Academic journal article The Quarterly Journal of Austrian Economics

From Marshallian Partial Equilibrium to Austrian General Equilibrium: The Evolution of Rothbard's Production Theory

Academic journal article The Quarterly Journal of Austrian Economics

From Marshallian Partial Equilibrium to Austrian General Equilibrium: The Evolution of Rothbard's Production Theory

Article excerpt

[C]oncentration on a single firm and the reaction of its owner is not the appropriate route to the theory of production; on the contrary, it is likely to be misleading.... In the current literature, this preoccupation with the single firm rather than with the interrelatedness of firms in the economy has led to the erection of a vastly complicated and largely valueless edifice of production theory (Rothbard, 2009 [1962], p. 455).

I: INTRODUCTION

Murray Rothbard's Man, Economy, and State (2009 [1962]) is a landmark book in Austrian economics. Following earlier writers, especially Ludwig von Mises (2008 [1949]), it is written in the form of a treatise that derives the general body of economic theorems from the ground up, starting with isolated individual action, moving on to various forms of interpersonal exchange, and ending with government intervention. When developing this economic organon Rothbard synthesized the works of many economists working in the Austrian tradition, including Carl Menger, Eugen von Bohm-Bawerk, Frank Fetter, Phillip H. Wicksteed, Ludwig von Mises, and F.A Hayek. The Austrian approach concentrates on issues such as real world price formation, entrepreneurship and the market process, and the relationship between time and the production structure. It uses the praxeological method--deduction grounded on the axiom that humans act purposively along with other realistic assumptions, such as that there exists a variety of natural resources and that humans value leisure as a consumer good (Salerno, 2009, pp. xxxii-xxxiii).

One of Rothbard's monumental contributions was the construction of a systematic production theory that integrated various strands of thought developed by earlier writers working in this tradition, which included capital and interest, the structure of production, rent and factor pricing, and entrepreneurship theory (Salerno, 2009, p. xxvi). For example, one achievement was his integration of the Mises-Fetter pure time preference theory of interest with the Hayek-Knut Wicksell structure of production analysis (Salerno, 2009, p. xxvii; Rothbard, 2009 [1962], p. lvii). In general, his production theory integrated all of the interrelations of the production structure and set out to actually explain the formation of output and input prices throughout the economy. This synthesized Austrian production theory is different from the more well-known Marshallian partial equilibrium approach. The latter approach is best represented in modern economics by Chicago production theory, which was mainly developed by George Stigler and Milton Friedman, who built off the works of Alfred Marshall and Frank Knight (Salerno, 2011, pp. 1-2). This theory analyzes equilibrium production decisions from the viewpoint of an isolated firm with given input and output prices. (1)

In contrast, Austrian production theory is the halfway house, or middle ground, between excessive microeconomic analysis, which is the Marshallian partial equilibrium approach that concentrates on a single firm facing fixed prices, and excessive macroeconomic analysis, which is the contrasting Keynesian aggregative approach that hermetically seals off sectors of the economy from each other. It shows that a change in any sector of the economy must always impart its influence through repercussions in the structure of prices and production in other sectors. This Austrian general equilibrium is starkly different than Walrasian general equilibrium for three important reasons. The first is that it is dynamic and not static because it shows the equilibrating processes between equilibrium states that are driven by profit seeking capitalist-entrepreneurs and emphasizes the importance of uncertainty and change. The second is that it recognizes the temporal heterogeneous capital structure. The third is that it expresses its theorems using verbal logic rather than non-causal mutually determined mathematical equations (Rothbard, 2009 [1962], p. …

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