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Absolutely! Much more intuitive and true for the macro level. The MV=MC seems to be most important at a micro level and potentially misleading at a macro level, no?

I applaud Dave's approach.

But what is the interpretation of a demand curve outside the point of plan coordination ("equilibrrium"). Are the demand and supply curves Marshallian or Walrasian?

Do consumers have plans at other than market (current) prices? What would be the meaning of such stated plans for Mises?

Jerry:

Good questions.

To me the curves are Marshallian in the sense that they are referring to partial equilibrium, and I'm not sure we must assume an overall Walrasian equilibrium to discuss market clearing in a given industry. (It may well be that the Chicago tight-prior makes such assumptions, at least implicitly.) In fact, a movement toward clearing here might bring about an adjustment away from previous market clearing there.

And expectations guide plans. The simple example we're talking about is a spot market. But even here, as we all know, should price expectations change the curves shift. People are adjusting their current purchase/sale plans to revised price expectations, so current and expected prices are built into the story.

I think, as a teaching device, the simple supply and demand presentation helps shed some light on this.

Another fair question one might raise is the nature of the supply curve. I've thought about this for some time. If a market supply curve represents a marginal cost schedule, then as we all know outside of perfect competition there is no market supply curve. If the neoclassical model is correct, then is it appropriate to say that a higher price leads to a change -- an increase -- in overall supply plans? Might it instead be true that firms plan to charge a higher price by reducing supply?

What does this make of my simple textbook approach? I don't know if I have a good answer to this. Anyone else?

Oops, a mistake I chide my students for making: reducing quantity supplied, not supply!

Jerry, actually, asks some very fundamental questions that rarely get asked precisely because we all have gotten "programed" to see the supply and demand graph and say "X marks the spot."

In the mainstream framework it is presumed that individuals have "given" tastes and preferences and their "plan" is the quantity they will buy when offered the good at a particular price. They modify their plan (the quantity decision) when the price offer changes.

Surely people imagine and make plans of various sorts ("I want to go to college" or "I want to go on a vacation") and then they shop around to see what option is attractive and would fit their budget.

At least some general conception of the plans in mind comes first, then the search for possible means, and then the trade off decisions given what the options would cost. ("Gee, I've love to go to Paris for my vacation, but given the airline and hotel expenses in July to do so, I guess I'll just go, again, to Atlantic City or Las Vegas.")

Given that this is more like how our minds usually work about these things, I would suggest that maybe we should start there, thinking about it that way, to find answers to Jerry's questions.

This would imply that plans do exist off and outside of the market clearing price. But we would have to think about them and deduce the logic of market actions and interactions differently than done in the textbook model.

Richard Ebeling

"This would imply that plans do exist off and outside of the market clearing price. But we would have to think about them and deduce the logic of market actions and interactions differently than done in the textbook model."

Do any economists have anything to say about the PATH to equilibrium other than vague Kirzner-type 'market for apples' stories? Or are they happy just invoking a tendency to plan coordination?

I agree with Richard. What "my" approach does is offer an additional interpretation of simple price theory. But you are quite correct that, in addition to adjusting plans based exclusively on current and expected prices (which is all what the simple S&D model does), we must talk about plan formation and revision beyond the domain of price theory itself.

It depends upon what you want to be told about the "path" to a possible equilibrium.

Surely, we can devise a sequence analysis with a set of particular assumptions in which we show the logic of the path movement to an equilibrium.

When I teach intermediate microeconomics, for example, I use an Edgewoth-Bowley box diagram to do just that. You first draw a budget line at with the two traders' indifference curves not tangent to the line at the same place, and allow them to trade, give whatever is the "short" side of the market at that price ratio. You change the resulting endowments due to the "false" (non-equilibrium) trades, and introduce a new budget line that reflects the necessary change to be moving in the "correct" direction.

You repeat the exercise, with the period-by-period adjustments finally leading to an equilibrium.

This shows the possible logic of the process through time without assuming trades only at equilbrium prices.

Richard Ebeling

Jerry:

I see that I probably misunderstood your original question. Below market clearing prices demanders can engage in competitive price bidding (which Alchian emphasized in University Economics) or, more likely, suppliers discover that they can raise their price and also sell more output. Students at first think that contradicts the law of demand, and this is why the plan-coordination theme helps them grasp the problem. As the sellers' plans change, so, too, do the buyers plans (Qd falls) and the overall result is that more is purchased at the higher price as the market moves closer toward clearing. In this sense, the sellers themselves initiate both price and quantity adjustments.

Is that what you were after?

What Richard Ebeling describes could be linked back to the idea of an inner range and outer range of prices. But I don't think it's quite the same thing.

Dave Prychitko: "we must talk about plan formation and revision beyond the domain of price theory itself. "

One of the interesting aspects of this is that if prices stay stable for some time then consumers will get better at forming plans around them. The consumers will increase their utility by doing so, even without prices falling. The changes in plans that will induce will then cause a change in prices though.

I've noticed this has happened to me. When I moved to Ireland I wasn't used to the prices, they are different because of different taxes to those in England. But, after having lived in that set of prices for a while I'm more adept at making trade-offs.

Perhaps we should see three ranges. Within the inner range of prices a particular individual doesn't change how they act at all. Within the middle range of prices that person has a predefined plan of what to do next. Outside of that range, in the outer range, the individual needs to think of a new plan because they've met an unplanned for event.

Dave, I can't quite see what is different about your presentation, compared to the standard one, other than semantics. What the typical textbook calls "the amount I'm willing to buy at price P" or "the amount I'm willing to sell at price P," you're calling "my plans at price P." You write: "Like demand, the supply curve represents a pattern of plan adjustments were the price alone to change. Shifts in the supply or demand curve represent a change in plans at any given price." Fine, but isn't this exactly the same as the standard analysis, except for the word "plan"? I.e., you're not arguing anything specific about the role of expectations in the formulation of bids and asks, the extent to which market participants' behavior in one market is linked to their behavior in another market, and so on. I'm not being snarky, I'm really asking. I must be missing something in your presentation. (Full disclosure: I never thought the concepts of "plan coordination" and "pattern coordination" made any sense.)

I teach high school economics including AP Microeconomics. When I was reading your second paragraph I was struck by the label marginal value. The term makes sense but it is usually referred to as marginal benefit at our level. As a teacher I always apologize for the fact that there seems to be so many variations in terminology, abbreviations, etc. Even from textbook to textbook. I understand that the meaning is more important than the particular names assigned to an idea. I have just found it interesting and kind of confusing for students learning economics, especially when utilizing multiple sources and texts.

I think that a price theory that is more appropiate to theorizing complex coordination would be one that abandones Marshall altogether and revives Boehm Bawerk's marginal pairing theory by linking it to expectations,to Morgenstern's game theory, possible worlds logic, and so on. This kind of theory would be extremely adaptable to theorizing disequilibrium situations and all sorts of settings.

Some of this discussion points out how rich and complicated elementary price theory really is. The "X marks the spot" approach (in Richard's nice phrase) short circuits discussion of plans, coordination, and choice. There are the curves and equations; be able to manipulate them on the final. That short circuit is a plus if you have not thought much about the real issues or don't want to talk to your students about how markets work in the real world. I think this difference in where the discussion goes helps explain the persistence of the X approach.

@ Peter Klein: I think it depends on what you take the "standard approach" to be. I've always done pretty much what Dave describes and considered it an interpretation of the standard approach. You know: What Nelson & Winter said about formal and appreciative theory. OTOH I think really a lot of college instructors are pretty clueless about the issues Dave's approach raises. For such instructors, Dave's approach would be a radical departure.

What Roger said. Typically it comes across as getting the P's and Q's right, and the idea of an explicit coordination of the plans among buyers and sellers tends to get slighted in that approach. In part it is semantic (in the law of demand the change in Qd is further expressed in the language of a change of plans) but the motivation is pedagogic. I've made no claims of having created something new here at the level of basic theory.

I look at an economic system as a set of institutions among which people coordinate their production and consumption plans, and I try to clearly demonstrate how they do so through voluntary exchange. The P's and Q's are essential in all of this, of course -- they solve the coordination problem -- and in our textbook Pete and I, like all other economists, cover that thoroughly.

But all of us here know that the P's and Q's aren't a part of all conceivable economic systems. And yet the coordination of plans is. Better, in my judgment, to make the problem of plan coordination explicit for introductory students.

So it is clear, I do not mean that an actual coordination of plans is a part of any conceivable economic system. I mean the problem of demonstrating in theory and achieving in practice a robust coordination of plans is part of any economy.

K.Zawacki:

I appreciate your difficulty... I'm sure the language differs, and the coverage, too, from high school text to high school text. I have a fellow NMU grad who uses our textbook in his high school econ class (he was first exposed to it as an undergrad, just like me) and he's quite pleased with it.

This is not a plug for our book. I think in many ways our text would be rather difficult for high school kids to understand and appreciate, for a number of reasons. One being there are no pictures and boxed-in examples. Ours looks like a... should I say it?... book and not an internet page.

Very interesting post and discussion. A couple of obersvations:

The planners are not the same group of people at different moments in time. If a buyers and sellers sell only once, then they're never the same group. If they buy and sell with some characteristic distribution in frequency, then you've already got the assumptions you need to see oscillation in price -- i.e., temporary shortages in planning buyers or sellers could result in temporary increases or decreases in price.

This brings out the synchronizing or latency-reducing role that market prices play in coordinating group behavior.

I side with Peter Klein. First, I was baffled by your statement that the equalization of MV and MC is related to the long run. In the long run, MV equals average costs (AC), since return on investment is adjusted by allocating savings (given free entry and unlimited managerial abilities ,etc). Second, this is Marshallian. What you describe as your approach (together with Pete's) is the standard procedure of deriving Walrasian demand curves. For any given price vector and given the primitives, see (the excess) demands expressed. I also think that this approach is superior. But it is Walrasian, nevertheless.

BTW: 'equilibria of plans, prices, and price expectations' are entirely compatible with Walrasian theory, see Radner; the problem is disequilibrium: how do build demand curves without tatonnement?

amv:

Sure, MV=ATC in the long run. But I was referring to the supply and demand curves themselves -- X marks the spot where MV=MC. From the perspective of disequilibrium outputs they are not equal, right? And here, while the sellers' plans are being achieved (in the sense that they sell the full amount of their quantities supplied) the plans of buyers are being frustrated, as they fail to fully satisfy their quantities demanded.

And recall that I misunderstood Jerry's original question. I thought he was referring to the nature of equilibrium outside the given market being referred to. I only meant that we were discussing partial equilibrium and not necessarily assuming general equilibrium, thus my "Marshallian" response. I read his comment too quickly, and didn't see that he was asking about the given market in disequilibrium. My fault.

Is it Walrasian or Marshallian or neither to say that (as in my shortage example) firms themselves are adjusting both prices and quantities?

While the comments on my post are interesting and fun, inevitable and productive, we seem to be losing the general teaching point of my post. Surely in a survey course and text I do not want to bog students down with discussions of Walrasian tatonnement.

Heyne said if you teach your introductory students as if it were their last and only class in economics, they are likely to come back for me. I agree with his strategy. How do you folks feel about that?


Come back for me? Freudian slip, perhaps!

Come back for more, not me.

Dave,

obviously, I did not follow through the entire debate. Seeing the bigger picture, my comment added nothing of importance. Since you've asked: firms adjusting prices are not Walrasian (as the term is used in standard literature). The super auctioneer sets the terms, the agents respond their preferred quantities. Literature allowing for price and quantity adjustment by the firm are called non-Walrasian. But they also differ from Marshallian approaches. I guess, coordination problemists somewhat like non-Walrasian theory a la Clower, Malinvaud, Grossmann, etc.

Heyne's quip deserves a full airing, as it is the best pedagogical advice one could give a newly minted PhD:

"If you teach introductory econ as if it were the first of many econ classes they will take, it will be their last. If you teach it like it's the last they'll ever take, it will be their first of many."

Dave,

You and Richard are both getting at what I was asking. Mises always emphasized that a preference is just a chocie made at a moment in time faced with the information available. He didn't rely on any existing set of preferences apart from that.

Is that consistent with a demand curve as a set of hypothetical preferences?

Marshallian demand curves just trace out actually intersections of demand and supply. They seem more consistent with Mises' approach.

Did Mises ever draw a demand and supply curve?
Tom Sowell wrote an introductory textbook with no diagrams.

Jerry

I'm not sure I'm looking at the demand curve as a hypothetical set of preferences. It is showing, ceteris paribus, purchase plans at differing prices. I don't mind the ceteris paribus assumption here.

Also, the graph itself is a nice way of illustrating conceptual differences between demand and quantity demanded, supply and quantity supplied, differences that I think are crucial. It has great pragmatic value as a teaching tool.

But okay, I'll take the bait and say it (what have I got to lose?): If the simple supply and demand graph in the EWOT textbook departs from Mises, so be it!

Not baiting you, Dave. Just trying to tease out the issues. It's hard to think about teaching economics w/o demand and supply curves, but Sowell did it.

Just joking about the bait. I should take a look at Sowell's book.

Dave,

If you think of demand curves as a hypothetical set of preferences alone, you indeed use compensated demand curves: you neutralize income effects that are however crucial in general equilibrium analysis. To get to the proper level of abstraction, at least if the allocation problem is at the heart of economics, it is necessary to think not only of preference preorderings but also of the global endowment vector (for an exchange economy). In varying the price vector, the auctioneer induces agents to adjust the notional quantities demanded and supplied for each good, considering changes in the value of their endowment. The aggregate excess demand function (which is not some kind of Keynesian aggregate demand function) is well-behaved, that is downward slopping, if we impose gross substitutionality. Income effects are dominated by substitution effects: negative feedbacks dominate positive feedbacks and the system is (globally) stable. Unfortunately, gross substitutionality cannot be imposed by putting constraints on individual choice (Sonnenschein-Mantel-Debreu results). I guess, Roger Koppl would point out that convergence is not computable (given Arrow-Debreu assumptions). With Marshall's partial equilibrium toolset, we lose sight of such complexity.

amv,

I assume you are not saying we should teach Sonnenschein to Intro Econ students. But then I don't really see how your comments relate to Dave's points about teaching intro.

Just to echo Roger - as interesting as the gory details of demand curves might be, the original context was intro and folks should re-read Heyne's aphorism above to understand why all this technical stuff is just utterly irrelevant to taht context.

Roger,

I am going to post on John Cassidy's How Markets Fail someday soon, but let me just point out that he tries to make a lot out of the Sonnenschein-Mantel-Debreu results. In fact, I was just emailing back and forth with Pete Leeson about this and rational choice modeling, etc. But I think this is again an issue where what Caldwell calls 'basic economic reasoning' is victorious over formal theorizing. The Arrow-Hahn-Debreu theorems DO NOT capture the 'invisible hand' propositions of Smith to Hayek. And thus, the sort of Cassidy narrative of how we go from Sonnenschein-Mantel-Debreu to a undermining of any claims to market efficiency is dubious.

In my JEL review of Stiglitz's Whither Socialism? I tried to take a stab at this issue as well. I don't think I succeeded.

But needless to say, I think your point about basic economics and what we teach to undergraduates and then the fancy games of mental masturbation that are often played in the journals should not necessarily be one and the same is spot on.

Pete

Jerry asks: "Did Mises ever draw a demand and supply curve?" Not to my knowledge; in Human Action Mises seems to assume the reader understands and accepts Bohm-Bawerk's marginal-pairs analysis and sees no need to explain it. Prices "are determined between extremely narrow margins: the valuations on the one hand of the marginal buyer and those of the marginal offerer who abstains from selling, and the valuations on the other hand of the marginal seller and those of the marginal potential buyer who abstains from buying" (Scholar's ed., p. 324). Rothbard, working in the tradition not only of Mises but also Wicksteed, Fetter, Clark, Davenport, etc. uses demand and supply curves, but only after an extensive discussion of individuals' preference orderings (which determine who, on the market, will be the marginal pairs).

BTW Rothbard's demand and supply curves do incorporate market participants' expectations about future market conditions (e.g., speculative demands -- see MES chapter 2, section 7), and I guess you could call these expectations "plans," in the sense Dave describes in his initial post.

Roger,

I indeed think that students should be confronted very early with the SMD results. Not the proof, but the significance. Some of these students become economists one day, perhaps no mathematical microeconomists, and start using representative agents and the like. I know more professional economists who do not know the results than. Even super-economists like Acemoglu write in his textbook that homothetic utility functions allow us to use representative agents and that income effects are unrelated to production (Ch. 5)!

Further, the SMD results are not that important in my comment. I rather expressed the view that we should not teach demand theory to our students by just "thinking of preference sets".

oh ... with "I know more professional economists who do not know the results than" I mean "... than those who do."

Steve,

these are no "gory details of demand curves" but what we teach in our lowest level micro courses! My comment is all about 'intro'! So you don't teach demand analysis with income and substitution effects? and supply curves are no inverted demand curves? what happened to opportunity costs (outside the simple - that is individual - choice problem)?

I confess that I'm having a hard time following amv, which may be my fault. I can't figure out, for example, why is reminding Steve about income effects as if Steve had somehow pooh-poohed them. I assume I am just not tracking.

Anyway, SMD makes it hard to stick with representative agent models as Kirman has emphasized. It is kind of weird that we stick with DSGE and just blow off SMD. To echo Pete's earlier comment, however, it's not clear what SMD says about a world in which order is defined by the process of its emergence. Thus, if you are teaching any sort of Austro-complexity-process version of elementary price theory, SMD just doesn't seem that relevant. I do think graduate professors should let their charges in on the SMD secret.

@ Roger,

it is all about introducing students directly to general equilibrium reasoning (which is what modern micro textbooks do), or to follow the habit of first using partial reasoning (what Dave's post seems to suggest). Dave talks about "plans" and how they become coordinated by changes in relative prices, right? well, this is general equilibrium theory! To use one demand curve and thus to consider one market is clearly insufficient. On such a market the law of one price establishes equilibrium. That's easy. It is more important, however, to describe the bigger picture of coordination: what determines the equilibrium price vector? it's all about relative prices, right?

what Dave describes is what is usually shown as adjustments of notional demands (and supplies!) during tatonnement. I do not see why 'Austrians' teach the same stuff without relying on the neat apparatus of microtheory. I stress income effects to highlight the interdependence of decisions.

And Roger: the SMD results I mentioned in a single sentence. No big deal. My intention was to anticipate the possible critique that GE apparatus is limited as shown by SMD. You may agree that if you teach students traditional general equilibrium theory, you should at least mention that SMD exists. It helps to show the limitation of the toolset. Perhaps one or the other student may become interested in emergent processes, if they see that A-D equilibrium theory cannot by itself provide much insight into the dynamics of the economic system. The best textbook suited for this purpose is still the second edition of Hildenbrand's and Kirman's Equilibrium Analysis.

@AMV:

I most certainly do not introduce the income and substitution effects in my derivation of demand curves in my intro courses. In fact, in my intro course I minimize the mathematics and technical issues as far as humanly possible (see Heyne, Boettke, and Prychitko). This is *precisely* the point that Heyne's aphorism is making: I'm teaching intro on the assumption that this is the only econ they'll ever take, so what do I think they need to know to be thoughtful, informed citizens who can understand the economic way of thinking and use it to assess public policy and their own choices? The issues you raise are utterly irrelevant to that goal. When they get into intermediate micro, then it's time to dig in deeper, but not in intro.

In intro, it's scarcity, opportunity cost, marginal thinking, spontaneous order, comparative advantage, gains from exchange, subjectivism, and inflation is a monetary phenomenon.

Intro is not about training potential PhDs.

We can also invoke Alchian and Allen from their intro to Exchange and Production: Competition, Coordination, and Control:

"Economics is relevant to the everyday activities and situations of our personal lives. We find, from some thirty years of experience in teaching, that students show keen interest and even excitement in discovery of economic theory -- mainly because, we believe, the theory is made pertinent and convincing by repeated, realistic applications within their own range of experiences. At the same time, major questions of national policy are considered again and again without a loss of continuity of interest."

I was quite fortunate as an undergrad that two of my professors (whom I considered to be both my mentors) were students of Alchian in the early 1960s. One used Exchange and Production for my micro principles course and Jack Hirshleifer's text in the intermediate course. My education at NMU was first-rate.

The other used Heyne in his survey course every year, from the very first 1973 edition through the Boettke and Prychitko editions. I had tutored using Heyne in my junior and senior years.

Heyne's book, of course, was a simpler version of Alchian's. When I met Alchian a few years back at a Liberty Fund colloquium on his work, I told him I'm a co-author and he joked that "Heyne stole my book!" He and I had some great conversations after that.

I am thrilled to hear that Liberty Fund will be reissuing University Economics, and in an inexpensive edition. That, unlike our EWOT book, would be much more suitable for a micro principles course, and I plan to use it.

In these books an overarching theme is the role of property rights and voluntary exchange in successfully coordinating economic activities, something that I've kept with me since my first course back in 1980. By the time I entered my intermediate class I knew I would pursue the PhD. Alchian's (and Heyne's) strategy worked.

Steve. My suggestions may be "utterly irrelevant" for your purposes. I do not expect you to change your mind on anything that makes you Austrian. I am however happy to be introduced to slutsky right on. It helped me to understand coordination problems and to understand that they are basic. You are of course not less formal: you use compensated demand curves but don't reveal the assumptions (otherwise you have to introduce income and substitution effects). Fine, too. I teach students (B.Sc., M.Sc) that opted to study econ. Econ is about allocation and coordination. GE is what they get.

Dave, I just love Alchian's work.

Something like the assumed income-compensated demand curve reminds me of a problem I continuously face when I teach intermediate micro. I become the bad guy in the department.

Some survey and principles courses might become too cute. For example, I've had colleagues who play little so-called "hands on" games in their classrooms. You know, they receive endowments of goods (different types of candy supplied by the instructor, etc) and then trade. "Oh, see, you're maximizing utility! Looky here, you face opportunity costs! Hey, now you can see that voluntary exchange is mutually beneficial!" And so on.

Some students fall in love with economics because they find these "hands on" methods appealing. Then they face me in the intermediate course. "Hey, let's begin further examining our principles and the assumptions behind them": Slutzky decompositions, illustrations of changes in price elasticity of demand along the price consumption curve, Edgeworth Diagrams(1) and so on and so forth -- the basic stuff. Now a good one-third of them are disillusioned. "I learn better through hands on examples," etc. They just don't get it. I end up weeding them out.

Yes, they face more formal theory. But any undergrad economics major must understand -- and I think the good ones also enjoy -- intermediate-level theory. (In my case, I was reading Mises and reading Gordon's textbook in intermediate macro at the same time and enjoyed them both, even though I was learning, on my own, the Austrian critique of standard macro theory. As a developing Austrian I appreciated what the fuss was all about.)

My point: there is a danger in becoming too cute in the survey and principles courses. The instructors are confused between good economics and cutesy economics. Here we have to be very careful in how we get students to enjoy, and appreciate the usefulness of, simple economic principles.

(1) Scott Beaulier and I have an imminently forthcoming paper in the Journal of Economic Education where we isolate traders' surpluses -- both consumer surplus and seller surplus for each individual -- in the Edgeworth box. I came up with the idea one day walking to my intermediate theory course, and gave the lecture on the fly. Even after refining it over the next couple years a good number of my students look at me as if I have squirrels coming out of my ears. But all what I'm doing is putting one plus one together.

It's not because they're Austrians, or Institutionalists or what have you. It's just that they're unprepared. Cutesy economics in their introductory classes is not the same as good economics -- Alchian's, for example.

Dave,

I googled for a draft version of the paper you mention. I couldn't find it. Is it somewhere available (before final publication)?

amv:

Scotte Beaulier should have a draft copy that he can email you: beaulier_sa@mercer.edu

thanks

amv:

No need to contact him. I've found an online link that I've just provided in a new post.

Besides the Marshallian and general equilibrium appraoches to supply and demand theory under discussion here, there stands a large literature on the Mengerian causal realist approach. In the causal-realist approach, supply and demand analysis is used only as a heuristic device to depict the theory of price determination by the marginal pairs, which was first suggested by Menger and then further elaborated by Boehm-Bawerk. It culminated in Wicksteed's classic demonstration that the supply curve is nothing but the reversed reservation demand curve of the sellers.

This approach avoids any reference to past production costs in the determination of the real (disequilibrium) prices that we observe being paid at every moment on actual markets. Unlike the Marshalllian short-run supply curve which is temporally mismatched with the instantaneous demand curve, the Wicksteedian supply curve represents instantaneous valuations of the goods actually held in stock and ready to be sold on the market. When production is brought into this analysis, it is always to determine the future supply curve based on the entrepreneur's (fallible) forecast and appraisement of future output prices in conjunction with production costs he expects to incur.

There is no reference to plan coordination in the causal realist literature. The reason is that the actual price that results on that future market is a brute fact that may disappoint or overwhelmingly exceed the entrepreneur's original expectations. It is determined by the interaction of the seller's valuations of the stock of the good that eventually emerges from the production process with the instantaneous demand existing at that moment The actual market price is what coordinates the actions--and not the plans--of buyers and sellers in the very moment of its emergence.

In the case of factor prices, entrepreneur's actions are coordinated with one another precisely when the factor price is determined. Every entrepreneur purchases units of the factor up to the point that the expected marginal revenue product in his line of production would fall below the actual price paid if he purchased an additional unit. The entire stock of any resource is thus precisely allocated by the pricing process to those uses that are ANTICIPATED by entrepreneurs to have the highest value to consumers.

For those who wish to learn about the Mengerian approach to price determination I suggest the following sources:

John Egger, "An Austrian Foundation for Economic Principles" QJAE vol. 11 2008
http://mises.org/journals/qjae/pdf/qjae11_3_6.pdf

Milton M. Shapiro, Foundations of the Market Price System, 1985, chapter 7 http://mises.org/etexts/Foundations.pdf

You should also read:

Wicksteed, Common Sense of Political Economy, vol. 2, pp. 493-526, 784-796

Boehm-Bawerk, The Positive Theory of Capital, book III, part B

Frank Fetter, Economic Principles, chapter 7

Herbert J. Davenport, The Economics of Enterprise, chapters 5-8

Rothbard, Man, Econmy, and State, chapters 2,4

In Human Action, Mises does not analyze price determination in any detail, merely referring to the theory of the marginal pairs as the correct explanation and moving on. The reason he did this was because of the availability of the substantial literature on this approach, familiarity with which he took for granted on the part of his readers.

I agree strongly with the original post. Talking about supply and demand in terms of plans works well in the classroom. Four years ago I wrote The National Economy for Greenwood's Guides to Economics and Business. The discusssion of supply and demand is entirely in terms of plans. I've been doing it in my classes for so long I don't remember where it came from, but I was surprised when I looked at some text books and didn't see it there. It may be largely a matter of semantics, but it makes sense to students. I think it also helps them to better understand Smith's argument that markets are a way for people to cooperate.


PS If Dave Prychitko reads this, please tell Tawni Brad says Hello.

Brad,

You were North's research assistant, right? Doug wrote the preface to The Economic Way of Thinking in honor of Paul when Dave and I took over keeping the book up-to-date. North claims he used the book in his undergraduate courses. Perhaps you learned it through working with North.

Pete

Boy! What have I done? What luck!

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