This is an excerpt from my working paper which examines how contemporary economic realities challenge conventional price formation models. Traditional price theory, rooted in neoclassical equilibrium models, struggles to explain modern markets characterized by digital platforms, behavioral anomalies, and network effects. Rather than viewing prices solely as equilibrium outcomes, this section explores price as an information system and coordination mechanism shaped by institutional contexts and evolutionary market processes, proposing alternative approaches that better capture the dynamic nature of pricing in today’s economy.

III. Methodological Framework

A. Philosophical Methodology

This research engages with the critical realist tradition in economic philosophy (Lawson, 1997; Fleetwood, 2017) while incorporating elements of pragmatist inquiry (Dewey, 1938; Hodgson, 2004) to examine how social outcomes are intrinsically embedded within price mechanisms. By adopting this philosophical stance, the investigation transcends the positivists’ limitations that have dominated mainstream economic methodology and artificially separated social dimensions from market valuation processes.

Methodological Rationale and Research Design

The methodology employs a dual approach combining narrative explication and formal econometric analysis—a mixed-methods design that aligns with what Downward and Mearman (2007) term “critical triangulation.” This approach recognizes that economic phenomena exist in open systems characterized by complex causality that cannot be adequately captured through purely deductive or inductive methods alone.

Narrative methodologies in economics have been increasingly recognized for their capacity to reveal dimensions of economic reasoning that formal models often obscure (McCloskey, 1990; Morgan, 2012). As Akerlof and Snower (2016, p. 23) argue, “Narrative economics provides a framework for understanding how stories that may have little grounding in reality nevertheless influence economic behavior.” This research employs narrative not merely as illustration but as a methodological tool to uncover how social dimensions are intrinsically incorporated into economic decision-making rather than treated as external considerations.

The research design progresses through three methodological stages:

1. Narrative case analysis of micro-level economic decisions where social costs and benefits are endogenously incorporated into price mechanisms
2. Systematic examination of market-level pricing phenomena that demonstrate social valuation integration
3. Econometric analysis using hedonic pricing models to formalize and quantify the incorporation of purported “externalities” within price

This triangulated approach provides methodological robustness by examining the phenomenon across multiple scales and through complementary epistemological lenses.

Market Integration of Health and Productivity Benefits

Consider the small business owner contemplating providing flu vaccinations for all employees at a cost of $50 per person. This case exemplifies what Hodgson (2013) identifies as the “reconstitutive downward causation” between institutional structures and individual agency. Conventional economic framing, following Williamson’s (1979) transaction cost analysis, might characterize this as either addressing an externality or reducing monitoring costs. However, this framework artificially separates the transaction into discrete “economic” and “social” components.

Following Sen’s (1977) critique of the rational fool construct, we can observe that the business owner engages in a multi-dimensional calculation that already incorporates social costs and benefits into their decision-making process. The owner calculates that seasonal influenza typically results in X hours of lost labor annually, representing not only direct wage costs but also diminished productivity, potential transmission to other employees, and compromised service to customers.

This integration happens not through external regulatory mandates but through what Davis (2003, p. 974) terms the “socially embedded individual” making decisions that intrinsically incorporate both private and social dimensions. The methodological significance of this observation lies in recognizing that the rational economic actor has not abandoned self-interest but rather operates with what Etzioni (1988) terms “I & We” paradigm that transcends artificial boundaries between private and social benefits.

Consumer Valuation of Production Standards

The organic food market provides another methodologically significant case. When consumers willingly pay premium prices for organic products, conventional economics often characterizes this through what Vatn and Bromley (1997) identify as the “commodification of externalities.” However, this methodological framing imposes an artificial separation that does not reflect the actual valuation process.

Following Callon’s (1998) analysis of market devices and Zelizer’s (2012) work on valuation practices, we can recognize that consumers paying a surcharge for organic certification are expressing a valuation that inherently includes both private benefits and social benefits. The price differential between conventional and organic products represents what Anderson and Holcombe (2013) term “integrated social valuation”—a comprehensive valuation where social dimensions are not external to the market but constitute an intrinsic component of the value proposition itself.

Methodologically, this challenges the ontological separation between “market values” and “social values” that has dominated economic analysis since Pigou’s (1920) formulation of externality theory. The organic certification standard operates as what Star and Griesemer (1989) identify as a “boundary object” that allows coordination between different social worlds without requiring consensus about precise meanings—a methodological perspective that permits more nuanced understanding of how social values become embedded in price mechanisms.

Natural Integration of Health, Environmental, and Safety Considerations

These examples illustrate a methodological approach to understanding markets not as fundamentally incomplete systems requiring external correction but as complex valuation mechanisms capable of incorporating multiple dimensions of value. This approach aligns with MacIntyre’s (1984) critique of compartmentalization in modern social thought and Polanyi’s (1944/2001) concept of embeddedness, challenging the philosophical premise that social costs and benefits exist outside market mechanisms.

This methodological perspective diverges from both neoclassical approaches that treat social factors as externalities and from heterodox approaches that reject market valuation altogether. Instead, it aligns with recent developments in socio-economics (Etzioni, 2003; Hodgson, 2019) that recognize the inherent integration of social and economic dimensions in human decision-making.

Formal Analytical Approach: Hedonic Pricing Models

The narrative understanding outlined above finds formal analytical complement in hedonic pricing models, following Rosen’s (1974) foundational work. This methodological approach decomposes price into its constituent value components without imposing artificial separations between “economic” and “social” factors.

Anderson’s recent study, “Wind Turbines, Shadow Flicker, and Real Estate Values” (2024), provides empirical evidence of how economic actors endogenously incorporate what conventional economics would term “externalities” directly into price mechanisms. The methodological significance of this approach lies in its capacity to quantify valuation components without presuming their ontological separation.

This research employs the hedonic pricing methodology with particular attention to what Heckman and Singer (2017) identify as “causal pluralism”—recognizing that price adjustments for social factors represent not market failures but rather evidence of markets’ capacity to incorporate complex, multi-dimensional valuations. Following Mäki’s (2009) discussion of models as isolations and surrogate systems, the hedonic approach allows us to isolate and examine specific components of valuation while recognizing their inherent integration within actual market processes.

Methodological Limitations and Reflexivity

This methodological approach is not without limitations. The narrative cases, while illustrative, cannot capture the full range of market behaviors, and there remains the potential for selection bias in the cases examined. The hedonic pricing models, while powerful, rely on assumptions about market efficiency and information availability that may not fully hold in practice (Bartik & Smith, 1987; Kuminoff et al., 2010).

Additionally, as Bourdieu (1990) emphasizes, researcher reflexivity must acknowledge that the conceptual frameworks we employ shape the phenomena we observe. The methodological challenge lies in distinguishing between artificially imposed conceptual separations and meaningful analytical distinctions—a challenge this research addresses through methodological triangulation and critical engagement with underlying philosophical assumptions.

In summary, this research employs a methodologically pluralist approach that combines narrative explication and formal hedonic pricing analysis within a critical realist philosophical framework. This approach enables a reconstruction of our understanding of how price mechanisms already incorporate social dimensions of value, challenging the artificial separation between private and social components that has dominated economic thought.