Price Labels in Economics

Natural, Artificial and Emergent

At a recent conference on the History of Economic Thought, Prof. Alex M. Thomas asked a brilliant, interesting question (which I have taken some liberty to rephrase),

If in both, markets and the government, we have individuals acting, why is it that some scholars (among them some associated with the Austrian school) refer to the market price as a “natural” price, and a government set price as an “artificial” price?

Although the question was posed on my panel, I was happy that it wasn’t addressed to me. I was happy to take some time to ponder over the question. What follows is the road I took in responding to this question, which perhaps isn’t straightforward, but the journey for me was useful.

My intuitive response was to go back to Adam Smith. In Chapter II of the Wealth of Nations, writing about the principle which gives rise to the division of labour, Smith says

It is not originally the effects of any human wisdom, which forseees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another (emphasis supplied).

Following Smith, one could say that market price is a natural price, because people have a natural propensity to exchange in the market. This was also the position taken by the Spanish Jesuits of the Salamanca School, who considered the market price as the natural price or the just price.

But as also a student of James Buchanan, I was a little uncomfortable with this position. Indeed, in his 1964 essay “What Should Economists Do?”, where he also invokes Smith’s quote from earlier, he actually defines the study of man’s behaviour in the market relationship, reflecting the propensity to truck and barter, and the various institutional arrangements that arise as a result of this form of activity as the proper subjects for the economists’ study.

Of the various institutional arrangements that Buchanan talks about — one is the government. Indeed, for Buchanan, the appropriate perspective for approaching the study of government or the State is politics as exchange (Brennan; Boudreaux and Holcombe), which becomes most clear in his discussion of the productive state as different from the protective state.

In this view then, the conundrum remains unresolved — if markets and the government are both spaces of exchange, a distinct discussion of natural and artificial remains weak.

Yet again I look to Buchanan for guidance. One of my favourite essays by Buchanan is “Natural and Artifactual Man”. Although the context is quite different, Buchanan essentially describes an Artifactual man as an artefact — a person moulded by their past self — through deliberate action and purpose.

This is the sense in which we can understand a price set by the government as being artificial — it is created deliberately and has a teleological character.

Elaine Sternberg describes three kinds of orders in society: natural, spontaneous and artificial. Natural orders are those that exist independent of human action, whereas artificial orders “are always constructed: they result from a conscious agent intentionally imposing some pattern or arrangement on the constituent items, typically to achieve a goal.”

But the third kind, as described by Adam Smith, FA Hayek and James Buchanan, are a “result of human action, but not human design”, or alternatively, “the unintended coordination of intentional action”. Human languages, religion and culture, and markets are all spontaneous orders. Some people, such as Russ Roberts, prefer to use the term emergent order — to avoid confusion regarding the spontaneity about these processes.

An example of a Spontaneous Order from the Reddit community.

So, to answer Alex’s question: I agree that the conception of a market price as natural is neither accurate nor useful, but there is good reason to call a government set price as an artificial price. When I say this, I attach no value judgement. It is only a description. And well — the market price can be thought of as a market price itself, or as an emergent price.

Buchanan thought that the main job of economics educators is teaching the concept of spontaneous orders. He wrote, in a quote I take from the Sternberg essay,

… there is only one principle in economics that is worth stressing…. Apart from this principle there would be no basis for general public support for economics as a legitimate academic discipline, no place for economics as an appropriate part of a liberal educational curriculum. I refer, of course, to the principle of the spontaneous order of the market….

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