Wednesday, January 21, 2015

Economic Action: Subjectivity, Value, and the Price System

Unlike in other fields of study, in economics we do not study objective reality. We study agents functioning subjectively within a given objective reality. As Kant argued in his Critique of Pure Reason, “Let us then make the experiment whether we may not be more successful in metaphysics, if we assume that the objects must conform to our cognition (13).” Whether in search of a metaphysic, or a daily meal, humans do not experience the world as it actually is. We interpret it through the black box of cognition. The manner in which an agent employs reason will manifests innumerable issues of interpretation of the world and its objects that the agent confronts daily. It is only by interpretation of reality, no matter how imperfect that interpretation, that agents can act with expectation of influencing that reality.
So we arrive at the subject of economics: man in all his fallibility. The amazing fact is that, even within mundane limitations of cognition, humans are able to extract enough information to form reasonably accurate expectations of the future. These expectations, in the least, allow them to survive, and when they are well formed, allow persons and the communities they form to prosper. How is it that, in a world of over 7 billion conscious actors, disorder is not the primary result? Why should we expect an orderly social economy to emerge?
Here, we must seek the motivations of men and women in their most general form: means and ends. Humans, perceive the world in its present state. They choose actions based upon their interpretation of the data of the world. Action is chosen with expectation of attaining some end state. Whether this state is to appear immediately, or it is to arrive at some point in the future is left to the discretion of the acting agent. Consider a husband he seeks to please his wife. He might plan a surprise dinner in effort to romance his wife. The expectation being that he and she will feel closer to one another than if the dinner was not prepared and enjoyed together.
Of course, the creation and implementation of a plan do not guarantee any degree of success. The husband mentioned above might be too selfish to plan such an event. Or his wife might not like romantic dinners. Beforehand, and the husband will employ his knowledge so that future actions pleases his wife. Ex ante, a plan is made. Only ex post – after the fact – can the husband judge whether or not he took correct action. If he is not pleased the result of the dinner, he can adjust his actions in the future. Still, this process of trial and error does not guarantee that the husband will correct his actions. If he is unable to please his wife, whether for reason of her being unpleasable or him being incompetent, she may elect to leave him, resulting in the ultimate failure if his goal is for her to be pleased with the relationship.
In the above example, a few descriptive terms will help to convey the point. The husband seeks an end which we identify as a good. For the sake of exposition, let’s say that he values his wife’s companionship. Or that he places a high degree of importance on maintaining a pleasant, loving relationship with his wife where both partners feel assured of each other’s passion and commitment. This thing, no matter how intangible, is a good. In its final state of being experienced, it is a good of the first order. The husband must find means to secure this good. The dinner itself, if viewed as a means to that end, is a good of higher order. Of course, one might also consider the dinner as part of the end, in which case we can abstract away from it and call the plan for dinner a good of higher order. Planning the dinner is itself a good because the husband expects that it will help him to achieve his desired end state. From this light, we can see that the dinner acquires value that is derived from the husband’s desire to be part of a fulfilling relationship, his ultimate end.
Value, always and everywhere, is an outgrowth of human desire. If a woman desires some object or end, she values it. In the tumult of desire, something must often be sacrificed in order for a particular end to be achieved. That thing sacrificed in exchange for the desired end state is the price paid for the end state. The price paid is not to be confused with the value of the object. Ideally, a woman exchanges an object that she values less than her desired end. When this is done successfully, she has attained a profit. The state achieved is valued more greatly than the state that was sacrificed. This does not always have to be the case. Again, the discrepancy between ex ante and ex post arises. The intended end state is not always the realized end state. It is possible that the state arrived at is less pleasant for the agent than expected. In such a case, the profit is smaller than expected. If the state is perceived as being worse than the previous state, this is considered a loss. Notice, that this definition is entirely subjective. It is possible that the pessimist finds himself facing incessant loss. It is not for the economist to argue that the pessimist is perceiving incorrectly and has actually earned a profit. Welfare improvement, like value, exists in the mind of the agent with respect to her reality.
Agent valuations, by the actions of those agents, eventually lead to something approaching market prices. An individual price is what an agent gives up for a transaction. Over time, prices tend to converge toward a narrow range of prices (Gintis 2005; Axtell and Epstein 1996). These prices reflect scarcities perceived within the economic system by at least some agents. Three situations are possible. 1) The available quantity of a good or service are insufficient to meet the quantity demanded at current prices, 2) the available quantity of a good or service are exactly equal to the quantity demanded at given prices, and 3) the available quantity of a good or service is greater than the quantity demanded at given prices. In the first case, the narrow range of prices will tend to increase. Otherwise, suppliers will face a situation where they cannot meet all consumer demands at the given price. In the second case, the corridor of prices will tend not to change. Finally, in the third situation, suppliers will find themselves with excess supplies of goods. In order to alleviate the excess, prices must tend to fall.
Consider the following example:

When there is a hurricane that causes power to fail and demand for ice rises, one of two things can happen. The stores and gas stations can raise the price of a bag of ice or else they will soon find that they have sold all available ice. Is the price increase bad? Economics cannot answer that question. However, if the price of ice is too high, the inventories at the store will fail to clear. On the other hand, if price rise sufficiently to prevent a shortage, ice will go to the most willing buyers. You might ask, doesn’t this only benefit the rich? While those who are relatively more wealthy can more easily purchase the ice than those who are not wealthy, anyone who is willing and able to pay the temporarily elevated price can assume ownership of the ice. The increase in price will encourage only those who need ice immediately to purchase it. Furthermore, an elevated price will encourage ice producers to send their ice to the stricken area, thus increasing the quantity available. The increase in the available quantity of ice will help alleviate what would otherwise be a shortage of ice.

In sum, humans experience the world subjectively. This subjective experience includes agent values and their evaluation of means toward attaining more highly valued end states. These values are reflected in the prices that agents pay in order to attain those end states. Within a competitive market, there is a tendency for prices to become constrained to a relatively narrow corridor. Thus, something approaching a market price of a good or service emerges and helps to coordinate resources toward uses valued relatively more highly.

*Late note: I draw the form of this lecture largely from Mises's "First Analysis of the Category of Action" in Human Action.

No comments:

Post a Comment