Abstract
The first part of the book is dedicated to a simple, however, non-trivial question: “How do we do that we can correctly estimate the future, that we can learn from realized mistakes and be economically successful?” The problem I am solving within the chapter is how it is possible that we are able to make rational decisions and to act rationally if we do not know the future and, at the same time, we are still economically successful (we are experiencing prosperity and improving living conditions). The solution is based on the small modification of the theory of subjective value with a connection to evolutionary (intersubjective) apriorism. The chapter also answers the question how we coordinate each other. It is possible to consider the chapter as an expansion of Hayek’s theory of social ordering.
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Notes
- 1.
The authors often supplement each other. The reader should not get the impression that if this essay cites, e.g., Mises or Hoppe, that Shackle–Lachmann’s interpretations of a phenomenon related to the future are completely different and less relevant. I originally wanted to focus on three lines of approach: The Knight–Mises–Hoppe–Hülsmann line, the Shackle–Lachmann line, and the Hayek–Kirzner line. However, after a more detailed examination of the selected authors, I had great difficulty in classifying them in this way.
- 2.
Shackle approaches the possibility of economic analysis only in terms of objectively given facts of neoclassical equilibrist analysis which eliminates the time factor from economic analysis. According to neoclassical economics, it is the only applicable economic analysis. In principle, it is an honest awareness of the problem of time and change, and the application of economic analysis only in the context of certain theoretical assumptions, e.g., Selgin (1990, p. 30) quotes Shackle in this context: “If there is a fundamental conflict between the appeal to rationality and the consideration of the consequences of time as it imprisons us in actuality, the theoretician is confronted with a stark choice. He can reject rationality or time.” However, one of our tasks is to identify the possibilities of implementing economic analysis in the context of the passage of time.
- 3.
From this point of view, it is completely understandable, that when examining economics why e.g., Shackle resorts to describing static equilibrium. For him, it is the only scientifically honest (!) method of studying economic phenomena. At the same time, Shackle is well aware that the elimination of several variables is a simplification, but in the context of the description of real reality, this is the only option for him.
From the classical Austrian analysis of the problem of economic phenomena, where it is argued that the neoclassical way of examining the problem of equilibrium is unrealistic, it is questionable to what extent the analysis based on the examination of human action is equally realistic. If we can even talk about any realism of the Austrian way of studying economics, it is only at the level of general and abstract knowledge, which is the modus operandi of human action. An equally interesting and related question arises as to how much this kind of abstraction of the description of human action differs from the neoclassical description based on the elimination of some variables.
- 4.
Shackle–Lachmann solves this problem by describing speculative markets, where one part of the speculative market belongs to the so-called bulls (speculators on price growth) and the second part of the market is called bears (speculators on falling prices). At one point in time, one or the other simply hits the bull’s eye and actually guesses the “result” correctly. However, it does not explain how our predecessors made decisions, they did not know these types of bull-bear markets and, if we go even further into history, did not even calculate in monetary units.
- 5.
As the reader will see later, these are not objective criteria, but intersubjective criteria. These people perceive them as tacit knowledge, they do not question it in any way, and in this respect, they are objectified criteria for them, based on which they make decisions.
- 6.
Shackle is also aware of this problem; within this context, Lachmann (2005, p. 228) compares Shackle to Mises: Both authors emphatically reject the calculus of probability as a tool for dealing with human conduct in a world of uncertainty. Shackle devotes his chapter 34 (‘Languages for Expectation’) to this matter. He sums up his view in the heading of section 34.40: ‘Probability concerns groups of events, not single critical choices’ (1972, p. 400). Mises makes the same point by distinguishing between class and case probability.
- 7.
Using Knight’s example with bottles of champagne, an entrepreneur buys 1001 bottles for every 1000 bottles used because he anticipates that 1 out of 1000 bottles will be broken. This way, the entrepreneur increases the degree of certainty related to the phenomena in question in order to achieve their intentions towards customers. However, this does not mean that purchasing 1001 bottles increase their level of knowledge about the surrounding reality. Nor does it mean that they are not interested in increasing their knowledge of the surrounding reality, which subsequently enables them to reduce the need for insurance; e.g., by investing in inventing a better method of bottle production, which will reduce the volume of breakage. Naturally, investing in a higher degree of knowledge of how reality works must be economically feasible. Using the bottles example means that the degree of certainty associated with lower average bottle breakage and the level of investment into a possible solution must bring economically meaningful results, otherwise, it is more advantageous to use either insurance or accumulating savings and not investing. In other words, it sometimes makes more sense to accept one bottle out of a thousand bottles being broken, than to invest in a solution that will reduce the bottle breakage.
- 8.
It is very interesting how Klein (2009, Footnote 6) approaches the problem. He notes that the very notion of “case probability” is misleading. According to him, Mises should have called the phenomenon “case non-probability,” or maybe “case judgments without probabilities.” According to Klein, it is not possible to apply deterministic principles of homogenized and time-invariant phenomena of reality to the phenomenon of human action. We will return to this remark later in the text because it is important to us.
- 9.
It should be noted that we use the term “entrepreneur” in economic theory in the form of an ideal type. In reality, each of us is to some extent an entrepreneur, worker, or owner of capital goods, land, or are consumers (Mises 1949; 1998, pp. 252–256). In other words, each of us somehow makes an entrepreneurial estimate of the future. And as we see around us, if politicians don’t stop us using political force, we’re relatively successful.
- 10.
Position held e.g., by Richard von Mises; defended e.g., by Hoppe (2007); the given concept is also promoted by authors such as Venn or Reichenbach.
- 11.
The term “certain interpretation of reality” is manifested in the fact that there is controversy, whether it is a classical (Laplace), subjective (de Finetti, Savage), epistemic and inductive interpretation (Ramsey, Cox), logical interpretation (Keynes, Carnap), or the newly proposed intersubjective interpretation (Gillies) of probability. See in more detail in Gillies (2006).
- 12.
For closer look see e.g., van den Hauwe (2011).
- 13.
On this basis, we could classify Knight among those who claim that class probability has an objective character. Knight is also a proponent of the a priori nature of the probability problem in the context of the mathematical expression of probability.
- 14.
Knight goes further within this context. He claims that the creation of these groups results in the creation of different sizes of entrepreneurial units. The size of the company makes it more likely that correct estimates will prevail over incorrect ones. Knight clearly suggests that one way of dealing with an uncertain future is through different types of organizational units, business entities, based on some form of cooperation between individuals.
- 15.
“Specialization itself is primarily an application of the insurance principle; but, like large-scale enterprise, it grows up to meet uncertainty situations where, on account of the impossibility of objective definition and external control of the individual ventures or uncertainties, a “moral hazard” prevents insurance by an external agency or a loose association of venturers for this single purpose” (Knight 1964, p. 256).
- 16.
As we can see, the first three strategies are similar to Lachmann’s divergent expectations.
- 17.
Here, Mises follows Weber and the historical school. He also differentiates himself against some of the historical school’s conclusions, but that is a different discussion.
- 18.
“Moreover, whether we evaluate our predictions as successful or not, the meaning of success and failure is necessarily ambiguous” (Hoppe 1997, p. 73). However, Hoppe contradicts himself here in the sense that either we can learn from errors and success, and then the meaning of success and failure is not ambiguous or the concept of error and success is only a chimera without any objectified criteria.
- 19.
As Lewis (2017) shows, Shackle has another kind of mistake in his system when he claims that free will is called “uncaused cause.” See also Footnote 24 below.
- 20.
It is a modus operandi, a characteristic feature, Mises uses across his argumentation system. It is not so much the fact that there is no human character formed by his past, but that free will can reverse and reject any past human experience and, conversely, create a new character trait. For a critique of the dichotomy of Mises’ approach, see Pošvanc (2019b).
- 21.
Here, like Lachmann, Shackle denies the existence of something like the “trial and mistake” principle, which stems from the nature of the choice, which is unique. The choice is what Shackle calls an uncaused cause.
- 22.
“‘Rational expectations’ remains for me a sort of monster living in a cave. I have never ventured into the cave to see what he is like, but I am always uneasily aware that he may come out and eat me” Littlechild (2003).
- 23.
Orientation will be one of the cornerstones of how we believe we are grasping the future. See below.
- 24.
However, this kind of explanation of the in-determinism of the will pushes Shackle to argue that the will, as a reason for action, has no cause (the will would be an uncaused cause). The critique and quite successful modification of Shackle dualism related to the problem of “uncaused cause,” or the in-determination of the will, is realized by Lewis (2017), who shows that if we apply to Shackle vital parts of Hayek’s theory of mind which is introduced as a system composed of parts (neurons), however, where neuronal interconnection creates a system with separate, new, emerged properties, i.e., the mutual organization of neuron-parts of the mind creates very new properties in the mind (the concept of the will) which do not apply to those parts as such (separate neurons do not have these properties), it is possible to avoid the given dualism and eliminate in Shackle the problematic claims associated with the existence of the will as an “uncaused cause.”
- 25.
As the reader will see below, the following presented solution will contain precisely this kind of certainty, which I will combine, among other things, with another certainty that is mentioned by Mises, meaning here, an abstract knowledge about human action, which, as the Hayek-Pavlik method shows, is created in an evolutionary (I would add intersubjective) way based on the differentiation of mind/s concepts (mind concepts are Shackle’s concept of Scheme) based on the Hegelian “crossing” of boundaries of created mind/s concepts; boundaries as (Shackle’s concept of Constrains) must be crossed by differentiation and creates, in that way, a new kind of a priori knowledge, providing us with some new certainty.
- 26.
Huerta de Soto (2012, p.70), in a footnote in this context, states that in this way we are able to actually understand the biblical commandment from Genesis: “Be fruitful and multiply, and fill the earth subdue it” (Biblia, Pismo Svate Starej A Novej Zmluvy- Bible Old & New testaments-1978 Slovak language Edition Publisher: Tranoscius, Liptovsky Mikulas).
- 27.
As the reader will see below, it is precisely inter-subjective standards that we can consider as normative coordinates in the economic sense of the word. See below.
- 28.
As can be seen, Hayek begins with remarkably similar questions as stated in this work.
- 29.
Hayek must be criticized for such a defined position. He is not consistent. His position implies the impossibility of learning, respectively it would be necessary to declare that learning or a higher degree of coordination of our activities over time is only a cliché and is not possible at all. This follows from the claim that every single situation to which a person responds by changing a plan is unique concerning its subjective interpretation. However, this contradicts his claims about the mutual coordination of our activities based precisely on learning; learning implies that we know where we have made a mistake and how to correct it or how to avoid it. However, this would require mutually objective, respectively, as we will see below an intersubjective comparison of the two situations over time.
- 30.
Lewis (2014, p. 11) shows that according to Lachmann, prices are not unambiguous coordination elements, because each price can be interpreted from an individual point of view in different ways, i.e., although prices show a relative perception of the scarcity of goods in question and a perception of scarcity by individuals, however, this does not mean that the subjective perception of the prices does not cause a high degree of diversity in the perception of scarcity in question, which in turn makes it impossible to attribute coordinative characteristics to prices.
- 31.
This remark is not a cliché. Hayek’s system is built on a very solid ontology of individual phenomena, which proves e.g., Pavlík or several followers of Hayek such as Caldwell or Lewis.
- 32.
See e.g., Lachmann, recognizing the organic evolution of institutional structures, seems to have also stressed the importance of design in the emergence of institutions. In the following paragraphs of the letter from May 2, 1985, he writes: “I distrust Hayek’s attempt to reduce the fundamental institutions of the market economy, such as the family and property, to products of the process of cultural evolution. If they are indeed such products, so are the Soviet Union and the British welfare state. Since the dawn of history, political rulers have tried to interfere with markets and to manipulate them in their interests. Was all this merely a matter of “fatal conceit”? No constellation of social forces behind them?” in Kuchař and Dekker (2019, p. 2, footnote 2).
- 33.
Pavlík (2004, pp. 550–552) agrees with Hoppe and proposes an adjustment of Hayek’s statements.
- 34.
See also Hayek’s criticism of some Rand’s objectivists, e.g., in Kinkor (2000). If we look away from the style, which sometimes goes beyond the necessary criticism of Hayek (Kinkor declares Hayek, for example, a statistician or an advocate of collectivism or socialism), then Kinkor’s remarks on the absence of a mode of purposeful action in Hayek’s work, i.e., the action of reason, by which the thinking being is equally governed, must be considered as valid.
- 35.
A critique of Hayek’s approach to the problem of economic calculation, which Hayek bases on the work of his teacher Mises, but also a proposal to modify Hayek’s concept, which will be consistent with the approach presented here, can be found in Pošvanc (2019a).
- 36.
The division of the Kantian world “as it should be” into the normative and teleological sphere of knowledge can be identified in Engliš (1930). Engliš divides knowledge about the world into the formal-logical knowledge, which is the basis for other types of knowledge, namely empirical (natural sciences), teleological (we can include here economics) and normative (we can include here legal sciences). Teleological and normative knowledge is at the same time knowledge in the context of man’s normative idea of the world—“how it should be.” See Engliš (1930) for more details.
- 37.
“As Hayek remarked in 1983, “while the analysis of individual planning is in a way an a priori system of logic, the empirical element enters in people learning about what other people do … [Y]ou can’t claim, as Mises does, that the whole theory of the market is an a priori system, because of the empirical factor which comes in that one person learns about what another person does.” In Lewis and Lewin (2015, p. 31).
- 38.
Pavlík (2006, pp. 25–26): “Indeed, the vicious circle seems to follow not only from the fact that the process of nature’s becoming self-reflected (both at the sensory and conceptual level) appears to be, at first sight, a purely circular movement but also from Hegel’s explicit formulation of the basic methodological principle of the monistic approach. It reads as follows: The results of any truly scientific or scientifically-philosophical inquiry must show that what served as an immediately and unconditionally valid starting point of the inquiry (e.g., the a priori principle of constantly operating causes) is in fact necessarily mediated (conditioned) by what has been discovered during the inquiry.”
- 39.
In this way, according to Pavlík, the so-called fallibilistic apriorism of Barry Smith is circumvented, which, on the contrary, is based on the fact that empirical facts can sometimes bring a priori knowledge to their margins and thus falsify them, which, according to Pavlík, would cause the blurring of the boundaries between empirical and a priori knowledge. Smith must be influenced by Popper in this version of a priori, according to Pavlik. For more details, see Pavlík (2004, pp. 656–661).
- 40.
To clarify this program, it is necessary to see Pavlík (2004), a brief introduction is given by Pavlík (2006) and a detailed continuation of the program is present in Pavlík (2010). It is necessary to warn the reader in advance of the fact that it is a very extensive and in-depth, but inspiring, work, reading of which “rewards” the reader with an endless number of new and interesting questions. I put rewards into the quotation marks because Pavlík does not offer (just like Hayek in his theories) definitive solutions. On the contrary, his work opens the door to further exploration, which in my opinion should excite and not disappoint, because knowledge has these very features.
- 41.
Pavlík (2004, p. 579), by referring to Dugald Stewart, Smith’s first biographer, argues that Smith was not the first to use the method; before him, they were e.g., Montesquieua, Hume, or d’Alembert.
- 42.
Pavlík (2004, p. 885, translated from Czech by author) writes: “Given the intrinsic relationship between phenomenology and the original version of Gestaltism, it is possible to treat Smith’s imagination method as an active Gestalt, which, through the production of a unifying principle, inserts the aforementioned structure of unity in plurality into the incoherent phenomenal matter.”
- 43.
Pavlík (2004, pp. 590–591, translated from Czech by the author) writes: “It is more than obvious that Smith (and even before him Hume) reach, especially in their conception of feeling, the threshold of the phenomenological method, i.e., apply phenomenological procedures without being aware of them. What they present as empirical knowledge of the individual features of immutable and universal human nature (inclination and emotion, which already have the de facto character of intentional acts), is only lacking its inner contradiction and inconsistency. Only by translating it primarily into Husserl’s “sensible intuition,” i.e., to the cognitive act, which sees the phenomenon occurring in the individual exemplification of the general essence or relational structure. This “sensible intuition” then, through the method of variations, by which the sensible intuition “cleanses” itself from accidence (lat.; meaning a variable non-essential feature or property), results in an intuitive view of the general and necessary essence of the phenomenon under study, i.e., in a categorical view, which grasps the general relational structure (gestalt). Only the phenomenological reinterpretation of Smith’s method allows, for example, his “laws of sympathy,” i.e., the rules of justice (which, according to Smith, arise from empirical generalization). These can be understood as true priori laws (or eidetic laws) independent of the relative conditions of the experiential empirical process, and that his fundamental statements such as “people necessarily approve or disapprove of certain types of behavior” from his Theory of Moral Sentiments, could be preserved as valid parts of philosophical discourse.”
- 44.
However, Pavlík (2004, p. 21, translated from Czech by the author) is justifiably critical of Hayek, when he writes: “In addition, in his conception of spontaneous order, Hayek did not include what is inherent in both the spontaneous order of the market and the spontaneous order of the living organism and life in general. That is, the structure of the circular return to the beginning; he did not include there the corresponding structure of spontaneous genesis, i.e., the process of concretizing the differentiation of the undeveloped form of the self-relationship, which is the “germ cell.” In fact, he gave up not only Hegel’s legacy but also on A. Smith’s legacy … The reason is, of course, well known—Hayek quite rightly rejected the part of Hegel’s (later Marx and Comte’s) conception, under which the historical process is predetermined by the social human essence (including a circular self-relationship), which in the form of an embryo develops from itself the individual phases of the historical process in the same way as a plant develops from a seed in the course of its growth phases. However, Hayek was too zealous—in addition to the above-mentioned positives of Smith and Hegel’s approach, which consisted of the possibility of applying the structure of spontaneous genesis by concretizing differentiation to explain the development of the human mind in the inter-individual relationships of men (as in Smith’s Theory of Moral Feelings), and also the possibility of explaining the origin of language and establishing universal grammar, etc., Hayek thus closed the way to Hegel’s interpretation of the development of a priori structures of the human mind, which, according to Hegel, also takes place in the form of concretizing differentiation, but explicitly and emphatically in subject-object relations and also through a trial and error process.”
- 45.
Pavlík (2006, pp. 24–25) writes: “… the Hayekian psycho-physical parallelism merely endeavors to show that causality as it really exists in nature outside our brain can be reflected in the causal relations within the neuronal network, i.e., within what is the external (spatial) side of mental processes; at the same time, it is also thought, in a reflectionist manner, that the causal relations within the brain which reflect the causality outside the brain are structurally isomorphic with the a priori causal relations as imposed within our mind. In addition, in the frame of the Hayekian parallelism, it is shown that some complicated entanglements of causal processes in neuronal networks are able to produce such relational order which is structurally isomorphic with the a priori teleological and normological orders which are imposed on sensory phenomena within our minds; it is also shown that there exists a structural isomorphism between some other types of entanglements of causal relations within the neuronal network and the classification of events on the basis of their sensory similarities and dissimilarities.”
- 46.
Pavlík (2004) “traces” the circular principle in Smith, later in Kant, which comes with the principle of inner self-relationship, which Hegel then interprets as an inherent feature, the primordial basis of all spontaneously realizing processes.
- 47.
The germ cell is understood by Pavlík (2004, pp. 600–601, translated from Czech by the author) as: “The germ cell of the system can also be characterized as an elementary relational concreteness, whose designations are abstract in relation to the designations of the developed complex system (systemic macrocosm), whereas it is true, that the relational structure of the elementary concreteness of the germ cell determines the structure of the relationship in its full concreteness, i.e., in the developed system, which has been established by the process of differentiation.”
- 48.
For more details see e.g., in Pavlík (2006, pp. 26–33).
- 49.
Pavlík (2006) demonstrates this e.g., on the example of knowledge in physics and mathematics on pp. 38–50.
- 50.
However, within the intersubjective view that we’re using in this work, it is questionable to what extent for us, for example, knowledge to explain ourselves, is/will be blurred. In this respect, I consider the term blurred to be more correct than the term fully unknown. Exceeding the limits of our knowledge is always realized by a scientist (e.g., by Pavlík) in the form of a new theory, but as we can see, the presented knowledge does not have exclusively his (Pavlík’s) “brand” of thinking. The thinker, of course, encounters a problem defined by him. However, it “appears” to him due to the combination of other individual ways of looking at the same problem (by other thinkers), respectively, related issues. It is the combination of many concepts that enables the identification, respectively, the appearance of that thinker’s problem. Given knowledge (his and others), therefore, does not have an exclusively individual character. It is the very combination of concreteness made up of several individuals that makes it possible to simultaneously reveal newer and newer sediments of thought, which are revealed and discovered by the thinker/s. Here, too, the intersubjective character of our knowledge is manifested. From this point of view, I am also inclined to terminology in the sense of naming the theory presented here as Hayek–Pavlík’s intersubjective evolutionary apriorism. As the reader will see below, the explicit acknowledgment of intersubjectivity “helps” to solve several dilemmas, even those set out here. At the same time, it is not an intersubjective “truth,” but an intersubjective process of seeking it. The intersubjective process of searching suggests that the limits of our mind, to which Hayek points, may be systematically exceeded by the systematic thinking of several individuals, thus creating a new system of knowledge that is not solely dependent on the influence of the individual scientist. It seems that Hayek’s description of the theory of cultural evolution, applied to thought per se, must also imply in the context of Lewis (2017) and his description of the emergent properties of the system, that we will constantly exceed the limits of our individual knowledge. This raises two interesting questions: To what extent is this in contrast to the fact that there are clear limits to the knowledge of our individual minds? And to what extent can an intersubjective combination of minds overcome them, i.e., a system of minds and their mutual thinking or thinking about some potential artificial intelligence?
- 51.
I think that there is one more general mind concept which leads us to connect the mind concept of means with real items of reality.
- 52.
Here, we are using the terminology of the post-Kantian Czech social scientist Karel Engliš, which he presented e.g., in Engliš (1930). He states that there are four categories of knowledge: (a) empirical knowledge that is connected with nature, knowledge which describes the world as it is, (b) the teleological and (c) normative knowledge which describes the world as it should be, and finally (d) formal knowledge which is used as a basis for the formulation of the previous three. Mutatis mutandis to our problem, it follows that a person recognizes the empirical causality among parts of reality, e.g., water—the human body—the elimination of thirst. However, there is another level of value causality which is between means and goods, a causality which deals with the nature of value—this is a domain of teleology. It is possible to explain this as another layer of thought, over and above the empirical level of knowledge we use to deal with reality and the human world.
- 53.
I think that the concept of the map is also very intersubjective; it is a mind structure that tries to describe reality as it is. Due to (intersubjective) learning, it is not only an individualized part of man’s realm, but it also has a subjective and intersubjective character. This brings to my mind question about objective knowledge: Does it exist? Cf. with Popper (1975).
- 54.
I am very inspired by this explanation by Horwitz (2010), who applies this mutatis mutandis to the concept of the firm. I think that Horwitz is among one of the first Austrians who addresses these stated problems in a similar way, as presented in this text; I mean here that he connects the mental concept of the [map-model] analogy to the reality-based problem of the [balance sheet—business plan] problem of the firm.
- 55.
O’Driscoll and Rizzo (1996, pp. 46–47) write: “Utility in this framework refers to the rank ordering of projected want satisfactions. An individual may value the prospective satisfaction of his desire for an additional unit of comfortable indoor temperature more than that of his desire for an additional unit of delicious meals. Strictly speaking, he does not rank the wants themselves, because they are mere deprivations and are not valued. Similarly, he does not rank the market commodities themselves, because they are wanted not for their own sake but only for the satisfaction they indirectly produce.”
- 56.
It was Chroustal (Chroustal, František. 14.11.2019. Personal interview. Vienna) who pointed out here, that it is necessary to explain the use of the following terms: the factual and counterfactual character of the value scale.
- 57.
It has to be stressed that I don’t think these “thought structures” are particular neuronal structures. I follow Hayek (1952), who describes neuronal structures as inevitable for building thought structures. However, there is not one specific kind of precise neuronal structure for these or those thoughts. The neuronal structure and its plasticity only enable us to build some thought structures. If I think about a particular concept, just as anyone else does, it is not so that we can have the same neuronal interconnections which cause the same thought concepts. The neuronal structure only enables to create a thought structure. I don’t think that there is some kind of exact equivalence. When I use terms such as mind or thought structures to describe something, as opposed to neuronal structures as well as over them; the emerging phenomena of the self, consciousness, thoughts and ideas.
- 58.
It is also a combination of features of the economic good as will be shown below. The combination of more features within one good has basically the same effect as the diversification of the portfolio.
- 59.
The problem with the traditional interpretation of the law of diminishing marginal utility is that it is necessarily applied over time when any additional unit of good may be subject to value perception changes caused by choice, which in turn necessarily precludes the application of the law. See also Chapter 4 of this book to deal with this topic in more detail.
- 60.
See an example of the calculation and marginal consideration of state of affairs in Sect. 2.3.5 concerning the intersubjective nature of success/error.
- 61.
It is possible to solve the problem mentioned by Alfred Marshall in this way as well. To explain the paradox that the more quality music to which a person listens, the stronger their preference for that music can become, Marshall had to deal with the argument that we must assume the invariance of preferences over time in a given law. The problem is solved by Gerry Becker, introducing the concept of social and human capital. I think that the concept briefly presented here, is more abstract and general. Marshall’s paradox is very easy to explain from the point of view of the modified theory of subjective value. The point is that we do not see a higher level of preferences associated with a higher consumption of quality music. What we see is a preference for some portfolio (P1) over portfolio (P2), when a marginal change in P2 is realized through the higher consumption of better-quality music. The fact that greater consumption of music implies a higher preference for quality music seems only apparent. The fact is that P2 contains only a higher relative proportion of quality music and is, therefore, preferred. However, the amount of music (good per se) in P2 is irrelevant, given that its position in the portfolio is relative and not absolute. Here, man still prefers a higher to lower satisfaction of needs that P2 provides for some reason in time. The law of diminishing marginal utility is valid over time and we do not have to assume the invariability of preferences. The law does not apply only to music but portfolios generally. The composition of P2 is still dependent on its relative change. The P2 can then theoretically be composed only of quality music because the person responds with a portfolio to the sum of needs. Even in this case, the law of diminishing marginal utility still applies to the portfolio of goods. Thus, if the P2 were composed only of music, the law would be applied in the context of the relative impoverishment of other imaginary goods in the P2, which would be only counter-factual, because they would be discriminated against at the expense of quality music. In my opinion, the concept is also compatible with Becker’s concept, where social and human capital is precisely part of the total sum of human needs. For a description of Becker’s concept and problem stated by Marshall, see e.g., Pavlík (2004, pp. 745–751) or in Becker (1997).
- 62.
I think that to treat an individual as a complex being, and in a time continuum, we ought to turn to the discussion about the imputation of value among early Austrians (see e.g., in Biľo 2004). It is also worth mentioning that Mises (1998) refused to expand on the early Austrian’s attempts to describe needs as complexes, which is possible to see in Menger (2007, pp. 129, 145). Mises considers this to be superfluous. Mises (1998, p. 123) writes that Menger and Böhm-Bawerk only “had to make use of the term ‘class of wants’ in order to refute the objections raised by those who considered bread as such, more valuable than silk because the class ‘want of nourishment’ is more important than the class ‘want of luxurious clothing’.” I think that the class of wants is a more workable concept which is expanded also in this work.
- 63.
The concept sum of needs met by the sum of means (or portfolio) also allows us to explain logically, the continuity of the action. Shackle and Lachmannn would say that if I implement plan A and I find, over time, given the new economic context, that I have to change it, I am starting from pure logic, from a different plan B because it is different compared to A. This strict discontinuity would mean many problems for men as a result of this very logic. However, this presented concept, a relative one, shows that man is still implementing some plan A, which is only somehow modified—we simply change the relative composition of certain parts of the plan. We only start to implement plan B if the composition of parts of plan B are not possible in order to connect to plan A in any way. This eliminates problems defined by Shackle and Lachmann.
- 64.
In this way, it is possible to explain the paradox of demand for inferior and unsuitable products as well. The demand for them exists precisely due to their certain “multi-purposeness,” e.g., to satisfy a demand related to the need to own a rarity that no one else has, or that the a given product is suitable in the context of other compositional needs, e.g., to fix something, etc. From this point of view, it is important to put forward three observations: (a) we either discover this multi-efficiency of the items of reality and make them goods or we intentionally produce them as goods in this way, (b) goods have in this respect their so-called intrinsic features but not intrinsic value; it is necessary to differentiate between features and values, of items and goods, (c) the properties of items of reality are the results of the evolutionary process of the combination of some properties created by nature or their intentional construction by man, who combines certain features of reality.
- 65.
However, in this sense, when inventing the car, we cannot imply in the sense of Kirzner (1999), that this is a development that would point to a waste of resources by entrepreneurs, who until then, focused on satisfying needs by allocating resources to the production of wagons or horse breeding. The claim about the waste of resources would be valid only if we knew what creative destruction the automotive industry would bring at a time when entrepreneurs had allocated resources to the production of wagons or horse breeding. The opportunity that entrepreneurs began to spread (i.e., cars) was invented by them; it did not previously exist in any form, even potentially. The invention, which ultimately eliminated almost all entrepreneurs focusing on wagons and horse breeding, consisted of the identification of a new complex set of needs and a suitable combination of resources to produce cars, was a gradual evolutionary process. Cf. with Kirzner (1999).
- 66.
This type of knowledge may not always be explicitly recognized by entrepreneurs. It can easily apply to the so-called tacit knowledge when entrepreneurs only intuitively know that they must have an additional property. Only the reconstruction by social scientists of the events that happen implies that an additional property of good satisfies a new combination of needs.
- 67.
In certain cases, the target group may be a particular individual in terms of providing a rare and very individual good.
- 68.
Economic relativism results from the subjective preference of the higher to the lower satisfaction of needs. However, economic relativism creates a problem for comparison. Paradoxically, as the reader will see below, we will solve this through an evolutionary developed and implicitly accepted “agreement” of economic agents.
- 69.
The explanation at this point is complementary to Hoppe (1997), who explains the creation of Knight’s production for the market based on ideal types. The ideal type is replaced here by the relativization of the needs of individuals, which makes it possible to form groups of individuals without claiming that they have the same needs. We have replaced the regularity of the ideal types with a more abstract thought construct. From this point of view, Knight’s strategy of diffusion seems as relevant and does not have to be rejected within the framework of subjectivism because the entrepreneur could consider not implementing technology which kills a few workers but to implement technology which only hurts many workers and could weigh what is relatively better.
- 70.
Given regularities—general complexes of needs or types of behavior in a given area of interest of individuals—are possible not only to identify through the analysis of the so-called big data today but also based on these analytics, it is possible to identify behavioral patterns that are usable for further identification of new products and services which have the character to satisfy a complex of newly discovered more general and time-invariant needs. It is necessary to emphasize that these time-invariant needs need not exist indefinitely. It is satisfactory for the entrepreneur that they exist for some unspecified time which, however, is sufficient for building his/her business model.
- 71.
Apart from many past prices which arose when one party of the exchange accepted the subjectively perceived bid and the other party the ask.
- 72.
It is possible to see the distinction of some past prices with intentions of individuals expressed within the price spread; meaning that e.g., if the price of one apple was 1 USD a month ago and now the seller asks for 1.5 USD, we can also see if there is anyone who is able to take this ask; it could be that there is no one for some reason. This shows us the distinction between the time a month ago and the present. It is useful information for us; however, it is not decisive because there is no bid on apples today or a poor bid. The past price has no connection to the present evaluation of a situation by agents on the apple market. It is something else that forces the bidder not to bid.
- 73.
These can be many things—a person’s credit score based on which he/she gets better interest from the creditor, better capital equipment, increasing the trust of the entrepreneur, the company’s history, the specific know-how of the individual/company, or the fact that it is a stable customer. In principle, these are different types of information that arise in the intersubjective interaction of people with each other, some of which have a purely historical character while others are focused on the future and contribute to the basic coordinates of our behavior.
- 74.
These are not only existing products but also existing commitments or combinations of given commitments.
- 75.
Rather, there are the founders of the Austrian school, such as Menger, Böhm-Bawerk, who explain market coordination in the context of the bid-ask spread through their examples of horse markets.
- 76.
The inspiration for spreads comes from the works of prof. Fekete and his followers, such as Keith Weiner, whose works are primarily focused on the problem of spreads.
- 77.
Graeber (2011) argues that debt inevitably precedes a direct barter exchange, i.e., that debt was the original concept for the creation of money. The so-called problem of coincidence of wants defined by Jevons is possible to solve by debt exchange when time is inserted between the discrepancy between the exchange of one good and another good, which the other party of the exchange does not want at a given time. Time allows for the harmony of mutual needs to occur later, and we need not presuppose them immediately at the time of exchange. The second aspect is that debt in quasi-family ties in a clan or primitive group should not be overlooked due to the possibility of its effective recovery and the low level of information costs of keeping debt records due to the size of the group. The third aspect, defined by Graeber, is that the barter exchange took place with someone our predecessors didn’t know, rather than someone they did. Making an exchange with strangers forced our predecessors to close the deal once and for all at a given moment of time, because they may not have met the other party of the exchange ever again. This does not apply to a clan member. In this respect, the potential information cost associated with recording a debt in the community had to be absolutely negligible compared to the costs that would result from the potential recovery of a debt from a foreigner. It is therefore likely that barter was more often used with foreigners. Of course, barter does not need to be excluded in the community either. From the point of view of our essay, however, it is not essential to decide definitively whether the debt or the barter was the primary phenomenon of some prehistoric clan. However, as Pošvanc (2019a, 2020b, 2021) shows, the debt exchange is a key phenomenon for the discovery of the economic standard of calculation and money because it provides structure (of mind) which is future oriented and usable in the economic interactions of individuals within a particular economic community.
- 78.
The statement is in accordance with Hayek–Pavlík’s theory of the origin of catallactic rules when Pavlík (1999) applies Hayek’s theory of cultural evolution to the norms of distributive justice, which were probably followed by groups of our predecessors. Empirical (supporting) evidence is also provided by social anthropology (e.g., Graeber 2011). However, to connect the empirical findings of social anthropology to an economic interpretation related to the emergence of economic ties of exchange is only possible when we divide the problem into the normative and economic context. Once we focus on the problem from two perspectives, normative and economic, it is possible for an economist to understand normative concepts such as reciprocity, altruism or the concept of gift, as an integral part of a prehistoric exchange, without being in contradiction with economic findings that any exchange has a solely subjective value inverse character, meaning that one part of the exchange prefers something they receive to something they had to give up, which is certainly not any kind of economic value reciprocity, altruism or act or gift.
However, economists should accept the fact that primitive exchanges took place within the context of meeting the quasi-needs. This presupposition is necessary to follow because we should presuppose a lower level of awareness on the part of our predecessors. Economic concepts related to the expression of individual subjective preferences arise only subsequently, with the birth of a higher degree of self-awareness. The economic component of exchange (as explained by economists) and its subjectivist interpretation of a value inverse and mutually beneficial act is possible only after our predecessors’ minds had undergone sufficient differentiation and a fully conscious human subject emerged. Until then, it is necessary to interpret the economic component of the exchange based on the quasi-need or instinct. However, once the differentiation of the mind ended, and a conscious person emerged, the economic component of exchange must be interpreted individually and based on a subjective value.
To focus more on the nature of debt exchange and to divide the problem of exchange into economic and normative parts, creates quite a vital possibility for the connection of findings between the social anthropology, as well as and the economic camp of scientists.
- 79.
It must be stressed that natural interest arises only if Alice is able to demonstrate time preference and if Bob agrees to the legal conditions of the exchange. All three phenomena influence each other. If the natural interest spread offered by Bob is not attractive to Alice, she will not demonstrate a time preference. If the legal conditions of exchange are too strict for Bob, he will not be able to enter the exchange. If Alice would endanger meeting her needs to give the economic good D to Bob, she will not enter the exchange. These spreads are discovered today at the level of society by the banking or financial sector.
Before money was invented, we were not able to express the spread in some good because we did not have a common denominator. Once money was invented, Bob was able to consider his spread between PcB1versus PpB which could be e.g., 10 M, so he was supposed to eliminate the debt by 110 M (100 + 10% of interest). The second advantage is that they express both spreads, in the same way, using the same denominator M. This is possible because we are able to express the portfolio in the form of money and so we are able to define spread more precisely. In practice today, it is realized as follows: if Alice considers lending 100 oz of gold, it depends on whether she is not jeopardized by this decision, in terms of her whole satisfaction of needs. Bob asks for 100 oz and offers 10 oz as interest, which is a decision tool for Alice. They both also consider some legal aspects of the exchange.
When using the terminology used by Lewis (2017), natural interest is actually an emergent phenomenon. It cannot be described as shown in Pošvanc (2020a) at the level of the individual. It can only be realistically described at the level of interacting individuals or community. It is thus a new characteristic of the economic system of cooperation. Interest rate, expressed in money, thus literally arises spontaneously—it is that emergent phenomenon of systematic economic activity which is related to the allocation of resources over time.
- 80.
Two remarks need to be made here. The first is that within the monetary economy the whole process takes place only through money when Alice provides money as principal and Bob buys for the provided principal capital goods (created in the past in a very similar way). The combination of these capital goods activates a new economic process, which produces a new product. Bob must also sell this new product later in time for money and returns the principal and interest from which it is possible to differentiate, due to the money. The second remark relates to the fact that this explanation does not necessarily refer to higher or lower nominal interest rates preferred by Alice. She may also opt for a lower proposed nominal interest due to two facts: (a) the debt exchange is a complex phenomenon; Alice may prefer a lower nominal interest rate due to higher collateral or a better reputation on the part of Bob, while there may still be a higher interest rate offered in the market by other potential debtors. However, related terms of the exchange with Bob are not as attractive to Alice as with others, (b) Bob creates an obligation to Alice (or Alice creates a claim to Bob) which becomes part of her portfolio and it could be that Alice is seeking something similar to what is offered by Bob (lower interest, but with lower risk and better conditions) because she has other exposures to others members of the community and the deal with Bob is, therefore, more preferred within the context of her portfolio PpA1; in other words, the spread between any desired PdA1 and potential PpA1 is depressed by the deal with Bob but not with others who could offer higher interest rates.
- 81.
Of course, this does not mean that the first farmer must be, by definition, unsuccessful. On the contrary. If the first is more successful, then in addition to invoking the gods, he unknowingly did something that ensured that his harvest was more abundant (if the goal is to grow as many crops as possible). And our knowledge has yet to reveal the unconsciously realized causal connection which is still attributed to God by the farmer. As can be seen, the technical error is rather related to the degree of knowledge of the surrounding reality. It is related to the class probability of how a group of phenomena behaves, when, as Shackle states, the probability rate shows the degree of our non-knowledge of the one hundred percent knowledge, i.e., to an absolutely certain extent in terms of the determination of phenomena.
- 82.
As we will see below, this problem can be circumvented by our proposed modification of the theory of subjective value, where we apply the time-invariant nature of evaluation to the concept of thought and not to the surrounding reality per se.
- 83.
I think that the best empirical evidence of this is money. The invention of money, basically, enabled our predecessors to eliminate the problem of diversification of any portfolio.
- 84.
What is interesting, from this point of view, is that according to Smail (2014, p. 118) the particular activity of over-hoarding among some people is a form of unnatural behavior. It is possible to trace it with some kind of certainty as far back as only a few centuries. However, Smail already mentions that in Footnote 24, that “The International OCD Foundation suggests that a reference in Dante’s Inferno constitutes evidence for hoarding behavior in the past.” However, he considers this not compulsive hoarding but avarice.
- 85.
The term attribution of “use value” is used in the Menger (2007, pp. 226–236) sense.
- 86.
The argument about the distributive justice within the group also supports the Graeber (2011) statement that debt exchange was a more common feature of the prehistoric group than the barter exchange, since the barter exchange was more or less an exchange between strangers.
- 87.
As it is possible to see e.g., in Kirzner (1978), the concept of error even appears to be a genuine one. It even seems to Kirzner that not to recognize some arbitrage opportunity is an objectively valid error which implies that the meta-standard we are dealing with is quite deeply incorporated in the minds of people and they commonly use it.
- 88.
As the reader will see later, this concept is even the basis of our current distinction between efficient and inefficient economic action, or profit/loss. The standard based on the concept of intersubjective economic error is thus one of the main coordinates of economic social coexistence.
- 89.
I think that this description is, for the sake of the argument, sufficient. However, I see that it has to be detailed more in my following essays on the subject.
- 90.
I think that this is also the reason why we saw many different kinds of money and calculation standards during the history of man; and we will see many more. It is a matter of complexity that we are trying to eliminate with these emergent phenomena, while still dealing with the very same concept of debt as the Smithsonian “germ cell.”
- 91.
Based on the obligation expressed in M, it is possible to derive the prices of other goods, which will be expressed in M over time (from time t to time t + 1), when the debtor will demand good M for the results of his activity X, which must, of course, be demanded by other members of an economic community. The debtor must either find, produce or exchange for the results of his activity what the creditor requires at time t + 1 between time t and t + 1. All three activities economically initiate the use of M, i.e., generate an exchange demand for the good M, albeit to varying degrees. The first two options initiate the exchange demand M only on the site of the debtor—he has to return M so he must either find it or directly produce it. In this mutual intersubjective context (creditor–debtor), the good M acquires an exchange calculation status only in terms of the internal part of the portfolio that the debtor has to sacrifice (the internal costs) to find or produce some unit M, which he has to return later in time. However, the real motivation comes when exchanging the results of the debtor’s activities for M, when the exchange demand for M is also perceived by other members of the community. The debtor then produces some goods, which he exchanges with other community members for the good M, which he has to return to the creditor later. In this way, the price of the M expressed in other goods is created, which leads to a price level in M, as well as a price spread—the demand and supply price of the M against other goods over time.
- 92.
In the initial stages of the development of the standard, interest was composed of debt exchange only implicitly in the form of a natural interest spread. Our predecessors were able to discover interest rate only after they were able to differentiate (identify) the monetary principal and the monetary interest rate, for which they first needed to identify the concept of money. See Pošvanc (2021) for more details.
- 93.
How to imagine such a thought structure—is it intersubjective in nature? The story of our son can serve as an example. When he was born, he was gifted with a plush dog named “Avor” from a friend. When he was 1.5 years old, we were on a hiking trip and we lost “Avor.” My girlfriend was crying because “Avor” had been with us for a year and a half. As a result, we bought the same new “Avor” so that my son would not be sad and we bought two of them; so as not to have identical problems in the future. My son did not notice that he had a new “Avor,” but he noticed that they were two of them. A big surprise—how was this possible? They were similar, (the same toy), but they were still sewn a little differently. The result was that “Avor” has a brother. Without a new name; after all, the toys were similar. We have been with “Avor” and “his brother” for three years. My son takes care of them as he “feeds” them, puts them in pajamas, communicates with them and we live this story with him. What are we looking at? At the family intersubjectively created thought structure. We also transferred the structure to the grandparents; our close friends know the story. The thought structure exists, is the subject of conversations, is based on the differentiation of empirical reality (at least with regard to different toys), the given structure lasts—my son is still interested in the toys, and even if he stops as he gets older, the story will probably remain in our memories.
This is, of course, a different shared thought structure compared to the intersubjective economic success/error standard. The standard has a society-wide character, perceived by foreign people between each other. However, the important point in the example is that it is the morphology of relationships of the different parts of reality, the time sequence of their connection and duration, our motivations and the motivations of our son, the transfer of information (even outside the family), which stands behind the existence of the thought structure. Of course, no one other than us is interested in its further transmission and use. However, in principle, I think that the creation of our family structure and society based intersubjective structures is identical. The difference in the case of society-wide standard structures is, of course, the above-mentioned degree of complexity, the morphology of mutual relations, the duration of structures, and the various layers of which it consists, in so far as economic, legal, and as well as social circumstances are concerned.
- 94.
Although this last option seems unlikely, it can occur. It may happen that later in time e.g. the creditor evaluates that even if he got rid of a goods in the past and the debtor eventually gave him nothing (the debt exchange went bankrupt), it is still better than if he kept the good and the debtor returned to him what he had promised; in this case, from the creditor’s point of view, these may be goods which, at both times t and t + 1, would have to be disposed of in certain circumstances in order to satisfy more of his needs—e.g. if he found out that at time t the good he gave to the debtor did not benefit his health and also at time t + 1 the good that should have been obtained from the debtor would also not benefit his health.
- 95.
The mass participation of human subjects that creates the defined intersubjective concept of success/error takes place at the institutional level today when specialized entrepreneurs—banks—mediate the demand/supply for savings and mediate the discovery process of the nominal money interest rate.
- 96.
It is the chapter of Determinism and Materialism, in which Mises explains the problems of determinism and the free will doctrine; he referred to his position as activistic determinism (Mises 1957, pp 177–183). Mises is not a pure determinist; however, his suggested solutions are based on the influence of a particular past on our decisions. I consider this a methodological mistake.
- 97.
See section “2.3.2 Interest – an intersubjective tool for decision-making towards the future” for the description of the natural interest phenomenon.
- 98.
These language structures which enable thinking needn’t have first been spoken, in a similar way to that which as we do today. It is possible to speculate about some combination of sound and sign with regard to primitive language gestures and expressions.
- 99.
As Szabo (2002) points out, it is already 500 goods which cause that member of the community to face the possibility of 25,000 prices (5002) if they are the object of the exchange. It follows in the context of our speculations that it is not necessarily a question of too many goods, the potential problems of chaos are already caused by a few goods used as the object of the debt exchange. However, these only highlight the tension of only using a few commodities within debt exchanges, while the empirical decision for the use of certain particular commodities could also be motivated by other empirical, religious, societal, or cultural contexts.
- 100.
An interesting description of some empirical examples to do with what kinds of goods were used as money commodity goods, is given in Einzig (2014).
- 101.
However, we will discuss this in greater detail in another work aimed at describing the theory of capital and the cycle, where we describe in more detail the functioning of the standard and its impact on emerging capital structures, as well as its negative—political—influences leading to unnatural economic cycles.
- 102.
- 103.
This statement has many implications in the theory of equilibrium. We will present the modification of the equilibrium concept based on the evenly rotating economy concept in a separate Chapter 3.
- 104.
At the same time, Kirzner’s remark, that the entrepreneur does not have to be the owner of the necessary capital goods, respectively, capital resources, applies. The owner can borrow them.
- 105.
From the individual point of view, the composition of the portfolio is always to a certain extent unique and individualized, i.e., it is subject to some community standards of a religious, cultural, family, or community nature.
- 106.
Nowadays, these can be various hermits or suicidal persons, but also people who think about satisfying needs only in terms of a higher degree of spiritual satisfaction of needs, etc. In the past, it could be groups of people who for various reasons, distanced themselves from society, i.e., groups of people who lived outside of civilizations and had their own profit standards.
- 107.
The strategies of hermits, suicidal persons or others who prefer spiritual strategies are based on a separation and a subjective solution to the problem of satisfying needs. The strategies of warriors, thieves, murderers are based on destruction and are not focused on a mutual satisfaction of needs. The strategies of politicians are of a special case and are sometimes implemented as the strategies of a scrounger, sometimes as strategies of warriors, thieves, murderers, and sometimes as strategies of enlightened monarchs providing also some basic services for his/her society in the form of security and the law. However, this is a problem that will be looked at in a future book.
- 108.
At this point, I would like to stress that I agree with the interpretation that this is “the utility of the next best alternative that must be forgone in any action.” This interpretation combined with the classical interpretation of value theory and the existence of some larger multilevel scale of needs suggests the question of why not sacrifice any other, less important, alternative. In the case of our modified theory of subjective value, it is quite explicit that it is “the utility of the next best alternative that must be forgone in any action.” This is correct due to the point that our theory implies only a two-opt preferential scale.
- 109.
We will use this state as a definition of the individual equilibrium position later on. There is no room for a deeper definition of this concept right now.
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Pošvanc, M. (2021). Why Are We Economically Successful?. In: The Evolutionary Invisible Hand. Palgrave Studies in Classical Liberalism. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-71800-8_2
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