Pete Boettke recently gave a talk about price theory. I love this bit about underlying variables. Listen 12:38-13:48.
The standard treatment of institutions as “rules of the game” is essentially static — it tells us what constraints are in place, but not why they persist, intensify, or dissolve. A more complete account requires treating shared objectives as the generative core of institutional life, and voluntary time-and-effort allocation as the price signal within the group that tells us how much those objectives are worth to members.
Consider: individuals do not sort into groups randomly, nor purely by material incentive. They sort by objective-fit — the degree to which a group’s collective purpose aligns with what they are trying to accomplish or become. This is praxeological in the strict Misesian sense: every hour volunteered into a church, a guild, a political movement, or a commons-governing body is a revealed preference for the objective-bundle that institution represents. Time is the least manipulable of resources — it cannot be borrowed against or subsidized — so voluntary time allocation is arguably the most honest signal we have of how individuals rank competing institutional commitments.
This has a direct and underappreciated implication for asset pricing. The assets governed by a group — whether land, reputational authority, epistemic legitimacy, or physical infrastructure — do not derive their value solely from their productive characteristics. They derive value from the depth of commitment surrounding them. An estate governed by a thriving, purpose-aligned community commands a premium not merely because it is productive, but because membership in its governing structure confers access to a bundle of shared objectives that individuals have already revealed they value highly. Conversely, when voluntary effort drains out of an institution — when members clock in but stop investing — the asset governed by that institution begins to reprice downward, even before any formal rule change occurs. The legitimacy discount precedes the market discount.
This reframes what Boettke calls the “underlying variables” in an important way. Property rights, norms, and enforcement capacity are not simply given features of the environment. They are continuously reproduced — or eroded — by the flow of voluntary commitment into and out of the objective-bundles we call institutions. The price system sits atop this layer, and price signals in the external market partially reflect the internal vitality of the groups that hold the relevant assets.
The sorting mechanism is therefore bidirectional. Individuals flow toward institutions whose objectives they share and whose shared assets are appreciating in legitimacy-value. As they do, their voluntary effort deepens the institution’s governance capacity, which further stabilizes and potentially raises the value of associated assets. The inverse dynamic — exit, reduced commitment, legitimacy decay — is equally self-reinforcing. This is not merely path dependence in North’s sense; it is a feedback loop between subjective valuation, voluntary action, and institutional asset pricing that operates continuously and below the threshold of formal rule change.
The practical upshot is that you can read the health of an institution — and anticipate repricing of its associated assets — by watching where voluntary effort is flowing, long before markets or formal governance structures register the shift.
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