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Austrian Economics v. The Mainstream

August 10, 1999

A Seminar with J. Guido Hülsmann

Held at the Ludwig von Mises Institute
June 1999

In the desert of academic economics, those looking for a drink of clarity got even more
than they might have hoped for in "Austrian Economics vs. The Mainstream," an eight-part
seminar directed by J. Guido Hülsmann.

Professor Hülsmann began with a solidly Misesian analysis of the implications of subjectivism as it relates to the theory of value. A comparison was
made between the "substance theory of value," held by today’s mainstream, as well as F. Wieser
and F.A. Hayek, and the Misesian relational value theory. The substance theory asserts or
assumes that value is something that is extended, and, in so being, can be measured and
quantified. This assertion is necessary to fill out the imputation theories in neoclassical thought, to
make interpersonal comparisons of value implied in indifference curves, and to assert efficiency in
the use of the factors of production to satisfy consumer demands.

Dr. Hülsmann pointed out that Mises’s relational theory of value is something completely
different from the substance theory found in the neoclassicals, Wieser, and Hayek. Value is not a
thing or a substance, but rather a relationship between one thing and another. With this view of
value, the Misesian branch of economics made a significant departure from the neoclassicism of
Walras and the verbal Walrasianism of Wieser, Hayek, and his students at the London School of

Dr. Hülsmann then showed how this difference in value theory leads to different price
formation theories. In the Misesian price theory, there are two phenomena to be explained: the
formation of consumer goods prices and the formation of producer goods prices.
Consumer goods prices directly express the value relations that various consumer goods have in
the eyes of the consumer.

The prices of producer goods are formed not directly from these
valuations, but rather from entrepreneurs’ judgments of future money prices for the output from
production processes. This view is very different from the price theory of the neoclassical school,
according to which value is somehow imputed from consumer’s utility onto producer goods.
In the relational view, we cannot directly impute the utility consumers receive from various
consumer goods back on to the factors of production; rather we impute the money prices formed
by the judgement of entrepreneurs back on to the producer’s goods necessary to produce the final
consumer good.

This difference in value and price theory accounts for the concessions made by Hayek and Lionel
Robbins in the socialist calculation debate (that high-speed computers with enough inputs might
be able to impute the value that consumer goods have in the eyes of the central planners back on
all factors of production), while Mises stood firm in his belief that socialism was an impossible
system of social organization because the absence of private property in capital goods meant no
entrepreneurial trading relations, and thus no market prices, could develop.

During the seminar Professor Hülsmann also covered the differences between
entrepreneurship in the Misesian system and other Austrian theories. From the Misesian
perspective, a successful entrepreneur is more than alert and competent in the knowledge of
production processes and cost cutting techniques; he is a predictor of future prices based on his
judgment of future conditions.

The limited usefulness of equilibrium theory as a method to discover the distinctions
between profit and loss were also discussed. Professor Hülsmann pointed out that in Mises the
proper use of equilibrium theory is to identify the distinctions between the entrepreneur’s wage,
interest, and profit or loss. Profit is earned by entrepreneurs when they exhibit better judgment
than other entrepreneurs. Apart from elucidating this one concept, equilibrium constructs are
useless in economic theory.

Other key points made during the lecture include the absence of the concept of supply and
demand curves in the passages on price determination in Mises’s Human Action, the
importance of a time component in Mises’s price theory, which is missing from the mainstream,
and clarifying comments on the calculation debate.

This seminar was one of the best held by the Mises Institute in Auburn. The twenty
participants agreed that they now have a better understanding of Austrian economics and the
differences between it and the ideas of the mainstream. We are extremely fortunate to have Dr.
Hülsmann here to elucidate the crucial distinctions between the Misesian line of economic thought and its

James Yohe
Auburn University

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