Tag: economics

The grocery and the mountain

When should a community gather up its resources and provide a service to all members? And when should individuals be turned out into the world to navigate on their own dime? These debates cross all levels of government.

Some provisions are accepted as a government thing, like piped water or sewer. Even basic universals like education attract conversation about private options. Roads are sometimes (although truly not very often) toll roads. Bridges are mostly a public venture, as are parks. What takes a good out of private production and places it in the receivership of a bureaucracy?

Fear usually. Police and firefighters are in place to ensure personal safety. The New Deal was to alleviate fears against a repeat of depression era outcomes. When society risks a loss that compels a human response, society steps forward with a safety net.

Mamdani, New York Cities new mayor, sold the people on a fear of escalating grocery prices and thus the need for a government run store. This seems different than when a small community rounds up a helicopter rescue for a mountain climber who ventured up a nearby peak alone and unprepared.

So who gets to pick what there is to fear? Not everyone does this well. Here’s Mises (from Theory and History)

They recommend some policies, reject others, and do not bother about the effects that must result from the adoption of their suggestions.

This neglect of the effects of policies, whether rejected or recommended, is absurd. For the moralists and the Christian proponents of anticapitalism do not concern themselves with the economic organization of society from sheer caprice. They seek reform of existing conditions because they want to bring about definite effects. What they call the injustice of capitalism is the alleged fact that it causes widespread poverty and destitution. They advocate reforms which, as they expect, will wipe out poverty and destitution. They are therefore, from the point of view of their own valuations and the ends they themselves are eager to attain, inconsistent in referring merely to something which they call the higher standard of justice and morality and ignoring the economic analysis of both capitalism and the anticapitalistic policies. Their terming capitalism unjust and anticapitalistic measures just is quite arbitrary since it has no relation to the effect of each of these sets of economic policies.

Taking over a grocery is sure to fail financially without ensuring any additional food security for those who need it. It’s a vanity project. Wouldn’t it be like telling the mountaineer that a government representative would need to participate in the planning and execution of his climb? Yet here, the little community bears a disproportionate cost for the climbers’ foolishness.

It seems that the risk to persons and the community happens to various degrees. Whether the risk triggers community involvement has to do with its extreme and the distance between the risky step and all the other steps in between.

When asked about Polanyi’s Double Movement- Claude said:

Polanyi’s Double Movement and the Evolution of Economic Thought

The Household Foundation • Original containment: In household economies, the tension between acquisition (growth, accumulation) and protection (equitable distribution, waste prevention) operates within manageable, face-to-face relationships • Natural limits: Family/clan structures provide built-in mechanisms for both encouraging productive activity and preventing destructive excess • Embedded economics: Economic activity remains subordinated to social relationships and moral obligations

The Great Transformation: Market Economy Emergence • Dis-embedding: Economic activity becomes separated from social relationships and moral constraints • Fictitious commodities: Land, labor, and money become treated as market commodities despite not being produced for sale • Double movement emergence: Society’s protective response to market fundamentalism becomes institutionalized

Evolutionary Responses in Economic Thought

Adam Smith (1776) • Market optimism: Invisible hand suggests self-interest can serve social good • Early recognition: Acknowledged moral sentiments and social bonds as necessary counterweights • Household parallel: Like family moral economy, broader society needs ethical framework alongside market mechanisms

Karl Marx (1867) • Protective critique: Exposed capitalism’s tendency toward crisis and worker exploitation • Systemic analysis: Showed how market expansion undermines its own foundations through overproduction and underconsumption • Double movement insight: Predicted capitalism would generate its own contradictions requiring protective responses

Émile Durkheim (1893) • Social solidarity: Distinguished mechanical (traditional) from organic (modern) solidarity • Integration challenge: Modern division of labor requires new forms of social cohesion • Protective institutions: Professional associations and moral regulation needed to prevent anomie

Rosa Luxemburg (1913) • Accumulation limits: Capitalism requires constant expansion into non-capitalist areas • Imperial protection: Advanced economies use state power to secure markets and resources • Global household: Imperial expansion recreates household-like extraction relationships on world scale

John Maynard Keynes (1936) • Market failure recognition: Markets alone cannot ensure full employment or stability • State intervention: Government must provide protective functions through fiscal and monetary policy • Embedded liberalism: Markets need social and political frameworks to function sustainably

Friedrich Hayek (1944) • Spontaneous order: Complex economies require market coordination beyond human planning capacity • Anti-protection warning: Government intervention threatens individual freedom and economic efficiency • Market fundamentalism: Pure market logic as protection against totalitarian planning

Contemporary Double Movement Tensions

Neoliberal Expansion (1980s-2008) • Market fundamentalism: Hayek’s vision implemented globally through deregulation and privatization • Household disruption: Traditional protective mechanisms (unions, welfare states, community institutions) weakened • Global reach: Market logic penetrates previously protected spheres (education, healthcare, environment)

Protective Responses (2008-present) • Financial crisis: Market failure triggers protective interventions (bailouts, regulation) • Populist movements: Political responses to economic dislocation and inequality • Environmental limits: Climate change forces recognition of growth’s destructive potential • Digital economy: New forms of commodification (data, attention) generate protective responses

Synthesis: The Persistent Tension

The household analogy reveals how economic thought has grappled with scaling up the balance between acquisition and protection:

• Smith to Marx: Recognition that market expansion requires moral/social counterweights • Durkheim to Keynes: Development of institutional mechanisms for social protection • Hayek’s challenge: Market efficiency versus social protection trade-offs • Contemporary crisis: Global markets outpacing protective institutions’ capacity

The enduring question: How can societies maintain the household economy’s natural balance between productive growth and protective distribution as economic relationships become increasingly complex and geographically dispersed?

Market Failure was used as the signal– but what now?

In days of yore, there was the market and the state. Two separate spheres of activity coexisted. And when private industry did not come through for the people, in the way they thought it should, market failure was the name given to assign blame. When the market failed, it was up to the state to address the lack of supply in areas such as medical care, poverty alleviation, housing, and the like.

One of economist Tyler Cowen’s first books addresses this trigger for state action in a compilation of thoughts on The Theory of Market Failure: A Critical Examination. But he isn’t convinced. He seems to say that when you look so closely at a tiny segment of a large system, you don’t see anything at all.

Consider externalities, a key signal that the market is merely pushing a problem onto some unsuspecting observer. He claims that (nearly) every single transaction has a positive or negative external effect. And, if you think about it, it’s true. We are social creatures. Although many consumptions are deeply personal, in the end, we always touch the lives of others.

The scope of the externalities/nonexcludability issue is vast. Nearly every concern of economic policy, from environmental considerations to research and development, involves externality problems. No one would claim that every instance of an externality warrants state intervention. There is no doubt, however, that the existence of externalities is one of the most powerful arguments for public sector involvement in the provision of public goods.

This isn’t the proper trigger for government intervention.

What about when the price seems too high, as in housing, or too low, as in wages? Whether a good is mediated through the private or public sector, prices still carry the most valuable form of comparative value information.

As noted earlier, the theory of public goods and externalities implies that if a good is characterized by nonrivalrous consumption, allowing additional individuals to consume it entails zero marginal cost. Demsetz’s arguments (1964; 1970) imply that this is only true in the presence of perfect information. Otherwise, allowing additional individuals to consume a good free of charge results in the abandonment of the price system in that sphere of activity. Since the publication of Hayek 1945, the role of prices in communicating information has been well known. In the provision of public goods as well as private goods, sacrificing such information may entail significant costs.

Prices are the most critical form of encapsulation of what groups of exchangers say about an exchange. We may not always conduct a thorough analysis of prices. That might be where the problem lies.

For instance, the exchange might be telling something vital about a group of people that others are simply not attuned to. People join various clubs throughout their lives. And these associations create structures of value.

The next two selections in section 2 of this volume discuss the nature of local public goods. Because such goods, by definition, can be provided to only a segment of a nation or community, determining which individuals will receive them becomes part of the economic problem. Once club or community membership becomes endogenous, many of Samuelson’s conclusions do not hold.

When people leave or join a club, when they exit or stay loyal, they impact how much of a surcharge the group of people in the club can charge.

The Tiebout model avoids the preference revelation problem; an individual’s preferences are revealed by his choice of location. It also avoids the free-rider problem; those who choose to belong to a given community are subject to the taxes or user fées that finance the provision of goods. Nor is pricing inefficiency a problem. If an individual is inefficiently excluded from the use of a public good or service, he can simply move to a community where that exclusion is not practiced.

The introduction written by Tyler Cowen is comprehensive. To the engaged observer, he dispels the dichotomy between industry and the state. There’s something pluristic out there. It’s big, messy, and complicated. It dovetails into many of the things people talk about under the titular of institutions. But it has structure– once you stand back and take a look.

That’s the project of the moment: a unified theory of price.

Litterature Review

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.

I think this section needs some more work. But here’s what we have so far:

II. Literature Review

A. Mainstream Economic Philosophy Foundations

The philosophical foundations of mainstream economic theory have been constructed upon a series of conceptual separations that artificially divide the economic from the social, the private from the public, and the individual from the collective. This review traces these separations through key philosophical traditions in economic thought, examining how they have shaped our understanding of price mechanisms and market functioning.

The Neoclassical Framework and Methodological Individualism

The neoclassical paradigm, beginning with Marshall (1890/1920) and formalized by Samuelson (1947), established methodological individualism as the dominant analytical approach to economic phenomena. This philosophical stance treats social aggregates as reducible to the actions of autonomous utility-maximizing individuals whose preferences are taken as given. As Arrow (1994, p. 1) acknowledges, “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.”

This methodological commitment has profound implications for price theory. Within the neoclassical framework, prices emerge from the aggregation of individual utility functions, with social dimensions treated as externalities—phenomena that exist outside the core market mechanism. Pigou’s (1920) seminal work on welfare economics formalized this separation, positioning social costs as divergences between private and social valuations that require correction through policy interventions. This philosophical framing fundamentally shapes how economists conceptualize market processes, treating the social as external to rather than constitutive of economic valuation.

Interestingly, even as neoclassical economics rigorously applies methodological individualism, it implicitly relies on group concepts without adequately defining them. Markets, firms, industries—these collective entities serve as the backdrop for individual decisions, yet their constitutive nature remains undertheorized. It is as if economic theory performs an elaborate mimetic gesture, tracing the outlines of social structures while focusing exclusively on the individuals within them, like a mime whose white-gloved hands demarcate invisible boundaries that audiences must imagine rather than observe directly.

Public Choice Theory and Rational Actor Models

The public choice tradition, exemplified by Buchanan and Tullock (1962), extends methodological individualism into the realm of political decision-making. By applying rational actor models to public policy, this approach treats political processes as aggregations of individual utility calculations rather than expressions of collective values. As Buchanan (1984, p. 13) argues, “There is no organic entity called ‘society’ that exists independently of the individuals who compose it.”

This philosophical stance reinforces the separation between economic and social dimensions by treating political processes themselves as markets—mechanisms for aggregating individual preferences rather than constructing collective meanings. While providing valuable insights into institutional incentives, this approach systematically marginalizes the embedded nature of economic decision-making within social contexts.

Again, the public choice tradition alludes to groups—voters, interest groups, bureaucracies—while consistently reducing them to collections of utility-maximizing individuals. The collective dimensions that give these groups meaning and coherence are acknowledged as backdrop but rarely examined as constitutive elements of the analysis itself. The mime continues to trace invisible boundaries without substantiating the spaces they enclose.

Transaction Cost Economics and Institutional Analysis

Williamson’s (1975, 1985) transaction cost economics represents a significant extension of economic analysis into institutional structures, examining how organizations emerge to reduce the costs of market exchange. While acknowledging that economic activities occur within institutional contexts, this approach maintains the philosophical separation between economic and social dimensions by treating institutions primarily as efficiency-enhancing mechanisms rather than socially embedded practices.

As Williamson (1985, p. 18) argues, “Transaction cost economics attempts to explain how trading partners choose, from the set of feasible institutional alternatives, the arrangement that protects their relationship-specific investments at the least cost.” This framing maintains the priority of efficiency considerations while treating social dimensions as constraints rather than constitutive elements of economic organization.

Despite its focus on organizations and institutions, transaction cost economics continues to treat these collective entities as instrumental arrangements serving individual interests rather than examining how they constitute economic actors themselves. The group remains an instrumental backdrop—a cost-minimizing solution to coordination problems—rather than a constitutive dimension of economic reality. The mime’s gestures outline organizational boundaries without examining how these boundaries shape the identities and preferences of those within them.

Behavioral Economics and the Modified Individual

Behavioral economics, pioneered by Kahneman and Tversky (1979) and expanded by Thaler (1991) and others, challenges the rational actor model by identifying systematic deviations from utility maximization. While this approach introduces psychological complexity into economic analysis, it maintains the philosophical separation between economic and social dimensions by treating these deviations as cognitive biases rather than expressions of social embeddedness.

As Thaler and Sunstein (2008, p. 6) argue in their influential work on nudge theory, “The false assumption is that almost all people, almost all of the time, make choices that are in their best interest or at the very least are better than the choices that would be made by someone else.” This framing maintains the philosophical commitment to individual choice while acknowledging limitations in cognitive processing, without fundamentally challenging the separation between economic and social dimensions.

Here too, the social dimension appears as an influence on individual decision-making rather than a constitutive element of economic action. Groups function as reference points that bias individual judgments rather than fields of practice that constitute economic meaning. The mime continues to gesture at social influences without substantiating the collaborative production of economic reality that these influences represent.

B. Critical Theoretical Intersections

Against these mainstream approaches, several critical traditions have challenged the separation between economic and social dimensions, offering theoretical resources for reconceptualizing price mechanisms as inherently incorporating both private and social valuations.

Social Capital Theory: From Group Phenomenon to Individual Asset

Loury’s (1976) groundbreaking paper, “A Dynamic Theory of Racial Income Differences,” introduced social capital as a group-contained phenomenon that shaped economic opportunities. This original conception recognized the embedded nature of economic action within social contexts, particularly in explaining persistent racial disparities. As Loury (1976, p. 176) argued, “The social context within which individual maturation occurs strongly conditions what otherwise equally capable individuals can achieve.”

However, as the concept evolved through Coleman (1988), Putnam (1993), and Lin (2001), it increasingly shifted toward what might be termed an “instrumental network” approach—treating social capital as a resource that individuals could access and deploy strategically rather than a field of relationships in which they were embedded. Coleman (1988, p. S98) exemplifies this shift in defining social capital as “a variety of entities with two elements in common: They all consist of some aspect of social structures, and they facilitate certain actions of actors—whether persons or corporate actors—within the structure.”

This conceptual migration represents a critical juncture in economic philosophy, where a potentially transformative concept that recognized the inherent embeddedness of economic action was gradually reframed to fit within methodological individualism. The group-level phenomenon that Loury identified became increasingly individualized—a network resource rather than a constitutive field of practice.

Notably, throughout this evolution, the central concept of “the group” remains persistently undefined. Social capital theorists allude to communities, networks, and associations without developing a rigorous philosophical account of what constitutes a group beyond the aggregation of connected individuals. The mime traces ever more elaborate networks of connection without substantiating what makes these networks constitutive rather than merely instrumental.

Embeddedness and Economic Sociology

Granovetter’s (1985) influential paper, “Economic Action and Social Structure: The Problem of Embeddedness,” directly challenged the separation between economic and social dimensions by arguing that economic actions are “embedded in concrete, ongoing systems of social relations.” This perspective reframed economic behavior as inherently social rather than merely influenced by social factors.

As Granovetter (1985, p. 487) argues, “Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a script written for them by the particular intersection of social categories that they happen to occupy.” This recognition that economic action is constitutively social rather than merely constrained by social factors represents a fundamental philosophical challenge to the separation paradigm.

Similarly, Zelizer’s (2012) work on “relational work” examines how economic transactions constitute social relationships rather than merely reflecting them. As she argues, “Economic transactions connect persons and establish meaning-laden relationships.” This perspective challenges the philosophical separation between economic and social dimensions by recognizing their mutual constitution.

Yet even within economic sociology, there remains a tendency to allude to social structures without developing a rich philosophical account of their ontological status. The mime gestures toward “concrete, ongoing systems of social relations” without fully substantiating how these systems exist beyond the interactions of individuals within them.

Ecological Economics and Systems Thinking

Ecological economics, developed by Georgescu-Roegen (1971), Daly (1977), and others, challenges the separation between economic and ecological systems by positioning the economy as a subsystem of broader biophysical processes. This approach recognizes the inherent embeddedness of economic activities within ecological contexts, challenging the artificial boundaries that conventional economics draws around market processes.

As Daly (1990, p. 1) argues, “The economy is a subsystem of the finite biosphere that supports it.” This simple yet profound observation challenges the philosophical foundations of mainstream economics by recognizing that economic activities are intrinsically rather than accidentally connected to their ecological contexts.

More recently, Raworth’s (2017) “doughnut economics” has extended this systems thinking approach, arguing for a reconceptualization of economic theory that recognizes social and ecological dimensions as constitutive boundaries of economic activity rather than external constraints. As she argues, economic theory must be “embedded in society and in nature, and that’s inherently connective.”

However, even these systemic approaches often maintain a distinction between “the economy” and its social and ecological contexts, preserving a conceptual separation even while arguing for integration. The mime traces the connections between systems while maintaining their distinct identities, without fully examining how these identities themselves are mutually constituted.

Feminist Economics and the Critique of Separative Self

Feminist economic philosophy has provided some of the most profound challenges to the separation paradigm through its critique of the “separative self” that underpins mainstream economic theory. Nelson (2006), Folbre (1994), and others have questioned the philosophical assumptions about autonomy and independence that shape conventional economic analysis.

As Nelson (2006, p. 30) argues, “The image of economic man as self-interested, autonomous, and rational creates a distorted view of economic life. Most economic decisions and actions are undertaken by people who are deeply connected to others.” This critique challenges not merely the assumptions of rational choice theory but the deeper philosophical conception of the economic actor as fundamentally separate from social contexts.

Folbre’s (1994) work on care economics further demonstrates how economic decisions inherently incorporate social dimensions, particularly in domains traditionally excluded from economic analysis. As she argues, “The invisible hand is all thumbs when it comes to care.” This observation highlights how conventional economic frameworks systematically marginalize activities where social dimensions are most evident.

Yet even these critical perspectives often maintain a focus on individuals—albeit connected and caring ones—without fully developing an alternative ontology of the social. The mime gestures toward connection and care without fully substantiating the collective dimensions these concepts imply.

C. Syntheses and Gaps in Current Literature

The literature reveals both promising directions for reconceptualizing the relationship between economic and social dimensions and persistent gaps that the current research aims to address.

Toward an Integrated Understanding

Several theoretical developments suggest potential pathways toward a more integrated understanding of price mechanisms. Lawson’s (2007) critical realist approach challenges the ontological assumptions of mainstream economics, arguing for a recognition of economic phenomena as emerging from “structured interrelationships in practices and positions.” This philosophical stance aligns with the current research’s emphasis on the inherently social nature of price mechanisms.

Similarly, Hodgson’s (2019) recent work on institutional economics provides theoretical resources for understanding how social institutions constitute economic behaviors rather than merely constraining them. As he argues, “Institutions not only constrain options, they establish the very criteria by which people discover their preferences.” This insight suggests how social dimensions might be understood as intrinsic to rather than separate from price mechanisms.

The Missing Ontology of the Group

Despite these promising directions, a significant gap remains in the philosophical understanding of how social dimensions operate within price mechanisms. Across divergent theoretical traditions—from neoclassical economics to critical alternatives—there persists a tendency to allude to groups without developing a rich philosophical account of their ontological status.

This mimetic quality of economic theory—gesturing toward social structures while focusing primarily on individuals within them—represents a critical limitation in current approaches. Like a mime whose white-gloved hands trace invisible boundaries, economic theory repeatedly outlines social dimensions without substantiating them philosophically. Markets, firms, communities, networks—these collective entities appear throughout economic literature without rigorous examination of their constitutive nature.

The present research aims to address this gap by developing a philosophical framework that recognizes price mechanisms as inherently social institutions rather than merely technical devices. By reconnecting with Loury’s original insight that social capital represents a group-contained phenomenon, this research seeks to recover and extend a more integrated understanding of how social dimensions operate not around but within price mechanisms themselves.

As the subsequent sections will demonstrate, this reconceptualization has profound implications for how we understand market processes, offering a more coherent theoretical account and opening new possibilities for addressing complex socioeconomic challenges through a more sophisticated understanding of how prices already incorporate both private and social dimensions of value.

After an Abstract comes the Introduction

This is an excerpt from my 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.

A. Research Problem and Contextual Landscape

Contemporary economic theory has constructed an artificial divide between private and social valuations that fundamentally mischaracterizes the nature of price mechanisms. The prevailing paradigm treats externalities and social costs as phenomena that exist outside market pricing structures—anomalies that require correction through policy interventions. This perspective has led to theoretical frameworks that fail to recognize how price already incorporates social dimensions of value.

This paper challenges this dominant position by advancing the thesis that price inherently accounts for social costs and benefits, functioning as Price = Value Private + Social. The conventional framing treats social costs as separate from private market transactions, focusing exclusively on externalities and spillovers as market failures requiring intervention. However, this approach overlooks crucial evidence that market participants routinely anticipate and internalize social dimensions in their valuation processes.

Several critical shortcomings emerge from the current theoretical framework. First, mainstream economics acknowledges that stock prices anticipate political actions and regulatory changes, yet fails to systematically incorporate this anticipatory social pricing into its core models. Second, empirical evidence demonstrates consumers’ willingness to pay emotional surcharges for products with perceived social benefits, yet this phenomenon remains marginalized in standard economic analysis. Third, economists typically wait for social costs to manifest as measurable externalities before acknowledging their existence, rather than recognizing their presence within the price mechanism itself.

This theoretical blind spot can be traced to a pivotal shift in economic philosophy that occurred following Glenn Loury’s groundbreaking 1976 paper, “A Dynamic Theory of Racial Income Differences,” which introduced the concept of social capital as a group-contained phenomenon. The subsequent evolution of social capital theory—through James Coleman, Robert Putnam, Nan Lin, and Mark Granovetter—gradually reframed social elements as external to market mechanisms rather than intrinsic to them. This conceptual migration has created artificial boundaries between private and social valuations that distort our understanding of how markets function.

By examining this historical trajectory and proposing a reconceptualization of price theory that acknowledges the inherent social dimensions of value, this research aims to resolve theoretical inconsistencies in contemporary economic philosophy and develop a more coherent understanding of market dynamics. The implications extend beyond theoretical discourse, offering potential pathways to address pressing socioeconomic challenges through a more sophisticated understanding of how social costs and benefits are already embedded within price mechanisms.

B. Theoretical Positioning

The philosophical underpinnings of twentieth-century economic analysis were largely constructed upon a reductive conception of human behavior—the rational actor paradigm, which posited economic agents as autonomous individuals pursuing narrowly defined self-interest. This framework, most prominently championed by neoclassical economists, created theoretical models that excluded the complex social dimensions inherent in economic exchange. By privileging methodological individualism, mainstream economics systematically marginalized the communal aspects of human decision-making and the social embeddedness of market interactions.

The 1970s marked a critical turning point with scholars like Kenneth Arrow, Gary Becker, and others beginning to interrogate this limited conception by examining economic trades within previously neglected domains such as family structures and racial dynamics. This represented an important, though incomplete, expansion of economic thought. While these analyses acknowledged that social factors could influence economic decisions, they still fundamentally positioned these factors as external constraints or modifications to an essentially self-interested calculus.

This paper advances a more radical philosophical proposition: economic actors do not merely respond to social factors as external influences but fundamentally incorporate communal objectives alongside personal gain when allocating their labor and resources. This perspective challenges the artificial separation between individual and collective interests that has dominated economic philosophy. Rather than viewing social considerations as secondary modifications to self-interested behavior, this research argues that economic actors integrate multiple value dimensions—personal, familial, communal, and societal—into their decision-making processes simultaneously and intrinsically.

This theoretical reframing has profound implications for how we understand price mechanisms. When economic actors integrate communal objectives into their decision calculus, the resulting prices already embed both private and social valuations. Market exchanges thus represent complex negotiations of value that transcend the narrow confines of individualistic utility maximization. By recognizing this inherent integration, we can begin to develop more sophisticated theoretical tools that accurately capture the multidimensional nature of economic exchange.

The proposed philosophical framework does not reject the insights gained from examining self-interested behavior, but rather situates such behavior within a more comprehensive understanding of human action that acknowledges our fundamental social embeddedness. This perspective builds upon but substantially extends the work begun by Arrow and others, offering a philosophical foundation for reconceptualizing how social dimensions operate not merely around but within economic decision-making and price formation.

Alchian and Property Rights

In a paper entitled Property Rights Paradigm, Armen Alchian suggests ownership is more intertwined than one might think.

There is some ambiguity in the notion of state or private ownership of a resource, because the bundle of property rights associated with a resource is divisible. There can and does exist much confusion about whether a resource or “property” is state or privately owned.
Some rights to some uses of the resource may be state owned and others privately owned. While it is true that the degree of private control is increased when additional rights of use become privately owned, it is somewhat arbitrary to pass judgment on when the conversion to private control can be said to change the ownership of the bundle of rights from public to private. The classification of owners can be carried beyond the important state and private dichotomy. Corporate, school, and church owners of property are also of interest. The structure of rights can have important consequences for the allocation of resources, some of which we now illustrate.

Think of the home you own. The deed at the county recorder’s office says you own it. But the utility company may access the property if it needs to do a repair. The city workers can drive a skid steer into your lot, dig a big hole to check the city water connection, without checking whether you have a graduation party planned for the weekend. Of course, the county can tax you for local services, and if you fail to pay, they can take your property.

So you own your home more in unison with the public than you might have thought.

What about going the other way? Do people pay more for property if it has better access to taxation-supported services? It makes sense that they would. Public groups may have formal or informal claims against your home. There’s a good chance these were sought after when they decided to move. A portion of the price acts as a place maker for value– or in other words, the market prices institutions, too.

O-rings in Community

The O-ring model in economics offers an explanation of a production weakness.

The O-ring theory of economic development is a model of economic development put forward by Michael Kremer in 1993,[1] which proposes that tasks of production must be executed proficiently together in order for any of them to be of high value. The key feature of this model is positive assortative matching, whereby people with similar skill levels work together.[1]

The model argues that the O-ring development theory explains why rich countries produce more complicated products, have larger firms and much higher worker productivity than poor countries.[2]

The name is a reference to the 1986 Challenger shuttle disaster, a catastrophe caused by the failure of O-rings.

WIKI

However, this model understates the possible results, as its production is thought to be positive. In communal markets, the weakest link can fail in their task and draw against the resources other teammates offer.

At Home Economics, we like to distinguish between two types of products: some are more conducive to private transactions, and others are more conducive to communal or public transactions. Those in the first category benefited greatly from the division of labor, for instance. Every worker in the chain focuses on one job, and the line produces a fabulous model T. The second category includes activities such as the ‘eyes on the street’ method of public safety, which was developed by urbanist Jane Jacobs. If a community is mindful of on-goings outside their front doors and reports as necessary, then residents benefit from reduced crime.

Now consider two forms of education delivery. Say one involves students completing modules of schoolwork from a home computer. The overall score of the class will harmed by the weakest link, but each individual performs independently. Now consider a classroom setting. Say one child often misses the bus. They regularly arrive late to class. This disrupts the teacher’s material delivery and causes friction between the students. In this communal situation, it is not only the tardy child who suffers but the whole class. This scenario is one most often given in explanation of why some high-poverty elementary schools suffer from below-average performance.

With items suited to private goods production, the o-ring model implies fewer products that meet perfection. If a company builds laptops and one worker fails to meet standards, fewer laptops are sold. But in a group scenario, where the leaders, perhaps of a certain age, are unwilling to adopt an electronic methodology, say a new accounting feature, they create more work for employees effectively pulling negative productivity.

The negative impact potential in the o-ring model for communal products is underestimated.

What about Marx Matters?

For anyone younger than 50, it might be hard to imagine the zeal and inflammatory context wrapped in the calling out of Marxism or Communism. There was a time when it triggered fear, fear of ostracism, loss of employment, or any many other adverse physical or social outcomes. Now that history has sorted itself out, the source of terror stemmed from the madmen who adopted Marx’s writings as their intellectual endorsement. Most agree that Marx would oppose the outcomes done under his philosophical banner. Most don’t bother to read the text to find out for themselves.

Last week, an English professor, Alex Moscowitz, suggested that Marx’s work is foundational for economics. The economists objected, debunking the validity of his work. Business people are particularly offended by his Labor Theory of Value, which the nineteenth-century thinker penned in Das Capital.

“The value of a commodity, therefore, is determined by the quantity of labor expended to produce it, but only of labor that is socially necessary. Socially necessary labor time is the labor time required to produce any use-value under the conditions of production normal for a given society and with the average degree of skill and intensity of labor prevalent in that society.”
(Das Kapital, Volume I, Chapter 1)

Everyone knows that in the commercial world, one gets paid the market rate for labor.

Noah Smith types up an interesting overview of the topic in Should Economists Read Marx. He chews through a lot of the interesting aspects of the topic, including listing out the foundational economic material he was required to tackle while a PhD student. Each work tussles with market failures or public goods. The greats like Paul Samuelson and Kenneth Arrow devoted intellectual energy to issues on the cusp of private and public sectors, two sectors each with their own structure.

It’s just that people who came after Marx took his text to initiate disruption and then exert social control. Noah closes with a reminder to his contemporaries that accuracy is not everything. An impassioned sweep and forceful embellishment of an errant study can end in tragedy.

This should serve as a warning to economists — a reminder of why although narrow theories about auctions or randomized controlled trials of anti-poverty policies might seem like small potatoes, they’re not going to end with the skulls of thousands of children smashed against trees. Modern economics, with all of its mathematical formulae and statistical regressions, represents academia appropriately tamed — intelligence yoked to the quotidian search for truth, hemmed in by guardrails of methodological humility. The kind of academia that Alex Moskowitz represents, where the study of Great Books flowers almost instantly into sweeping historical theories and calls for revolution and war, embodies the true legacy of Marx — something still fanged and wild.

But what about the labor theory of value? Is there anywhere in life where there is a pooling value to the work at hand? Consider intellectual property. Is there some pool of work hours necessary to accomplish a new way of thinking about a technology? Scientists in twos and threes or on their own throw their time into advancing an idea. Isn’t the idea behind a patent that the inventor doesn’t get his labor time paid for in the idea development process, so he has a claim to future benefits from the product as a reimbursement mechanism?

What about founders and startup folks. Don’t they calculate the labor hours they think they’ll need to put into a new venture and then figure out whether they’ll be able to recoup their labor time?

Super Power

It might be a bit difficult to buy this picture as a model of spontaneous order. Spontaneity, perhaps, but order?

Each little bubble is a representation of an independent actor out fulfilling their purpose of the day. Bubble wrapped, as they each get to retain their skills, talent and experiences and bring those forth in the work they do.

This is in fact their super power. No matter who you know in life or where you start, you have the power to devote your time and energy to the endeavors of your choice.

Luckily, the twentieth century is full of modeling the chores done in exchange for pay. No need to review that here. Economics is most comfortable in this environment: money for goods, services, and labor. It’s countable. The measures are used in all sorts of reports and for all sorts of comparisons.

Sometimes the numbers seem off. Sometimes, people don’t end up where someone thinks they should. And Social Welfare Economics tried to get a handle on such things. As a method, it really couldn’t pull off the knowing part. How do you know when such a group is better off than the other? Isn’t a comparison contingent on all the factors that go into the moment? This is what James M Buchanan seems to argue in Positive Economics, Welfare Economics, and Political Economy (1959)

A second major problem which has concerned theorists in welfare economics has been the possible existence of external effects in individual consumption and production decisions, sometimes called “spillover” or “neighborhood” effects. But this annoying complication also disappears in the approach to welfare economics suggested here. If, in fact, external effects are present, these will be fully reflected in the individual choices made for or against the collective action which may be proposed. External effects which are unaccounted for in the presumptive efficiency criterion of the economist and the proposal based upon this criterion will negate the prediction of consensus represented in the alternative suggested. The presence of such effects on a large scale will, of course, make the task of the political economist more difficult. His predictions must embody estimates of a wider range of individual preferences than would otherwise be the case. The compensations included in the suggested policy changes must be more carefully drawn and must be extended to include more individuals who might otherwise be neglected.®

The reader might be led to believe, in this bottom-up observation of human behavior, that consumers reflect a comprehensive analysis of the entirety of their transaction, including internalizing spillovers and externalizing expenses. The market filters through individuals’ private desires and their accommodations for public or group enterprise in a complex, yet thoughtful manner.

The graphic specifies the draw of a common cause, whether it be education, peace, or public health (and there are thousands more). It is the cause that sorts the analysis. It’s not a group being told to sign up to walk for MS. It’s the desire to be on the team fighting a deadly disease that drives the worker to devote their superpower to a cause.

In review

First principles of the model are

  • 1. Actors are independent free agents.
  • 2. Actors may offer work for private benefit or toward a group goal.

Claims about Housework

Duncan Ironmonger, an Australian household economist, wrote in 2001.

3.2 The New Household Economics
In the mid 1960s a major theoretical development took place, known as the “new
household economics” (see Becker (1981), Ironmonger (1972) and Lancaster (1971).
In this theory the household is regarded as a productive sector with household
activities modeled as a series of industries.
In this new approach, households produce commodities that are designed to satisfy
separate wants such as thirst, hunger, warmth and shelter. The characteristics, or
want-satisfying qualities, of the commodities used and produced can be regarded as
defining the production and consumption technology of households. With changes in
incomes and prices, households still alter expenditures as in the earlier theory.
However, in the new theory, households adjust their behaviour as they discover new
commodities and their usefulness in household production processes.
The activities approach derived from the theory of the new household economics
readily combines with the earlier input-output approach of Leontief (1941) to
establish a series of household input-output tables as the framework for modeling
household production.

And then this in conclusion.

6 Household Production and a World of Binary Economies

The major scientific achievement of this field has been the measurement of the
magnitude of household production through surveys of the uses of time. Household
production is now recognised as an alternative economy to the market; in many
countries the household economy absorbs more labour and at least one third the
physical capital used in the market economy.

In future, national statistical organisations will produce regular estimates of GHP.
Data on outputs of household production – accommodation, meals, clean clothes and
the care of children and adults – will complement data on inputs of unpaid labor and
the use of household capital.

Proper recognition of the household economy will have arrived when national
household accounts are published each quarter alongside national accounts for the
market economy. These data will enable greater scientific research on the
organisation of household production, the interactions with the market economy, the
role of households in building human capital, on the effects of household technology
and alternative social and economic policies on gender divisions of labor and on
family welfare.

Full paper: Houshold Production and the Household Economy.

Hayek’s Extended Order

Hayek won the intellectual battle. Government of any sort is not be capable of planning their country’s economy. If in doubt, this animated version of Leonard Read’s famous essay, I, Pencil, will surely convince you.

Near the end of his life, Hayel published his last book The Fatal Conceit, The Errors of Socialism (1988). By now the debate had lost its salience. The Berlin Wall would fall just a year later vindicating all who opposed socialism. A reader is left to think of the Fatal Conceit as a remix of a brilliant mind’s famous career.

But I think Hayek was trying to advance his ideas of extended order to a new level. First note, in the clip above, that the creation of the pencil navigates hundreds if not thousands of exchanges between people. It’s a linear activity. The order is rather flat.

Hayek suggests there is more.

Moreover, the structures of the extended order are made up not only of individuals but also of many, often overlapping, sub-orders within which old instinctual responses, such as solidarity and altruism, continue to retain some importance by assisting voluntary collaboration, even though they are incapable, by themselves, of creating a basis for the more extended order. Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos i.e., of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it.

Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them. So we must learn to live in two sorts of world at once. To apply the name ‘society’ to both, or even to either, is hardly of any use, and can be most misleading (see chapter seven).

We live in two worlds. The mechanics of one would crush the other—but then again, the passions are known to be deadly as well. In this way, the actions in one must bend to the actions in the other. And in the worlds of dual ambitions, the subgroups explode into a cacophony of midlevel playing fields of interactions. He describes the replication process in Appendix C.

Social influence on price- Endogenous or External?

It was a privilege to meet sociologist Viviana Zelizer yesterday. Our No Due Date book club read her 1994 book The Social Meaning of Money and we are fortunate to have an hour live with authors to discuss their work.

I think ChatGPT provides some interesting insights into her work:

Viviana Zelizer’s work suggests that the value of social relations is not simply an external force acting on price, nor is it strictly endogenous in the sense of being fully determined within the price mechanism itself. Instead, she argues that social relations and economic transactions are deeply interwoven in a way that both shapes and is shaped by the cultural and moral contexts surrounding them.

In her framework, Zelizer contends that social values and economic exchanges co-constitute one another. That is, social relations influence economic value and practices, but these exchanges also affect the nature of social relationships. For example, in “The Social Meaning of Money,” she demonstrates that people assign specific social meanings to money and earmark it for different purposes (like gifts or household expenses), which reinforces particular social relationships. The relational context affects how money is perceived and used, indicating that social and moral values are not external to money and price but integral to how people understand and navigate economic transactions.

Zelizer’s approach thus goes beyond a simple model of “external influence” or “endogenous value,” advocating instead for a relational view. She calls this the “relational work” perspective, emphasizing that people continuously create and manage the boundaries between social and economic life. Through this process, social norms and values both influence and are influenced by economic behavior, making them mutually constitutive rather than separable or one-directional forces.

Internalize, Externalize, Optimize

If you’ve been following this site, you know the thesis in play here is that at the time of transaction, there is a settling of accounts. Both private and social ambitions are considered before cash is exchanged for a good or service. Price is a numerical representation of both selfish and communitarian aspirations and obligations.

But that’s not what you hear when externalizing costs and internalizing benefits are explained. A familiar story of social costs is a story of industrial pollution. The product is being sold at a sub-optimal level as it does not reflect the nearby communities’ detriment of absorbing manufacturing waste. Marginal Revolution University (the best place for economic education) offers this graph in their section What Are Negative Externalities.

The lines on the chart tell the story. If the cost of the good included the social cost of pollution, the price would be higher, and the company would have to survive on fewer sales. Note the efficient quantity on the horizontal axis is to the left of the market quantity.

Fortunately, the market can also be responsible for positive externalities. This occurs when a transaction leads to extra benefits for those nearby who did not contribute financially to the transaction. If a few businesses at a corner invest in surveillance equipment, the neighborhood could benefit from a drop in crime. If a wealthy family invests in a school music program so their young protege can have a venue for their talents, the whole student body benefits from access to a higher level of music education.

In this case, more of these transactions would be beneficial to groups nearby, so they are underproduced, as the graph shows. Here, you will note that the quantity most efficient is located on the right-hand side of the market quantity on the horizontal axis.

Thus, the efficient quantity, which we want for the best private/social optimization, lies along the horizontal axis from left to right. At some point, Q efficient must share a spot with Q market. That’s the price we are interested in here- the price at which the optimal level for both private and social needs and ambitions is met. Price falls on this point more often than not.

Flow

Often, the merits of a transaction are given from the perspective of a single agent in the trade. An assembly line-worker lost their job when the plant was moved to another location. This is bad. The worker suffered a loss. Quickly, within sentences, the effect is generalized to all the workers in the plant, town or even region. The Experience of the middle aged white guy who is difficult to retrain and find meaningful work of the same quality is the catalyst for all sorts of feelings and demands for government intervention.

Do you see the slide? From a valid totaling up of wins and losses for one individual turned into a model involving segments of society.

It’s important to declare which model is in play as this dictates whether the players are individuals or groups, whether the tally of net benefit or loss is assigned to one or to many, and perhaps most interestingly the flow of reaction and counterreaction as value settles in the system. More interesting insights surface when consequential outcomes are looked at in a flow of events.

Think back to the time of the 2008 recession. Say one buyer purchased a home at the peak of the housing market with a three-year adjustable ARM. When the ARM recalculated in 2011, the buyer’s payment adjusted upwards to an amount beyond their ability to pay. Due to the recession, the value of the home had decreased below the mortgage balance. The buyer ends up in a familiar situation at that time and loses the property to foreclosure. This is a clear loss.

But say every other homeowner in the neighborhood had owned their homes for more than ten years. None of them were interested in selling until after 2015. These individuals realized no impact from the value changes during the recession expcept to see their assessed values decline resulting in lower property taxes. As a neighborhood the effects of the recession were uneventful.

In the plant closure story, there were most probably workers who ended up better off for the closure. Perhaps it encouraged them to return to school to achieve an updated skill. At the other end of work life, perhaps someone nearing retirement ended up with a more favorable retirement package. Getting people to think of workers as a mass might be useful for unions, but loses a finess of obeservation for analysis.

It seems, to have a profitable discussion, one must pick a playing field. If you want to pick a town, then the players are all the workers, their economic impact on local services, and the support available through the municipality’s local services. Who netted out what and where did the money settle in time periods 1, 2, and 3 following a plant closure. If there was a draw of support from a higher level of governance, maybe the playing field needs to be moved up a rung to the county level, or to the region within the state. The players then get expanded to blend in other economic agents and their positive and negative tallies.

Instead, the story is usually told like some mid-19th century Russian novel. The peasants were persecuted and the capitalists must be blamed! This is not helpful.

Convo with Stiglitz

I have been introduced to so many interesting (and famous!) people through Tyler Cowen’s podcast, Conversations with Tyler. This last one with Joseph Stiglitz is no exception. Tyler knows exactly the tempo to keep the clip of information at a perfect speed. The written follow-up provides links to referenced papers. It’s truly a wonderful service.

The breath of Stiglitz career leaves many areas open for further review. But this comment stumped me a little.

STIGLITZ: Today, the critical issue in trade policy is US CHIPS Act and the IRA. The CHIPS Act was, we had lost the ability to make chips. That meant that if anything happened to Taiwan or Korea, we were in a very vulnerable position. Markets don’t take into account that kind of defense concern, or even the resilience. That goes back to some of my earlier work that markets aren’t very good at assessing risk and pricing risk into the decision-making process.

How does he mean that the market does not take into account national defense? Undoubtedly the chips made in Taiwan are produced at a lower cost than in the US, hence the benefit from trade. But where is the documentation to show the accounting of that price drop? Surely people think that a portion of the discount is from the difference in state governance?

When US retailers buy from a textile plant in Bangladesh, they are aware of the different standards imposed (or not imposed) on the building facilities. Surely they factor that into the the price difference? The US retailers could choose to pay a bit more under the conditions that the building and machinery were held to a high standard, should they choose.

The dynanism of the market will adjust to new circumstances and knowledge as it surfaces under changing conditions.

Do those who claim ‘shoulds’ about wages get it right?

Let’s investigate the claim that every job should be paid a ‘livable’ wage by
spending some time with a mom in the neighborhood. First off, livable is very
subjective. What some people claim as a bare minimum to get by in, say, NY is a
fortune to others in Ames, Iowa. Furthermore, as soon as a generation goes by, livability
inevitably has upped itself on the notches of life’s expectations. But for this
examination, let’s assume that to qualify as livable the wage must be more than all
lower paid work.

Now to say every job ‘should’ command a livable wage is the same (well
almost the same) as saying that every job that does not offer a livable wage
should be eliminated. And the intent of wanting every job to pay at least a livable
wage (although I can read what’s in the hearts of those who say should) is to
make society better.

A mom of three kids starts her day by dropping them off at school, after
feeding them a breakfast of milk over cereal. After the middle schooler catches
the bus, she delivers the first one to a before-school program where a college
student greets them. He is picking up a few hours of work (not a working wage)
to help with tuition and later he will be sitting in classrooms getting his
in-school experience. The second child is walked over to the library where a
nice grandmotherly woman sits at a low table surrounded by six mini chairs
waiting to start extra reading help. She is part of a literacy program paid for
through grants. (She does not receive a working wage).

Then the mom runs over to Target. Thanksgiving is around the corner and
there’s lots of food to buy. At the checkout, she is pleased to see her
neighbor. Her kids are a bit older, so our mom always appreciates picking up
tips from a mom who has just forged down the road of rearing her children.
Target gets busy over the holidays and hires additional workers (not a livable
wage) so that busy parents can be in and out quickly with all their supplies.
Many workers like the extra spending money around the holidays and the store
gives a discount to employees.

Once the mom gets the groceries put away and straightens out the scattered
items throughout the house, she pops over to the Y to get some ‘me’ time. After
committing to a workout routine, which keeps her sanity, she’s gotten to know
some of the instructors. Her favorite is a graduate of West Point and, a mom
herself, is using the work (not a living wage) to keep in shape and provide an
outlet to adult relationships.

Before you know it the first round of school classes are starting to let
out. Her middle school child is involved in the Scouts, and they are having a
special activity with a city recreational leader, a senior adult (not a living
wage) who will show them some features of the local park. She drops him off
before running back to the elementary school to pick up her two youngest. Once
at home, a sixteen-year-old who lives next door stops in. She is going to look
after the kindergartener (not a living wage) while our mom takes her other
child to basketball. The coach (not a living wage) is great, and mom played in
college so she stays on to help.

Our mom encounters six workers in less than eight hours who voluntarily and
willingly participate in employment that is not considered a livable wage. They
are not coerced. They are not full of regret. They play an essential role in
elevating the quality of life for families.

If someone had time on their hands, they could calculate the market rate of
each of these services and come up with the pecuniary difference. Yet this
still would not be a true reflection of the total value as the interaction
between these folks serves as a clearing house of beneficial information
throughout the networks they support. The mom receives no income for her work
to raise her children and would be at a great disadvantage to lose these
support services.

Now think of a CEO, or an accountant, or a doctor, or a stockbroker, or a veterinarian.
Do they depend on lower-wage labor to do their jobs? It seems like the people
who they depend on like the managers and nurses and financial services admins
and vet techs are all paid a living wage.

So, by eliminating the jobs paid at below a living wage the groups that get hurt are
those who also do not earn above the living wage.

Downs called it Dual Rationality

As Chat GPT explains:

In Chapter 2 of “An Economic Theory of Democracy,” Anthony Downs introduces the concept of dual rationality, which he suggests characterizes individuals’ decision-making processes, particularly in economic and political contexts. This dualism reflects the idea that individuals often consider not only their narrow self-interests but also broader social concerns when making choices.

Here’s a breakdown of the dual rationality concept as outlined by Downs:

  1. Narrow Self-Interest: Downs acknowledges that individuals typically act to maximize their own utility or self-interest. This aspect of decision-making is rooted in traditional economic theory, which assumes that individuals are rational actors who seek to maximize their personal well-being. In economic choices, individuals often weigh the costs and benefits to themselves personally.
  2. Social or Broader Concerns: However, Downs also recognizes that individuals may take into account broader social or altruistic considerations when making decisions. This broader concern may include considerations for the welfare of others, societal values, or long-term societal well-being. In the context of political decision-making, voters may consider not only how policies directly affect themselves but also how they impact society as a whole or specific groups within society.

Downs argues that individuals exhibit this dual rationality in both economic and political spheres. While they may prioritize their narrow self-interest in many situations, they also incorporate social considerations into their decision-making process. This dualism reflects the complexity of human motivations and the interplay between individual and societal concerns.

By acknowledging this dual rationality, Downs provides a more nuanced understanding of decision-making processes in both economics and politics. He highlights the importance of considering not only individual self-interest but also broader societal implications when analyzing human behavior in various contexts.