3 Problems With Austrian Economics

[Truth_and_Liberty]

Like I said, my knowledge of Mises might have deteriorated a bit, does he make that assumption explicit? Presumably then we’re defining milk in objective terms once we make this assumption. I mean, I view my 3 cartons of milk as my supply of milk because they have certain physical properties that mean they’re useful to me.

Actually I don’t think I’ve ever seen it stated explicitly the way I did. I don’t quite agree with either Mises’ or Rothbard’s descriptions of praxeology. (This thread may be of interest).

And no, I don’t think we’re ever defining milk in objective terms really. It’s just that there is a very close correlation between an object’s characteristics, and the serviceability ascribed to those objects by the actor, and by other actors.

No two cartons of milk are objectively identical, if only because they occupy different spaces. The mind is flexible when it is creating classes of goods. The fact that your cartons occupy slightly different positions in your fridge has been dismissed as irrelevant in your mind, which is what makes them all the same good, part of one supply. Suppose one carton is due to expire a day before the other two. Will this now make you think of your supply as “one carton that I must use by Wednesday” and “two cartons that I must use by Thursday” - i.e. two different supplies? It may do, or it may not if that is irrelevant to you. In other words, what people consider a supply of goods is all subjective.

The thorough subjectivism and the like is often unnecessary, when we talk of the price of weed going up we’re defining weed in terms of its physical properties, not any mental categories of actors.

I suppose the price of weed is the price of the thing that people think of as weed. And this in turn is determined by the physical properties of weed. So it’s just shorthand to say “the price of weed”. This is really an abstraction in itself, because the price of weed will vary by location, vendor, etc. You’ve gotta love subjectivism.

My point is simply this, when we talk about the business cycles for example we talk about stuff like “higher order goods” and “capital goods” but we’re really talking about goods as defined by their physical properties or at least we’re making a whole bunch of simplifying assumptions because it’s really complicated, messy and somewhat incoherent to look at goods and think whether it’s a first, second, third…nth order good, all the more so when we encounter problems like feedback loops and the like.

I see the role of translating what is actually a first-order, second-order, n-th order good, in any given time and place, as one for the entrepreneur, not the economist. As economists we know that there must be a capital structure, because we can trace the development of a consumer good right back through the orders of production, and there can be lots of them. The economist can say there is a boom in higher-order industries, but cannot say exactly which industries are high-order industries. In practice they are not very hard to identify - mining, construction, etc - but this is an entrepreneurial function, something that comes from looking at the empirical data.

As for my second point. I understand that and I anticipated that answer, you’re right, firms have to trade off internal makes with transaction costs. But my point was simply that I don’t see anything like economic calculation as Mises described it as being carried out by large firms.

Mises described calculation as impossible in the absence of free market prices, which means that firms cannot calculate internally. So they are never sure whether any one particular function of the firm is adding value or wasting resources. If the function is done by a completely seperate company, it knows exactly whether it is adding value by looking at its P&L. The firm tries to mimic the market (as does socialism), by giving section manager’s control of budgets, etc, but since each section manager is not the owner of his function, there are no market prices formed between the company’s various functions. With internal prices all screwed up, the various functions may appear to be adding value when they are not.

Here’s a subsidiary question by the way, given these tradeoffs between economies of scale and diseconomies of scale where does the state come in? I mean, if grant that the state has problems internally calculation but grant that it can exploit considerable economies of scale is there a roll for it in providing certain goods? I don’t think we can tell a priori. So how would you go about deciding this?

Test it. If the State has by some miracle found the optimum size for providing a good, then the market process will give us a firm of the same size. Nothing to lose by getting rid of the State. Everything to gain.