Mises on the Prices of Factor Inputs: A Critique

The essence of Mises’ views are below:

“The prices of the goods of higher orders are ultimately determined by the prices of the goods of the first or lowest order, that is, the consumers’ goods. As a consequence of this dependence they are ultimately determined by the subjective valuations of all members of the market society. It is, however, important to realize that we are faced with a connection of prices, not with a connection of valuations. The prices of the complementary factors of production are conditioned by the prices of the consumers’ goods. The factors of production are appraised with regard to the prices of the products, and from this appraisement their prices emerge. Not the valuations but the appraisement are transferred from the goods of the first order to those of higher orders. The prices of the consumers’ goods engender the actions resulting in the determination of the prices of the factors of production. These prices are primarily connected only with the prices of the consumers’ goods. With the valuations of the individuals they are only indirectly connected, viz., through the intermediary of the prices of the consumers’ goods, the products of their joint employment.” (Mises 2008: 330–331).

“The market determines prices of factors of production in the same way in which it determines prices of consumers’ goods. The market process is an interaction of men deliberately striving after the best possible removal of dissatisfaction. It is impossible to think away or to eliminate from the market process the men actuating its operation. One cannot deal with the market of consumers’ goods and disregard the actions of the consumers. One cannot deal with the market of the goods of higher orders while disregarding the actions of the entrepreneurs and the fact that the use of money is essential in their transactions. There is nothing automatic or mechanical in the operation of the market. The entrepreneurs, eager to earn profits, appear as bidders at an auction, as it were, in which the owners of the factors of production put up for sale land, capital goods, and labor. The entrepreneurs are eager to outdo one another by bidding higher prices than their rivals. Their offers are limited on the one hand by their anticipation of future prices of the products and on the other hand by the necessity to snatch the factors of production away from the hands of other entrepreneurs competing with them.” (Mises 2008: 332–333).

“The competition among the entrepreneurs is ultimately a competition among the various possibilities open to men to remove their uneasiness as far as possible by the acquisition of consumers’ goods. The decisions of the consumers to buy one commodity and to postpone buying another determine the prices of factors of production required for manufacturing these commodities. The competition between the entrepreneurs reflects the prices of consumers’ goods in the formation of the prices of the factors of production.” (Mises 2008: 335).

The crucial concept is that of “value imputation.” The notion of value imputation is explained by Hülsmann:

“The kernel of Mises’s theory of calculation is this: while calculation in terms of money prices is the essential intellectual tool of entrepreneurs acting in a market economy, calculation in terms of ‘value’ is impossible. A calculus can only be performed with multiples of an extended unit; for example, one can add one apple to another apple or one grain of silver to another grain of silver. In contrast, one cannot add a telephone to a piano concerto and still less can one add wittiness to silence. These things are incommensurable and therefore cannot be linked through mathematical operations. So it is with value. One cannot quantify the value of a thing because value is not extensive and therefore not measurable.

However, value can be qualitatively ‘imputed’ from consumer goods to factors of production, in the sense of a value-dependency: those factors of production are valuable only because they serve to produce valuable consumer goods. But there is no such thing as quantitative value and thus no value calculation; there is only price calculation.” (Hülsmann 2007: 399–400).

That is confirmed by Mises’s statement that “[e]conomic calculation always deals with prices, never with values” (Mises 2008: 332).

In Mises’s view, capitalists do not value factor inputs directly but indirectly for the goods they can produce.

Thus the subjective value of factors of production to entrepreneurs are ultimately determined by the value of consumer goods. That is not an unreasonable insight, but it does not follow that all prices are formed in the way Mises imagines: that is, in a flexible manner in auction-like markets where capitalists are bidding against each other.

The fundamental failing of Mises’ analysis is that even factor inputs such as capital goods can have prices set by the producers based on average costs of production per unit plus a profit mark-up.

In particular, durable capital goods tend to have mark-up prices, and this is confirmed in the relative inflexibility of producers’ goods prices (Greenslade and Parker 2012: F4)

In this case of mark-up pricing, Mises has it the wrong way around: the prices of the relevant factor inputs used in production determine the prices of mark-up capital goods, not consumer prices.


BIBLIOGRAPHY
Greenslade, Jennifer V. and Miles Parker. 2012. “New Insights into Price-Setting Behaviour in the UK: Introduction and Survey Results,” Economic Journal 122.558: F1–F15.

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Ludwig von Mises Institute, Auburn, Ala.

Mises, L. von. 2008. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.

Murphy, Robert P. and Amadeus Gabriel. 2008. Study Guide to Human Action. A Treatise on Economics: Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.