Coase’s Transaction-Cost Theory of the Firm Can Be Interpreted as Attempting to Strengthen the Argument for Market Socialism

 Instead, however, Coase chooses a very different approach, in which the market’s resource allocation, in accordance with Salter’s and Plant’s teachings, is efficient but in which it appears costly to use the price mechanism. Doing this, Coase formulates an argument that seems intended to undermine Mises’s case for free-market resource allocation by showing that the cost of using the price mechanism makes it imperfect (costly) for coordinating production. While the allocative result of the price mechanism may be superior (even with transaction costs), this is insufficient, since the assumption often made in economic theory—that prices are known—“is clearly not true of the real world.” This identification is well in line with Coase’s lifelong contribution to economic research, which has been dedicated to “the study of the working of the real world economic system.”

The ‘costly market’ approach plays well into the market socialists’ argumentation for the possibility of socialism, as discussed above, and their proposed schemes to overcome Mises’s calculation problem by providing socialism with centrally regulated, advertised (therefore easily known) list prices. Coase's transaction-cost theory of the firm can, in this sense, be interpreted as attempting to undermine the theory of capitalism and, at the same time, strengthen the argument for market socialism.

Really, Coase’s argument essentially echoes that of Taylor (1929): socialism (or the firm) can be as efficient as capitalism, yet have the benefit of being less costly. Coase’s concurrent work on accounting appears to strengthen this interpretation.

—Per L. Bylund, “Ronald Coase’s ‘Nature of the Firm’ and the Argument for Economic Planning,” Journal of the History of Economic Thought 36, no. 3 (September 2014): 320-321.

Léon Walras Was Hired as a Professor of Economics in Lausanne Because, and Not in spite of, His Socialism

Walras, born in 1834, was the son of Auguste Walras (1801-1866), an amateur economist who favored a utility and scarcity value theory and agreed with James Mill about the desirability of the nationalization of land. Léon Walras borrowed the important elements of pure and social economics from his father but his analytical method belongs only to him. Nevertheless, the beginnings of Walras’s career were not easy. As a supernumerary pupil at the Paris Ecoles des Mines, he never got a degree and became, for his first job, a kind of secretary in a railway company. From 1864 to 1870 he devoted himself to the cooperative sector and wrote some of his most important pieces in social economy. He did not begin to lay the foundations of his mathematical economics until 1871, when he took the new chair of political economy just created in the same Vaud Canton which had honored Proudhon. Walras’s pure and social economies are not, however, unrelated. Besides, Walras was hired as a professor of economics in Lausanne because, and not in spite of, his socialism. Walras spent the rest of his life in Switzerland. Although he never managed to get a chair of economics in France, which he craved for many years, he lived long enough (until 1910) to contemplate the triumph of neoclassical economics and to enjoy the prestige of his own pure theory among a growing number of young disciples.

—Michel Herland, “Three French Socialist Economists: Leroux, Proudhon, Walras,” Journal of the History of Economic Thought 18, no. 1 (Spring 1996): 134-135. 

The Anti-Bullionists Wanted an Elastic Money Supply Linked to the Discounting of Bills of Exchange

This elasticity of the money supply was channeled through the bank discount of bills of exchange issued against the increase in the supply of real goods (Torrens 1812, p. 127). Therefore, it was assumed that when discounting those bills, the banking industry was just providing new currency to those individuals who had increased their transactions demand for money to acquire newly produced goods.

This conception of the elasticity of the money supply linked to the discounting of bills of exchange was later known as the Real Bills Doctrine (Mints 1945, p. 25), but its origins can be traced back even before the Bullionist Controversy in the writings of Adam Smith ([1776] 1904, p. 287; Arnon 2011, pp. 40–45). However, Smith’s version of the Real Bills Doctrine presupposed a regime of monetary convertibility and free banking competition that was lacking in the version espoused by the antibullionists: whereas Smith tried to describe a mechanism of self-regulating bank liquidity within an institutional framework characterized by free banking and metallic money, the antibullionists tried to exculpate the monetary policy of the Bank of England of any responsibility for the inflation in England during the Restriction Period (Glasner 1992). The antibullionists’ version of the Real Bills Doctrine was specially problematic because money supply was ultimately not subject to the demand for money but to the demand for credit by those with sufficient collateral, and that demand for credit could endogenously be manipulated by the banking system itself through changes in its discount rate (something that, as we will see, moderate bullionists explicitly criticized).

—Juan Ramón Rallo, “The Issue of Free Banking During the Bullionist Controversy,” Journal of the History of Economic Thought 41, no. 1 (March 2019): 105-106.

J. S. Mill's 4th Proposition on Capital Should Be Understood as a Continuation of the General Glut Debate

John Stuart Mill’s Fourth Fundamental Proposition Respecting Capital, first stated in 1848, had become an enigma well before the nineteenth century had come to an end. Never challenged in Mill’s own lifetime and described in 1876 as “the best test of a sound economist,” it has become a statement that not only fails to find others in agreement, but fails even to find an internally consistent interpretation that would make clear why Mill found it of such fundamental importance. Yet the fourth proposition should be easily understood as a continuation of the general glut debate. Economists led by Malthus had argued that demand deficiency was the cause of recession and a body of unproductive consumers was needed to raise the level of demand if everyone who wished to work was to find employment. Mill’s answer was that to buy goods and services would not increase employment, or, in Mill’s own words, “demand for commodities is not demand for labour.”

—Steven Kates, “Mill's Fourth Fundamental Proposition on Capital: A Paradox Explained,” abstract, Journal of the History of Economic Thought 37, no. 1 (March 2015): 39.

Macaulay’s D Better Captures What Austrians Have Struggled to Express in their Capital Theory

In the esoteric history of capital theory, as originated by Carl Menger and William Stanley Jevons and developed further at great length by Eugen von Böhm-Bawerk, one can find the concept “average period of production” (henceforth APP). It was formulated by Böhm-Bawerk to give concrete expression to the notion of “roundaboutness”—the idea that production projects that “take more time” will, if wisely chosen, be more productive than those that are shorter in duration.

For the Austrians, roundaboutness was a crucial manifestation of Adam Smith’s division of labor, thus a key ingredient in the explanation of the prosperity of capital-using economies. Though the idea of roundaboutness continued to exert some influence on economic thinking over the years, the APP all but disappeared. It was, for a while, a matter of some energetic controversy, featuring prominently in the debate between Böhm-Bawerk and his critics, a theme in what became known as one of the famous “capital controversies” that mark significant episodes in the history of capital theory. It had a rocky start and went downhill from then.

At first, it seems to be an intuitive concept. Given that production takes time, it would seem there had to be an APP. But intuition runs into serious difficulties the moment one tries to formulate this idea more precisely and to measure it. Indeed, serious problems arose as soon as Böhm-Bawerk proposed a measure of the APP. His specific formulation was decisively criticized. Nevertheless, the idea of “time embedded in production” continued to exercise the imagination of capital theorists and those working in related areas. Time is an important, though neglected, aspect of production, and this influences how production is treated in economic models. The (modern) Austrians continue to use the idea in their analyses of economic cycles. The APP makes a (sometimes implicit) appearance through the Mises–Hayek, or Austrian, business-cycle theory (ABCT). This theory has been influential to a greater or lesser degree since the 1930s and the Great Depression, with a notable renewed interest since the 2008 financial crisis. . . .

Austrian capital theory tried to capture the intuitive and basically undeniable importance that time plays in economic life, but arguably was diverted down a blind alley with Böhm-Bawerk’s APP. Böhm-Bawerk attempted a purely physical measure of roundaboutness to capture the length of the production process. Such a measure is a chimera. But the intuition is strong, and the idea survived and reappeared at various points in the history of capital theory. Almost unknown to economists, an alternative value measure of roundaboutness has existed at least since Hicks’s formulation of his average period in 1939, which, coincidentally, was exactly the same measure discovered by the financial actuary Frederick Macaulay in 1938, called by him “Duration.” Macaulay’s D, more richly interpreted as Hicks’s AP, is a measure that more appropriately captures what the Austrians struggled to express over many years in their capital theory and in their analysis of the business cycle. It remains to be seen whether this will provide a basis for future work along these lines.


—Peter Lewin and Nicolás Caachanosky, “The Average Period of Production: The History and Rehabilitation of an Idea,” Journal of the History of Economic Thought 40, no. 1 (March 2018): 81-82, 96.

For Menger, The Term “Capital” Belongs to the Sphere of Economic Calculation, Not Production

A considerable part of the paper of Endres and Harper is dedicated to the demonstration that Carl Menger and Ludwig Lachmann endorse the same concept of capital and that their approach has to be distinguished from those of other members of the Austrian School. In this short comment, it has been shown that this interpretation cannot be upheld at all. Rather, the opposite is true. Lachmann strongly rejects the capital concept envisioned by Menger. Their notions of capital are diametrically opposed to each other, and it is very misleading to lump them together and call them the Menger–Lachmann Trajectory. This does not imply that Lachmann’s capital theory does not build upon some central ideas contained in Menger’s Grundsätze. Even in his monograph, Menger (1888, p. 9) refers to his classification of goods into those of lower and higher order as a very important one. However, Menger makes clear that these ideas have nothing to do with capital theory. For him, “capital” is a term that belongs to the sphere of economic calculation, not to the theory of production. Menger (1888) does not elaborate on this point because his intention is mainly to criticize other theories of capital. But, in view of the evidence provided in this short comment, it should be clear that it constitutes a misclassification to lump Menger and Lachmann together.

—Eduard Braun, “The Menger-Lachmann Trajectory on Capital: A Comment on Endres and Harper,” Journal of the History of Economic Thought 36, no. 1 (March 2014): 101.