Umberto Eco juxtaposes the following quotes as illustrative of the two poles of theories of interpretation:
“What does the fish remind you of?”
“Other fish.”
“And what do other fish remind you of?”
“Other fish.”
(Catch-22)
Hamlet: Do you see yonder cloud that’s almost in the shape of a camel?
Polonius: By th’ mass, and ‘tis like a camel indeed.
Hamlet: Methinks it is like a weasel.
Polonius: It is back’d like a weasel.
Hamlet: Or like a whale?
Polonius: Very like a whale.
(Hamlet)
These poles, which Eco refers to as examples of “epistemological fanaticism,” are relevant to the question of how we may validly interpret prices. But we should begin by clearing the floor of the terminological debris scattered about it. Do prices “communicate”? The use of “communicate” in this discussion only serves to make things cloudy. Humans communicate, perhaps animals communicate (one’s answer will depend on one’s stance on zoosemiotics), perhaps computers communicate (the answer depending on one’s Strong AI position).
Prices surely do not communicate! They do not even communicate what the interpretive minimalists say they do, the fact that such-and-such an exchange took place. No, they just sit there -- in the Wall Street Journal, in a computer, in my mind, etc. To even arrive at the minimalist conclusion, prices must be interpreted. The discussion of prices and knowledge can be more usefully framed as a discussion of the pragmatic aspects of interpreting prices. The question to answer here is an empirical question.
Prices are semion, or signs. Anyone who speaks about prices and knowledge, pro or con, must always mean a price as sign: a report in a paper, a flashing on a ticker screen, a memory lingering in the mind of a participant to an exchange. A price that existed as only a momentary ratio in a transaction and then vanished forever could not be of any interest to anyone, and we could not even have this discussion over such a price. (In fact, such a discussion would mean that it hadn’t so vanished!) Our debate is about prices as signs, as reports about past exchanges, where -- aliquid stat pro aliquo -- that which is there stands for that which is not. Our question then is which interpretation(s) of these signs are valid, i.e., which interpretations can be used as an effective means towards a chosen end, and which mere fancy.
On the one hand, as mentioned above, we have those who regard prices as signs of nothing more than the fact that such-and-such exchange took place. Prices are signs of a particular historical event that yield no interpretation relevant to any other events, particularly, no interpretation relevant to any future events. This style of interpretation is even more limited than Yosarian’s from Catch-22: the fish doesn’t even remind us of other fish, but only of itself. This view is tenable, but it will lead many of those who hold it somewhere they do not wish to go.
At the other extreme of a semiotics of prices, we have neoclassical general equilibrium theory. Here, every price is a sign of the entire rest of the economy, all related by the elegant mathematical apparatus of neoclassical price theory. In general equilibrium theory we can, upon seeing a price, judge that it precisely represents the average utility gained by possessing and lost by giving up that object. Like Hamlet gazing at a cloud, we can move backward and forward from that price to the factors that produced it and the things it will produce, and out from there through all of the prices of the catallaxy, since all entrepreneurs have all relevant information about producing that object, and all of them have perfectly estimated changes in future demand and supply.
The problems with modeling the real economy as if it were an evenly rotating economy are well known to Austrians, and we needn’t revisit them here. It is the other extreme of interpretation that seems to attract some support among us, and it is that pole which is worth addressing.
The question before us then becomes: Are their valid interpretive moves that begin with a price and end somewhere other than the conclusion that somebody and somebody else exchanged X for Y?
By valid I mean pragmatically useful. An interpretation is a means, and we should judge it by whether it is suitable to achieving the end sought. If I interpret a chair as a vaporous visitation from the spiritual world, I will find myself with any number of bumps and bruises from the times that this interpretation failed to yield pragmatically useful results. If I interpret it as a solid object capable of supporting a human body, I will find comfort and rest by sitting on it. (See, for instance, Mises in Human Acton on the pragmatic aspect of interpreting our fellow humans as conscious beings like ourselves versus interpreting them as automatons, or Hoppe’s statement that “knowledge is a means for bringing about preferences.”)
One objection to non-minimalist price interpretations I have seen is that all such interpretations rely on things beside the price alone. We must dismiss this objection as tendentious, since all interpretations of anything rely upon a context of interpretation. If we admit this argument, we would have to say that when someone passes me on the street and says “Hello,” we can’t validly interpret this as anything other than some sounds coming from a shape. (Of course, even the notions of “sounds” and “shapes” imply a context, but the very fact that I must assume some minimal context illustrates my point.) “Hello” must be interpreted in the context of a knowledge of what humans are, the idea of speech, the notion of a greeting, the English language, the body language of the greeter, the physical setting, and so on. None of these things are given, as anyone who has raised children from birth and watched the slow growth of their conception of such a context can attest to.
So yes, if I am walking down the street and find a scrap of paper with “$4.19” on it, there is very little I can make of it. But this is rarely the situation we are in when we come to interpret a price, and is clearly not the type of situation someone like F.A. Hayek was envisioning when he wrote of prices and knowledge.
The question we should ask is: In a particular context, can prices be usefully interpreted as signs of anything other than the mere fact of exchange? I think that from within the Menger-Mises tradition we must answer “Yes.” To see why, let us direct our attention to two articles appearing in the same issue of the RAE (10.1).
The first of them is Herbener’s “The Pareto Rule and Welfare Economics.” Here, Herbener says:
…Mises went on to explain how ordinal utility can be the basis for socially-meaningful cardinal comparisons of values. Money is a common denominator in which ordinal preferences can be expressed… The price for the existing stock of each consumer good reflects, but is not and cannot be equal to, the subjective value of its marginal unit… [Cannot be equal because exchanges take place at points of inequality of valuation, and we are not in an evenly rotating economy, where this inequality would become vanishingly small.] The price for each factor is imputed to it by entrepreneurial demands to rent the factor, according to the objective value of the amount of the consumer good that the factor produces at the margin… This price will also reflect the subjective opportunity cost factor owners place on the marginal unit of the factor…
Already, we are seeing a wealth of valid interpretations that employ the prices of the past. But on what basis are we justified in using these interpretations in the planning of future action? Hoppe gives us the answer in “On Certainty and Uncertainty, Or: How Rational Can Our Expectations Be?”
Hoppe is addressing Lachmann’s notion of the “kaleidic society,” which is precisely a world in which the facts about past human actions give us no empirical clue as to future actions. Hoppe notes that Lachmann downplayed: ”…Mises and his idea of a logic of action,” by contending “precisely by virtue of the logical necessity inherent in it, it is impotent to engender empirical generalizations.”
In response to Lachmann, Hoppe points out that we do interpret people as if they have a character, not immutable but also not subject to violent, random variation, and that, empirically speaking, this interpretation is highly successful. We see society as “patterned social change.”
Hoppe says:
…experience is invariably past experience, that of past events. It cannot reveal whether or not the facts and relationships of the past will also hold in the future. We cannot but assume this will be the case, by and large. [Emhasis mine.]
Since prices are a social phenomenon, they also exhibit “patterned social change.” It is our historical understanding (verstehen) of these price patterns that allows us to employ them in economic calculation. Obviously, without an actual history of prices, we could not have developed this understanding.
This is why Mises (HA) says we would “pay dearly” if all knowledge of the prices of the past were to disappear tomorrow. The notion of patterned social change is also crucial to the Menger-Mises regression theorem. We have a notion of the value of money today because we had a notion of it yesterday.
Empirically speaking, we do not find ourselves in the world of general equilibrium theory. Our ignorance is not merely quantifiable risk, but turns on the more fundamental uncertainty of what we will learn tomorrow. This is why we see no million-year contracts and find no people hedging pork belly futures with comic-book collections.
On the other hand, we are not in the radically uncertain world of Lachmann, either. We can follow patterns of prices and come to understand something of their likely future direction. In tightly-related markets, we may not need to have any expectations of future prices at all, beyond believing the market we are in will continue to function. Derivative trading is an example of such a market, where constant price relationships are defined by contract. Many times each day on the options markets, opportunities known as reversals and conversions appear, where only the current quotes out on the market is relevant to one’s decision to act or not, and there is absolutely no need to formulate expectations about future prices. (They are a pure arbitrage opportunity, and it would shock any “rational markets” adherent to see how often they appear.
I work with a group of extremely successful traders. One of the things they do religiously, throughout the day, is watch price tickers. If there is a five second delay between a quote on the floor and its arrival at their desk, it is considered intolerable. They spend millions of dollars a year to prevent this from happening. If the prices of the past were irrelevant to their future actions, why on the world would they be so concerned with them?
Economic calculation depends on the fact that prices are the only numerical approximation of valuation available, and that we may expect some historical continuity from our fellow men. If prices were the completely discrete entities that the semiotically-minimalist price theorists seem to contend they are, than of what use would they be for calculation? The socialist commonwealth could just as easily arbitrarily slap numbers onto goods and then proceed to “calculate” using those numbers.
Market prices, if divorced from valuation and any historical connection to other prices, would be no-less-arbitrary inputs into any calculation of past or future profits. (Past profits because we calculate them as a guide to future action, and with past prices radically unrelated to future prices, the fact that I made good money trading X for Y yesterday says literally nothing about whether I can do so today. I can total up yesterday’s gambling profits, but they are no guide as to today’s outcome.)
If I discover two chemical processes, one for turning lead into gold, and another for turning gold into pizza dough, it is a epistemologically extreme position to contend that the historical prices of these goods give me no hint as to which of these processes is worth exploring in more depth. We will have entered the kaleidoscopic world of Lachmann, with its “haphazardous character of entrepreneurial prediction,” consisting of animal spirits, hunches, and guesswork. Planning for the future further out than one’s next meal will be pointless.
The other epistemological extreme, as pointed out above, is the neoclassical world of perfect knowledge. In this world, nothing relevant is unknown, and there is literally no place for human action. As Mises says (HA), the driving force of the evenly rotating economy is a deus ex machina. Faced with these positions, we must side with Hoppe: “Only a middle-of-the-road position between the two extremes of perfect knowledge and perfect ignorance is consistently defensible.”
I think that Misesians can appreciate Hayek’s work on prices as an exploration of the notion of “patterned social change” in the price constellation of the catallaxy. Beginning his career, Hayek found himself in the brilliant light of a great economist, who was elucidating a dazzling economic system. Capable of creative economic work, Hayek sought out areas he felt had been left in the shadows.
Hayek and Mises held differing views on how the result related to Mises’ system. Hayek thought that he was making discoveries outside the scope of the Misesian system. Mises thought that Hayek was illuminating aspects of Mises’ system that Mises had not explored in depth. This is captured by their differing views of the significance of “Economics and Knowledge,” where Hayek thought he was arguing against Mises, while Mises praised the work “as if he had not been aware that it was a criticism of his own views.”
Hayek’s efforts to break new ground are laudatory, and his accomplishments significant. If, in fact, at times Hayek strove too hard to differentiate himself from Mises, I think he deserves our tolerance. After all, we are all creatures “driven and derided by vanity.”
