Administered Prices Discredit the Austrian Economic Theories of Mises

AdministeredPricesDiscredittheAustrianEconomicTheoriesof Mises

Why? The reason is that Austrian economics – via the work of Mises – is fundamentally dependent on the idea of flexible prices and wages moving at least towards their market clearing values in a way that allegedly coordinates markets. Although Austrians do not think that economies ever actually reach an equilibrium state (such as Mises’s final state of rest) because of constant changes in the data, nevertheless the fundamental equilibrating mechanism in Misesian economics is the flexible price system:

“Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.” (Salerno 1993: 124).

But if the majority of real world prices are relatively inflexible, not properly set by supply and demand dynamics, nor set to converge to market-clearing levels, Misesian economic theory encounters insuperable difficulties, for the following reasons:

(1) there is no strong tendency to Misesian “economic coordination” by which full use of resources is achieved as product markets and labour markets are cleared, so that unused resources offered for sale are eliminated.

(2) the idea of rapid and smooth recovery from recessions/depressions will not work, if there are widespread price and wage rigidities, and firms adjust their output to demand changes.

(3) the whole Misesian argument against price controls collapses (at least in administered price markets) if a price control simply mimics an administered price already set by a private firm, allowing it a sufficient profit and allowing it continue to adjust its output to demand.

If a firm’s total average costs change, government price controls can always be reviewed and changed, when necessary.

There is no clear theoretical reason why such price controls could not work and be effective in those markets already subject to private capitalist administered prices, especially when production of the goods under price control is highly elastic (which, its turns out, many goods actually are in modern capitalist economies outside of primary sectors producing raw materials and agricultural products [Nell 1996 108]).

(4) Mises’s argument against socialist economic calculation is also rendered highly questionable if many firms already shun his flexible price mechanism.

Even if all consumer prices and prices for factor inputs were set by costs of production plus profit mark-up by a planning board, profit and loss could still be calculated by means of administered prices. If the production system had state-owned firms with unused excess capacity and stocks and inventories, they would simply adjust output quantity to the quantity demanded by production decisions, as modern capitalist firms do.

Supply shocks in primary commodities and other crucial factor inputs could be dealt with government buffer stocks – just as in fact Western capitalist nations did in the Golden Age of Capitalism and, to some degree, even to this day (e. g., think of the US Strategic Petroleum Reserve). (Admittedly, another point is that, unless such a planned economy had persistent trade surpluses, it would probably need to retain its financial and real asset markets to attract foreign exchange to pay for trade deficits, which would require that (1) bonds or stocks and shares for some state-owned companies are still sold in a way that allows minority ownership by the private sector, (2) some private property in real assets such as real estate is allowed, and (3) the government can sell bonds to foreigners.)

Why do we have good reasons to think that such a planned economy would work, at least in an advanced industrial nation? Because so many of the elements of such a system are already used and practised in modern capitalist nations by the private sector.

So many “free markets” have long since been abolished by private businesses themselves, because they do not like the consequences of such free markets, such destructive price wars, cut throat competition, and a chaotic price system that makes profit and loss difficult to calculate or estimate.

All this is not an argument for actually adopting a planned economy, of course, but merely an exercise in showing theoretically why Mises’s socialist calculation critique is flawed and how a hypothetical system could function.

Nell, Edward J. 1996. Making Sense of a Changing Economy: Technology, Markets, and Morals. Routledge, London and New York.

Salerno, Joseph T. 1993. “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6.2: 113–146.

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