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Source link: http://archive.mises.org/15244/the-foremost-austrian-contribution-to-economic-science/

The Foremost Austrian Contribution to Economic Science

January 6, 2011 by

Without a dynamic price mechanism — trademark of a money-based, capitalist society — there can be no calculation, and without calculation there can be no advanced division of labor. Our society would be no more advanced than it was during the age of barter. FULL ARTICLE by Jonathan M. Finegold Catalan

{ 40 comments }

fundamentalist January 6, 2011 at 11:01 am

Excellent summary! Thanks! Mainstream economists have no incentive to be honest about Austrian economics. They’re lazy, and frankly as someone who earned an MA in mainstream econ, Austrian econ is much much harder. Mainstream economists are simply dishonest. Finally, mainstream economists don’t want to discuss and debate; they want to win! Ridicule wins more arguments than debate.

I think Mises said it best when he wrote that the monetary theory of business cycles is a major threat to socialism because it proves that markets are not unstable but become unstable through the manipulation of money. Mainstream economists are closet socialists for the most part and they cannot accept sound monetary theory without giving up their love affair with socialism.

Daniel Hewitt January 6, 2011 at 12:31 pm

Fantastic article. Thanks.

Andras January 6, 2011 at 1:18 pm

A truly great article!
Should not this be applied, or at least considered in the debate on intellectual property? I might be wrong but I can not imagine innovative research without co-operation, a result of this Dynamic Price Mechanism. Just imagine it may take years before the first tangible (the cherished physical) product of the research appear on the market. How could these two, DPM (quote below) and non-IP be reconciled?

“Without a dynamic price mechanism — trademark of a money-based, capitalist society — there can be no calculation, and without calculation there can be no advanced division of labor. What we enjoy today in the form of production and wealth is the direct consequence of monetary calculation by means of prices. Without money and monetary calculation our society would be no more advanced than it was during the age of barter.”

Jonathan M. F. Catalán January 6, 2011 at 5:42 pm

I think that, while related, ultimately the intellectual property debate is separate. The problem with state-enforced IP laws is clear—it is arbitrary (ten years? five years? the dates are arbitrarily chosen by estimating what is “fair” and what is not). Can the market provide intellectual property “rights” (whatever that may refer to)? I don’t know, but I think it is true that individuals will strive to find ways of maximizing profits (even if they are not granted legal monopolies).

Tangible property rights are far easier to enforce, because you can — to varying degrees — control the use of the property. Intellectual property is much more difficult, because intellectual property is non-scarce. Someone using your idea doesn’t deny you of the idea, just the opportunity to exploit the idea, and so how does one limit the ability of another person to use an idea without a way of enforcing a ban (that is, a society in which a state police force [which exercises a monopoly on force] does not exist, or at least does not protect your “intellectual property”). The cost of the enforcement, in a free society, would probably be higher than it’s worth. I do think, however, that over time these costs will come down, as people devise ways of “protecting” their ideas (and this means maximizing the exploitation of the presented opportunities, not so much physically barring other people from using the idea). Nevertheless, the way IP works would be radically different without state-enforced monopolies.

What did you have in mind?

Stephen Grossman January 6, 2011 at 2:01 pm

What is the relation between Austrian price coordination and Smith’s discovery of the benefits of trade?

Jonathan M. F. Catalán January 6, 2011 at 5:46 pm

What discovery of Smith’s, specifically, do you have in mind? It seems that it was clear to Smith that a free division of labor society had utilitarian advantages, and he realized the importance of the division of labor. I’m just not sure he knew of a tangible explanation of what guided the market process in this division of labor society.

Stephen Grossman January 7, 2011 at 11:00 am

>I’m just not sure he knew of a tangible explanation of what guided the market process in this division of labor society.

So price coord. determines the div. of labor which determines trade? Something like that?

Isn’t price theory a big deal in economics for the last 50 yrs or so? If so, is that an influence from the Austrians?

Bob Roddis January 6, 2011 at 4:19 pm

Jonathan,

This article is simply beyond outstanding.

Joe Saleno January 6, 2011 at 4:23 pm

This article contains a number of important insights that cannot be emphasized too often. First, the vague, nebulous, and mystical metaphor of the “invisible hand” is inadequate to capture the richness of the modern Austrian conception of the pricing process. It is, therefore, an easy target for the enemies of the market economy and should be abandoned. Second, in an age when economic “imperialism” has run riot and wantonly extended its reach to every corner of social science with pernicious effect, the article stresses that the main task of economics remains to explain the determination of the structure of market prices. Third, and most important, the article clearly explains the point that the constellation of prices actually paid and expected to be paid on markets is the sole means of meaningfully appraising scarce resources and finely coordinating their allocation in a complex, capital-using economy based on the social division of labor.

My only quibble with the aticle is semantic: the term “price mechanism” is–well–too mechanistic. It does not convey the dynamism and human rivalry that is th essence of price making. I suggest the term “pricing process,” which goes back to Boehm-Bawerk and was used by Mises. The former by the way also used the German term “Preiskampf” (“price struggle”) which he adopted from A. E. Shaeffle, one of his teachers.

Jonathan M. F. Catalán January 6, 2011 at 5:47 pm

Thank you Prof. Salerno, and your suggestion of replacing “pricing process” for “price mechanism” is well noted.

Bob Roddis January 6, 2011 at 5:49 pm

Austrian “critics” also meticulously avoid any familiarity with basic Austrian concepts such as ignorant “acting man” and subjective value which are ultimately the reasons that the pricing process must be allowed to occur unimpeded and why interference in the process is disasterous.

Stephen Grossman January 7, 2011 at 11:02 am

Objectivist economist Richard Salsman says the invisible hand is businessmen.

Beefcake the Mighty January 6, 2011 at 5:14 pm

JFC:

Do you believe, as in the neoclassicist formulation, that prices are a proxy for value equivalencies between goods? At several points you seem to take this position (which is actually present throughout the Austrian literature).

Jonathan M. F. Catalán January 6, 2011 at 5:52 pm

What do you mean by value equivalence between goods? To clarify my position in the article, while prices are derived from values, prices do not measure that value (this could be illustrated by simply pointing out that the only reason an individual would pay X amount of dollars for Y good is because Y good is worth more to that individual than X amount of dollars). Do price differences between goods suggest differences in value? I think that such an exercise would be futile.

Or, did you have something else in mind? I don’t know the neoclassical position on pricing too well (unfortunately). With that said, I plan to read Hicks’ Value and Capital sometime within the next months.

Beefcake the Mighty January 6, 2011 at 10:32 pm

I apologize, I’m using my own terminology here. By “value equivalencies” I simply mean marginal rates of substitution. It does indeed arise from the standard (Hicksian) indifference analysis, in particular the representation of ordinal utility by a utility function. Many Austrian critiques of neoclassicist value theory are flawed because they believe utility functions entail some kind of cardinality of value; this is incorrect and the real issue is the assumption that for a given good, there is some amount of another good that an actor is indifferent in regards to (even the brilliant Huelsmann makes this mistake). In the neoclassicist formulation (eg, the consumer choice problem) there is a relation between price and value equivalents (possible
because both are cardinal entities). It should be noted that in Rothbard’s rendition of utility (where he basically follows Mises), there is no notion of value equivalencies between goods, as the value of a good is the end that must be forgone if the good is removed from an actor’s control (or attained if the good comes into his control); it is impossible to reckon value in terms of cardinal amounts of other goods. Money is not fundamentally different in this regard; it too is a good, the only complication is integrating it into an ordinal ranking scheme, a problem which Mises’ regression theorem solves. Hence there cannot be any sense in which price and value are related as in the neoclassicist sense, and the primary debate in economics over how well (if at all) prices proxy for (supposedly more fundamental) values is irrelevant. Rothbard of course goes on to explain how factors of production are valued, in terms of monetary calculation in terms of *prices* (as you discuss in your article).

At times (and of course Mises contributes to confusion here at many points in his analysis)
you seem to be closer to the neoclassicist, rather than Rothbardian conception. For example,

“In a division-of-labor society, which is one in which the individual depends chiefly on others to satiate his desires, the consumer reigns supreme. The task of investing and risking the capital[15] to produce the goods to meet these desires is that of the entrepreneur, and as such he is the driver of the market.[16] The theory of market coordination deals precisely with how entrepreneurs dissect and predict consumer preference, invest, produce, and distribute to meet demand. This is all encompassed within the umbrella of the price mechanism. Changes in preference are reflected in prices, thus changing the investment patterns carried out by entrepreneurs.”

“We know that in a market society consumer preference is sovereign, and because of this entrepreneurs aim at investing into lines of production that best fulfill consumer desires. A further consideration is that monetary calculation allows entrepreneurs to determine profit and loss, which in turn reflects how well they satisfy consumer desire. Strictly monetarily speaking, we can assume that because the entrepreneur himself is interested in maximizing the satisfaction of his own desires, he will therefore strive to garner the greatest possible profit from whatever quantity of capital he may decide to invest into a particular line of production.”

You are clearly presupposing that prices (or rather price differentials) reflect consumer preferences in some sense. There is no reason to presuppose this, and actually many reasons to doubt it. In truth, a money-using economy is fundamentally different from a non-monetary economy, and the case for the free market should not be based on arguing that money prices somehow proxy for supposedly more fundamental entities like value. Put differently, money is part of the real economy, and not a “veil” (fluttering or otherwise).

Jonathan M. F. Catalán January 7, 2011 at 1:57 am

Like I said, money prices is not the same as value, but I don’t see how the price of consumer goods would not reflect on the valuations of the consumer is the most general sense. If we assume a fixed aggregate nominal demand going towards consumer goods, changes in the amount of money being spent on specific consumer goods will reflect changes in preferences. There is presupposition of cardinal utility here; utility is not measured. In fact, nothing is being measured. Prices are conveying changes in preference to the entrepreneur.

james b. longacre January 7, 2011 at 2:55 am

could you define value in this context?? do you mean that if you paid 2 moneys for something you may value 10 moneys to part with it?? would the ten moneys you would take to part with it then be called a what??? a price??

Beefcake the Mighty January 7, 2011 at 7:01 am

“Prices are conveying changes in preference to the entrepreneur.”

They’re conveying changes in how much *money* the consumer will pay for the good in question. But you seem to mean “preference” in a different sense, however.

Jonathan M. F. Catalán January 7, 2011 at 10:26 am

Let’s take a fixed aggregate nominal demand for consumer goods, at equilibrium. The existing pattern of spending reflects consumers’ preferences (not only the values of particular goods, but reflecting also on their ordinal value scales). A change in that spending pattern reflects a change in preference. This doesn’t consist only of changes in preference of specific goods, but also changes in the utility scale of multiple goods. Again, it’s not a measurement, but preferences are changing.

Beefcake the Mighty January 7, 2011 at 11:34 am

If we’re in equilibrium, there isn’t any role for money, so I’m not sure what the signifigance of your construct here is. At any rate, do you believe that money is a good? The changes in preferences that actually occur are changes in preferences between various goods and money, not between one non-monetary good and another non-monetary good as you seem to be implying.

Jonathan M. F. Catalán January 7, 2011 at 12:31 pm

The changes in preference are between goods. Money is an exchange good. It follows that changes in spending patterns by an individual represents a change in preference. For example, let’s say I spend my income of $100. I spend $50 on food, $20 on books, $15 on gasoline, and $15 on clothing. From this, you couldn’t derive my preference for each item, but if I reduced my spending on food to $40 and spent that $10 on books, you could say that $10 more dollars on books commands a greater utility (to me) than spending those same $10 on food. Since this represents a change, it means that my preferences are changing.

Beefcake the Mighty January 7, 2011 at 12:38 pm

I think you’re conflating the psychological reasons for the price change with the praxeological reason. It may be the case, eg, that I spend less on ice cream because I wish to spend more on beer, but this is not the relevant comparisons an actor makes, which is between ice cream and money on the one hand, and beer and money on the other. It does not necessarily follow that changes in prices (ie, changes in preferences between money and non-monetary goods) entail changes in preferences between non-monetary goods.

james b. longacre January 7, 2011 at 12:56 pm

is an inch always a distance??

would a price always be a value?? but not necessarily the other way around??

and how is the price – value discussion a part of so called austrian economics??

Beefcake the Mighty January 7, 2011 at 9:13 am

“Like I said, money prices is not the same as value, but I don’t see how the price of consumer goods would not reflect on the valuations of the consumer is the most general sense.”

Well, a lot (everything, really) hinges on what you mean here by “reflect.”

“There is presupposition of cardinal utility here; utility is not measured. ”

I assume you omitted “no” in the first sentence. Again, my point is not that utility as such is being measured or is cardinal, but rather it is assumed that value equivalencies between goods are an economically meaningful cardinal entity (such that prices proxy for these equivalencies, and as the market equilibrates value equivalencies align with price ratios).

Jonathan M. F. Catalán January 7, 2011 at 10:28 am

Well, a lot (everything, really) hinges on what you mean here by “reflect.”

As far as I know, there is only one definition of the word “reflect”.

Again, my point is not that utility as such is being measured or is cardinal, but rather it is assumed that value equivalencies between goods are an economically meaningful cardinal entity (such that prices proxy for these equivalencies, and as the market equilibrates value equivalencies align with price ratios).

For me to have established price equivalency between goods I would have had to establish utility cardinally. That changes in consumer spending represent changes in valuations doesn’t imply any type of cardinal measurement, whether of specific goods or between goods.

Beefcake the Mighty January 7, 2011 at 11:37 am

“As far as I know, there is only one definition of the word “reflect”.”

Indeed there is, but I would say in the current context you are using the term metaphorically.

“For me to have established price equivalency between goods I would have had to establish utility cardinally. ”

This is not true; I would urge you to study the proof of the representation theorems (which are based on an ordinal concept of utility) in any intermediate microeconomics text. I’m not trying to be snotty or rude here, I think you will find the exercise quite useful. I know I only came to fully appreciate Rothbard’s formulation of utility theory after having understood the neoclassicst viewpoint.

Jonathan M. F. Catalán January 7, 2011 at 12:33 pm

Indeed there is, but I would say in the current context you are using the term metaphorically.

I think you are reading too much into it. The only thing I meant is that prices reflect preference (as oppose to measure preference). That is, prices are derived from preferences and changes in prices reflect changes in preference.

This is not true…

If price is not the same as value, then price differences between goods is not the same thing as value differences.

james b. longacre January 7, 2011 at 12:57 pm

Let’s take a fixed aggregate nominal demand for consumer goods, at equilibrium.

does that ever occur??

james b. longacre January 9, 2011 at 11:13 pm

Like I said, money prices is not the same as value,…..

if you price something arent you placing a value (i price it at 5 dollars, i value it 5 dollars) on that something??? wouldnt a price always be a value?? as an inch is always a distance??

james b. longacre January 7, 2011 at 2:56 am

i value it at 2 moneys from you but i value it at 10 moneys to part with it??

Beefcake the Mighty January 7, 2011 at 1:02 pm
Robert January 6, 2011 at 9:22 pm

Jonathan, being extremely young, cannot be expected to have a comprehensive knowledge of the economic literature. But I cannot see why somebody has not pointed out to him literature on setting models in historic time. I think these articles are particularly apropos:

Paul Davidson (1985). “The Economics of Ignorance or the Ignorance of Economics”, Critical Review, V. 3, N. 3 & 4: pp. 467-487.

Jan A. Kregel (1986). “Conceptions of Equilibrium: The Logic of Choice and the Logic of Production”, in Subjectivism, Intelligibility, and Economic Understanding: Essays in Honor of Ludwig Lachmann on his Eightieth Birthday (ed. by I. M. Kirzner).

Beefcake the Mighty January 6, 2011 at 10:34 pm

Here’s a useful demolition of Davidson:

http://mises.org/misesreview_detail.aspx?control=365

Robert January 7, 2011 at 5:39 am

No, that is a non sequitur in the context of this conversation, not a useful demolition of Davidson. The author is ignorant of the existence of Paul Davidson’s views on Austrian economics.

Beefcake the Mighty January 7, 2011 at 7:05 am

And you’re ignorant of the fact that Davidson’s opinions on Rizzo and O’Driscoll’s work do not constitute a decisive critique of Austrian economics as a whole.

Robert January 7, 2011 at 7:40 am

The above, of course, is a strawperson.

Beefcake the Mighty January 7, 2011 at 9:08 am

Why don’t you simply explain why these articles are of relevance to the essay in question? What points did JFC overlook that are important? Better yet, what flaws do YOU find in JFC’s essay?

Jonathan M. F. Catalán January 7, 2011 at 2:25 am

Well, if the first article wasn’t $35 and the second one seemingly impossible to find, I would read them. By the way, what do you think of Don Patinkin’s Money, Interest, and Prices?

Bala January 7, 2011 at 10:01 am

I wanted to ask the same thing as BtM finally did, but why bring age into it? Further, why don’t you state your objections to what JMFC has written? Are you trying to hide behind papers that anyone will have to pay to read or are just not accessible at all?

An honest interlocutor would place his objections on the table. Are you an honest interlocutor?

Maggie Gilmore January 12, 2011 at 1:54 pm

This article blew my mind. A complicated subject but made totally understandable, thank you!

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