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Source link: http://archive.mises.org/18553/salerno-varieties-of-austrian-price-theory-rothbard-reviews-kirzner/

Salerno: “Varieties of Austrian Price Theory: Rothbard Reviews Kirzner”

September 28, 2011 by

The following article was published yesterday in Libertarian Papers:

25. “Varieties of Austrian Price Theory: Rothbard Reviews Kirzner”

by Joseph T. Salerno

View the .pdf for this article View the .doc for this article

Abstract: The root of any system of economic theory is the theory of price.  But while modern Austrian economists have put a great deal of effort and ingenuity into building up the superstructure of their discipline since the mid-1970s, they have paid scant attention to ensuring that the price theory supporting the edifice is a sound and settled doctrine.  The result is that, for many current Austrians, price theory is a “dynamic” version of neoclassical price theory.  More precisely, it is Chicago price theory with a theory of entrepreneurship and of competition as a rivalrous process grafted onto it. This ad hoc approach to Austrian price theory thus relies heavily on the analytical tools and techniques developed by Alfred Marshall, Frank Knight, and Jacob Viner. George Stigler later elaborated these individual contributions into a systematic price theory.

The prevailing approach almost completely ignores the fact that there exists an alternative “causal-realist” tradition of price theory that was founded by Carl Menger and developed by his followers both in Austria and abroad.  These include especially Böhm-Bawerk, J.B. Clark, Frank Fetter, Herbert Davenport, Philip Wicksteed, and Ludwig von Mises.  The causal-realist tradition, which is explicitly anti-Marshallian and anti-Stiglerian, maintained a shadowy presence in Austrian economics for most of the postwar period.  It is only in recent years that some Austrian economists, seeking a sound price theory to sure up the foundations of their discipline, have explicitly recognized and embraced it.

Israel M. Kirzner’s neglected book, Market Theory and the Price System, which was first published in 1963 and reprinted in a new edition this year, was the first and only systematic attempt to marry Stiglerian price theory with elements of the causal-realist tradition.  Murray N. Rothbard, who had already reformulated and significantly advanced the causal-realist tradition in his own treatise Man, Economy, and State, wrote a comprehensive and quite critical referee report on Kirzner’s book manuscript for the publisher in 1961.  His comments have never been published before.

This article contains two parts.  The first part is a response to certain claims and omissions made by Peter J. Boettke and Frédéric Sautet, the editors of the new edition of Kirzner’s book.  The second part contains Rothbard’s report on the book as a supporting document for the arguments of the first part.  By proceeding in this way the goal is to clarify the important issues at stake for Austrian price theory.

{ 1 comment }

fundamentalist September 28, 2011 at 9:14 am

Rothbard: “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?”

Actually, the marginal revenue would be $10 and the marginal cost $9.9 because marginal means the addition of one more unit. In addition, marginal revenue isn’t marginal profit. The additional 10 units of production provide 10 more units over which to spread fixed costs, so fixed costs are lower and therefore profits are higher. The marginal costs = marginal revenue formula translates into lower marginal revenue, as Rothbard notes, but higher marginal profits. The goal is profit maximization, not revenue maximization. It’s easy to show that the formula does maximize profits. Whether the additional profit is greater than the money interest rate depends on the cost structure of the company and how much debt the company has.

I quit reading after a few pages. Rothbard’s comments just seem petty.

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