The Economic Mind in America: Essays in the History of American Economics

By Malcolm Rutherford | Go to book overview

8

HERBERT J.DAVENPORT’S TRANSFORMATION OF THE AUSTRIAN THEORY OF VALUE AND COST

J. Patrick Gunning

This chapter is about Herbert J. Davenport’s contribution to the Austrian theory of value and cost. 1 The term “theory of value,” in today’s words, means “theory of price.” 2 “Price” includes the prices of consumer goods and the prices of the factors of production. An all-inclusive theory of price would aim to discover every cause of prices in the market economy. No Austrian economist has tried to achieve this aim. The Austrians have excluded theft and deceit. Also, while being careful to recognize that money is not neutral, Austrians have presented the theory of price independently of the theory of money. By doing so, they have disregarded the demand for and supply of cash balances. Besides these, Austrian authors have typically excluded time preference as a cause in order to achieve simplicity. Finally, in this field, the Austrian theory has not tried to account for credit and the money based on credit.

My point is only that when we speak of the Austrian theory of value, we are not talking about an all-inclusive theory but a special theory designed to show the relationship between the prices of goods and factors in isolation of the above-mentioned influences. Following this lead, this chapter also assumes fully defined property rights, no fraud, neutral money, absence of time preference, and no credit.

The word “cost” is included in the title of this chapter to indicate that the theory of relative prices should also describe or explain cost as we understand it in everyday life. Cost in this sense means opportunity cost, which may be different from the prices that a producer must pay for the factors of production.

When modern Austrian economists use the term “cost,” they invariably refer to cost as subjective, meaning that it is a cost as perceived by some

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