Thursday, October 22, 2020
If Only One Owner Establishes Prices, Then They Lose Their Basic Feature as a Denominator for the Competition Process
Wednesday, October 21, 2020
Cost-Curve Theorists Erroneously Claim that a Firm Should Invest Up to the Point Were MR = MC (Marginal Revenue Equals Marginal Cost)
Mises’s Position on Socialist Calculation Emerged Out of His “The Theory of Money and Credit” (1912)
The Values of the Factors of Production (FoP) DO NOT Depend Solely on the Valuation of the Consumers’ Goods But Also on the Conditions of Supply of the Various FoP
A recent statement by Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist “from the elementary proposition that consumers in evaluating (‘demanding’) consumers’ goods ipso facto also evaluate the means of production which enter into the production of these goods.”
Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter’s “ipso facto” presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers’ goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers’ goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.
—Friedrich A. Hayek, “The Use of Knowledge in Society,” in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), 89-91.
Hayek Chides Schumpeter on the Assumption of “Imputation” Outside the Market
The breathtaking naivete of the Orthodox Line should have been evident even in the 1940s. As Hayek later chided Schumpeter on the assumption of “imputation” outside the market, this formulation “presumably means . . . that the valuation of the factors of production is implied in, or follows necessarily from the valuation of consumers’ goods. But . . . implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind.”
Economists were convinced of the Lange solution because they had already come under the sway of the Walrasian general equilibrium model; Schumpeter, for example, was an ardent Walrasian. In this model, the economy is always in static general equilibrium, a changeless world in which all “data” — tastes or value scales, alternative technologies, and lists of resources — are known to everyone, and where costs are known and always equal to price. The Walrasian world is also one of “perfect” competition, where prices are given to all managers. Indeed, both Taylor and Lange make the point that the Socialist Planning Board will be better able to calculate than capitalist markets, since the socialist planners can ensure “perfect competition,” whereas the real world of capitalism is shot through with various sorts of “monopolies”! The socialist planners can act like the absurdly fictional Walrasian “auctioneer,” bringing about equilibrium rapidly by trial and error.
—Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” Review of Austrian Economics 5, no. 2 (1991): 55-56.
Tuesday, October 20, 2020
Owing to Schumpeter’s Influence, Mises and Hayek Were Considered to Have “Lost” the Rational Economic Calculation Debate
Considering the extent to which Mises’ approach to economics ran completely counter to prevailing views during his lifetime, recent interest in his writings is nothing short of phenomenal. Two striking examples may suffice. For a long time, the most celebrated controversy in comparative economic systems theory — that is, the debate raging during the inter-war period over “rational economic calculation” in a socialist society, which was sparked off by a famous article by Mises — seemed to be a closed chapter in the history of economic thought. Not least owing to Schumpeter’s influence, Mises and Hayek were commonly considered to have “lost” the debate. Indeed, “victory” for the kind of market socialism espoused by Lange and Lerner was held to be so overwhelming that modern treatments of welfare economics do not even care to mention that there ever was such a controversy. (Layard and Walters (1978, p. 27) is illustrative of a general tendency.) Most recently, the standard account of the calculation debate has been seriously called into question, largely as a result of its iconoclastic reexamination by Don Lavoie (1985).
—Stephan Boehm, “The Austrian Tradition: Schumpeter and Mises,” in Neoclassical Economic Theory, 1870-1930, ed. Klaus Hennings and Warren J. Samuels, Recent Economic Thought Series 20 (Boston: Kluwer Academic Publishers, 1990), 210.
The Enthusiast for Macroeconomics and Co-Founder of the Econometric Movement, Joseph Schumpeter, Had Previously Supported ‘Methodological Individualism’
In 1908, when Joseph Schumpeter at the age of twenty-five published his Wesen und Hauptinhalt der theoretischen Nationalökonomie, it attracted much attention by the brilliance of its exposition. Moreover, though he had been trained at the University of Vienna and had been a leading member of the famous seminar of Eugen von Böhm-Bawerk, he had also absorbed the teaching of Léon Walras, who had received little notice by the Austrians and had adopted the positivist approach to science expounded by the Austrian physicist Ernst Mach. In the course of time he moved further away from the characteristic tenets of the Austrian school so that it became increasingly doubtful later whether he could still be counted as a member of that group.
Schumpeter was very much a ‘master of his subject’, in contrast to the ‘puzzlers’ or ‘muddlers’ who follow their own distinct ideas; he also showed a strong receptivity to the dominant opinions in his environment and the prevailing fashion of his generation. Nowhere does this show more clearly than in the still entirely Mengerian chapter of his early book, now translated into English for the first time and regarded as the classic exposition of a view which he later abandoned. Many of his students will be surprised to learn that the enthusiast for macroeconomics and co-founder of the econometrics movement had once given one of the most explicit expositions of the Austrian school’s ‘methodological individualism’. He even appears to have named the principle and condemned the use of statistical aggregates as not belonging to economic theory.
That this first book of his was never translated is, I believe, due to his understandable reluctance to see a work distributed which, in part, expounded views in which he no longer believed. His reluctance to keep his brilliant first book in print, much less having it translated, can probably be explained by his awareness that his own distinct opinions emerged only in his second book on the Theorie der wirtschaftlichen Entwicklung, which came out four years after the first. Though the author may later no longer have been prepared to defend the ideas of his first work, they are certainly essential enough to the understanding of the development of economic theory. Indeed Schumpeter made a contribution to the tradition of the Austrian school which is sufficiently original to be made available to a wider public.
—F. A. Hayek, “Joseph Schumpeter (1883-1950),” in The Collected Works of F. A. Hayek, vol. 4, The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom, ed. Peter G. Klein (Chicago: University of Chicago Press, 1992), Kobo e-book.