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G. Rothbard versus the Marshallian Synthesis
Murray Rothbard rejected, in the strongest terms, this Marshallian attempt at a synthesis of marginalist innovations with
the legacy of Ricardo. And with it, he rejected Marshall's attempted synthesis of labor and waiting as elements of "real cost."
To understand why, we must start with Rothbard's distinction between the judging of actions ex ante and ex post.
In judging ex ante, an actor determines which future course of action is most likely to maximize his utility. Judgment
ex post, in contrast, is an assessment of the results of past action. Rothbard denied that "sunken costs" could confer
value. "....cost incurred in the past cannot confer any value... now."88
"It is evident... that once the product has been made, 'cost' has no influence on the price of the product.
Past costs, being ephemeral, are irrelevant to present determination of prices...."89
Against the doctrine of classical political economy that "costs determine price," which was
"supposed to be the law of price determination 'in the long run,'" he argued that "the truth is precisely the reverse":
The price of the final product is determined by the valuations and demands of the consumers, and this price determines
what the cost will be. Factor payments are the result of sales to consumers and
do not determine the latter in advance. Costs of production, then, are at
the mercy of final price, and not the other way around....90
A revolutionary doctrine, indeed! Only, on closer inspection, it does not seem so revolutionary after all. And the Marshall
and Ricardo to whom Rothbard opposed himself so dramatically, turn out to be gross caricatures. Their statement of the cost
principle was nothing so crudely metaphysical as "the price of the final product is determined by
'costs of production....'"91 (Rothbard was, if anything, more charitable than Böhm-Bawerk, who felt compelled
to deny that there was power "in any element of production to infuse value immediately or necessarily into its product."92)
Admittedly, too, Rothbard made a half-hearted attempt at fairness, in giving a slightly less cartoonish description of
the Marshallian "scissors":
Marshall tried to rehabilitate the cost-of-production theory of the classicists by conceding that, in the "short-run,"
in the immediate market place, consumers' demand rules price. But in the long run, among the important reproducible goods,
cost of production is determining. According to Marshall, both utility and money costs determine price, like blades of a scissors,
but one blade is more important in the short run, and another in the long run....
But he immediately proceeded to tear Marshall's doctrine apart--or rather a caricature of it. In this straw-man version
of Marshall, a modern counterpart of the scholastic realists of the Middle Ages, the "long run" was a phenomenon with concrete
existence.
Marshall's analysis suffers from a grave methodological defect--indeed, from an almost hopeless methodological confusion
as regards the "short run" and the "long run." He considers the "long run" as actually existing, as being the permanent, persistent,
observable element beneath the fitful, basically unimportant flux of market value....
Marshall's conception of the long run is completely fallacious, and this eliminates the whole groundwork of his theoretical
structure. The long run, by its very nature, never does and never can exist....
To analyze the determining forces in a world of change, [the economist] must construct hypothetically a world of
non-change [i.e., the Evenly Rotating Economy]. This is far different from... saying that the long run exists or that
it is somehow more permanently or more persistently existent than the actual market data.... The fact that costs
equal prices in the "long run" does not mean that costs will actually equal prices, but that the tendency exists, a tendency
that is continually being disrupted in reality by the very fitful changes in market data that Marshall points out.93
(We have already seen, by the way, that Marshall's long-run is not equivalent to the Austrians' hypothetical world of non-change,
or ERE, but rather to the Austrian "final equilibrium" toward which the economy tends, but never approaches).
Compare Rothbard's version of Marshall to what Marshall himself said, as we have already quoted him above:
But in real life such oscillations are seldom as rhythmical as those of a stone hanging freely from a string; the comparison
would be more exact if the string were supposed to hang in the troubled waters of a mill-race, whose stream was at one time
allowed to flow freely, and at another partially cut off.... For indeed the demand and supply schedules do not in practice
remain unchanged for a long time together, but are constantly being changed, and every change in them alters the equilibrium
amount and the equilibrium price, and thus gives new positions to the centres about which the amount and the price tend to
oscillate.94
There is a constant tendency towards a position of normal equilibrium, in which the supply of each of these agents [i.e.,
factors of production] will stand in such a relation to the demand for its services, as to give to those who have provided
the supply a sufficient reward for their efforts and sacrifices. If the economic conditions of the country remained stationary
sufficiently long, this tendency would realize itself in such an adjustment of supply to demand, that both machines and human
beings would earn generally an amount that corresponded fairly with their cost of rearing and training.... As it is, the economic
conditions of the country are constantly changing, and the point of adjustment of normal demand and supply in relation to
labour is constantly being shifted.95
More important than the deviation of most prices from their normal value, at any given time, is the fact that they will
tend toward this value over time if not impeded by monopolistic privilege. As Schumpeter wrote, although there may always
be a positive average rate of profit, "[i]t is sufficient that... the profit of every individual plant is incessantly threatened
by actual or potential competition from new commodities or methods of production which sooner or later will turn it into a
loss." The price trajectory of any particular capital or consumer good, under the influence of competition, will be toward
cost: "for no individual assemblage of capital goods remains a source of surplus gains forever..."96 Or
in the words of Tucker, "competition [is] the great leveler of prices to the labor cost of production.”97
Setting aside Rothbard's caricature of Marshall's views (i.e., his supposed view of the long-run as actually existing in
some real sense, as a static model like the Evenly Rotating Economy), we find that Marshall actually said something quite
like what Rothbard said: the price of reproducible goods tends toward the cost of production. Equilibrium price and
the "long run," like the Austrian "final equilibrium," are not viewed in conceptual realist terms as actually existing things.
Rather, they are theoretical constructs for making real world phenomena more comprehensible. The Austrian pose of radical
skepticism, when it is ideologically convenient, effectively deprives economists of the ability to make useful generalizations
about observed regularities in the phenomena of the real world.
The problem with Rothbard's critique of Marshall is that it could be applied with almost as much justice to Rothbard himself.
For example, Rothbard admitted that cost of production could have an indirect effect on price, through its effect on supply.
In his discussion of the distinction between ex ante and ex post judgements, from which we quoted above, he
also proclaimed it "clear that [the actor's] ex post judgments are mainly useful to him in the weighing
of his ex ante considerations for future action."98 And directly after his statement quoted above
that "'cost' has no influence on the price of the product," he went on at greater length:
That costs do have an influence in production is not denied by anyone. However, the influence is not directly on the price,
but on the amount that will be produced or, more specifically, on the degree to which factors will be used.... The height
of costs on individual value scales, then, is one of the determinants of the quantity, the stock, that will
be produced. This stock, of course, later plays a role in the determination of market price. This, however, is a far
cry from stating that cost either determines, or is co-ordinate with utility in determining, price.99
But this is almost exactly how Marshall himself explained the action of the cost principle, at length, in his discussion
of Jevons' critique of Ricardo, in Appendix I of Principles of Economics. Indeed, one can find many passages in the
Principles of Economics in which Marshall describes the action of cost on price through supply, in language almost
identical to that of Rothbard above. Marshall did not claim that the price of a specific present good was mystically "determined"
by its past cost of production. He argued, rather, that prices over time tended toward the cost of production through
the decisions of producers as to whether market prices justified future production.
And the Austrians attached some very compromising qualifications to their bald statements that utility determined value,
and that final price determined the cost of production. Böhm-Bawerk, in Positive Theory, wrote that value was determined
by "the importance of that concrete want... which is least urgent among the wants that are met from the available
stocks of similar goods. [emphasis added]"100 Rothbard wrote that "[t]he price of a good is determined
by its total stock in existence and the demand schedule for it on the market. [emphasis
added]"101 Likewise: "In the real world of immediate market prices, ...it is obvious to
all that price is solely determined by valuations of stock--by 'utilities'--and not at all by money cost.... [M]ost
economists recognize that in the real world (the so-called 'short-run')
costs cannot determine price.... [emphasis added]"102 This sounds awfully similar, in practice, to Marshall's
understanding of the predominance of the "utility" blade of the scissors in the "short run." The difference, as we saw above,
was that Rothbard denounced the very idea of the "long run" as utterly meaningless.
Rothbard's qualifications of the utility principle suggest a weakness of the subjective theory of value which we have recurrently
pointed to in the sections above: it can be taken literally only to the extent that we ignore the dynamic aspect of supply,
and treat the balance between demand and existing stocks of supplies at any point as given, without regard to the time factor.
This is true both of the Austrians' utility theory of value of consumer goods, which assumes fixed stocks at the point
of exchange, and of their imputation theory of factor prices, which likewise assumes a fixed stock of higher-order goods.
As Dobb criticized the latter,
If the situation is handled in terms of concrete capital-goods (dispensing with the genus of "capital" as a supposedly
scarce factor), then if these goods are reproducible there should be no reason for any positive rate of profit at all in strictly
static conditions. If all inputs other than labour are produced inputs, whence the specific "scarcity" from which profit is
supposed to arise? If assumptions of full static equilibrium are consistently adhered to, then production in the capital-goods
sector of the economy will tend to be enlarged until the output of goods is eventually adapted to the need for them.... With
the supply of them fully adapted to the demand for them for purposes of current replacement, there will no longer be any ground
for their prices to be above the (prime) cost of their own current replacement (or depreciation).103
Dobb also wrote of the Austrian "assumption of given supplies of various factors, with consequential demand-determination
of all prices...."104 Later in the same work, Dobb remarked on the artificiality of value theories based entirely
on the short-term balance of supply and demand:
....in order to make such statements, a number of things have to be taken as given (as--to take the extreme case--in
all statements about Marshallian "short-period", or quasi-short-period, situations): data that are dependent variables at
another, and "deeper", level of analysis....
One way of illustrating what is meant when one speaks of contexts in which demand-determined exchange-relations are applicable
may be the following. One could suppose that all productive inputs were natural objects available at any given date in given
nature-determined amounts [e.g., Marshall's meteoric stones].... But then, of course, the process of production as
ordinarily viewed... would be non-existent....
To the extent, per contra, that human activity is assigned a major role in the production process and reproducible
inputs... replace scarce natural objects, the essentials of the economic problem become different....
But if a formal mode of determination in terms of scarcity-relations... can be constructed, and can convey some information,
in a situation of naturally-determined means or inputs, why should it not be able to do so in analogous situations where any
set of n means or inputs, although not dependent on natural limitations, are necessarily determined as to their
supplies in some other way? ....Indeed, this is quite possible; but... subject to the restrictive condition that the set of
n means or inputs is already given as datum. The restriction is a large one. It excludes from consideration
all situations in which these supplies are likely to change (i.e. to change as a "feedback" effect of their
prices), and analysis thus restricted can make no pronouncement as to why and how these changes occur or as to their effects--for
which reason we spoke of the situations to which such a theory can apply as "quasi-short-period situations".105
In Political Economy and Capitalism, Dobb wrote in similar terms of the Austrian assumption that, "in any given
set of conditions, the supply of such ultimate productive factors was fixed."106 He qualified this in a footnote
by adding, "Strictly speaking, the Austrians did not assume, or need to assume, that the supply of basic factors of production
was unchangeable: merely that the quantity of them was determined by conditions external to the market, and hence could be
treated as independent."107 Nevertheless, the practical effect was that, "[b]eing limited by an unalterable
(for the moment) scarcity, these factors, like any commodity, would acquire a price equal to the marginal service which they
could render in production: these prices formed the constituent elements of cost."108 This required deliberately
abstracting the "theory of value" of factors of production from cost, or any "characteristics affecting the supply."109
In addition, the Austrian theory of factor pricing is, in a sense, an elaborate exercise in question-begging. Saying that
factors are priced according to their marginal productivity is just another way of saying the price is based on capitalizing
expected profit and rent. But the latter quantities, and their natural level in a free market, are precisely the points at
issue between the mutualist and Austrian versions of free market theory.
As James Buchanan characterized it, the subjective theory was an attempt to apply the classical theory of value for goods
in fixed supply to all goods, both reproducible and not.
The development of a general theory of exchange value became a primary concern. Classical analysis was rejected
because it contained two separate models, one for reproducible goods, another for goods in fixed supply. The solution was
to claim generality for the simple model of exchange value that the classical writers had reserved for the second category.
Exchange value is, in all cases, said the marginal utility theorists, determined by marginal utility, by demand. At the point
of market exchange, all supplies are fixed. Hence, relative values or prices are set exclusively by relative marginal utilities.110
Marshall believed, by the way, that production cost influenced demand, even in the short run, through buyers' expectations
of future changes in price as output increased. For a similar case of the effect of expectations on demand-price, we need
go no further than electronic goods. How many people have postponed the purchase of a DVD player in the expectation that they
would be produced more cheaply in a year or two?
For the Austrians, by definition, "value" was identical to market price at any given time. "Future price" was indeed subject
to change, through producers' reactions to present price; but to go so far as to introduce "equilibrium price" as a useful
concept, or to claim a relation between equilibrium price and cost of production, was a no-no. Theoretical constructs are
well and good--but only for Austrians.
The Austrian doctrine that utility determines price, if taken literally, is utter nonsense. The doctrine is true only with
the qualifications that they, parenthetically, provided: that value is determined without regard to the long run, but only
by the existing stocks of supplies in relation to market demand at any given time. And these qualifications, taken with Rothbard's
admission that cost of production indirectly affected price through its effects on supply, bring the substance of Rothbard's
theory quite close to that of Marshall.
Rothbard's caricature of Marshall closely parallels the straw-man version of classical political economy which Jevons congratulated
himself on destroying over a century ago. And Marshall's analysis of the Jevonian critique of Ricardo, which we saw above,
could be turned against Rothbard to great effect: if we consider Marshall's actual doctrine, rather than Rothbard's crude
parody of it, it is apparent that the two are much closer in substance than Rothbard would admit; but if we are to take the
doctrines of either Marshall or Rothbard as lampooned by their enemies--as the bare assertion either that cost "determines"
price, or that utility "determines" price--the truth is much closer to the former than to the latter assertion.
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