The Review of Austrian Economics, 17:4, 407–446, 2004.
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Of Contracts and the Katallaxy: Measuring
the Extent of the Market, 1919–1939
JAY COCHRAN, III email@example.com
Research Fellow in Regulatory Studies, Mercatus Center, George Mason University, 3301 N. Fairfax Drive, Fourth
Floor, Arlington, VA 22201, USA
Abstract. This paper develops a view of the extent of the market based on the katallactic notions advanced by
Mises, Hayek, Buchanan, and others. This contractarian approach to the katallactic process is used to analyze
one of the most studied but still controversial periods of U.S. economic history, the interwar years from 1919 to
1939. The pictures that emerge from a katallactic analysis of the interwar years are quite different from those that
emerge, for example, from considerations of national income and product. The katallactic approach reveals, for
example, that a much larger and more dynamic structure of production and ﬁnancial exchanges sits behind the
relatively sanguine fa¸cade of ﬁnal consumption during this turbulent period.
KeyWords: great depression, katallactics, measurement
JEL classiﬁcation: E10, N12.
As it is the power of exchanging that gives occasion to the division of labour, so the
extent of this division must always be limited by the extent of that power, or, in other
words, by the extent of the market.
Smith’s observation is a vein rich in economic content. Young (1928), Stigler (1951),
Buchanan and Yoon (1994), Levy (1999), and others have successfully mined the Smithian
vein, drawing a wealth of important inferences from its implications.
This paper develops a
view of the extent of the market based on the katallactic
notions advanced by Mises [1966
(1949)], Hayek (1976), Buchanan (1988), and before them, Whately [1966 (1832)]. Simply
put, the katallaxy is the nexus of voluntary exchanges that emerges in a division of labor
society based on private ownership of the means of production.
As such, the katallactic
approach necessarily places primacy on agreement and is therefore sympathetic with the
contractarian analytical paradigm. Moreover, since the contractarian paradigm proceeds
from a voluntary foundation, a party to a prospective exchange may agree to a proposed set
of exchange terms or not, and if the terms are disagreeable, may exercise an exit option by
vacating the proposed exchange, or she may voice her disagreement and attempt to change
the contract terms through persuasion.