Mises and Mainstream Price Theory

All this adds up to a significant difference between the Misesian understanding of the market process and the mainstream neo classical theory of competitive price. Hie latter theory sees prices as emerging spontaneously out of the imagined conditions of perfectly competitive supply and demand. These prices are, at each and every instant, equilibrium prices. The task of the pure theory of price is seen as fully accomplished by the identification of the conditions that must be fulfilled—at the level of the consumer, at the level of die producer, and at the level of the resource owner—in order for all decisions to be able to be carried out simultaneously without disappointment and without regret. From this perspective, this price theory is helpful in understanding the real world because the predictions of the model are in fact approximately fulfilled in die real world (even though, it is of course conceded, the real world does not exemplify the assumptions of the perfectly competitive equilibrium model). In other words, mainstream theory applies its competitive model to the real world by treating that world as having, at each and every moment, attained the equilibrium state. For Mises, the nature and applicability of market process theory is entirely different.

For Mises, the identification of what might be the equilibrium price (given the current state of supply and demand) is of distincdy secondary importance. (Mises at one point refers to die drawing of supply and demand diagrams as possibly helpful for teaching purposes, but as not really helpfiil in understanding the essential analytics of market price determination

[ha, 333]). What is important for Mises is to understand the dynamic process continually at work in markets, operating to identify where resource or product prices arc "too high" or "too low," and operating to "correct" them by attracting appropriate entrepreneurial discoveries.1 The diagrams which dominate the microeconomics textbooks have virtually no place in the Misesian system. These diagrams identify optimal decisions for various market participants (including, especially, producing firms) under a variety of assumed demand and cost situations. They throw no light on the dynamics through which these relevant demand and cost situations, as they confront the various decision makers, are themselves being changed in the course of the market process.

Where the mainstream theory of price has, because it is an equilibrium theory, squeezed die entrepreneurial role out of existence, Misesian theory places that role at the very center of the analytics of the process.

One very important result of these differences between die Misesian theory of the market process and the mainstream neoclassical theory of price, is that these two approaches have two entirely different perspectives on the meaning and significance of monopoly in the working of markets. (As we shall see in a later chapter, a direct implication of these different perspectives is that they generate two entirely contrasting views on die appropriate public policy in regard to the phenomenon of monopoly.)9

0 0

Post a comment