“In neoclassical equilibrium theory the relationship between value and price becomes problematical in a way it was not for classical economists. The difference is one of the knowledge we may attribute to market participants. In the classical world it was reasonable to assume that every trader in a market knew the long-run cost of production of the product traded and was able to make use of this knowledge in dealing with day-to-day price fluctuations. But neoclassical equilibrium rests on a complex interplay of demand and supply in thousands of markets. In the absence of ‘The Auctioneer’ nobody can ‘know’ an equilibrium price until the system as a whole has attained this position. Traders are unable to compare current prices with a ‘long-run normal price’ as they do not know the latter. The problem of price formation arises in a new form. The day-to-day conduct of traders requires a new form of explanation.And a further observation:
It is therefore not surprising that a fairly straight line links Mayer’s position to contemporary discussions of fixprice and flexprice markets, two terms we owe to Sir John Hicks. Once we realise that in our world all prices are disequilibrium prices, the problem mentioned above arises on many levels. It was to be expected that post-Keynesians would seek guidance in the writings of Keynes who, in any case, distrusted neoclassical theory. Chapter 29 of the Treatise on Money may be said to contain a rudimentary theory of price formation in conditions of disequilibrium. A few years ago Professor Davidson made a notable attempt to take Keynes’s thought on price formation in different markets a little further by distinguishing between ‘produce-to-market’ and ‘produce-to-contract’ entrepreneurs (Harcourt (ed.) 1977:313–17).
In different markets prices are formed in different ways. Not all pricefixing agents have the same interests. Here historical change plays its part. The decline of the wholesale merchant, whose dominating role Marshall took for granted, for instance in textile markets, and who naturally aimed at setting such prices as would permit him to maximize his turnover (a short-run consideration), reduced the range of markets with flexible prices. The rise of the industrial cost accountant as a pricefixer, with his interest in ‘orderly marketing’ (a long-run consideration) and his aversion to frequent price changes, has made most prices of industrial goods in our world Hicksian fixprices. In all markets dominated by speculation of course prices must be flexible. On the other hand, all bureaucracies, including those concerned with production planning in large industrial enterprises, naturally abhor flexible prices. ... .” (Lachmann 1994: 165–166; originally published in Lachmann 1982).
“Hence, while Marshall’s was a world of flexible prices, even though not of ‘perfect competition,’ ours is a ‘fixprice world’ with prices set on a ‘cost plus’ basis and wage rates as ultimate price determinants.One will look in vain for a discussion of these issues in other Austrian literature, apart from a scant discussion in Reisman (1996: 414–417).
The analytical significance of this historical change lies, on the one hand, in the fact that the ‘Temporary Equilibrium Method’ which Hicks himself, following Lindahl, used in Value and Capital in 1939, has lost much of its validity. ‘The fundamental weakness of the Temporary Equilibrium method is the assumption, which it is obliged to make, that the market is in equilibrium—actual demand equals desired demand, actual supply equals desired supply—even in the very short period.’ (76) Hence we have to look for another method of dynamic analysis. To find it we must move nearer to Keynes and his successors who are here given credit for having understood, earlier than others, that a fixprice world requires a fixprice method of analysis.” (Lachmann 1977: 238–239).
But none of the modern Austrians – not even Lachmann – bothered to properly think through the implications of administered prices.
If they had, they would have seen that the central plank of the Misesian theory of economic coordination – that the market, even an “unhampered” market, has a strong tendency to market clearing and full use of resources – must be abandoned.
Lachmann, Ludwig M. 1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. Walter E. Grinder). Sheed Andrews and McMeel, Kansas City.
Lachmann, L. M. 1982. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” Journal of Institutional and Theoretical Economics 138.4: 629–645.
Lachmann, L. M. 1994. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” in D. Lavoie (ed.), Expectations and the Meaning of Institutions: Essays in Economics. Routledge, London. 159–178.
Reisman, George. 1996. Capitalism: A Treatise on Economics. Jameson Books, Ottawa, Ill. and Chicago.