9

What is a price? Explanation and understanding

(With apologies to Paul Ricoeur)

Richard M.Ebeling

INTRODUCTION

One of the central concepts of economic analysis is that of price. Indeed, it is probably little exaggeration to say that it was the discernment of the significance of prices in the network of market exchanges that enabled economics to emerge as an autonomous field for investigation. It came to be seen that it was the structure of market prices, and the responses to changes in those market prices by participants in the social division of labour, that made possible the emergence and maintenance of a spontaneous order of economic relationships.

The existence of such a spontaneous market order and the place of prices in it has been appreciated for thousands of years.1 Yet it has only been in the last 250 years that truly systematic analyses of market orders and the role of prices have been undertaken. Particularly following the publication of David Hume’s essay, ‘Of the balance of trade’, in the middle of the eighteenth century, the selfregulatory qualities of a market-pricing system has been a central theme of economic analysis. Hume argued that discrepancies in the prices at which goods were sold at different locations would set in motion shifts in market supplies and demands until prices had adjusted sufficiently to bring both domestic and international trade into balance (see Hume 1985, pp. 308–26; also Hume 1970, pp. 60–77).

Through most of the nineteenth century, the classical economists had focused on the processes of change and adjustment when agents in the market discovered such discrepancies between cost and selling prices (see McNulty 1967, p. 75–90; McNulty 1968, pp. 639–56; cf. also Robbins 1952, p. 16). But for the past 100 years the central concern of neoclassical economics has been to explain the logic of what prices do (i.e. what role and function they perform, in a hypothetical state of general equilibrium). What neoclassical economics has failed to do to any significant degree is to provide an analysis of the process of how prices are formed in markets (cf. Mayer 1932, pp. 147–239b and von Mises 1966 [1949] pp. 350–7 and 710–15). Nor has it offered any understanding of how market participants interpret changing market conditions as expressed in prices, and

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which enables the maintenance of a spontaneous order of interdependent social actors through appropriate responses in individual actions.

Now such a claim will strike most economists as either confusing or as proof that the person making the charge does not know what economics has been about for the past 100 years. But I think it is a more damning statement about the state of contemporary economics that most economists would not comprehend what was meant in contrasting an explanation of prices with an understanding of

prices.

It is for this reason that Paul Ricoeur’s essay, ‘What is a text? Explanation and understanding’, has been chosen as the inspiration and guiding framework for this paper. The question, ‘What is a text?’ as I shall attempt to show, has its counterpart in the question, ‘What is a price?’ Both a text and a price reflect human intentionality: in the case of a text the desire by an individual to convey knowledge about some aspect of the natural or social worlds, or of his thoughts and beliefs, to anonymous others separated from him by time and space; in the case of a price, the desires of individuals to obtain goods and services from anonymous others also separated from them by time and space. And both texts and prices must be interpreted by those others to discern the meanings they contain. Furthermore, as Ricoeur has argued, once written, a text takes on an existence of its own now that it is ‘objectified’ and separated from its author. Market prices have a similar characteristic, since they represent the composite outcome of many interacting supplier and demander choices, and since the unintended result of a multitude of actions are separate from the individual ‘authors’ whose decisions have generated those composite results.

WHAT IS A TEXT? EXPLANATION AND

UNDERSTANDING

It seems possible to situate explanation and interpretation along a unique hermeneutical arc and to integrate the opposed attitudes of explanation and understanding within an overall conception of reading as the recovery of meaning.

(Ricoeur 1981, p. 161)

One of the consistent characteristics of Paul Ricoeur’s writings is his ability in demonstrating compatibility and even complementarity between concepts and theories traditionally considered to be in diametric opposition. His analysis of the relationship between ‘explanation’ and ‘understanding’ in the human sciences is an example of one of his most successful reconciliations. And as in many of his other intellectual excursions, he returns to the genesis of things in the history of ideas. He reminds the reader that it is in Wilhelm Dilthey’s writings that the supposed dichotomy between explanation and understanding was most clearly articulated:

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The human sciences are distinguished from the natural sciences in that the latter take as their object features which appear to consciousness as coming from outside, as phenomena…for the former, in contrast, the object appears as coming from within, as a reality…. It follows therefore that for the natural sciences an ordering of nature is achieved only through a succession of conclusions by means of linking of hypotheses. For the human sciences, on the contrary, it follows that the connectedness of psychic life is given as an original and general foundation. Nature we explain, we understand mental life.

(quoted in Howard 1982, pp. 15–16)

But he also reminds the reader that Dilthey pointed out that the process of interpersonal understanding is not undertaken directly (i.e. not on the basis of any direct insight into the intentionalities of men but rather through the external manifestations of human actions). In Dilthey’s own words, the human spirit ‘speaks to us from stone, marble, musical compositions, gestures, words and writings, from actions, economic arrangements and constitutions, and has to be interpreted’ (Dilthey 1982, p. 247). Interpretation, therefore, is the art of understanding the meanings of human intentions as they have left their trace in the form of sediments of past human conduct (Ricoeur 1981, pp. 150–1).

It is at this point that a tension arises concerning the presumed dichotomy between explanation and understanding. While understanding for Dilthey rests on the idea of an empathetic psychologizing, this psychologizing is undertaken through the mediations of those sediments left by previous human acts. What, then, are the criteria for evaluating the validity of any interpretations made of these ‘objectifications’ of human intentions? As Ricoeur expresses it:

Although this distinction between explanation and understanding seems clear at first, it becomes increasingly obscure as soon as we ask ourselves about the conditions of scientificity of interpretation. Explanation has been expelled from the field of the human sciences; but the conflict reappears at the very heart of the concept of interpretation between, on the one hand, the intuitive and unverifiable character of the psychologizing concept of understanding to which interpretation is subordinated, and on the other hand the demand for objectivity which belongs to the very notion of human science. The splitting of hermeneutics between its psychologizing tendency and its search for a logic of interpretation ultimately calls into question the relation between understanding and interpretation.

(Ricoeur 1981, p. 151)

A solution of the dilemma can be found, Ricoeur believes, through a reflection on the nature of a text, a reflection that suggests a new relationship between explanation and understanding.

What is a text? A text, Ricoeur says, ‘is any discourse fixed by writing… fixation by writing is constitutive of the text itself’ (Ricoeur 1981, p. 145). While

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writing appears to be merely a linear script of what has been spoken, writing radically transforms the discursive process. In spoken discourse, there are certain unique qualities that are abridged through the recourse to writing. The act of speech, and its tacit assumption of speaker and listener, implies that the parties to the exchange share at that moment in time a common world. Participants share a common environment; they can exchange questions and answers through direct dialogue; and the referents of speech can more easily be grasped or ‘pointed to’ through interaction of the minds present simultaneously at a specific time and place.

All of this is thrown into upheaval with the transformation of communication from the intimacy of the spoken word to the anonymity of the written word:

the reader takes the place of the interlocutor, just as writing takes the place of speaking and the speaker…. Dialogue is an exchange of questions and answers; there is no exchange of this sort between the writer and the reader. The writer does not respond to the reader. Rather, the book divides the act of writing and the act of reading into two sides, between which there is no communication. The reader is absent from the act of writing; the writer is absent from the act of reading. The text thus produces a double eclipse of the reader and the writer. It thereby replaces the relation of dialogue, which directly connects the voice of one to the hearing of the other.

(Ricoeur 1981, pp. 146–7)

Writing, therefore, intercepts the discursive exchanges. Writing is now one side of the communicative act and becomes as a consequence an ‘intentionto-say’. ‘The emancipation of the text from the oral situation,’ Ricoeur argues, ‘entails a veritable upheaval in the relations between language and the world, as well as in the relation between language and the various subjectivities concerned (that of the author and that of the reader)’ (Ricoeur 1981, p. 147). The anchoring of language to that commonly shared world of speaker and listener is broken. ‘The movement of reference toward the act of showing is intercepted, at the same time as dialogue is interrupted by the text’ (Ricoeur 1981, p. 148). The text now takes on an autonomy, an existence of its own. It is freed to be placed into relationships with other texts, and in other settings of time and place. ‘Words cease to efface themselves in front of things; written words become words for themselves’ (Ricoeur 1981, p. 149).

If the written word creates a distanciation, a separation of the writer from what he has written and the reader from the author, how does one approach the text? What now, is the meaning of the text? How shall the intentionalities objectified in the text be interpreted? Ricoeur considers two possible ways. One way is to treat the text ‘as a wordless and authorless object’ in which ‘we explain the text in terms of its internal relations, its structure’. The other way is to restore the text

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as a ‘living communication’ in which ‘we interpret the text’ and rediscover the meanings that were captured in it as a telling (Ricoeur 1981, p. 152).

What does it mean to explain the text in terms of its internal relations and structures? Robert Scholes, a proponent of the ‘structuralist approach’, helps us with this question:

Under semiotic inspection neither the author nor the reader is free to make meaning. Regardless, as author and reader they are traversed by codes that enable their communicative adventures at the cost of setting limits to the messages they can exchange. A literary text, then, is not simply a set of words, but…a network of codes that enables the marks on the page to be read as a text of a particular sort.

(Scholes 1982, p. 110)

Within this perspective, explaining the text becomes an explanation of the language of that text as a game of rules, or ‘codes’, the logic of which specifies and permits the use of words and language units (e.g. the sentence) in certain ways and not in others. Explanation in this sense means the logic of language separate from and regardless of the particular message that any concrete text written by a certain author at a moment in time and place was meant to convey. When analysed in terms of the logic of language, the text is lifted out of the context of its historicity—its making and meaning—and transformed into an entity lacking both temporality and speciality. It is reduced to and examined in terms of its purely formal properties. The text in a fundamental sense is dehumanized. In other words, the intentionality of the text’s creator as it is to be found in the communication now only has meaning as an example of the general linguistic rules to which any specific text may be reduced, and which may be discerned to reside in any text of a particular type.

But what is the purpose of such an explanation of the text? It was seen earlier that human intentionalities left their traces in ‘objectified’ tracks of signs, symbols, monuments, and manuscripts. An understanding of them and their meaning was only possible through the mediation of interpretation. Yet the validity of interpretation required a basis of evaluation. The logic of language is, therefore, a set of explanatory tools—a ‘textual way of thinking’ with which to approach the written word and give it order and internally consistent relationships for general intelligibility (Ricoeur 1978, pp. 153–4).

In Ricoeur’s eyes, the development of a logic of language is a means not an end. It is a way to reapproach the text and undertake the art of interpretation. If it were not, if the means become the end of the analysis, it would be reduced to a sterile game. Only by returning to the meaning of the text, by refocusing upon a world of subjects, subjectivities, and intentionalities, can explanation fulfil its task—to facilitate understanding through the mediation of interpretation. And by returning to the text as communication it now not only has internal structure but meaning as a narrative entered into and followed by the reading subject.

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By itself, structural analysis—the logic of language—is a static analysis, a logic of timeless, interdependent relationships among word codes and rules.2 The task is completed only by moving on to the dynamics of the narrative of the text —in which specificity, temporality, and a unique succession of meaningfully structured events and ideas represent the context of understanding. The focus of

attention is shifted to the text within the structure, rather than the structure within the text. The determinateness of the structural analysis is replaced by the patterned path of the tale of the text. In Ricoeur’s words:

Following a story, correlatively, is understanding the successive actions, thoughts and feelings in question insofar as they present a certain directedness. By this I mean that we are pushed ahead by this development and that we reply to its impetus with expectations concerning the outcome and the completion of the entire process. In this sense, the story’s conclusion is the pole of attraction of the entire development. But a narrative conclusion can be neither deduced nor predicted. There is no story if our attention is not moved along by a thousand contingencies. This is why a story has to be followed to its conclusion. So rather than being predictable, a conclusion must be acceptable.

(Ricoeur 1980, p. 170)

Thus, the hermeneutical arc is completed. ‘Naïve’ interpretation is replaced with structures of formal explanation, which then guide the reader back to the actual texts for critical interpretations of the meanings and intentionalities within them.

EXPLANATION WITHOUT UNDERSTANDING: THE MEANING OF PRICE IN FORMAL ECONOMIC

ANALYSIS

what we have in mind…is not to pose and solve the problem in question as if it were a real problem in a given concrete situation, but solely to formulate scientifically the nature of the problem which actually arises in the market where it is solved empirically…. What must we do in order to prove that the theoretical solution is identically the solution worked out by the market? Our task is very simple: we need only show that the upward and downward movements of prices solve the system of equations of offer and demand by a process of groping.

(Walras 1954, pp. 157 and 170)

Neoclassical economists in general begin their analysis with the individual human decision-maker. After all, only individuals evaluate, prefer, choose, and exchange. The explanatory schema, the analytical grid, that they use for coherence and universal applicability is the logic of choice. The formal structure of choice is demonstrated to be a matter of a certain invariant relationship

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between diverse, competing ends and limited means which have alternative uses, under a particular set of general assumptions: that a chooser can rank alternatives in order of importance; will experience a diminishing marginal utility or usefulness from each additional unit of a means applied to any specific end; can decide whether the application of an additional unit of a means will have a higher marginal utility in one use rather than another; and can co-ordinate, or bring into equilibrium, his own actions in such a manner that no reallocation of the means available to him can bring about a net improvement in his particular circumstance.

From the perspective of the logic of choice, all of the concepts and categories usually specified as ‘economic’ can be seen as being present in every conscious human decision in which the means are found to be insufficient in relation to the ends: cost and benefit, profit and loss, exchange and price. This has been succinctly expressed in relation to the concept of exchange by R.G.Collingwood in his essay ‘Economics as a philosphical science’:

there is no such thing as an exchange between persons. What one person gives, the other does not take. I may give a piece of bread for a cup of milk; but what I give is not the bread, but my eating of the bread, and this is not what the other party gets; he gets his eating of the bread, which is an utterly different thing. The real exchange is my giving up the eating of bread and getting the drinking of milk; and there is another exchange, that of his drinking against his eating, on the part of the person with whom I am said to exchange commodities. All exchange, in the only sense in which there can be a real exchange, is an exchange between one person and himself; and since exchange, understood as the relation between means and ends, is the essence of economic action, all the essentials of economic theory can be worked out with reference to a single person. Indeed, it is only so that they can be intelligibly worked out.

(Collingwood 1925, pp. 169–70)

What, then, is a price? In this context it is, as Philip Wicksteed clearly stated, the alternative foregone:

the price paid stands for the alternatives foregone; so that ultimately the price we pay for getting this consists in going without that (which we want) or putting up with the other (which we dislike).

(Wicksteed 1933, p. 93)

The price is the cost of the choice. Using Collingwood’s example, for one individual it is the foregone eating of a piece of bread for the drinking of a cup of milk; for the other, it is the foregone drinking of a cup of milk for the eating of a piece of bread. The external manifestation of their decisions, the transfer of bread and milk, is ultimately only the consummation of respective exchanges in the minds of the two, after they individually conclude that the price to be paid is

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worth it in terms of what was to be acquired. It is the pricing and exchanging in the minds of the individuals that can be seen as the ultimate foundation of the economic process.

By focusing attention purely upon the decision-making process in the mind of each individual, neoclassical economic theory shoves into an obscure corner of the analytical background an essential element inherent in the very nature of the market process: that the fulfilment of the exchanges made in the mind of each requires a meeting of the minds of the two. Neither can consummate their intention and pay the price they are willing to incur without the consent and assistance of the other. Their intentionalities are interdependent. But the assistance of each through exchange requires an understanding of the intention of the other. And an understanding of the other’s intention requires an interpretation of his plans and actions.

In the logic of choice, where the focus of the analysis is on one mind, an understanding of price is acquired through an explanation of price as the cost of a decision. Choice is explained as selection among alternatives and the terms at which alternatives may be obtained are their prices for the individual. But in an arena of multiple minds, prices are not merely generalized constraints, but a means for communication with others concerning one’s own intentions and the reciprocal actions desired from those others in the nexus of exchange. Prices now enter as a potentially coordinating element in the arena of interpersonal relationships. In order to fulfil this role, however, the actors in the market must understand the meanings of others as externalized in the form of ratios of exchange between commodities traded.

Rather than understanding the process of interpersonal interpretation of prices, neo-classical economics has predominantly directed its attention to a formal explanation of the logic of prices, conceived as generalized constraints. In the logic of market prices, actors are conceived as reactors; they become the evaluators of goods, but neither the doers nor interpreters of acts. They neither offer nor interpret prices, for in the formalized schema the market participants neither communicate nor respond to each other. Rather, they simply, and individually, register the alternative quantities of goods they would be willing to buy or sell along a hypothetical spectrum of higher or lower prices that are both ‘given’ and given to them.

In this analytical schema of things, prices are not used by actors to interpretively co-ordinate; rather, their role is to equilibrate logically. The ‘individual experiment’ (in which n number of anonymous choosers are confronted with a family of buy and sell prices) is followed by a ‘market experiment’ (from which equilibrium values of demand and supply are determined by simultaneously varying the prices of the n goods in question until all prices have moved in the respective directions logically necessary for a general clearing of all markets).

Human action is removed from the scene and replaced with quantitative relationships. The heterogeneity of conduct is replaced with the homogeneity of

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amounts. And an arid explanation of the relationships among magnitudes at alternative ratios and rates becomes the end of economics.

EXPLANATION WITH UNDERSTANDING: THE MEANING OF PRICE IN INTERPRETIVE ECONOMIC

ANALYSIS

We may regard the price system as a vast network of communications through which knowledge is at once transmitted from each market to the remotest corners of the economy…. But…in a world of continuous change…knowledge derived from price messages becomes problematical…[price] information therefore requires interpretation (the messages have to be ‘decoded’) in order to be transformed into knowledge, and all such knowledge is bound to be imperfect knowledge.

(Lachmann 1978 [1956], pp. 21–2)

Neoclassical economic analysis detaches the logic of choice and price from its natural moorings in the context of human action. The logic of choice, as we saw, concerns the appropriate allocation of given means among alternative and given ends that have been ranked in order of importance. The concept of action, on the other hand, as developed for example by Ludwig von Mises, focuses on the mental doings of men by which the ‘givens’ of the logic of choice are created and given contextual or subjective meaning by the actor, without which the content of choice would have no intelligibility for human understanding. As Mises (1966) put it concisely: ‘Economics is not about things and tangible material objects; it is about men, their meanings and actions.’ The mental doings behind all human action involve the creation of pictures of imagined alternative courses of action and the arrangement of their various elements in men’s minds. For example, what are the ‘costs’ of alternative actions and what are the relevant dimensions of ‘sooner’ or ‘later’ in a particular mode of conduct? These mental pictures in the minds of men, in turn, guide their actions. These imagined possibilities are maps that men draw in their minds and from which they select some possibilities and set aside others and for which they initiate actions for their materialization in a journey into an uncertain future (see Mises 1966, pp. 13–14 and 92–118; see also Cranach and Harré 1983, pp. 1–73; and Brenner 1981, pp. 1–27).

When looked at from the context of ‘action’, men also create their own prices. What they imagine as possible alternative circumstances, what they ‘see’ as means to their attainment, and how they estimate the trade-offs between them, establish the constraints inhibiting the achievement of their desired ends. Whether their beliefs and expectations turn out to be ‘objectively’ correct or not

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they still serve as the points of orientation for all they say or do. Experience may override and modify men’s mental creations, but it can never replace them.

I have argued that while price and exchange were ultimately acts of the individual mind, their consumption requires a meeting of the minds in a setting of interdependent intentionalities. The assistance of each through exchange requires an understanding of the other. And an understanding of the other’s intentions requires an interpretation of his actions.

Neoclassical economics, with its arid formalism, has closed itself off from a serious posing of such questions. Much can be gained, on the other hand, by taking a look at some of the contributions in neighbouring social disciplines. And it is particularly in the sociological writings of Max Weber and Alfred Schutz that some useful conceptual tools for an interpretive economics may be found.

The hallmark of Max Weber’s approach is his emphasis on the subjectively meaningful act. Human behaviour takes on the characteristic of ‘action’ when that behaviour has a meaning expressible by the actor in terms of the goal towards the achievement of which the action is directed. Human action incorporates a ‘social’ aspect when it contains awareness of the behaviour of some other human actor. Human actions take on the character of a ‘mutual orientation’ when the actors incorporate into their respective actions an appreciation of the actions of the others (Weber 1978, pp. 4–31). The words most frequently employed by the economist represent notions of such mutual orientation. ‘Market’, ‘buyer’, ‘seller’, ‘competition’, ‘fidelity to contracts’, all imply behavioural expectations concerning attitudes, conduct and response in the context of particular circumstances that actors would intend for themselves and expect from others (Weber 1978, p. 27). As Weber clearly expresses it, ‘exchange’ would be meaningless without the presence of a mutual orientation in which the transactors assign a particular type of meaning to their specific doings:

Let us suppose that two men who otherwise engage in no ‘social relation’ …meet and ‘exchange’ two objects. We are inclined to think that a mere description of what can be observed during this exchange—muscular movements and, if some words were ‘spoken’, the sounds which, so to say, constitute the ‘matter’ or ‘material’ of the behavior—would in no sense comprehend the ‘essence’ of what happens. This is quite correct. The ‘essence’ of what happens is constituted by the ‘meaning’ which the two parties ascribe to their observable behaviour, a ‘meaning’ which ‘regulates’ the course of their future conduct. Without this ‘meaning’, we are inclined to say, an ‘exchange’ is neither empirically possible nor conceptually imaginable.

(Weber 1977 [1907], p. 109)

The actors possess a mutual understanding of each other when they have interpretively grasped the meaning to be discovered in the action of the other (Weber 1978, pp. 8–9).

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But how are interpretive judgements to be made as to the meanings to be discerned in the actions of others? Here Alfred Schutz comes to our assistance. And he aids us through his developments and improvements on Wilhelm Dilthey’s idea of ‘structures of intersubjective meaning’ and Max Weber’s conception of the ‘ideal type’. We all are born into an ongoing social world already containing commonly shared structures of intersubjective meaning. They define objects and situations, relationships and feelings (Shutz 1973, pp. 7–11). Through a process of inculcation beginning in childhood, we are introduced to that world, and come to ‘see’ in various actions, things and situations the same potential meanings that others do (e.g. this individual is a ‘bank teller’, this object is a ‘door stop’, this experience is ‘professional recognition’, this situation is a ‘riot’ or ‘trading on the stock exchange’). This commonly shared world enables individuals to understand both themselves and others as manifested in various words and deeds.

Within the commonly shared world of intersubjective meaning, individuals experience each other in varying degrees of intimacy and anonymity, what Schutz characterizes as ‘ideal types’. At one extreme all other members of the social world are experienced merely as the anonymous ‘others’, typified in terms of those general characteristics discernible in all men (i.e. choosers of ends, appliers of means, doers of acts). At the other extreme is the face-to-face relationship in which individuals construct composite images in their minds of the particular person in question (i.e. an ‘ideal type’ of that individual’s characteristics and personality traits that make him what he seems to be in our eyes). And in the middle are ‘ideal types’ that represent concrete generalizations concerning behavioural motivations and patterns of action that have come to be expected from any individual in the particular social or economic role or situation referred to.

The ‘ideal types’, as developed by Schutz, serve the role of explanatory schemata for the purpose of interpretive understanding in the concrete social world of everyday life: for example, any individual motivated by this goal or endeavour will ‘typically’ act in the following manner…; or any individual performing this particular task will ‘typically’ fulfil the requirements of that task in the following manner…. In turn, similar ‘ideal typical’ explanatory schemata tacitly exist in the minds of social actors and serve as the basis upon which individuals are able to form expectational judgements as to the meanings of others with whom they interact. They enable each individual to both understand and anticipate to varying degrees the likely conduct of others in alternative circumstances (see Schutz 1976, pp. 20–63; see also Ebeling 1987, pp. 50–61).

An understanding of prices in the market requires a situating of prices in the context of the intentionalities they reflect. By themselves, prices are nothing more than quantitative ratios—magnitudes of things. They become more than this when viewed from within the setting in which they arise, and they arise from the actions of men. The intentionalities of men as reflected in prices are what require interpretation, and not the prices themselves. The prices of the market are

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indicators and not signals—that is, they register changes, but by themselves they do not specify what is to be done.

How then are prices used and how are markets co-ordinated? Since Friedrich A.von Hayek’s essays on ‘Economics and knowledge’ and ‘The use of knowledge in society’, it has generally come to be recognized that what is of crucial importance with the emergence of a division of labour is the accompanying division of knowledge. Once an economic order goes beyond a certain threshold level of increasing complexity, it transcends the ability of any mind or group of minds to collect, integrate, and evaluate the knowledge upon which a complex economy relies (see Hayek 1948, pp. 33–56 and 77–91).

In ‘The use of knowledge in society’ Hayek emphasized the distinction between scientific knowledge (which is recordable, transferable and permanently available) with the special practical knowledge of time and place (which is specific to changing, local circumstances). Practical knowledge concerns the workplace, resource availabilities, production eccentricities and labour skills that could never be passed on to a central planner and still be effectively used.

More recently, Don Lavoie has reinforced the Hayekian idea of ‘special knowledge of time and place’ by pointing out the importance of Michael Polanyi’s insight into the nature of tacit or inarticulate knowledge. This is the type of knowledge that is crucial for the undertaking of practically all daily and scientific tasks, yet can never be converted into an ‘objective’ form capable of being transferred to another human being without losing some of its essential properties (see Lavoie 1985, pp. 56–64 and 251–65).

Yet, by themselves, neither Hayekian nor Polanyian knowledge specifies the particular type of knowledge that enables the process of price interpretation to generate a pattern of market co-ordination. If one reads Hayek carefully, it is sometimes unclear whether or not he assumes that the messages conveyed by market prices are unambiguous, and that the only problem is whether those possessing the particular and changing knowledge of the resource and production possibilities in various corners of the division of labour can bring that special knowledge to bear.3 In the case of Polanyi, most of his examples about the uses of inarticulate knowledge refer to ‘skills’ and scientific creativity.

The particular knowledge that is the basis upon which price interpretation is undertaken is that of the ‘structures of intersubjective meaning’ and ‘ideal types’. But it, too, is a knowledge that is divided among time and place and almost always in an inarticulate, non-quantitative form. While most people in a community or society would share a vast multitude of ‘ideal types’ in common, the process of division of labour would result in a differentiation in both the types and degrees of specificity of various ‘ideal types’ possessed in the minds of the market participants. There results a particular kind of social distribution of knowledge (Schutz 1976, pp. 120–34).

The ‘ideal types’ that different individuals will construct in their minds, and which serve them in interpreting the market, will be products of experience with the specific markets within which they operate, the particular set of customers

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with whom they normally do business, and the tangles they have had with competitors selling the same or substitute goods. Particular changes in market conditions or movements of prices will result in the individual being confronted with the dilemma of interpreting market indicators (prices). In other words, when he is juxtapositioning, integrating and structuring the ‘ideal types’ he has to draw upon, he has to do it in ways that seem relevant to him. The question about which of the ‘ideal types’ and what relationships between them will be relevant in a particular circumstance, will only be known to him, and involves an intellectual exercise that will often be a classic instance of Polanyi’s conception of tacit knowledge.

Yet, regardless of the ‘tacit’ or ‘inarticulate’ nature of the ‘ideal typifications’ and their use in the minds of the market actors, they nevertheless remain the social background to the market foreground upon which decisions will have to be made by the participants in the nexus of exchange. Without such a stock of social knowledge, the actors could neither evaluate a change observed in the market prices relevant to their own lines of production, nor estimate consumers’ response to a self-initiated change in the price of their own product, or a change in its qualities or characteristics. A furniture manufacturer, for example, must interpret the state of the market for furniture concerning the styles, quantities and various prices for the furniture he could construct. To make his pricing and product decisions, he must draw upon his accumulated experience, knowledge, and ‘feeling’ for the market.

One of the consequences of the development of the market economy during the past 200 years has been that a diminishing portion of output is ‘made-to- order’, (i.e. with specification of what product or characteristics are desired before production begins, through prior face-to-face discourse between seller and buyer). Production is usually undertaken in advance for anonymous ‘others’ on the basis of judgement and speculation on the producer’s part. This has meant that ‘price’ is not merely the consummation of a literal meeting of two minds who conclude terms of trade on the basis of bargaining through conversation. Prices, as historical artefacts (the terms of trade of past acts of exchange), must serve as indicators of future possibilities towards which present actions are to be oriented.

Generalizations must be made about the participants in the market who may be potential customers of the good in question, or competitive rivals in a line of production. The producer’s informal and tacit generalizations of his accumulated experiences, knowledge and feelings about his corner of the market and those in it are his ‘ideal typifications’. They are what enable him to use the prices of the market for purposes of interpretation.4

As long as formal, neoclassical price theory is separated from an understanding of the social context within which the laws of price manifest and work themselves out, the task of price theory remains incomplete. Neoclassical economics constructs a rarified, rigorous, timeless logic of the formal function of prices in the market; but the interpretative arc—by which Ricoeur means an

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integration of theory with the world it is meant to comprehend for the purposes of understanding—is left incomplete.

It is true that in elementary textbooks and in informal conversations among themselves, economists tell ‘stories’ about how the laws of economics and price work in the ‘real world’. And in these informal ‘tales’ they introduce actions, plans, discoveries and temporal-sequential adjustments. This is analogous to the linguist who, in trying to show how the ‘rules’ of a language work in practice, makes up concrete sentences for purposes of example. Both exercises are indispensable for grasping the logic behind either language or market relationships; but in neither case is this a return to the text or a return to the actual setting of the market requiring interpretation.

Economists have either remained at the rarified level of abstract formalism and model-building or claimed to have returned to the ‘real world’ through applications of formal, mathematical theory via statistical constructions. In the former case, they abstract from the interpretive dimension represented by the ‘social structures of intersubjective meaning’ and the ‘ideal typification’ process of which it is composed. In the latter case, they decompose the structure of market and price relationships and reconstitute them in the form of various frequency distributions, mean averages and stochastic processes. This method of analysis has its counterpart in those textual interpreters who attempt to understand the meaning of a text by reducing the text to various word classes and then test their interpretive hypothesis concerning its ‘meaning’ in terms of word frequencies. Such exercises may very well have certain linguistic functions, but they would not help in the necessary task of what is normally meant by ‘understanding’ the meaning of the text.

The consequence of reducing economic phenomena to statistical aggregates is to submerge sequential-temporal relationships between both the actions of the individual market participants and the pricing process and patterns that emerge out of the intersecting of a multitude of individual plans in the social market arena. By transforming the actual and existing structures and price relationships of the market into a statistical image, economists following this method do not succeed in understanding the market; instead, they create a different pattern of relationships that may appear to possess ‘interesting’ properties, but which usually have little to do with the ‘real world’.5

CONCLUSION: COMPLETING THE INTERPRETIVE

ARC

In the movement from an explanation of the logical function of prices for market equilibrium to an understanding of the social process of the formation and interpersonal interpretation of prices for market coordination there appears to be a loss in both rigour and determination. The formal and axiomatic structure dissolves away into something more ambiguous, tentative and open to different meanings and ‘interpretations’. The solid foundation of what is traditionally

188 ALTERNATIVE VIEWS OF HERMENEUTICS

considered the method of scientific reasoning and evidence seems to slide from beneath our feet. We enter an arena in which scholarly discourse appears to become mere ‘opinion’ and ‘judgement’.

This sense of ambiguity seems to arise from two sources. The first comes from the analytical isolation that economists have progressively imposed on themselves. The excursions, for example, that economists have made into other social sciences have resulted in the application of the formal structures of economic theory to a variety of new settings and situations. Economists, for the most part, have assumed that possession of the right ‘technique’ is all one needs, and that the technique for answering one type of question is appropriate for all types of questions. If one views all problems in the social sciences as only involving the working out of solution sets for individual maximization of utility, profit or product (subject to alternative constraints), then all social sciences are reducible to the logic of choice narrowly defined.

If, however, instead of defining ‘price’ only as a generalized constraint from the individual’s point of view, ‘price’ is also looked upon as a social means for mutual orientation of individual plans in a system of division of labour, then one technique does not fit all problems. The economist must now truly become a social scientist. He can achieve this, not by superimposing his established method of analysis on other disciplines, but rather by inquiring into the methods of those other disciplines to see what useful analytical tools have been developed to grapple with problems of understanding social action.6 Social action is by its nature interpretive action, and therefore its analysis requires the methods that have been developed in other social disciplines for understanding the processes through which individuals interpret one another’s meanings and actions. An illusionary exactitude and determinateness is gained by economists only through their peculiar definition of ‘the economic problem’. Ambiguity seems to reign everywhere outside of this definition only because of their methodological pretence that excludes other methods as ‘unscientific’.

It is this ‘positivist’ presence (that is in disarray and in retreat in the philosophy of science) that is the second source of this ambiguity. As Donald McCloskey has eloquently and convincingly shown in his (1985) book, The Rhetoric of Economics, the ‘positivist’ criteria are not, and have not been, the basis for defending alternative propositions and hypotheses in economics. Rather than being an ‘objective’ standard, ‘positivism’ has itself been a particular form of argumentation to justify and rationalize the acceptance of one type of scientific approach and one type of theoryformation peculiar to it. A high ‘r- square’ is not an answer but an argument. It is an evaluational standard within one way of ordering and arranging ‘the facts’ of the world, and presumes prior justification of that view of things through argumentation and persuasion.

What are acceptable answers depends upon the questions that have been asked. No answer is right or wrong separate from the context of the problem under discussion and what is considered a suitable answer in terms of the subjectmatter and its properties (cf. Collingwood 1944, pp. 24–33). The logic of price