[OPE-L] The phenomenology of prices

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Thu Dec 27 2007 - 13:26:53 EST


Semmler doesn't really cover what I am looking for, although the book to which you refer is certainly important.

What I am really looking for is a more systematic phenomenological theoretisation of what is actually involved qua cognitive assumptions, both subjectively, intersubjectively and objectively, in trade or calculation using prices, including what is involved when one moves from real prices to ideal prices, and vice versa. 

As I've argued before, generally economics assumes 

(1) that all prices are self-evidently in the same object-class, 
(2) that it is possible to manipulate price information and compute price aggregates without any reference to value relations that exist independently from prices. 

What if those assumptions are ontologically not true? What I've argued previously is, for instance, that all accounting presupposes or implies some kind of value theory, but I wonder if anybody has actually fleshed out that idea much more systematically and explicitly.

The relevance of this problem is that whereas many Marxist theorists swear by value theory, almost nobody can explain coherently why it is necessary. The neo-Ricardian challenge is essentially a defence of double-entry bookkeeping, with an ethic about the utility and efficiency of information. If you need to explain X, certain price data are sufficient to explain it, and no reference to values is necessary.

But, I suggest, if we looked more closely at what we actually have to do, when we assign or compute a price, i.e. what this presupposes, we might get another answer. The argument is really that you cannot coherently talk about prices at all, without assuming value relations of a particular kind, which are themselves not reducible to price information. The question is then one of teasing out the logical presuppositions involved in the manipulation of price data.

Generally, when you think of something, somebody has already thought of it. But who, in this case?


PS - To give you an idea of the kinds of theoretical presuppositions I am talking about, the US Financial Accounting Standards Board (FASB) comments for example that:

"This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort."

FASB has some delightful "philosophical" ideas. How about the "Statement of Financial Accounting Concepts No. 2 Qualitative Characteristics of Accounting Information May 1980":

"A map represents the geographical features of the mapped area by using symbols bearing no resemblance to the actual countryside, yet they communicate a great deal of information about it. The captions and numbers in financial statements present a "picture" of a business enterprise and many of its external and internal relationships more rigorously-more informatively, in fact-than a simple description of it.
There are, admittedly, important differences between geography and economic activity and, therefore, between maps and financial statements. But the similarities may, nevertheless, be illuminating.
A "general purpose" map that tried to be "all purpose" would be unintelligible, once information about political boundaries, communications, physical features, geological structure, climate, economic activity, ethnic groupings, and all the other things that mapmakers can map were put on it. Even on a so-called general purpose map, therefore, the cartographer has to select the data to be presented. The cartographer, in fact, has to decide to serve some purposes and neglect others. The fact is that all maps are really special purpose maps, but some are more specialized than others. And so are financial statements. Some of the criticisms of financial statements derive from a failure to understand that even a general purpose statement can be relevant to and can, therefore, serve only a limited number of its users' needs."

Here are a few more "theoretical" excerpts from the same document (if you care to read on): 

The important difference between meteorological and financial predictions is that only
exceptionally can meteorological predictions have an effect on the weather, but business or
economic decision makers' predictions often affect their subjects. (...)

As accounting concepts become more complex, assessing the faithfulness of accounting
representations of economic phenomena becomes increasingly difficult, and separating relevance
or effectiveness from reliability becomes much more difficult than in the drug example used
earlier (paragraphs 60 and 61). Social scientists have much discussed the concept of
representational faithfulness (which they call validity) in connection with educational testing,
and though that field may seem remote from accounting, the difficulties that beset it in some
respects bear a close resemblance to some of those encountered in accounting. If two students
score 640 and 580, respectively, in a scholastic aptitude test of verbal skills, it is inferred that the
first student has more verbal aptitude than the second. But does the test really measure verbal
aptitude? Is it, in other words, a valid test of verbal aptitude? That is a very difficult question to
answer, for what is verbal aptitude?  (...)

Accounting information, for example, purports to reflect the activities of a
particular enterprise. However, aggregating the amounts reported by all businesses may not
result in a faithful representation of total activity in the business sector, for that is not the
purpose for which the accounting information was intended. Information that is
representationally faithful in the context for which it was designed, therefore, may not be reliable
when used in other contexts.  (...)

The financial statements of a business enterprise can be thought of as a representation of
the resources and obligations of an enterprise and the financial flows into, out of, and within the
enterprise-as a model of the enterprise. Like all models, it must abstract from much that goes
on in a real enterprise. No model, however sophisticated, can be expected to reflect all the
functions and relationships that are found within a complex organization. To do so, the model
would have to be virtually a reproduction of the original. In real life, it is necessary to accept a
much smaller degree of correspondence between the model and the original than that. One can
be satisfied if none of the important functions and relationships are lost. Before an accounting
model-either the one now used or an alternative-can be judged to represent an enterprise
reliably, it must be determined that none of the important financial functions of the enterprise or
its relationships have been lost or distorted. The mere fact that model works-that when it
receives inputs it produces outputs-gives no assurance that it faithfully represents the original.
Just as a distorting mirror reflects a warped image of the person standing in front of it or just as
an inexpensive loudspeaker fails to reproduce faithfully the sounds that went into the
microphone or onto the phonograph records, so a bad model gives a distorted representation of
the system that it models. The question that accountants must face continually is how much
distortion is acceptable. The cost of a perfect sound reproduction system puts it out of reach of
most people, and perfect reliability of accounting information is equally unattainable.  (...)

In summary, verifiability means no more than that several measurers are likely to obtain
the same measure. It is primarily a means of attempting to cope with measurement problems
stemming from the uncertainty that surrounds accounting measures and is more successful in
coping with some measurement problems than others. Verification of accounting information
does not guarantee that the information has a high degree of representational faithfulness, and a
measure with a high degree of verifiability is not necessarily relevant to the decision for which it
is intended to be useful.  (...)

Materiality judgments are concerned with screens or thresholds. Is an item, an error, or an
omission large enough, considering its nature and the attendant circumstances, to pass over the
threshold that separates material from immaterial items?  (...)


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