Did You Know About this Challenge in Economic Theory?
Some thoughts on the Theory of the Firm and trying to draw a clear distinction between in/out of market processes.
I believe there may be some misunderstanding regarding the use of pricing as a determinant for defining boundaries within economic systems. To clarify, I don't think there is such a thing as a "market price" in a general praxeological sense. All prices are inherently tied to specific conditions, making them unique to particular times and places.
For instance, when we talk about the price of "oranges," we're not referring to a universal market price for all oranges everywhere. Instead, we're talking about the price of a specific orange or a specific bag of oranges at a particular moment in time, in a particular location. This specificity is crucial because all production requires time, and this time-sensitive nature means that the price of any given orange is a signal that it's part of a broader production structure, which has evolved over time.
To illustrate this, consider an orange that was plucked from a tree. Even this seemingly simple act raises important questions about the nature of production and boundaries. One of the critical questions is whether the transformation of original factors—such as labor, land, and capital—into a final product like an orange occurs inside or outside the boundary of the market. The answer to this depends on whether there is already an established price for the good being created. If no price exists yet, it suggests that the good is not yet part of the existing structure of production but may be introduced as a novel product.
The introduction of a novel process or product into the market does not, in my view, disqualify prices from being a determinant of boundaries casually speaking. It doesn’t work praxeologically because of the uniqueness of prices. But it may be of pedagogical help to understand the Austrian Theory of the Firm. For a robust explanation of the theory see Per Bylund’s The Problem of Production. That book is super underrated, and I highly recommend it. Consider this: the "current" prices for goods and services are reflective of production plans that were made at an earlier point in time. These plans anticipated certain conditions and prices, which then became reality when those goods were produced and brought to market. These existing prices create a boundary—a kind of economic landscape—that the novel process or product will inevitably disrupt. However, this disruption does not invalidate the role of prices in determining boundaries; rather, it raises new questions about the effects of the innovation on the market.
A firm can engage in the structure of production even if its final good has not yet been priced. For example, a company can purchase capital goods, hire labor, and organize other resources to create a new product. This state, which I refer to as "pricelessness," occurs when a firm is in the process of producing a good but has not yet sold it on the market. During this phase, the firm may be purchasing inputs from the existing structure of production, but the final good remains unpriced because it has not yet been introduced to consumers. Of course there is the ex ante price the entrepreneur is is predicting what the good will sell for, but this is tangibly different from the realized or final price (price actually sold for).
Once the first customer purchases the new good, the firm transitions from the state of pricelessness (outside the market) to having a price (inside the market). At this point, the good transitions from being an unpriced novelty to being part of the market's structure of production (Even though its already a part of the structure by competing for resources on the market to build the novel good. Adding to the difficulty of drawing the distinction of a novel good/process.). The fact that the good was produced in a state of pricelessness underscores its novelty; if it were not a novel product (process), it would already be integrated into the existing structure and would have a known price.
Pedagogically, pricing might play a crucial role in signaling the boundaries of production and market structure. However, it's essential to recognize that prices are not static or universal but are dynamic and specific to particular contexts. No such price boundary actually exists. Although there is a real distinction between novel and existing processes/goods. This context-dependency allows for the introduction of new goods and processes, which can challenge and reshape the existing economic landscape, but does not negate the importance of prices in understanding and defining those boundaries. It does raise the crucial challenge – Is there a way, praxeologically speaking- to determine the in/out of market boundaries? Prices don’t work, but hopefully someone out there can rise to this challenge and contribute to the Theory of the Firm.