Costs of choice: reformulating price theory without heroic assumptions

Abstract The space of human possibilities is vast and ever-growing in a creative, unpredictable fashion. Still, prices form. Acknowledging the costs of choice invokes the famous infinite regress argument wherein utility can’t be calculated without first computing an infinite chain of transaction costs. Rational individuals, to avoid getting stuck in infinite regress, must look outside themselves to make decisions. Heuristics, culture, aesthetics, and other elements of human sociality can be understood as grappling hooks to scale the unknown. Contextual or heuristic decision-making appears irrational under perfect knowledge assumptions, but theorists of creatively evolving systems cannot sufficiently explain emergent system features like prices, tradeoffs, and transaction costs without marshaling a nontrivial theory of knowledge acquisition and use. A price theory of creatively evolving social systems must, therefore, minimize a priori agent knowledge, like the “classical price theory” developed by Inoua and Smith (Economics of markets: neoclassical theory, experiments, and theory of classical price discovery, Palgrave Macmillan, London, 2023). I motivate and then discuss the contours and implications of a price theory that takes the costs of choice seriously, such that the primary modeling assumption isn’t epistemic heroism but epistemic humility.