Rothbard’s Clueless Statements on Costs of Production and Price

They can be read here:

“What are the costs involved in the decisions made by the owners of the factors? In the first place, it must be stressed that these costs are subjective and cannot be precisely determined by out­side observers or be gauged ex post by observing accountants. Secondly, it is clear that, since such factors as land and the produced capital goods have only one use, namely, the production of this product (by virtue of being purely specific), they involve no cost to their owner in being used in production. By the very terms of our problem, the only alternative for their owner would be to let the land lie unused, earning no return. The use of labor, however, does have a cost, in accordance with the value of the leisure forgone by the laborers. This value is, of course, unmeasurable in money terms, and necessarily differs for each indi­vidual, since there can be no comparison between the value scales of two or more persons.

Once the final product has been produced, the analysis of the previous chapter follows, and it becomes clear that, in most cases, the sale of the good at the market price, whatever the price may be, is costless, except for rare cases of direct consumption by the producer or in cases of anticipation of a price increase in the near future. This sale is costless from the proper point of view – the point of view of acting man at the relevant instant of action. The fact that he would not have engaged in the labor at all if he had known in advance of the present price might indicate a deplorable instance of poor judgment, but it does not affect the present situation. At present, with all the labor already ex­erted and the product finished, the original – subjective – cost has already been incurred and vanished with the original making of the decision. At present, there is no alternative to the sale of the good at the market price, and therefore the sale is costless.

It is evident, therefore, that once the product has been made, ‘cost’ has no influence on the price of the product. Past costs, being ephemeral, are irrelevant to present determination of prices. The agitation that often takes place over sales ‘below cost’ is now placed in its proper perspective. It is obvious that, in the relevant sense of ‘cost,’ no such sales can take place. The sale of an already produced good is likely to be costless, and if it is not, and price is below its costs, then the seller will hold on to the good rather than make the sale.

That costs do have an influence in production is not denied by anyone. However, the influence is not directly on the price, but on the amount that will be produced or, more specifically, on the degree to which factors will be used. We have seen in our example that land and capital goods will be used to the fullest extent practicable, since there is no return or benefit in allowing them to remain idle. But man laboring bears the cost of leisure forgone. What he expects will be the monetary return from his labor is the deciding factor in his decision concerning how much or whether or not to employ his labor on the product. The monetary return is ranked on his subjective value scale along with the costs of forgoing leisure, and his decision is made on the quantity of labor he will put forth in production. The height of costs on individual value scales, then, is one of the determinants of the quantity, the stock, that will be produced. This stock, of course, later plays a role in the determination of market price, since stock is evaluated by consumers according to the law of diminishing marginal utility. This, however, is a far cry from stating that cost either determines, or is co-ordinate with utility in determining, price. We may briefly summarize the law of price (which can be stated at this point only in regard to specific factors and joint ownership, but which will be later seen as true for any arrangement of production): Individuals, on their value scales, evaluate a given stock of goods according to their utilities, setting the prices of consumers’ goods; the stock is produced ac­cording to previous decisions by producers, who had weighed on their value scales the expected monetary revenue from consumers against the subjective costs (themselves simply utilities forgone) of engaging in the production. In the former case, the utility valuations are generally (though by no means always) the ones made by consumers; in the latter case, they are made by producers. But it is clear that the determinants of price are only the subjective utilities of individuals in valuing given conditions and alternatives. There are no ‘objective’ or ‘real’ costs that determine, or are co-ordinate in determining, price.” (Rothbard 2009: 341–343).

The first part of this quotation uses a purely subjective definition of “costs,” which appears to deny that monetary costs of production are what Rothbard has in mind.

Yet, by the end of the passage, Rothbard advances to a gross non sequitur, where he moves to a different “objective” definition of costs that must include monetary costs of production:

“But it is clear that the determinants of price are only the subjective utilities of individuals in valuing given conditions and alternatives. There are no ‘objective’ or ‘real’ costs that determine, or are co-ordinate in determining, price.” .

This, as anyone familiar with real world capitalist economies would know, is completely and utterly contradicted by the empirical evidence on administered prices.

Depending on the particular nation involved, administered prices – or mark-up prices – tend make up between 50% and 70% of prices in modern market economies. The administered price is quite clearly determined by average costs of production per unit plus a profit mark-up.

Rothbard’s view of costs and prices is clueless, ignorant, and wrong.

Nor is Rothbard alone in this spectacular error. Here is the Austrian Thomas C. Taylor:

“The individual seller’s costs were shown to relate to his subjective scale of values – that is, to his own valuation of the good in its next best alternative use of either direct use or future sale. Once the goods have been produced, his past money costs are irrelevant to deciding how to use these goods. As Thirlby has said, ‘Cost is ephemeral. The cost involved in a particular decision loses its significance with the making of a decision because the decision displaces the alternative course of action.’ Jevons stressed the same truth when he stated, ‘In commerce bygones are forever bygones and we are always starting clear at each moment, judging the value of things with a view to future utility. Industry is essentially prospective not retrospective.[’] The seller’s task is to make the best of his situation in light of his possessing a certain stock of goods. Thus it is not correct to say that prices are determined by demand and by money costs. Money costs enter into the seller’s decisions about the undertaking of production. … Once the goods are produced, only subjective valuations expressed by individual buyers and sellers relating to these goods and to their exchange ratios in money terms are effective in the establishment of market prices.” (Taylor 1980: 59–60).

Austrian price theory, as least as it stands in these authors, has precious little relevance to the real world.

BIBLIOGRAPHY
Rothbard. M. 2009. Man, Economy, and State: A Treatise on Economic Principles. Scholar’s Edition (2nd edn.), Ludwig von Mises Institute, Auburn, Ala.

Taylor, Thomas C. 1980. An Introduction to Austrian Economics. Ludwig von Mises Institute, Auburn, Ala.