Cost-Curve Theorists Erroneously Claim that a Firm Should Invest Up to the Point Were MR = MC (Marginal Revenue Equals Marginal Cost)

One fundamental such flaw is the artificial and even disastrous isolation of price theory from monetary and from time (and capital) phenomena. I know that questioning such isolation means bringing into question perhaps the very idea of a textbook devoted solely to price theory, but I’m afraid that this questioning must be done. The abstention from money is unfortunate but not fatal, but the abstention from time and capital analysis is, and this cannot be remedied by an appendix that Kirzner promises us on time. Problems of time, capital, interest must be infused into the price analysis. As a result of the failure to infuse, Kirzner ignores the vital “structure of production” analysis, which he claims makes little difference to one’s view of the economy. Further, the result of abstention from capital leads to all the crucial errors of the “cost-curve” analysis. For example, it is the claim of the “cost-curve” theorists (in the ranks of which Prof. Kirzner joins) that a firm will invest funds in production up to the point where “marginal revenue” equals “marginal cost.” Setting aside the equality fallacy which I will comment on below, this means, e.g. that if an output of 10 more units will bring in $100 of revenue and cost $99, the firm will produce the 10 more units. Now I submit that this is a critical fallacy. Why should the owner of the firm invest a $100 more for an expected return of (approximately) 1%, when he can invest the same $100 for, say, 8% elsewhere—or get 5% at a savings bank? Once we bring investment interest return, into the picture, we see that the whole elaborate cost-curve structure is totally faulty and should be tossed into the discard—but if that should occur, what in the world would happen to that dazzling display of quasi-mathematical pyrotechnics with which “modern” economics professors bedazzle their students?

—Joseph T. Salerno, “Varieties of Austrian Price Theory: Rothbard Reviews Kirzner,” Libertarian Papers 3 (2011): 7-8.