Vulgar Austrians do not Understand Austrian Price Theory

Vulgar Austrians do notUnderstandAustrianPriceTheory

Certain vulgar and ignorant internet Austrians actually seem to believe that Austrian price theory does not have a fundamental role for the idea of flexible prices and wages that, in market trades by buyers and sellers, are moved towards their market-clearing levels to clear product markets by equating quantities demanded with quantities supplied, so that economic coordination and full use of resources are achieved.

Well, here is a clear statement of the Austrian view of prices by Thomas C. Taylor in his AnIntroductiontoAustrianEconomics (1980), a book republished by Ludwig von Mises Institute:

“The day-to-day tendency in the market is toward the establishment of an equilibrium price for each particular consumer good. Prevailing prices tend toward that price at which quantity supplied and quantity demanded are equal, a movement that attests to the price system’s capacity to coordinate the actions of persons engaged in different activities. The typical depiction of this tendency on a graph shows the equilibrium price at the point at which the market supply-and-demand curves intersect. Any price above or below the equilibrium price cannot persist because such a price will result, respectively, in either frustrated sellers or frustrated buyers. Prices are reduced by sellers if the market price is too high to clear the quantity offered; prices are bid upward by buyers if the price is too low to induce sellers to offer a quantity ample enough to satisfy the buyers’ demand.” (Taylor 1980: 56).

This passage appears to be a straightforward descriptive statement of how Austrians view real world prices.

Of course, Austrians no doubt see a good deal of rigidity and inflexibility of real world prices, but they attribute this to “evil” interference by government and the deleterious influence of trade unions, so that no doubt Austrians can also see the passage above as a prescriptive vision of how a free market should set prices.

But there isn’t really any serious contradiction here: it can function both as a rough descriptive statement of how prices are set in a modern market economy (with qualifications to explain some price rigidities) and an ideal prescriptive statement of how prices ought to be set in a free market.

I could cite many other passages confirming this. A sample follow below:

“In fact, pricing on the market is not an act of will by sellers. Businessmen do not determine their selling prices on the basis of whether they feel greedy or ‘responsible’ that morning. The entire apparatus of economic theory, built up over centuries, is devoted to demonstrating a great truth: that prices are set only by the demand of purchasers (how much of a good or service purchasers will buy at any given price), and by the supply or stock of the good.

Prices are set so as to ‘clear the market’ by equating supply and demand; at the market price the supply of a good will exactly equal the amount of the good that people are willing to buy or hold. If the demand for the good increases, purchases will bid the price up; if the supply increases, the price will fall. Demanders consist of consumers, whose purchases are determined by the values they place on the goods, and various producers or businessmen, whose demands are determined by how much they expect consumers to pay for the final product.” (Rothbard 2006: 390).

“We know from ‘microeconomic’ analysis that if there is a ‘surplus’ of something on the market, if something cannot be sold, the only reason is that its price is somehow being kept too high. The way to cure a surplus or unemployment of anything, is to lower the asking price, whether it be wage rates for labor, prices of machinery or plant, or of the inventory of a retailer.” (Rothbard 2006b: 44).

“A worse problem is that, since the 1930s, government and its privileged unions have intervened massively in the labor market to keep wage rates above the market-clearing wage, thereby insuring ever higher unemployment.” (Rothbard 2006b: 45).

“Similarly, most economists would readily admit that keeping the price of any good above the amount that would clear the market will cause unsold surpluses to pile up. Yet, they are reluctant to admit this in the case of labor. …. In a free market, wage rates will tend to adjust themselves so that there is no involuntary unemployment, i.e., so that all those desiring to work can find jobs. Generally, wage rates can only be kept above full-employment rates through coercion by government, unions, or both.” (Rothbard 2008: 43).

“Private business prices its goods and services to ‘clear the market,’ so that supply equals demand, and there are neither shortages nor goods going unsold.” (Rothbard 2006a: 259).

“There is no reason why prices cannot fall low enough, in a free market, to clear the market and sell all the goods available. If businessmen choose to keep prices up, they are simply speculating on an imminent rise in market prices; they are, in short, voluntarily investing in inventory. If they wish to sell their ‘surplus’ stock, they need only cut their prices low enough to sell all of their product. But won’t they then suffer losses? Of course, but now the discussion has shifted to a different plane.” (Rothbard 2008: 56).

“The characteristic feature of the market price is that it equalizes supply and demand. The size of the demand coincides with the size of supply not only in the imaginary construction of the evenly rotating economy. The notion of the plain state of rest as developed by the elementary theory of prices is a faithful description of what comes to pass in the market at every instant. Any deviation of a market price from the height at which supply and demand are equal is – in the unhampered market – self-liquidating.” (Mises 2008: 756–757).

“The market interaction brings about a price at which demand and supply tend to coincide. The number of potential buyers willing to pay the market price is large enough for the whole market supply to be sold. If government lowers the price below that which the unhampered market would set, the same quantity of goods faces a greater number of potential buyers who are willing to pay the lower official price. Supply and demand no longer coincide; demand exceeds supply, and the market mechanism, which tends to bring supply and demand together through changes in price, no longer functions.” (Mises 2011: 101).

“Rothbard presumed that in individual markets, the law of one price dominated, and that market clearing happened rapidly and smoothly … . Just as in conventional neoclassical economics, general equilibrium, the evenly rotating economy (ERE), was the direction in which the economy was headed.” (Vaughn 1994: 97).

There is no way to interpret these except as saying that flexible prices and wages converging towards their market-clearing levels have a fundamental role in Austrian economic theory and in the real world.

The only alternative to this is that Austrian price theory is not even meant to describe real world price setting. This bizarre possibility would entail that Austrian price theory is devoid of any serious description of reality. I wonder if vulgar Austrians really think this.

High, J. 1994. “The Austrian Theory of Price,” in Peter J. Boettke (eds.), The Elgar Companion to Austrian Economics. E. Elgar, Aldershot. 151–155.

Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Mises, L. von. 2011. A Critique of Interventionism. Mises Institute, Auburn, Ala.

Rothbard, Murray N. 2006a. For a New Liberty: The Libertarian Manifesto (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

Rothbard, Murray N. 2006b. Making Economic Sense (2nd edn.). Ludwig von Mises Institute, Auburn, Ala.

Rothbard, Murray N. 2008. America’s Great Depression (5th edn.). Ludwig von Mises Institute, Auburn, Ala.

Taylor, Thomas C. 1980. An Introduction to Austrian Economics. Ludwig von Mises Institute, Auburn, Ala.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York.

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