wicksteed warned. This is a task we have still not yet successfully mastered.

This article was originally published in the April 2024 edition of Future of Freedom.

Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).