Economic Theory

Price is the only language that everyone speaks (Part 2)

Continued from Part 1.


But if not under the commanding instructions of a central planner or government regulator, how will people know how, when, and for what to apply their unique bits of knowledge, which cumulatively add up to all “the knowledge in the world,” but resides in no one mind or group of minds?

Worldwide Knowledge and the Price System

Hayek’s answer was the competitive pricing system of a free market. It is not necessary for everyone to know what all the others in society possess as their unique knowledge. It is sufficient if there is an institutional mechanism through which people can convey a minimum required amount of information to others, so producers and suppliers may know what products consumers want and how intensely they desire them.

Likewise, it is not necessary for every private enterpriser to know all the other businessmen who have a competing use for all the different types of means of production to make up their minds about how best to manufacture a product that minimises the cost outlays to maximise the profits that might be earnable.

Consumers and producers “speak” to each other through the prices that are offered on the market. This tells multitudes of suppliers what products are wanted by consumers and what price might be paid for them. The prices offered by rival enterprisers and accepted by labour and resource owners looking for employment tell each businessman the relative costs to be paid to hire or purchase various combinations of inputs relative to the anticipated selling price.

Thus, businessmen and workers and resource owners thousands of miles away from each other on other sides of the world can make reasonable and informed decisions about how to apply their own specialised forms of knowledge in ways that they hope profitably improve their own circumstances by satisfying the wants and desires of many others; others who they will never meet or personally know and who may live far away or around the corner, nor do they need to.

Knowledge Needed for Forming Expectations

But there is a fourth type of knowledge that is equally essential for social and market participants to successfully coordinate all they do that is interdependent with the actions of others. Hayek insightfully explained the central role of market-based prices for bringing together the dispersed knowledge of the world to help bring into balance all that is done by those buying and selling in the social system of division of labour.

But when prices change, or even stay the same, what are they telling the relevant market participants about what it suggests will be the situation tomorrow?

Prices need to be interpreted to successfully form expectations about the actions and reactions of others in the marketplace in deciding how best to use one’s own specialised knowledge in effective ways for the achievement of one’s own ends.

An understanding of how people actually form many of the expectations that guide and direct their interactions with others was developed in the writings of the famous German sociologist Max Weber (1864-1920) in his monumental work Economy and Society (1921), in the works of the Austrian sociologist Alfred Schutz (1899-1959) especially in The Phenomenology of the Social World (1932) and in a variety of his essays written in the 1950s, and in the works of Ludwig von Mises, most particularly in Human Action: A Treatise on Economics (1949, 3rd revised ed., 1966) and Theory and History (1957).

Max Weber on Meaningful Action and Ideal Types

Weber argued that what makes “human action” distinct is that it is conscious conduct to which an individual assigns a “subjective” (a personal) meaning, and that the meaning defines what kind of action the individual is undertaking and with what end in mind. But no man is an island; he interacts and associates with others. As a result, Weber said, “social action” is conscious human conduct in which individuals “orient” their actions intentionally toward one another.

For instance, Weber argued that what makes the physical transfer of two objects between two individuals an act of “free exchange,” as opposed to being some compulsory transfer, is how the transactors view their own intentions and that of the other with whom they are interacting. Weber’s primary focus was developing various interpretive tools of analysis for the study of history.

Thus, he argued that a central tool of history and sociology is the “ideal type.” This was meant to be a composite image of a “type” of an historical person or activity. Thus, one might construct an image, or “mental picture,” of the “typical” characteristics of a Latin American military dictator, or the qualities and characteristics of the “typical” Medieval “lord of the manor.” Or it might reflect the “typical” aspects and forms of development of the “typical” Western European city in the modern era.

Alfred Schutz and the world of Intersubjective Meanings

But it was the Austrian sociologist Alfred Schutz, who had studied at the University of Vienna and who was part of Ludwig von Mises’s circle of scholars in Vienna of the 1920s and early 1930s, who took Weber’s ideas and combined them with aspects of Austrian Economics to develop a theory of how expectations are formed and used by human actors in society.

While we may reasonably speak about the general qualities discoverable in all human conduct – what Mises named “praxeology,” the logic of human action – Schutz emphasized that filling in the actual “content” of that general logic of action comes from the social setting into which people are born and within which they interact with others.

We are born into an existing social world, and we learn a language, customs, traditions, rules of conduct, etc., by growing up in a family, around friends, within a society of other human actors from whom we absorb the interpersonal structures of meaning that define and “objectify” the meaning of actions and objects.

For instance, this object is a “book” and this other object is a “Halloween mask.” This object is a “knife” for carving meat, while another sharp object is a “surgeon’s scalpel” for performing a “medical operation.” This person’s “kneeling” before a woman is a “proposal of marriage,” while this other person’s “kneeling” before a “royal queen” is being “knighted” for acts of “valour” or “heroism.”

The division of labour brings about not only a specialisation of tasks but particular forms of standardised conduct in performing them in various social and market settings, Schutz explained.  Thus, we come to expect that anyone understood as performing a certain task in a certain way, and, perhaps, dressed in a specific manner is a “policeman,” or “fireman,” or airplane “steward,” or “bank manager,” or “server” at a restaurant, or “mailman” on their delivery rounds, or . . .

Regardless of which individual is “playing this role” in society, we anticipate each will act toward any others with whom they interact in a generally prescribed way. Likewise, that person expects anyone interacting with them to act and interact in expected ways.

The mailman does not expect any of us to ask him what may be the cause of a heart palpitation. Nor will the fireman expect that a person whose house is on fire is going to ask him what is on the menu for lunch in business class on a flight they are scheduled to be on later in the week. These “ideal typifications” of tasks and routinised conduct in various specialised roles in the division of labour provide essential everyday points of interpersonal orientation and expectations for planning one’s own actions.


To be continued…

This article was first published by the Foundation for Economic Education (FEE).

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