“A technological breakthrough actually increases the overall production of the economy in a one-off manner in essence making all goods cheaper.”

Sure, there would be other consequences of the technological advancement that reduces the cost of coconut production and thus the relative price of coconuts to other products (fish, berries, etc.), but these feedbacks could not raise the relative price of coconuts to other products above what it was before the technological cost reduction of coconut production because all other feedbacks depend upon the reduction in the cost and relative price of coconuts.

In the context of Mengers work (although admittedly I haven’t studied it directly and am reliant on other Austrian economists such as some of those at LvMI like Salerno), cost of production is really just broken down into asking the same questions about demand but this time for the factors of production (higher order goods) – it is competing demand for those goods that influence the price.

To go back to the RC type 2 person economy analogy, you are forgetting the unseen consequences that this new technological advancement has brought about. Now that person X has freed up more of his time by being able collect coconuts more easily he’ll be able to start collecting berries also. The fisherman will now have a choice to trade fish for coconuts or fish for berries which will help direct where the islands capital (human labour) will be more efficiently directed to serve his needs. In this way the cost of production of coconuts is actually being influenced by demand for the factors of production of coconuts versus demand for those same factors that could be used to make alternative goods (eg. berries).

A technological breakthrough actually increases the overall production of the economy in a one-off manner in essence making all goods cheaper.

I think we could get stuck going in circles here though because perhaps we’re defining things in different ways. Looking at a single product in isolation (eg. coconuts), you’re correct to say that should their cost of production go down then this will influence price down also. If I’m correct though, the Austrian economists are saying that ultimately the things driving the cost of production is demand for those higher order goods and not some intrinsic or tangible value that is transferred to a good dependent on what is spent producing it. Therefore the source of pricing is demand for the good and for the factors of production that are utilised in making it. Technological breakthroughs are one-off gains that shift the equilibrium point of the ERE (evenly rotating economy).

“Now if there was a second individual who fished, but who also was willing to trade fish for coconuts, the technological discovery of the pokirng stick that reduced the costs of coconut production and increased the supply of coconuts relative to fish would mean that the relative price of coconuts to fish would fall. Note that it is the reduced cost of coconut production that reduced the price of coconuts (absent any change in subjective valuation of coconuts or fish).”

I like the simple RC economy type approach but can see a couple of assumptions loaded into it.

Without other coconut suppliers competing for coconut demand why would the price necessarily fall relative to fish – unless the stick “technology” was passed on to the fisherman so he could now choose to more easily harvest his own coconuts rather than exclusively trade for them? Wouldn’t the coconut collector’s demand for fish have to be elastic – if it were inelastic and all he wanted was 1 fish a day to satisfy his needs for fish entirely then where would be his incentive to trade more coconuts for more fish?

I guess we could quibble about how the asking price for production goods might be influenced by demand and selling price of the consumer good, depending on the distance to the final concsumption and universal understanding of what that consumper price was actually going to be.

However, in general, the further away in the manufacturing chain from final consumption, the less influence this would have. To use the cigarette example posted earlier, if the demand for cigs went to zero, the utility of a machine to make them would fall dramatically, but not to zero. At the least, it still has scrap value, and any components that can be repurposed would have some value, but not in any way related to cigs. As the machine was dismanteled and sold off, they would become inputs for some other production process.

Mises used a formula for equilibrium to demonstrate this effect. I don’t have the reference, but he was showing that a tendency towards euilibrium does not mean the market actually gets there, because the relationship between the cost of inputs adn the price of consumer goods is always changing, especially as new tecnologies, changes in demand, changes in preferences, etc, continue to fluctuate. This non-equilibrium is the arbitrage for profit.

A one person economy. Person X has had some coconut to eat today but would gain some enjoyment today from some more coconut. In order to get some more coconut for today’s consumption X must climb a palm tree to shake the coconut loose. However, he regards the effort (cost) of climbing the tree today as not worth the extra coconut consumption, so he doesn’t climb the tree to acquire his coconut for consumption.

The next day he wakes hungrier than he was the day before, so the value to him of climbing the tree and shaking loose another coconut has increased, and he climbs the tree for another coconut.

Now, consider the prior day again. If the individual had thought of using a big stick that was lying a few feet from him to poke at the coconut, he wouldn’t have had to climb the tree, and he may have been quite happy to acquire the additional coconut by poking. The use of the poking stick is essentially a techonological advancement (over treeclimbing) for acquiring coconuts that reduces the cost of coconut harvest. His subjective valuation of the extra coconut consumption didn’t change when he used the stick; it was the reduced cost of production (if you will) that increased his coconut supply.

Now if there was a second individual who fished, but who also was willing to trade fish for coconuts, the technological discovery of the pokirng stick that reduced the costs of coconut production and increased the supply of coconuts relative to fish would mean that the relative price of coconuts to fish would fall. Note that it is the reduced cost of coconut production that reduced the price of coconuts (absent any change in subjective valuation of coconuts or fish).

Make no mistake: we do not agree.

“Input costs are determined by the prices people are willing to pay for other goods that require those inputs. Costs are determined by prices.”

I think this is a misunderstanding. Input costs (seller) and prices (buyer) are determined by the trade between buyer and seller of the production good. Output = income.

If the buyer is a manufacturer of consumer goods, and he is buying goods as inputs, like in all economic trades the price is negotiated. If you have ever been in a manufacturing business, you know what I mean. The negotiation between seller and buyer rarely includes a discussion of what the buyer’s profit will eventually be; sometimes, but that is a special case.

Mises describes this as the entrepreneurial function. The entrepreneur formulates a plan that “inputs + manufacturing = cost”, and “price – cost = profit”, then he attempts to implement that plan. If everything was known for certain by everyone in the supply/consumption chain, then the future price of goods would be factored into all of the inputs and there would be no profit.

Of course this is not the case. Only the entrepreneur knows for sure what the plan is and how efficiently he performs against that plan, and if he is right, he makes a profit, and if he is not, he fails.

The price of inputs operates the same way on up the supply chain, all the way to say, the mining of the minerals. You might think of this as the highest order good, the transformation of a natural resource into a good. The price is based on demand. The demand is based on utility. If there is no demand, there is no price, and even a cost of zero would not turn a profit.

Imagine a natural resource, like iron, that can be eventually formed into infinite numbers of consumer goods. It is not reasonable to argue that the seller of iron is somehow basing his price on the selling price of all of these finished goods, right?

No, he looks at his universe of buyers, and his universe of costs, and attempts to offer a price. If there is strong demand, he may raise the price, if there is low demand, he may lower the price, each time affecting his profits. Or he may respond to low profit by modifying his costs with some capital investment, resulting in more profit with the same price.

His universe of buyers is not the consumers who will buy the finished goods. It is the operators of the next stage of manufacturing that require iron as an input. It is there that the price of the production good is determined.

The next day he wakes hungrier than he was the day before, so the value to him of climbing the tree and shaking loose another coconut has increased, and he climbs the tree for another coconut.

Now, consider the prior day again. If the individual had thought of using a big stick that was lying a few feet from him to poke at the coconut, he wouldn’t have had to climb the tree, and he may have been quite happy to acquire the additional coconut by poking. The use of the poking stick is essentially a techonological advancement (over treeclimbing) for acquiring coconuts that reduces the cost of coconut harvest. His subjective valuation of the extra coconut consumption didn’t change when he used the stick; it was the reduced cost of production (if you will) that increased his coconut supply.

Now if there was a second individual who fished, but who also was willing to trade fish for coconuts, the technological discovery of the pokirng stick that reduced the costs of coconut production and increased the supply of coconuts relative to fish would mean that the relative price of coconuts to fish would fall. Note that it is the reduced cost of coconut production that reduced the price of coconuts (absent any change in subjective valuation of coconuts or fish).

I was talking about this elsewhere with Phinn. I referred to Mises’s discussion of this in HA, p.277.

Monopolies do not exist just in IP, they exist everywhere. Monopoly prices only occur when the monopoly holder can make more net returns by withholding supply. I think the diamond industry is a good example of this.

Most monopoly holders have no desire to withhold their goods form the market, and monopoly prices don’t arise, in IP or any other good. (But yes, many find Kinsella persuasive)

Your last paragraph is about business tactics; “loss-leaders”, “inventory reduction sales”, and most famously, “making it up in volume” are all part of the business environment. However, when the final balance sheet is summed, there is either something left over (profit) or not. Even then, companies may operate at a loss for quite a while as long as the credit holds out, before they actually go under.

So, we are discussing this in a simplified, generalized way. However, the exceptions listed above still have to fit the general theory, and they do.

“I believe that, if a process were developed by which a car could be produced that cheaply, the effect would be a drastic increase in supply, which would drive the price down. This is of course the story of capitalism generally. Technological innovation and capital accumulation allow for greater efficiency in production, leading to prices being driven down (dramatically in many cases).”

Exactly! The improvement in technology leads to lower costs of production (an increase in supply at any given price) and lower market prices.

“Of course no car company could afford to sell a car for 7 dollars today, and this is because costs are so high, but that doesn’t mean costs are determining the price. The price is thousands of dollars today because car companies can find people willing to spend thousands of dollars.”

As you have agreed in your two quoted statements above, costs influence selling price. They determine prices not by themselves but are a joint determinant with demand (subjective value).

All I am really saying about governemt here is that the catallactics are different because there is not “profit’ to calculate, there is coercion built into the trade, they operate with a budget and allocate that budget over the costs as represented by willing sellers.

That is most often done on a cost+ basis because the governemt is a monopoly buyer. That is a different economic case than a for-profit business selling goods in a free market.

It is difficult to treat it as apples to apples when discusing costs, prices and profits.

That’s all (for a change).

Don’t recall you complaint, and can’t imagine what it was, but have a good time off.

The proposition that costs determine the price of a good only begs the question; where do costs of the inputs to the inputs come from?

Input costs are determined by the prices people are willing to pay for other goods that require those inputs. Costs are determined by prices.

Government is not a free-market actor, and so the price mechanism is not functioning in the transaction.

This is a misleading description. I already complained about this to you in the past, I don’t remember however how you responded. Government’s agents might prefer to use force instead of voluntary trade, but that does not mean they are not subject to economic laws. Just like any other actor, they need to use scarce resources in order to achieve goals, and they need to select among the unlimited goals. To do this rationally, economic calculation is required.

usually operate on a cost+ basis

Cost+ is only possible within the context of the company, where the upper management determines goals for the section of the business. The business itself still needs to make profit and the market mechanism to guide its goals.

I’m going for a vacation today so my response speed is likely to decline for a while.

Both I guess. It is presumptuous of me to speak for Richard but I also presuming Richard can set me straight if he thinks my interpretation is wrong. Ok and “set” was a bad choice of word but surely most people reading this would get the gist? I perhaps should have said what “predominantly influences” rather than sets. I’ll admit I sacrificed accuracy and clarity for brevity.

Let’s now talk about your post then james. You’re saying exactly what?

“does the cost of other inputs ‘set’ the price??? o fjus tomeones say so that sets the price??”

It hurts me to even repost such nonsense so before I attempt to decipher it do you want have another go at making a point?

“can prices be unaffordable for some?”

At what point is anyone here even talking about prices being “unaffordable for some”? Isn’t that a factor operating in every market for every good? It is part of the rationing function between supply and demand. Did you accidentally end up on this site? Oops I’ll unconditionally withdraw that remark Your Honor.

i believe that to be false

are you asking richard or telling others?

Richard is talking about what sets the price for those inputs? The answer can’t be the cost of them…..does the cost of other inputs ‘set’ the price??? o fjus tomeones say so that sets the price?? can prices be unaffordable for some?