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The cost-price doctrine on Böhm-Bawerk and Reisman

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Tags Monetary TheoryMoney and Banking

09/26/2007

Mises and Rothbard created a very strong following of fine scholars and brilliant minds. But critiques are always a feature that a very much alive tradition such as the Austrian School needs to have and use for improvement. And sometimes improvement implies bringing back forgotten doctrines of previous generations. In this case, I am referring to the cost-price doctrine for reproducible goods that Eugen Böhm-Bawerk developed but was dismissed entirely by most Misesians and certainly most Rothbardians. On this you can see Robert Murphy's treatment of cost and price at his MES Study Guide (p.56). Prof. Reisman is rescuing the Böhm-Bawerkian insight that costs, in reproducible goods, are the immediate although not the ultimate determinant of prices, from the Austrian plumb-line that has long ignored that fact, putting an emphasis on marginal utility as if didn't depend itself on present quantities of fungible goods available. Let's quote prof. Reisman from his translation and commentary:

"However that may be, the genuine Austrian doctrine on the relationship between value, cost, and marginal utility is to be found first and foremost in the writings of Böhm-Bawerk. Böhm-Bawerk represents the "Real McCoy" of Austrian economics when it comes to the theory of value and price. The present essay is, of course, by no means the only place in which he presents it."

And prof. Böhm-Bawerk from the same text:

"And now I ask: under these circumstances, has it been worthwhile [337] to raise a great hue and cry against the marginal-value theorists over the fact that they trace the law of costs back to the law of marginal utility? Was it proper to call it a "caprice" when the marginal-value theorists undertook to put forward in the law of marginal utility a unitary law, which subsumed the law of costs rather than merely stood beside it? And is it really the mark of a so much higher scientific standpoint, when one first, with all possible emphasis, declares not marginal utility but costs to be the ultimate cause of the value of goods, however then is forced to explain this alleged ultimate cause in turn on the basis of marginal utility, which is allegedly not ultimate? If it were only a matter of pointing out some injustice to my esteemed opponent, I could confidently conclude my remarks. However, that would be a job only half done, and as a result, fruitless."
Only when everything has been decided, when the price that has emerged as the result of the interplay of utility valuations as a ready-made price that is already "known," do people again dredge up cost valuation, which was carefully put aside earlier, and in connection with which, in some measure, they now can no longer be taken at their word, and allow it to "finally triumph." "A number of buyers appear on the market with the desire for a definite exchangeable good. Each has a subjective utility valuation of the good that differs from that of all other buyers. This utility valuation is the direct valuation. However, as soon the price at which the good is for sale, its objective cost value, is known, cost valuation finally triumphs."
"Caprices,” therefore, cannot be eliminated from our valuations; nor from "exact" cost valuations. The difference is only this: Where we directly value according to marginal utility, we base our valuation on our own "caprices." Where we value "exactly," according to costs, we base it on other people's caprices; on the result of the caprices of those hundereds, thousands, or millions of buyers whose demand fixes a definite cost figure as the "highest necessary." It is immediately to be admitted that such a result of caprices is much more stable than the individual caprice.

We can ask any _real life_ entrepreneur for his position on the matter. Avoiding that insight does not make us Austrians "all-around subjectivists" but in fact divorces theory from entrepreneurial practice (a.k.a. reality, and markets), which is absurd. That is too high a price to pay just to stubbornly and unnecessarily avoid all contact with the British Classics and/or ...Marx. The former had a lot of valuable things to say, and reading "Capitalism" by Reisman is a must if one is to have a better perspective of their contributions, specially on the "Macro" front. Finally, prof. Böhm-Bawerk asks himself and responds brilliantly:

Which Is "More Ultimate," Costs or Marginal Utility?
Namely, the height of marginal utility is in no way an ultimate, causeless fact, but, as we marginal-value theorists point out, is determined by means of the prevailing relationship of demand and supply. And the size of the supply is in turn, as the marginal-value theorists likewise point out with all requisite definiteness and emphasis, in very large part determined by the state of the conditions of production, by the difficulty of attainment, or, as one is accustomed to say in brief, by the costs of production. Consequently—so it seems—since they do indeed help to determine marginal utility itself, costs are a more primary or more ultimate basis of value than marginal utility, which is influenced by them.

In sum, we need not throw away the baby with the bathwater. Prof. Böhm-Bawerk cost-price doctrine needs to be rescued and put back on the central place it deserves.

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