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REASON, SPEECH AND PRICES

I propose, first, that we use this insight to recast radically our understanding of the market-price system. That prices transmit information has long been known, and acknowledged by both friends and foes of the market economy. The significance of this fact, however, is not widely agreed upon. Do prices serve merely as parametric guidelines for the appropriate reconciliation of human preferences in the allocation of goods?12 Do they serve as indicators of opportunities for profit and loss, and thereby as a mechanism for plan coordination?13 While I am most sympathetic to the ‘plan coordination’ view of Mises, Hayek and Kirzner—principally because it leaves room for the real-world activity of competition —I believe that this view can be enriched by a return to the conception of price held by Adam Smith. The implications of this for our understanding of the spontaneous emergence of order—as well as for such topics as property rights, advertising, competition and other topics—should be made clear shortly.

In a famous and oft-quoted passage from The Wealth of Nations, Adam Smith identifies the source of the general opulence attendant upon the division of labour:

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility: the propensity to truck, barter, and exchange one thing for another.

(Smith 1978a [1776], p. 25)

The following paragraph, however, asks a much deeper question, which Smith puts off as inappropriate to the occasion:

Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire.

(Smith 1978a [1776], p. 25)

Had Smith taken the time to spell out some of his thinking on this subject in his book, it might have avoided many subsequent misunderstandings in the science of economics. That he had thought about the matter is clear, however, as his lecture of March 30, 1763 shows:

If we should enquire into the principle in the human mind on which this disposition of trucking is founded, it is clearly on the natural inclination every one has to persuade. The offering of a schilling, which to us appears to have so plain and simple a meaning, is in reality offering an argument to

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persuade one to do so and so as it is for his interest. Men always endeavour to persuade others to be of their opinion even when the matter is of no consequence to them.

(Smith 1978b [1896], p. 352)

That ‘reason and speech’ are necessary for the emergence of a market, and therefore for our adequate understanding of it, has been shown by the fact that animals do not trade (something which Smith noted). The mere presence of wellordered preferences, uncertainty, scarcity or property (in the form of possession, or of territoriality) is not sufficient to generate trade (see also Levy 1986). That is because trade requires reason and speech—i.e. persuasion.14 When we read in our translations of Aristotle that man is the rational animal, what is brought to our modern minds is rationality in the narrow sense of calculation, of fitting means to ends.15 The phrase used by Aristotle is zoon logon, which might better be translated as ‘the animal that talks’.

The market should be seen, then, not merely as a vast mechanism for the efficient exchange of information, as it is often considered by neoclassical economists, but as a forum for persuasion.16 It is not simply an informationcollating system. Persuasion should be an integral part of our understanding of the market process because the preferences of suppliers and consumers are not data—merely the Latin term for ‘givens’—to be fed into a vast calculating mechanism, thereby yielding a fully determinate result that was implicit in the initial conditions. Instead, the market exchange process is better illumined in the light cast by rhetoric, the art of persuasion (a constant and recurrent theme in Gadamer’s work). There was no ‘given’ demand for portable computers, digital laser-guided music systems, video games, pet rocks, or genetic engineering, to take but a few recent examples, before they were developed by inventor-entrepreneurs who ‘created’ (i.e. persuaded) the demand for them. In such cases, the end result could not have been implicit in the ‘initial’ conditions, which did not include any demand for these goods at all.

This approach has a number of implications. I will take the following in order:

(1) the charge that markets merely ‘generate’ wants to be fulfilled, and that it is therefore no great feat to argue that they are superior to other, coercive, arrangements at satisfying those wants; (2) the inseparability of ‘process’ and ‘order’; (3) the hypostatization of preferences and the problem of public goods;

(4) the informative and persuasive dimensions of advertising; and (5) the role of legitimate property rights in facilitating conversation and opening a ‘public place’ for social intercourse.

THE SATISFACTION OF GENERATED WANTS

It is often raised as an objection to the market system that it ‘creates’ needs and desires, ‘forcing’ us to want ever more ‘things’ and thereby making us (1) greedy and miserable, and (2) pawns of those who ‘create’ these needs. What this view

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fails to comprehend is that the process of civilization is, to a very large extent, precisely one of learning to ‘demand’ new things for which previous generations had no demand. As Hayek has remarked: ‘If the fact that people would not feel the need for something if it were not produced did prove that such products are of small value, all those highest products of human endeavour would be of small value’ (Hayek 1969, p. 315). That one acquires new desires through imitation of others, or through persuasion of one sort or another, should not be shocking.17 The implicit premise of those who consider this obvious fact of social interaction and interdependence to be a damnation of the market is the assumption that the producers of new goods, fashions, or ideas somehow ‘force’ us to buy their products or adopt their ideas. This ‘force’, however, is the ‘force’ of persuasion— an altogether different kind of ‘force’ from that of the guillotine or the gun.

In line with this complaint, David Ingram laments:

we find Gadamer arguing…that the rhetorical hegemony which corporate powers apparently exercise with respect to formation of public opinion is illusory because it is dialogically checked and countered by individual consumers whose scales of preference function as the decisive factor regulating production in the free market.

(Ingram 1985, p. 46)

This is, of course, taken as evidence of the naïvety of Gadamer’s philosophy.18 It would not be too strong to say that the emergence of civilization and the

emergence of the market are largely the same process (Hayek 1988, pp. 38–47). It is this element of learning, not in the neoclassical sense of moving along a learning function, but in the sense of true novelty and surprise, which is indispensable for understanding the emergence of the market economy (what Adam Smith called ‘The Great Society’) and of civilization itself. This kind of learning is what Gadamer has in mind when he describes the openness of a conversation; in a true conversation I must be open to being convinced by my interlocutor. A conversation, properly so called, has no determinate conclusion. Analogously, the market process has no determinate conclusion.

PROCESS AND ORDER

In standard economic analysis, equilibrium is conceived as a state of the market, a state toward which the market is ever tending. Setting aside for the moment the conceptual difficulties (if not impossibilities) in treating a dynamic process like the market solely in static terms, there is a philosophical problem which vitiates the entire project. As James Buchanan has stated the matter:

the ‘order’ of the market emerges only from the process of voluntary exchange among the participating individuals. The ‘order’ is, itself, defined as the outcome of the process that defines it. The ‘it’, the allocation-

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distribution result, does not, and cannot, exist independently of the trading process. Absent this process, there is and can be no ‘order’.

(Buchanan 1985, pp. 73–4)19

The act of choice is not the response of an automaton to stimuli, but a free and creative act, incorporating the moment of creative application so strongly stressed by Gadamer in his description of understanding (see Gadamer 1982, especially pp. 274–8).20

The understanding of the relationship between preference and choice can be better understood by recourse to Husserl’s distinction between two different kinds of ‘parts’: ‘pieces’ are potentially independent parts of a whole (like my finger, which may be separated from me) while ‘moments’ are non-independent parts of a whole (like the brightness of a surface) (see Husserl 1970, pp. 435–89). The neoclassical equilibrium approach hypostatizes preference; it ‘thingifies’ it, and in such a way that choice is altogether obliterated. As Buchanan further explains:

Individuals do not act so as to maximize utilities described in independently-existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choice), in terms of ‘as if’ functions that are maximized. But these ‘as if’ functions are themselves generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of the will…. In economics, even among many of those who remain strong advocates of market and market-like organization, the ‘efficiency’ that such market arrangements produce is independently conceptualized. Market arrangements then become ‘means’, which may or may not be relatively best. Until and unless this teleological element is fully exorcised from basic economic theory, economists are likely to remain confused and their discourse confusing.

(Buchanan 1985, pp. 73–4)

The order of the market cannot be achieved without the voluntary process of exchange among multiple property owners which constitutes the market. Nor, as the model of openness offered by Gadamer implies, can state officials ‘help’ the market through indicative planning, ‘targeted industrial policy’, ‘trends analysis’, or any of the various other schemes recently placed on the policy agenda, for the very reason that the future that the planners claim to divine does not exist, and will not exist until the choices which will constitute it are made. As Karl Popper has shown, it is logically incoherent to claim to predict the knowledge that we will have in the future: ‘For he who could so predict today by

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scientific means our discoveries of tomorrow could make them today; which would mean that there would be an end to the growth of knowledge’ (Popper 1972, p. 298).21

The implications for the attempts of technocratic planners to ‘plan’ the economy, or even to ‘direct’ it on a piecemeal basis, are clear. They cannot justify their use of coercion on the standard welfare-economics grounds typically offered for such intervention.

PUBLIC GOODS AND THE HYPOSTATIZATION OF

PREFERENCES

A similar difficulty faces the standard neoclassical account of public goods and their generation. As William Baumol puts the matter:

if we assume the role of government to be that of assisting the members of the community to attain their own aims with maximum efficiency, then in a case such as we have just considered [military preparedness] it becomes the task of government to override the decisions of the market. This is not because the government believes, on some peculiar ground, that the people are not competent to judge, but rather because the market fails to provide machinery for these decisions to be given effect.

(Baumol 1969, pp. 55–6, my italics)

This approach suffers from the very same problem discussed in the previous section of this chapter. It takes preferences (or even, more strongly, decisions) as existing independently of the choices made by market participants. After hypostatizing these preferences, it finds that the existence of transactions costs pre-empts their realization, requiring a shift to a level of ‘meta-choice’ in which we all agree to coerce each other.22 Under voluntary exchange conditions, all of us have incentives to under-reveal our ‘true’ preferences or decisions.

Not only is this a hypostatization of preferences, and therefore subject to the same cricitisms as those found above, but an argument for provision of certain goods is framed in terms that require those goods already to exist— an inconsistency that undercuts the entire research programme. Given the existence of a good, for which the marginal cost of making it available to one more person is zero (or less than the cost of exclusion at the margin), it is inefficient to expend resources to exclude non-puchasers. This begs the question. Since we live in a world where goods are not given, but have to be produced, the problem is how best to produce these goods. An argument for state provision that assumes that the goods are already produced is no argument at all.23

This is not to discount the problem of preference revelation altogether. It is a real problem. The point is to understand how people interact in realworld markets to overcome co-ordination problems, including the problem of coordinating their productive activities so as to satisfy their demand for goods often