How Similar are Markets and Languages?

I am a student of economics. And while I cannot say the same for Literature, some of my recent readings and ‘listenings’ have prompted an interesting line of thought – languages and markets are actually quite similar. In a talk I was attending two years ago, I learnt Douglass North’s (the 1993 Nobel-prize winning economist) definition of institutions – “humanly devised constraints that shape human interaction.”  And of course, there is the first similarity – languages and markets both have constraints devised by us to serve their function better. 

Languages and Markets are both socially required institutions. Languages allow two humans to communicate with each other and markets allow humans to exchange, to produce and to consume. The similarities between markets and languages exist in their origin, their development, the kind of rules they operate in and their functions in a society. Let me explore these further to better convince you.

Firstly, markets and languages are both emergent, in the sense that they are both a result of human action but not of human design. No single person or authority has designed either of them. Both have evolved through numerous interactions among individuals. These are what Hayek would have described as Spontaneous Orders. 

Now, there may be innate grammar in languages, but my argument that grammar itself is a result of the spontaneous order also has support. Grammar provides the rules for common use of both spoken and written language so we can more easily understand each other. In markets too, the rules that emerge make it easier to exchange, by reducing the transaction costs (simply the cost incurred to make an exchange, could be the cost of planning, contracting, resolving disputes, etc). My primary focus here is on the institutions that Boettke, Coyne and Leeson would describe as ‘indigenously introduced endogenous’. 

Rules and regulations may also try to be introduced exogenously. Although it might sound ridiculous (and they might as well be), there are various language regulators, just as there are various market regulators set up by governments. If there are rules and regulations that make it difficult to interact – communicate in the case of languages, and exchange in the case of markets – the institutions are actually defeating their purposes. 

Many renowned-littérateurs have been known to break grammar rules. Few would deny though that a certain beauty has emerged from their adventure. This rule-breaking produces utility for people, and no person is really harmed from it. Similarly, if two people wish to exchange, and there’s no direct and real harm to a third person, we must be a little humble about trying to make it difficult or even criminal for them to exchange. These individuals, if exchanging voluntarily, may only be trying to gain utility. Additionally, in the process, the society may benefit through the innovations that might emerge, just as beautiful poems emerge through linguistic rule-breaking. 

Words & Prices 

Now that we have explored the similarities between languages and markets through a dragon’s eye view, I would like to look at a specific component of each, namely words and prices. There are many nuances to them, which I think make them truly good analogies for each other. 

Prices, like words, communicate information and are very necessary to coordinate actions of millions, and even billions of people. Frédéric Bastiat, a 19th century economist, asked ‘How does Paris get fed?’ and economist Russ Roberts’ ‘It’s a Wonderful Loaf’ is a wonderful answer. Hayek writes that it is the marvel of the price system that allows the many people around the world to coordinate their actions despite never meeting or communicating in any way except through prices. When Uber shows surge prices, it tells me that there may be people who may have a greater need to travel right now, and I might decide to just take the metro – all this communication and coordination only through prices.

Another similarity between the two is that prices and words both emerge only from human actions and interactions. They are certainly natural, but do not come from a nature absent of humans. You might say that onomatopoeia comes from nature, but it actually comes from how humans perceive nature. Otherwise, why would a dog’s bark be ‘woof woof’ in English and ‘bhow bhow’ in Hindi? Prices are purely a result of subjective valuations, and even the ‘objective costs blade’ of the Marshallian Scissors actually comes from subjective costs – particularly opportunity costs. 

An important feature of both a word and price is that they cannot exist independently, and have no essence in the absence of other words and prices respectively. One cannot define a word in a dictionary without having other words first. Thus, words simultaneously are defined by and do define each other. Similarly, considering a price independent of other corresponding prices (prices of inputs, substitutes and complements) makes no sense. That’s why economists belonging to the Austrian tradition stress on the importance of price ratios in individuals’ decision making, and it also explains why it makes little sense to aggregating or averaging various prices to determine a price level in an economy and making policy decisions based on the same.

The essence of the essay is this –  languages and markets foster coordination and cooperation among individuals. They both result from numerous individual interactions and rely on the particular knowledge of time and circumstance, that more often than not, only individuals can have. Just as Esperanto, a language ‘designed’ to be a universal language failed, so have centrally planned economies. I again implore you to be humble while thinking about obstructing an exchange between two people, who are interacting voluntarily because you believe that it may be wrong. I may have unknowingly broken some grammar rules while writing this essay, but I do hope that I was able to get my message across. Similarly, markets may not be perfect, but they do work – and the people participating in the market learn from their mistakes – as I have from my editor while writing. 

If you found the role of prices and markets in an economy, spontaneous order, and similarities between languages and markets interesting and would like to explore them further, keep an eye out for the Austrian Economics Seminar. The seminar will be conducted by the Centre for Civil Society on the weekends between 5th and 27th of February 2022. Austrian Economics is an entirely different approach to understanding social realities, dissenting from mainstream method, theory, and policy. Economist Peter Boettke beautifully describes it as being “Humanistic in Approach and Humanitarian in Concern”. To apply for the seminar, and for more information, visit here.

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