Economic Theory

Price is the only language that everyone speaks (Part 3)

Continued from Part 2


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. Thus, if I go into a bank I know that if I sit down with a bank manager he will be able (and is expecting) to offer information to me for applying for a home or car loan or opening a new account. If I make an appointment with a dermatologist, I know he will be able (and he expects) to do an examination and offer a diagnosis of a skin problem I may have.

Our personal “ideal types” of each other

Alfred Schutz also highlighted that such “ideal types” of people are along a spectrum. At one extreme are those most general characteristics of all human action, which is the basis for Ludwig von Mises’s formulation of a general logic of choice and action, “praxeology.” In the middle of this spectrum of ideal types are those just explained of “typical” roles and specialised activities often routinised in the division of labour.

And at the other end of this spectrum is what Schutz called the “personal ideal type.” This is not the general characteristics discoverable in any human action or the specialised “types” of actions expected from any individual performing a particular role. Instead, these are the qualities or characteristics “typifying” a particular, distinct individual. This is our “mental image” not of all men, or some men performing specialised tasks, but of this specific human being.

I explain to my students that when they entered one of my classrooms for the first time, what could they anticipate about me? Certainly, that I am a human being and they could expect that I would demonstrate those qualities known to be true about any other person. But they also had an image in their mind, an “ideal type,” of a “college professor,” and a college professor who (hopefully!) knows what he is talking about in an introductory economics class.

But as they sit in the class and interact with me they come to formulate in their minds an image, an “ideal type,” not of all men, or some men in the division of labour, but of me.

We all develop and use these “personal ideal types” of others, and on the basis of which we form expectations when we interact with these specific individuals. If you laugh at Joe’s jokes, he is likely to buy you a round of drinks. If you mention sex to Bob, he usually acts embarrassed and becomes quiet. If you mention to Sally that “a woman’s place is in the kitchen,” you’re going to get a “lecture” on the place of women in modern society. If you criticise socialized medicine in Europe, George is likely to go into a rant on the “evils” of the profit motive.

It should be evident that many, if not most, of the ideal types discussed by Alfred Schutz overlap with that category of tacit or inarticulate knowledge. In our interactions with others, we all form these types of mental images of those with whom we associate in various settings. But it is something we do “tacitly,” that is, without consciously thinking about it very much, if at all.

And while we often know “how to interact” with someone based on our “ideal type” of them in our mind, it is not always easy to express in words to someone else how and why we see these characteristics in that other person, or how and why we “just know” most of the time that if we do or say “X” around that person we are fairly confident that it will bring about response “Y.”

Ludwig von Mises and the “thymology” of market expectations

Ludwig von Mises came to call this method of understanding and interpreting others through ideal types as the subject matter of “thymology,” the study of how individuals form images of others in their minds to generate expectations for purposes of interpersonal understanding, planning, and coordinating one’s own actions with those of others.

In Mises’s theory of the market process, a central actor is an entrepreneur. The entrepreneur must make informed judgments, and in doing so, Mises said, he must form expectations of individuals and groups on both the demand- and supply-sides of the market. The knowledge on the basis of which he does so is built up from the experiences he has personally had, or heard about, or learned from others in some manner concerning the likely actions and reactions of those with whom he interacts in the marketplace, and whose future actions he must anticipate the best he can.

Ideal types, Mises argued, enable the acting man to be what he called “the historian of the future.” Forming composite pictures of individuals from their past actions in terms of characteristics, qualities, motives, and meanings, “ideal types” enable an individual decision-maker to project himself into the future, imagine that another individual or group are confronted with a particular event or change in their circumstance, and then ask the question, “What responses would these individuals manifest in this situation?” It enables the formation of expectations concerning patterns or “types” of response for prediction of a wide variety of circumstances. No matter how imperfect, it introduces an additional source of knowledge for coordination of plans in the complex social setting of the market.

Indeed, it is the “ideal types” of these various forms within the wider social structure of intersubjective meanings, that allows entrepreneurs and other market participants to evaluate the meaning behind competitive prices and changes in them so as to form expectations of what those prices are “saying.”

Mises pointed out that many might consider this a rather unsatisfactory method of anticipating possible social actions in comparison to the claims of more detailed and determinate predictive power in the natural sciences. But he argued that given the unique qualities of human action in the social world, this, in fact, might be the best that can be hoped for, given the intentional and choice-based reality of human conduct.

Ideal types, expectations, and the free society

One other aspect of this social institution of “ideal types” for interpersonal plan coordination is that it is part of the wider “spontaneous order” of the social system. That is, the social structures of intersubjective meaning, the “ideal types” of actors and actions in various face-to-face and “role-playing” tasks in the division of labour, and the formation of expectations by people in their respective locations within the market order emerge out of the actions and interactions of multitudes of people in various societal settings at a moment and over time.

They are part of the societal “glue” for coherence, cooperation, and coordination, with degrees of complexity and adaptability that defies the very notion of intentional planning by political actors asserting the need for and their ability to impose “order” on communities of human beings.

Appreciation for the nature, workings, and importance of expectations formation in the marketplace of the free society demonstrates once more the superiority of the classical liberal system of individual liberty, free markets, and limited government, and the absurdity of the pretense of knowledge claimed by political paternalists and social engineers.


This article was first published by the Foundation for Free Enterprise (FEE).

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