Emergence and Subjectivist Economics

Posted on April 17, 2011 by


Marginal utility theory solved an old economic problem, explaining how prices were set in the market, replacing the labor theory of value.  The key insight was that value as reflected by price was set by the collective impact of millions of independent decisions by consumers participating in the market. Therefore price mirrored the collective values of all the people acting in the marketplace. This insight strengthened the role methodological individualism played in economic theory.

I think a complete integration of Hayek’s insight about markets as spontaneous orders into social theory preserves marginal utility as explanatory for price theory but otherwise gives us a significantly different perspective.  But my economics texts are gone, a victim of too many moves, so I toss this out to see what the economists reading this blog might have to say.

I think those who attribute market prices to individual values, all of which are subjective, confuse a systemic characteristic of an emergent system with the properties of elements within that system.  That is, subjectivism says a great deal about the market but not nearly as much, and nothing very insightful, about human beings and their values. The apparent radical subjectivism in human action is an artifact of how the market functions.  It is an emergent quality and cannot be accounted for through a reductionist analysis based on methodological individualism.

Insofar as something can be expressed in terms of property rights that can be sold, the market will develop a money price for it.  That price will change as demand and the costs of production change.  Importantly, every thing that can be sold on the market will be a multiple or fraction of money value compared to everything else that can be sold.  This is true for labor, food, pornography, pets, slaves, houses, and fine art.

Because all these things can be expressed in money terms, and if the property rights domain allows it, produced and sold, the idea that values are themselves subjective can appear to be true.  Since all commodities can be compared on a common scalar, every attempt to maximize money values can appear to be a rational calculation. I suspect “rational choice” theories are in part inspired by this observation: we each seek to maximize our utility in whatever terms we define it.

A clue to some deeper issues can be found in my reference to the market price for slaves.  Such a price existed in the antebellum South.  In market terms, slaves were treated like other capital goods, no different in how their price was arrived at than mules, carts, and cotton gins.  How much a slave was valued was a subjective preference akin to how much a hammer was valued.

Today normal people are agreed that the market price for slaves did not capture their value.  It only captured the money that had to be given up in order to acquire one.  In fact their value could not be expressed in terms of a market price.

In short, the market price is an artifact of the workings of the market and not an expression of value in human terms.  Something’s worth, and whether and to what extent it can be included within market relations are two entirely different issues.

I remember Ludwig von Mises and Murray Rothbard both argued that analytically means and ends can be kept separate.  Indeed they can.  But not in human action.  People do not usually think in those calculating terms during their day to day lives.  To the degree that they do not, the assumption that monetary incentives will increase performance may not be true.  And in fact there is plenty of research available to suggest that monetary incentives often do not improve performance. Significantly, the more closely work is physical and unskilled, the better money incentives appear to work.  The more brains are needed, the less the correlation.   There is even good evidence that increasing incentives in certain fields, such as banking, works in the opposite direction.  The results can be very serious, and in the opposite direction as traditional economic reasoning suggests.

Market Value is not Human Value

Market price expresses market value.  This price is an artifact of the market process as it expresses itself within a largely depersonalized context where no one knows anything about how a product is produced and it is presented with a money price: give up X and obtain Y.  The X that is given up can be given up to obtain other things.  Everything is presented as a means for obtaining other things, and everything is presented as obtainable through money, insofar as it can be provided as a property right.

This being so, two important implications shake out.  First, freely arrived at contracts mediated by market prices can be unjust if the property rights system is unjust.  There is nothing inherently just about prices in a free market.

Second, prices for all things in the market tend over time to reflect their utility and only their utility except for the final purchaser of a consumer good. The more impersonal the market becomes and the more things are produced as commodities, the more this is true.  To the degree something is only a thing, an object, and its price incorporates all costs in its provision, such that there are no all significant negative externalities, this process is a great boon to human well-being.

But to the degree that what is sold on the market is not simply a thing, not simply a means to an end, the market price will not reflect its value. That is, how something is valued by individuals will not be reflected in its price.  Its price will reflect its costs of production and effective demand for it once it is produced.  Price is an emergent property of the market process and need have no very strong correlation to any conception of value as human beings experience it.

Let me give an example. In hisThe Economy of the Earth  Mark Sagoff described a classic instance of this kind of thing.  The Disney Corp. had wanted to build a ski resort in a Sierra wilderness in California. The issue had garnered considerable attention within the state.  Sagoff, who taught in California, asked his students whether they would ski there if the resort were built.  Most said they would.  He then asked whether they thought the resort should be built.  None said yes.

For years I repeated a version of this thought experiment and always got the same general pattern of responses.  I always used local cases.  Sometimes it would be a possible highway along the Cascade crest in Washington.  Such a road would bring many lakes and other scenic attractions closer to hikers as well as giving drivers an extraordinarily beautiful drive.  It would be a toll road of unsurpassed beauty.  When I taught in New York state my example was a restaurant atop Mt. Marcy, the state’s highest point.  The restaurant would be reached by a beautiful gondola ride providing fantastic views, and as diners ate it would rotate, giving them an extraordinary dining experience.  Most of my students said they would drive the road or eat at the restaurant.  So did I.

These examples demonstrated that it was possible for a highly profitable enterprise to be built where the profits came from people who universally believed it should never have been built, and who would regard themselves as better off if it had not been.  No logical problem arose because the contrasting choices were made in very different contexts.  But given that capital could easily be amassed for a profitable road or restaurant, but would be very difficult to obtain from a vastly larger number of people who disapproved such a use and did not think of these values in monetary terms, organization costs guaranteed the market context was not neutral in enabling the initial choice to be made.

Freedom and the market

Subjectivism has been used to defend individual freedom of choice, but to the degree values are not subjective – matters of taste – subordinating them to impersonal processes that treat all values as divisible into other values denies important elements of what individuals really are, and so distort any social analysis based purely on that insight.

The common Austrian lack or interest in, or sympathy for issues of power relations in employment so long as the relations are formally “contractual” is a case in point.  This is not the case with all Austrian economists.  David Prychitko, Paul Lewis, and Rob Garnett have all addressed issues involved here.  But they seem to work in isolation. I think a better appreciation of the market as a spontaneous order would give their work more attention.

When values are expressed in terms of utility alone, the logic of organization subordinates everything else to maximizing utility by making whatever is valued instrumentally completely powerless vis-à-vis the valuer/owner.  Doing so makes it able to be used ever more “efficiently” as expressed in market terms.  When “labor” is separated from the worker, and becomes a commodity sold to a “boss” then the logic of the transaction requires the boss to seek as much control as is possible over the labor.  Any consideration of the laborer during the time of work is based on increasing labor’s utility for the boss, very much as if a slave owner fed a slave well because such slaves had greater strength and energy to devote to serving the master.  Because labor is not something that can be separated from the on going life of the worker, workers will have an interest in keeping as much of their  labor/life under their own control as possible, unlike when they sell an apple they grew to another.

My point is not that labor is slavery.  No. My point is that when we think of something only in terms of its utility, the logic that follows means that whoever buys the thing of utility should then be able to maximize the efficiency with which it can serve his or her goals.  This may fit a genuine object, but it does not fit a human being, and very arguably there are other things that can be bought and sold where this logic does not fit either.

Intersubjective comparisons of utility

The common Austrian claim that “interpersonal comparisons of utility cannot be made” is easily seen as wrong as soon as radical subjectivism as reflected in prices is seen as a systemic feature of the market order and not an attribute of individuals.  Every parent knows that such comparisons can in fact be made, and makes them continually.  This cannot be avoided while raising a child.

Good friends also do this all the time.  Ironically, more than a few of us are often more aware of what will be good for our friends under certain circumstances than of what will be good for us.  This does not mean that we should use coercion to enforce our awareness.  That is a entirely separate issue.  But it does mean that the claim we cannot make well grounded interpersonal comparisons of utility is false, and that human life in fact depends on our doing so.



To the degree that values are instrumental, the market vastly increases their usefulness.  Nothing exceeds it in this regard.  But to the degree that values are not instrumental the market’s relation to them becomes far more ambiguous, and can ever be destructive.

This little essay forms a part of the case I am making that the market as a whole is not the realm of human freedom, civil society is.  Part of the market falls within the realm of civil society, but not all of it.  I hope that those who argue the market as a whole is the realm of freedom will take the time to give me rebutting arguments.