Homo Economicus, Homo Informaticus and Homo Dialecticus Part One: The three big things that make markets so productive and how we¢â¬â¢ve underplayed one of them.

Lennon and McCartney, Lerner and Lowe, Rogers and Hammerstein, Gilbert and Sullivan, John and Taupin, Lloyd-Webber and Rice. Were any of these guys quite as good on their own as they were with their partner? Are these gains from trade? Well in some cases one of the partners concentrated on words, the other music. But even here, collaborations with other librettists didn’t usually seem to work out as well.

It seems to me there are at least fundamental things that characterise markets and explain their power at fostering economic efficiency and development but only two of them have made their way squarely into the centre of the analysis of economics.

The first thing that markets are built around is ministering to their participants self-interest. This is at the centre of neoclassical theory which is built from individual people styled as ‘homo economicus, each seeking to optimise their own situation. To make this as uncomplicated as possible, it is assumed that their tastes are in some sense ‘given’ though we all know (including hopefully the people who make the assumption to help their analysis) that this is a simplification.

The second thing markets do well is what Hayek made the centre of his own critique of socialism. They allow information that exists in all sorts of nooks and crannies throughout the system to be efficiently deployed in decision making. Thus a tea trader or farmer in rural Japan can make use of some localised information (for instance about some local event that could influence local production in the coming season) that a central planner would never discover, and could probably not use properly in its planning.

I think there’s a third thing that’s a central aspect of economic progress which provides an additional explanation for the success of markets. That’s feedback and interaction between agents agents like buyers and sellers, suppliers and customers, employers and employees and Lennon and McCartney. I’m not suggesting that the existence or even importance of feedback is some new insight.

It’s incorporated in the neoclassical story of how prices arrive at their equilibrium at least in a crude form via t¢tonnement. But it’s really only what Joan Robinson called a “fudge” a makeshift to integrate the modelling one wants to do into a ‘story’ that hangs together it’s not the centre of the analysis. And at least in my own reading, it doesn’t figure very prominently in Hayek who is much busier making the second point about the decentralisation of existing information in his economics. I recall reading Hayek and looking for feedback in his articles and finding it surprisingly hard to come by, a surprising thing given that it ought to add another string to his anti central planning bow. I have little doubt that he would have mentioned it in passing and perhaps focused on it in a passage or lengthier piece here or there, but if people could point me to it I’d be grateful.*

Since both Hayek and the neoclassicals built their system ostensibly out of ideas present in Adam Smith it’s of interest to observe that feedback seems to be a stronger and more central element in Smith than in the two traditions that think of themselves as his followers. The analysis of the Austrians and Hayek envisage the economy as a process rather than an outcome, but even so, where innovation is concerned, it is often produced by some more or less heroic entrepreneur rather than a process of feedback and interaction between agents. (Again, please correct me, preferably with chapter and verse, if you think I’m wrong).

Some Troppodillians will remember a bunch of posts about Adam Smith that I called Homo Dialecticus. The title highlights the way in which Smith’s centre of analysis was not the individual as such but his co-determination within a community of others.

This is overwhelmingly true of Smith’s ‘socio-psychology’ as presented in the Theory of Moral Sentiments. Here people become people by way of a process of interaction with each other and the social expectations of their culture which is complex, subtle and profound. It is also present in a foundational way in Smith’s economics when he presents us with his ‘oratorical’ theory of exchange.

He sees the bargaining between buyer and seller as inherently communicative bids and offers are attempts to persuade the one of the other’s point of view with the ultimate result being some compromise between them. And Smith also theorised language in the same way and in a way that most people would find least controversial. Languages are a joint-product of many people interacting and co-determining co-developing the language in the process of using it.

I think this idea of feedback and interaction essentially a Smithian idea that we are all forever jointly co-producing value has become progressively more evident and important as modernity has unfolded. Intensification of feedback and interactivity is central to the story of various revolutions in production in the workplace. But that, dear Troppodillians is the subject of the next exciting installment of this post.

* By way of aside I'd make this observation about Hayek from my own reading and invite contradiction from those better read (or more recently read) than me. He is often pretty static in his treatment of information. No doubt he understood that people could go in search of information and generate new knowledge, but he seems to spend more time talking about the use of existing information rather than the creation of new information.
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Andrew Norton
Andrew Norton
14 years ago

Nick – I agree that communication between buyers and sellers is is a very important part of the market economy. But in terms of political emphasis, it is the price mechanism that has been under most threat through history – though there are various restrictions on commercial freedom of speech. And intellectually, the price mechanism is probably more fascinating. Intuitively, we can understand pretty easily how people can coordinate their actions by direct communication. But the miracle of the market economy is how billions of people who do not know each other coordinate their actions – and for that to happen effectively, you need price signals.

Tony Harris
Tony Harris(@tony-harris)
14 years ago

The detailed theory of entrepreneurship is hotly debated in Austrian circles and in my opinion it is all about acting to create opportunities for mutual gain which can be done in small or large measure.

This thought may be of interest.

http://catallaxyfiles.com/?p=2281

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