At a recent conference on History of Economic Thought¹, Prof. Alex M. Thomas asked a brilliant, and a very interesting question: “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?”
To the above, one could 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; where 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. In James Buchanan’s 1964 essay “What Should Economists Do?”, he invoked Smith’s quote from earlier wherein 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 however remains unresolved — if markets and the government are both spaces of exchange, a distinct discussion of natural and artificial remains weak.
In Buchanan’s “Natural and Artifactual Man, he 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, F.A. 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.
To go back to the question, 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. But to say this is to describe it – not attach a value judgement. On the other hand, 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, “… 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.”
What other emergent or spontaneous orders can you identify in society, that make you marvel at them?
1. International Conference on the History of Economic Thought, Azim Premji University, August 2023