Tuesday was filled once again with required lectures focusing on more fundamentals of Austrian school economics.
Thomas DiLorenzo gave an excellent lecture on monopolies and competition. There's a lot written in textbooks on monopolies, but the Austrian view is different from the mainstream and has broad implications to business and government today. In the 18th century, business was viewed very much like the Austrians - rivalry and entrepreneurship and competition for consumer's dollars. If in the process you were able to corner the market because of your better business (and not because you got the government to force everyone else out of the market such as in utilities), then that was the market working itself out. It was known very well that the only way to create a true "monopoly" was through government restrictions and protectionism. When the first antitrust laws (the Sherman Act) were passed, there was almost unanimous criticism against them. Even socialists (of all people) said that these businesses were the natural outgrowth of business evolution. Who would have thought that the socialists would agree with the free market on anything, much less the aspect of monopolies.
This all changed with a revolution in thinking about markets in economic scholarship. Economists tried to "mathematize" economics to make it look more like physics. They developed the so-called theory of "perfect competition" and its assumptions of the "many firms," homogeneous products, free entry, and perfect information. I'd have to write a huge article to attempt to explain these things, so I'll let Hayek summarize it for me in his essay "The Meaning of Competition": "In perfect competition, there is no competition. It's all assumed away."
Peter Klein, our next lecturer, happens to be from the University of Missouri - Columbia. So there really is hope for Missouri! Peter is very kind and personable; I talked with him for a while after his lecture on the economics of the firm. So, what exactly is a firm? Many people would answer a factory, but that's not really true. That places too much emphasis on technology rather than valuation, and there is very little thinking from the consumer's point of view. Furthermore, there is no place for the entrepreneur or the investor in those ideas, and we haven't yet described the firm as a legal entity either. Without too much elaboration, Austrians say the firm is described in terms of the ownership of assets. The firm is the capitalist-entrepreneur (or a group of capitalist-entrepreneurs) plus the assets he owns. Firms can own many, or no, production processes.
Why do firms exist in the first place? Firms allow individuals to reduce the number of transactions needed to commence a market operation. It follows that firms also exist because of the need for economic calculation. Austrian economics does offer a unique theory of production, not merely a verbal rendition of neoclassical production theory. It can provide a causal, realistic analysis of factor pricing and usage that is grounded in marginal utility theory.
Robert Murphy then lectured on Austrian versus neoclassical analytics in economics. It was very interesting but doesn't apply as much to those newly learning the fundamentals of economics, so I won't elaborate upon it very much. Here's the essence of the differences: Austrians focus on studying the market process, or market equilibration. We try to find the forces that propel the market towards balance. They look for causal relationships through the lens of praxeology, the logic of action. Neoclassicals, on the other hadn, focus on finding the specific "equilibrium points" of those wacky equations they are always saying describe the market fully. Again, Austrians look at the process of equilibrium versus the points of equilibrium.
Now came Joseph Salerno's lecture on calculation and socialism. You've probably already read the words "economic calculation" in my posts, so I hope to explain in two or three paragraphs what Mises wrote books about.
One of the most important articles in economic history is "Economic Calculation in the Socialist Commonwealth" by Ludwig von Mises. It destroyed the theoretical foundation of socialism and proposed many revolutionary ideas for economists to consider. The debate regarding socialism when the article was published in 1920 was was over the problem of incentives. Mises said that for economic success to occur there must be three preconditions: there must be private property in all orders of goods, there must be freedom to exchange for money or other things, there must be sound money. Mises' analysis proved this, and then he showed that socialism abolishes each of these! Furthermore, when these conditions are abolished, the entire basis of social order is abolished. His argument was not that socialism could not exist on a very small scale (like a family), but that it could not be used as the basis for planning a state.
Consider an example such as the production of a car. Mises argued that under socialism no one would know what would be the best method for producing the car. Each scarce resource needed to produce the car (steel, electronics, labor, management, engineering, etc.) could be used to produce other things, likes bikes or houses. There is no way of knowing what will be the best mode of efficiency, though, because all the resources (capital goods) are owned by the state (that's what socialism is, by the way). Hence, you cannot compare the costs of production! Because one person/entity owns the resources, there can be no exchange and competition for the factors of production.
In capitalism, on the other hand, one speculates that the car will sell for $20,000, and then he counts his costs. He then calculates his costs as $18000 and concludes that he should make the car. He could be successful at this effort, make a profit, and continue to produce goods which he trades in the market economy. However, he could be mistaken in his speculation and not make a profit. Because of his inefficient use of production factorsl, those resources would be diverted to more productive pursuits. But here's the problem of socialism: no one can ever know if the resources should be used for that product! The system literally falls apart when applied to the production of goods. You cannot have valuation without calculation! As Mises would say, the central planner would be "in a vast desert without a compass." Do entrepreneurs ever make mistakes? Sure they do, but the errors are revealed quickly through the price system and then corrected. In socialism, it's just planned chaos. Mises was proved right with the ultimate collapse of the Soviet Union in the 1980s.
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