Saturday, March 23, 2013

Salerno on Mises’s View of Coordination in Market Economies

This is presented in Salerno (1993) and is of some interest.

First, the role of flexible prices:
“prices that are generated by the market process and serve as the data for economic calculation. These are realized prices; or, in other words, they are the actual outcome of the historical market process at each moment in time and are determined by the value scales of the marginal pairs in each market. They are, therefore, also market-clearing prices the establishment of which coincides with a momentary situation, what Mises calls the ‘plain state of rest’ (PSR), in which no market participant, given his existing marginal-utility rankings of goods and money and knowledge of prevailing prices, can enhance his welfare by participating in further exchange. However, despite their character as market-clearing prices, these are also disequilibrium prices. Thus as a consequence of the unavoidable errors of entrepreneurial forecasting and price appraisement under uncertainty, most goods are sold at prices that do not conform to their monetary costs of production, thereby generating realized profits and losses for producers.” (Salerno 1990: 121).
So prices are “disequilibrium prices” in the sense that they are not equal to costs of production, but allow profit and loss. Nevertheless, supply and demand are equated by a tendency to market-clearing prices:
“Mises conceives the market process as coordinative, ‘the essence of coordination of all elements of supply and demand.’ This means that the structure of realized (disequilibrium) prices, which continually emerges in the course of the market process and whose elements are employed for monetary calculation, performs the indispensable function of clearing all markets and, in the process, coordinating the productive employments and combinations of all resources with one another and with the anticipated preferences of consumers.” (Salerno 1993: 124).
Present prices or prices of the immediate past (or “realised prices” in Mises’s terminology) are the basis for monetary calculation when entrepreneurs guess or forecast prices in an uncertain future (Salerno 1993: 123).

But the market process is open-ended, because continuous change always shifts the end point equilibrium state which Mises calls “final state of rest” and into a new state, then a new state and so on.

Therefore economies do not have a long-term tendency to equilibrium (Salerno 1993: 122), but rather at most shifting, very short term tendencies, which are always thwarted.

But the Misesian theory is not the same as that of Hayek.

For example,
“The Hayekian paradigm stresses the fragmentation of knowledge and its dispersion among the multitude of individual consumers and producers as the primary problem of social and economic cooperation and views the market’s price system as the means by which such dispersed knowledge is ferreted out and communicated to the relevant decision-makers in the production process.” (Salerno 1993: 115).
In contrast to this,
“Salerno points out that for Mises, knowledge and appraisal on the market are complementary, and have very different natures and functions. Knowledge is an individual process, by which each individual entrepreneur learns as much as he can about the largely qualitative nature of the market he faces, the values, products, techniques, demands, configurations of the market, and so on. This process necessarily goes on only in the minds of each individual. On the other hand, the prices provided by the market, especially the prices of means of production, are a social process, available to all participants, by which the entrepreneur is able to appraise and estimate future costs and prices. In the market economy, qualitative knowledge can be transmuted, by the free price system, into rational economic calculation of quantitative prices and costs, thus enabling entrepreneurial action on the market.

As Salerno notes: ‘competition therefore acquires the characteristic of a quintessentially social process, not because its operation presupposes knowledge discovery [as with Hayek-Kirzner], which is inescapably an individual function, but because, in the absence of competitively determined money prices for the factors of production, possession of literally all the knowledge in the world would not enable an individual to allocate productive resources, economically within the social division of labor.’

In short, the entire Hayekian emphasis on ignorance and ‘knowledge’ is misplaced and misconceived.”
(Rothbard 1992: 19–21).

Rothbard, Murray N. 1992. “The Present State of Austrian Economics,” Working Paper from the Ludwig von Mises Institute, November.

Salerno, Joseph T. 1990. “Ludwig von Mises as Social Rationalist,” Review of Austrian Economics 4: 26–54.

Salerno, Joseph T. 1993. “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6.2: 113–146.


  1. You should also check Salerno's view on the different monetary systems:

  2. I disagree with Rothbard that "the entire Hayekian emphasis on ignorance and ‘knowledge’ is misplaced and misconceived". Hayek's explanation supplements and complements the analysis of Mises especially for purposes of explaining to obtuse interventionists the necessity of unadulterated market prices.

    1. Let us run through the reasons why Hayek's "prices-convey-the-needed knowledge" theory is wrong:

      (1) First, Hayek's own theory requires the belief that real world economies persist in a state of near equilibrium to the role of prices to work:

      “as Hayek points out, in order for prices to fulfill their knowledge-disseminating and plan-coordinating functions, the economy must subsist in a state of what I will call ‘proximal equilibrium,’ wherein realized prices are always fairly accurate indicators of future prices.” (Salerno, Joseph T. 1993. “Mises and Hayek Dehomogenized,” Review of Austrian Economics 6.2: p. 128).

      That is absurd -- and curiously a damaging criticism leveled at Hayek even by Misesians.

      (2) Secondly, and strongly related to the first, is the correct observation that Hayek's theory about prices communicating knowledge ignores the crucial role of Knightian uncertainty:

      “Uncertainty for Hayek means that each individual decision maker only has a small piece of the puzzle. However, as a whole, the aggregated set of all decision makers have a complete set of all relevant knowledge. There are no pieces missing, lacking or unavailable from the puzzle. Market prices organize and synthesize the aggregate amount of knowledge so that market price signals, understood only by savvy, knowledgeable entrepreneurs, [eliminate] … any uncertainty.” (Brady, Michael Emmett. “Comparing J.M. Keynes’s and F. von Hayek’s Differing Definitions of Uncertainty as it Relates to Knowledge,” January 30, 2011. p. 14)

      “Keynes, Knight and Schumpeter deny Hayek’s claim that the market generates price vectors which concentrate the knowledge so that savvy, knowledgeable entrepreneurs can act on this information and solve the problem of uncertainty. Uncertainty means vital important information is missing. Pieces from the puzzle are missing and will not turn up in the future” (p. 14).

      “Hayek could not accept the standard concept of uncertainty as defined by Keynes, Knight and Schumpeter because it would then be impossible for market prices to concentrate knowledge that did not exist. In conclusion, nowhere in any of Hayek’s three articles on Knowledge in Economics in 1937, 1945 and 1947 does Hayek deal with the standard view that uncertainty means knowledge that is not there.” (p. 15).

      (3) Hayek never made the slightest attempt to explain how fixprice markets and price administration contradict and destroy his theory.

      Real world capitalists -- as opposed to fantasy world Hayekian ones -- get their signals from demand and sales orders, that is to say, from quantity signals, not primarily from prices.