TheMarketForIdeas

This article highlights the implications of the subjective communication and interaction between economic agents in the process of expanding individual and implicitly social knowledge. Each economic actor goes through a set of unique experiences, which facilitates the emergence of unique expectations and perceptions. As such, these perceptions will lead to a distinct allocation of resources. Therefore, I try to emphasize the importance of expanding knowledge in socio-economic evolution, as a mechanism of exchanging unique experiences. 

The primacy of interpretation and the evolution of knowledge in-time 

Economic agents are not the result of external factors but active elements that create social phenomena. Each action taken has a hermeneutic character (meaning that it requires interpretation), that is why “the relationship between objective economic variables (…) and the expectations of individuals are dependent on the interpretation that agents provide to them” (Bellet & Durieu, 2004, p. 236). Economic agents can be represented in the form of an active mind, which allows for initiating an action based on selective interpretation, starting from a priori social knowledge. This knowledge has a historical-evolutionary character and results from the institutional framework in which agents were socialized. And this socialization allows an economic actor to become part of a social world, to act in a subjective and fallible way. As such, hermeneutics can become a relevant economic analysis tool to overcome the homogenization of human behaviour found in the econometric models of mainstream economic schools of thought.

Starting from the work of Hans-Georg Gadamer, we understand knowledge as a unique individual horizon. The present interpretation capacity originates in the previous flow of experiences, each such experience being a way of expanding the horizon. Since the ability to interpret is dynamic, it cannot take place outside an active timeframe. Thus, human action is interconnected with the qualitative time, allowing the evolution of knowledge and expectations, representing, at the same time, the subjective perception from which the present human activity is formed. This qualitative type of time allows a fair understanding of social phenomena, in contrast to the deterministic-Newtonian time, which assumes a static, homogeneous agent.

Each previous experience is added to the present capacity of attributing a meaning, so we observe a continuous interrelationship between the subjective past-present-future of the economic agent. This inability to incorporate all possible experiences at the same time, given the dispersed bits of knowledge, allows ex-post error to exist, but also enables a new zero moment after which the interpretative horizon can be restructured.

As “…there are no pure sensations, since every new sensation is understood only within the framework of past experiences” (Butos, 2010, p. 242), we can understand the uniqueness of human behaviour. Differences are not only cognitive, but also cultural, and imprint a different type of perception both at the social group level and at the individual level. The know-how from these previous experiences can be likened to the capital structure and is heterogeneous, complementary and constantly accumulated. In other words, each action taken is carried out in an intersubjective framework, based on historically developed rules, principles and institutional conventions, which underlines the disequilibrium of the socio-economic environment. And this character allows the existence of an entrepreneurial process and, equally important, of a communicative one. Each previous experience will add to the memory of the economic actor and this will lead to a new perception (Fuster, 1995, p. 58). This means that an economic agent cannot be represented statically, but as an active entity acting in-time, in a dynamic social process. The economic agent represents a continuous project, in which the new flow of experiences will expand its knowledge, which in turn will allow the initiation of new activities, becoming complementary to those initiated by economic actors with a different perception. And this temporal structure implies a mutual influence, acting on the perception at every active moment of the individual, which could lead to a gradual improvement of perception and implicitly generate new expectations. In other words, “…an experience is not (…) something that quickly passes through the stream of conscious life” (Gadamer, 2004, p. 58), but is a phenomenon that acts and shapes the active-body. 

Perception and interpretation 

The reality, in this case, cannot be an objective representation of an external world, which we cannot discuss in terms of a static, non-evolutionary knowledge, but it should be emphasized that individual preferences will fluctuate according to these experiences. Perception is an intrinsic phenomenon of social reality, all objective data resulting from the interactions of economic agents being interpretable. We say objective but they incorporate subjective preferences and are then interpretable in the light of present and future knowledge. In other words, if we refer to the price system, it represents a source of knowledge, being formed by communication, but not in a deterministic sense, these absolute and relative prices being decoded in a specific way by each economic agent and acted on based on their idiosyncratic understanding. And this incomplete understanding, based on the history of each individual, will allow a constant change in circumstances, but will also lead to unintended effects. But it is precisely this aspect that gives autonomy to the individual. In a social-world where we cannot discuss in terms of essences, given the constitution of reality through continuous perception and interpretation, but not through the reflection of objective properties of it, we can understand why the preservation of this uniqueness will maximize human behaviour in a given epistemic context, i.e., at a level of present social and individual knowledge. And this phenomenon can be applied in economic activity. “Most economic phenomena are observable, but our observations need contextual interpretation if we want them to make sense and to be added to knowledge” (Lachmann, 1994, p. 274).

The mind is a complex, self-organizing system. The neural system achieves the perceptive categories through its system of organization, but changes depending on any new external stimuli and implicitly on the prior neural interaction, ensuring a learning process. Also, any unpredictable change, which originates within the limits of present knowledge, will be able to act on a future neural arrangement. In this way, we can overcome the Cartesian mind-body dichotomy and understand the active body both as a receiver of sensory experiences and as an element generating experiences.

Thus, we understand that there is an equilibrium at the individual level, but this is only temporary, until the moment when the new external stimuli will act on the original plan. At the macro level, human dynamics and the uniqueness of the horizons allow only a tendency towards equilibrium, which we can never achieve in practice. 

The linguistic process as necessity 

We cannot understand human activity without appealing to linguistic evolution. If we were able to observe, briefly, the interpretative apparatus and its function of initiating the experiences, we must understand the need for communication and, implicitly, the linguistic property of transmitting our knowledge in a social framework.

The language presents a dynamic character and can be divided into two categories that find their source in the writings of Ferdinand of Saussure. These are langue and parole (Ricoeur, 1976, pp. 2-5). The first is represented in the form of a logical, encoded construction; communication is carried out employing objective properties of the language. Parole, on the other hand, facilitates the subjective transmission of one’s knowledge and allow the initiation of the lived-world through a subjective set of events. This category becomes important for the present analysis.

Language is a creative process of introducing the economic agent into a social-world. Through linguistics, he will become part of a historically developed social and temporal context. Each communicative interaction with another economic agent will be represented in the form of an event-speech, which has the ability to translate into the real world not only the unique perceptions of the agent but also his subjective expectations. Language will be a means of introducing his own perception into reality, an active message mechanism, because “languages do not speak, people do” (ibidem, p. 13). Moreover, it becomes a living entity, being modified by the interactions of economic agents, existing at the same time within a reference and discourse system. In other words, dialogue becomes an essential element of social life, affirming the uniqueness of the individual and allowing the transmission of their own experiences in the social-world. Simultaneously, it positions an individual in a space-time context, in which a meaning can be generated. Each dialogue involves a form of objective transmissible data, which the other participants in the dialogue interpret subjectively and which they use to generate their reality.

Several unique horizons are needed to achieve a communicative process and this will interconnect individuals in an intersubjective framework and will facilitate the initiation of new expectations or future production processes, allowing, as I mentioned before, the transfer and, thus, the expansion of the knowledge of each individual in a society. Also, not only subjective knowledge can be expanded, but also the normative-institutional framework, the one that can be represented in the form of a pool of accepted norms and social knowledge that streamlines human activity in a given society, leading to information-economizing and thus “reducing the entropy of the environment” (Langlois, 1986, p. 175).

Returning to the communicative process, it is a complex mechanism in which we will find the uniqueness of each agent, outsourcing his own historical set of prior interactions and productive activities, which can be a future source of information for complementary actions. Each economic agent reflects his own understanding and participates in a complex structure in which the intersubjective understanding of phenomena is formed. Through communication, not only the present knowledge is reflected, but there is also the possibility of introducing into the social-world some goods or services that individuals did not specifically ask for, but which they will use after emphasizing their purpose through the same communicative process. And each new social action will have to be preceded by a linguistic innovation, in order to highlight its benefits.

I should elaborate. The transmission of idiosyncratic information is not carried out in a context of perfect knowledge, but is an important mechanism by which hermeneutical dynamics facilitate the expansion of knowledge to reduce the uncertainty of the initiated projects and implicitly to change the subjective expectations regarding the activities. And the aforementioned eliminates the monopoly of the speaker, dialogue and the active participation of all agents in the social-world becoming essential for economic development. 

Entrepreneurial process as a result of communicative action 

We have seen how perception is the result of memory and implicitly of previous experiences, and so we can emphasize the entrepreneurial importance in the real economic environment. Each entrepreneurial activity requires a heterogeneous capital structure and a subjective entrepreneurial perception. And this behaviour will be reflected in assuming present costs in order to obtain a relatively higher anticipated income flow, given the present knowledge of the entrepreneur. But there is always the risk of an ex-post analysis error, which can result in a loss. This entrepreneurial behaviour can be explained as a subjective process of identifying the productive function of a capital asset in relation to existing complementary resources. This process is interpretative and takes place over time, with the chance of modifying it once a distinct understanding of a new productive function of the resources used occur. Or by understanding the potential benefits from other alternative activities. Thus, we understand the capital structure as evolutionary, individual experiences representing knowledge pool used either for the introduction of new functions of capital goods, given ontological uncertainty, or for their reconfiguration. Communicative interaction capacity represents external stimuli that can alter the understanding of a phenomenon and implicitly of the unique horizons, hence the lack of a homogeneous or constant capital structure. “Capital is primarily and ontologically the result of subjective mental processes” (Ferlito, 2018, p. 60). If reality is perceived in some way, the response of the economic agent will be congruent with this perception. At this point, dynamic expectations will derive in relation to the configuration of the future market. I say dynamic because every economic agent will only take into account certain aspects of this state of the market and the subjective understanding will not allow him to perfectly understand the future development of market processes.

But behind the capital goods lies not only saving, as a form of diminishing the current consumption by which the resources necessary to initiate or expand the capital structure will be released, but also entrepreneurial knowledge. In the absence of linguistic transmission of knowledge, which can be represented both in the form of know-how, managerial skills, distinct complementary resources whose role was not perceived until then and in the form of a new time preference, the capital structure could not be expanded. Thus, the resources released have a productive function only corroborated with a change of entrepreneurial interpretation through communication, hence the heterogeneity of the capital structure. Also, if we take into account the uniqueness of the horizons, each entrepreneurial process will require a unique behaviour, using some specific production factors. If the entrepreneurial forecast was erroneous ex-post, although the ex-ante analysis showed a potential return, complementary knowledge of other economic agents would act on it and there would be an organic tendency to eliminate misallocations of resources, as long as they are not generalized, through an expansionary monetary or fiscal policy. If these errors are generalized, epistemological interrelationships between entrepreneurs are artificially modified and the price system can no longer express the real demand.

Capital goods have a zero intrinsic value, their yield is null in the absence of an entrepreneurial process consisting of prior knowledge. The value of these goods is given by the fair interpretation of some social needs and the realization of an entrepreneurial subjective and fallible calculation that results in an accounting profit, understood as a benefit obtained in relation to the assumed uncertainty. And expectations about this profit will vary depending on individuals and their perceptual ability. Also, certain goods become capital “not by virtue of their physical properties, but by virtue of their economic function” (Lachmann, 1956, p. XV). As long as a good can fulfil a productive role, it can be assumed to be good capital. I was remembering ontological uncertainty just now. Since knowledge is evolutionary, goods do not have a fixed role either. In other words, certain consumption goods can become capital for an entrepreneurial activity. Let us imagine the situation of a town in which we will find two educational institutions and no printer. An economic actor owns this printer and perceives this as a way to achieve a return by taking a risk in the form of assuming present costs in order to obtain an uncertain future profit. And this profit is uncertain given the completion of any human or entrepreneurial action in the future.

Thus, he begins to use this consumption good for an entrepreneurial activity, which gives this good another economic function. It should also be specified that any capital asset becomes such by combining it with complementary resources. In the case mentioned earlier, the printer becomes productive only through a personal computer, a software, a building connected to the electrical network and a given number of paper sheets. It should be noted that in this subjective combination the other consumption goods become productive goods as well, as a result of the plan imagined by the economic agent. But this entrepreneurial plan can also be modified, depending on the ability to reconfigure the action. It is also of the utmost importance that depreciation is covered by these operating costs in order to continue operating. And these assumed costs are subjective as well, being interpretable.

To synthesize, the identification of capital goods is carried out following an active-hermeneutic process, their value being derived from the formation of expectations about the potential yield. Thus, a capital asset becomes such due to the subjective value attributed to it by the economic agent in a dynamic process, the outsourcing of the mental plan being achieved by a communicative process. And starting from this subjective aspect, we understand why we cannot homogenize capital goods and why capital goods cannot be included in a self-regenerating stock, à la Chicago School. 

Conclusion 

Highlighting the hermeneutic nature of the world-social and the primacy of interpretation in the conduct of interactions within a social framework, we understand the importance of the social distribution of knowledge and implicitly entrepreneurial activity. Communication and expanding knowledge become the main elements of an organic economic development, these having the capacity to change the horizon and implicitly the perception of economic agents, stimulating the emergence of new production processes aimed at improving the social standard of living. We have also seen how social reality is generated by assigning specific meanings, which makes the capacity of interaction between economic actors extremely important. 

References 

Bellet, M. & Durieu, J. 2004. Lundberg and Lachmann on Expectations. Evolution of the Market Process. Routledge, London, UK, & New York, NY.

Butos, W.N. 2010. The Social Science of Hayek’s The Sensory Order. Emerald Group, Bingley, UK.

Ferlito, C. 2018. For a New Capital Theory: A Hermeneutical Approach. Storia Libera, anno IV. n. 7.

Fuster, J. 1995. Memory in the Cerebral Cortex: An Empirical Approach to Networks in the Human and Nonhuman Primate. MIT Press, Cambridge, MA.

Gadamer, H.G. 2004. Truth and Method. Continuum, London, UK, & New York, NY.

Hayek, F.A. 1952. The Sensory Order. An Inquiry into the Foundations of Theoretical Psychology. University of Chicago Press, Chicago, IL.

Lachmann, L. 1956. Capital and Its Structure. Ludwig von Mises Institute, Auburn, AL.

Lachmann, L. 1994. Expectations and the Meaning of Institutions: Essays in Economics. Routledge, London & New York.

Langlois, R.N. 1986. Coherence and Flexibility: Social Institutions in a World of Radical Uncertainty. In Israel Kirzner, ed., Subjectivism, Intelligibility, and Economic Understanding: Essays in Honor of the Eightieth Birthday of Ludwig Lachmann. New York University Press, New York, NY, pp. 171-191.

Ricoeur, P. 1976. Interpretation Theory. Texas Christian University Press, Fort Worth, TX.