Catallactics is the praxeological theory of the way the free market system reaches exchange ratios and prices.
It aims to analyse all actions based on monetary calculation and trace the formation of prices back to the point where an agent makes his or her choices. It explains prices as they are and not as they should be. The laws of catallactics are not value judgments, but aim to be exact, objective and of universal validity.
It was first used extensively by the Austrian economist Ludwig von Mises.
Friedrich Hayek used the term Catallaxy to describe as "the order brought about by the mutual adjustment of many individual economies in a market."[1] He was unhappy with the usage of the word "economy", feeling that the Greek root of the word - which translates as "household management" - implied that economic agents in a market economy possessed shared goals. Hayek derived the word "Catallaxy" (Hayek's suggested Greek construction would be rendered καταλλ?ξια) from the Greek verb katallasso (καταλλ?σσω) which meant not only "to exchange" but also "to admit in the community" and "to change from enemy into friend."[2]
According to Mises (Human Action, page 3) it was Richard Whately who coined the term "catallactics". In effect, in Whately's book Introductory Lectures on Political Economy, published in 1831, it can be read:
"It is with a view to put you on your guard against prejudices thus created, (and you will meet probably with many instances of persons influenced by them,) that I have stated my objections to the name of Political-Economy. It is now, I conceive, too late to think of changing it. A. Smith, indeed, has designated his work a treatise on the "Wealth of Nations;" but this supplies a name only for the subject-matter, not for the science itself. The name I should have preferred as the most descriptive, and on the whole least objectionable, is that of CATALLACTICS, or the "Science of Exchanges.""
Also, in a footnote to these sentences, he continues:
"It is perhaps hardly necessary to observe, that I do not pretend to have classical authority for this use of the word Catallactics; nor do I deem it necessary to make any apology for using it without such authority. It would be thought, I conceive, an absurd pedantry to find fault with such words as "thermometer," "telescope," "pneumatics," "hydraulics," "geology," &c. on the ground that classical Greek writers have not employed them, or have taken them in a different sense. In the present instance, however, I am not sure that, if Aristotle had had occasion to express my meaning, he would not have used the very same word. In fact I may say he has used another part of the same verb in the sense of "exchanging;" (for the Verbals in are, to all practical purposes, to be regarded as parts of the verbs they are formed from) in the third book of the Nicom. Ethics he speaks of men who hold their lives so cheap, that they risked them in exchange for the most trifling gain []. The employment of this and kindred words in the sense of "reconcilement," is evidently secondary, reconciliation being commonly effected by a compensation; something accepted as an equivalent for loss or injury."
It has also been cited that Whately first coined the term in commentary during his Oxford lectures. [3]
