Austrian Economics. Ruminations. End Part.


Mainstream economics originates from Jevons’ and Menger’s marginal utility and Walras’ and Marshall’s equilibrium approach. While their foundations are similar, their presentation looks quite different, according to the two schools which typically represent these two approaches: the Austrian school initiated by Menger and the general equilibrium theory initiated by Walras. An important, albeit only formal, difference is that the former presents economic theory mainly in a literary form using ordinary logic, while the latter prefers mathematical expressions and logic.

Lachmann, who excludes determinism from economics since acts of mind are concerned, connects determinism with the equilibrium approach. However, equilibrium theory is not necessarily deterministic, also because it does not establish relationships of succession, but only relationships of coexistence. In this respect, equilibrium theory is not more deterministic than the theory of the Austrian school. Even though the Austrian school does not comprehensively analyze equilibrium, all its main results strictly depend on the assumption that the economy is in equilibrium (intended as a state everybody prefers not to unilaterally deviate from, not necessarily a competitive equilibrium). Considering both competition and monopoly, Menger examines the market for only two commodities in a barter economy. His analysis is the best to be obtained without using mathematics, but it is too limited for determining all the implications of the theory. For instance, it is unclear how the market for a specific commodity is affected by the conditions of the markets for other commodities. However, interdependence is not excluded by the Austrian school. For instance, Böhm-Bawerk examines at length the interdependence between the markets for labor and capital. Despite the incomplete analysis of equilibrium carried out by the Austrian school, many of its results imply that the economy is in equilibrium, as shown by the following examples.

a) The Gossen-Menger loss principle. This principle states that the price of a good can be determined by analyzing the effect of the loss (or the acquisition) of a small quantity of the same good.

b) Wieser’s theory of imputation. Wieser’s theory of imputation attempts to determine the value of the goods used for production in terms of the value (marginal utility) of the consumption goods produced.

c) Böhm-Bawerk’s theory of capital. Böhm-Bawerk proposed a longitudinal theory of capital, where production consists of a time process. A sequence of inputs of labor is employed in order to obtain, at the final stage, a given consumption good. Capital goods, which are the products obtained in the intermediate stages, are seen as a kind of consumption goods in the process of maturing.

A historically specific theory of capital inspired by the Austrian school focuses on the way profit-oriented enterprises organize the allocation of goods and resources in capitalism. One major issue is the relationship between acquisition and production. How does the homogeneity of money figures that entrepreneurs employ in their acquisitive plans connect to the unquestionable heterogeneity of the capital goods in production that these monetary figures depict? The differentiation between acquisition and production distinguishes this theory from the neoclassical approach to capital. The homogeneity of the money figures on the level of acquisition that is important to such a historically specific theory is not due to the assumption of equilibrium, but simply to the existence of money prices. It is real-life homogeneity, so to speak. It does not imply any homogeneity on the level of production, but rather explains the principle according to which the production process is conducted.

In neoclassical economics, in contrast, production and acquisition, the two different levels of analysis, are not separated but are amalgamated by means of the vague term “value”. In equilibrium, assets are valued according to their marginal productivity, and therefore their “value” signifies both their price and their importance to the production process. Capital understood in this way, i.e., as the value of capital goods, can take on the “double meaning of money or goods”. By concentrating on the value of capital goods, the neoclassical approach assumes homogeneity not only on the level of acquisition with its input and output prices, but also on the level of production. The neoclassical approach to capital assumes that the valuation process has already been accomplished. It does not explain how assets come to be valued originally according to their marginal product. In this, an elaborated historically specific theory of capital would provide the necessary tools. In capitalism, inputs and outputs are interrelated by entrepreneurs who are guided by price signals. In their efforts to maximize their monetary profits, they aim to benefit from the spread between input and output prices. Therefore, money tends to be invested where this spread appears to be wide enough to be worth the risk. In other words, business capital flows to those industries and businesses where it yields the largest profit. Competition among entrepreneurs brings about a tendency for price spreads to diminish. The prices of the factors of production are bid up and the prices of the output are bid down until, in the hypothetical state of equilibrium, the factor prices sum up to the price of the product. A historically specific theory of capital is able to describe and analyze the market process that results – or tends to result – in marginal productivity prices, and can therefore also formulate positions concerning endogenous and exogenous misdirections of this process which lead to disequilibrium prices. Consider Mises,

In balance sheets and in profit-and-loss statements, […] it is necessary to enter the estimated money equivalent of all assets and liabilities other than cash. These items should be appraised according to the prices at which they could probably be sold in the future or, as is especially the case with equipment for production processes, in reference to the prices to be expected in the sale of merchandise manufactured with their aid.

According to this, not the monetary costs of the assets, which can be verified unambiguously, but their values are supposed to be the basis of entrepreneurial calculation. As the words indicate, this procedure involves a tremendous amount of uncertainty and can therefore only lead to fair values if equilibrium conditions are assumed.


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