Mises’s notion of economic calculation and coordination in market economies is at the heart of Austrian economics.
I provide an overview below and critique.
Note that I am not discussing the issues of the strict socialist calculation debate, which should be differentiated from Mises’s views on economic calculation in capitalist systems where there are money and money prices for capital goods (unlike the socialist economies Mises imagined).
In market societies, there are money prices, and economic calculation “is calculation in terms of money prices” (Mises 1998: 206). Money prices allow us to compare “input and output on a common basis” (Mises 1998: 209), and money is the “common denominator of economic calculation” (Mises 1998: 215). Economic calculation “in terms of money prices is the calculation of entrepreneurs producing for the consumers of a market society” (Mises 1998: 217), and it deals with the future, though it takes “pasts events and exchange ratios of the past into consideration” (Mises 1998: 211).
The aim that economic calculation achieves is to “establish the outcome of acting by contrasting input with output” (Mises 1998: 211). The prices of the past are starting points in the endeavour to “anticipate future prices” (Mises 1998: 213). Money prices allow the calculation of profit and loss (Mises 1998: 231).
So far so good.
Mises states the monetary factors needed for a reasonable level of economic calculation in a market system:
“The first aim of monetary policy must be to prevent governments from embarking upon inflation and from creating conditions which encourage credit expansion on the part of banks. But this program is very different from the confused and self-contradictory program of stabilizing purchasing power.So according to Mises what is required is as follows:
For the sake of economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money. Gold and, up to the middle of the nineteenth century, silver served very well all the purposes of economic calculation. Changes in the relation between the supply of and the demand for the precious metals and the resulting alterations in purchasing power went on so slowly that the entrepreneur’s economic calculation could disregard them without going too far afield. Precision is unattainable in economic calculation quite apart from the shortcomings emanating from not paying due consideration to monetary changes. The planning businessman cannot help employing data concerning the unknown future; he deals with future prices and future costs of production. Accounting and bookkeeping in their endeavors to establish the result of past action are in the same position as far as they rely upon the estimation of fixed equipment, inventories, and receivables. In spite of all these uncertainties economic calculation can achieve its tasks. For these uncertainties do not stem from deficiencies of the system of calculation. They are inherent in the essence of acting that always deals with the uncertain future.” (Mises 1998: 225).
(1) for the sake of “economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money”; andThis entails that mild changes in money’s purchasing power – whether inflation or deflation – are, according to Mises, consistent with effective economic calculation. For example, the 19th century had bouts of inflation, such as from 1896–1914, yet presumably Mises thought that economic calculation proceeded during this period without being seriously impaired.
(2) slow changes in purchasing power of money (as in the 19th century and gold standard eras), so that the “entrepreneur’s economic calculation could disregard them without going too far afield.”
But there is also a clear contradiction here: Mises says that governments have to be prevented “from creating conditions which encourage credit expansion on the part of banks.” Yet the 19th century and gold standard era had significant credit expansion, as I have demonstrated here.
Yet presumably Mises held that the 19th century did have reasonably effective economic calculation. Either Mises must
(1) abandon the idea that 19th century had reasonably effective economic calculation, orIf the latter, then it follows that the post-1945 era with its relatively low inflation and moderate credit expansion must also have had reasonably effective economic calculation.
(2) admit that some moderate degree of credit expansion is consistent with economic calculation.
But how does the price system perform its most fundamental task in economic calculation and coordination? Why, for example, would Austrians complain about excessive money supply expansion “distorting” prices and frustrating or impairing economic calculation?
The reason is that the Austrians see prices revolving around or moving towards their market-clearing values. The market-clearing price is the “right” price in an economic sense, because it is the adjustment of prices by market participants in their trades towards their market-clearing levels that coordinates, or equates, supply and demand.
In particular, the capitalists who produce consumer goods have a crucial role here:
“The driving force of the market process is provided neither by the consumers nor by the owners of the means of production – land, capital goods, and labor – but by the promoting and speculating entrepreneurs. These are people intent upon profiting by taking advantage of differences in prices. Quicker of apprehension and farther-sighted than other men, they look around for sources of profit. They buy where and when they deem prices too low, and they sell where and when they deem prices too high. They approach the owners of the factors of production, and their competition sends the prices of these factors up to the limit corresponding to their anticipation of the future prices of the products. They approach the consumers, and their competition forces prices of consumers’ goods down to the point at which the whole supply can be sold. Profit-seeking speculation is the driving force of the market as it is the driving force of production.” (Mises 1998: 325–326).Salerno summarises Mises’s views on flexible prices moving towards their market-clearing values in the Misesian view of economic coordination:
“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).The crucial point is that it is flexible prices that are supposed to coordinate demand with supply, as noted by Rothbard:
“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).
“Despite the economy’s disequilibrium character, however, the market-clearing process has an important function to perform in the pricing and allocation of scarce resources, a function that Hutt felicitously described as ‘the dynamic coordinative consequences of price adjustment.’ According to Mises, the coordinative social appraisement process of the market insures that the current price of every scarce resource is equal to its expected marginal revenue product (discounted by the interest rate), and thus that all existing productive resources are always fully employed in those uses that entrepreneurs consider to be most valuable in light of their knowledge of the technological possibilities and their forecasts of future market conditions, including their appraisements of prospective output prices.
As I have argued elsewhere, a Misesian conceives the market’s coordinative process as extremely hardy and no more liable to be disrupted by market-produced changes in the money-spending stream, such as hoarding, dishoarding, and changes in the production costs of mining gold, than by changes in the ‘real’ data of the economic system. As Mises argued, however, the process can be hampered and distorted by external intervention that undermines or nullifies its market-clearing property in resource markets, a property that may be crudely and temporarily restored by an episode of unanticipated inflation which lowers the real prices of labor and other resources toward equilibrium levels. Thus Mises’s analysis explains the observed effect of inflation on employment and output in a way that is fully consistent with the microfoundations of Austrian monetary theory and does not invoke ad hoc and unrealistic assumptions about the behavior of market participants.” (Salerno 2010: 210–211).
“There is no reason why prices cannot fall low enough, in a free market, to clear the market and sell all the goods available. If businessmen choose to keep prices up, they are simply speculating on an imminent rise in market prices; they are, in short, voluntarily investing in inventory. If they wish to sell their ‘surplus’ stock, they need only cut their prices low enough to sell all of their product. But won’t they then suffer losses? Of course, but now the discussion has shifted to a different plane. We find no overproduction, we find now that the selling prices of products are below their cost of production. But since costs are determined by expected future selling prices, this means that costs were previously bid too high by entrepreneurs. The problem, then, is not one of ‘aggregate demand’ or ‘overproduction,’ but one of cost-price differentials. Why did entrepreneurs make the mistake of bidding costs higher than the selling prices turned out to warrant? The Austrian theory explains this cluster of error and the excessive bidding up of costs; the ‘overproduction’ theory does not. In fact, there was overproduction of specific, not general, goods. The malinvestment caused by credit expansion diverted production into lines that turned out to be unprofitable (i.e., where selling prices were lower than costs) and away from lines where it would have been profitable. So there was overproduction of specific goods relative to consumer desires, and underproduction of other specific goods.” (Rothbard 2008: 56-57; emphasis in original text).So in the Austrian theory businesses must lower prices to clear their product market, even if the price falls below the cost of production. If they suffer losses, this is only because they overproduced goods in specific industries, and they must make supply adjustments in those specific industries only, to allow prices to be adjusted upwards to restore profits.
Finally, the role of flexible wages is also described by Salerno:
“Now, unlike the Chicago price theorists, Mises and the Misesian wing of the modern Austrian school, do not believe that the market economy is ever at or even within sight of long-run general equilibrium. Rather, the structure of realized market-clearing prices is seen by Austrians as functioning, despite its non-general equilibrium character, to continuously coordinate the uses and technical combinations of available resources in light of entrepreneurial forecasts of constantly shifting future market conditions, including consumer preferences. Hence, for Mises, in direct contrast to Friedman, it is the decline in real wage rates toward their market-clearing levels brought about by unforeseen inflation that is equilibrating – albeit crudely and temporarily; the ensuing restoration of the former level of real wage rates by renewed union restrictionism, on the other hand, marks a reversion to a pervasive and chronic disequilibrium situation in which the labor market is precluded from establishing even a coordinative, momentary equilibrium of supply and demand, while the market’s long-run tendency to generate a structure of final equilibrium wage rates and optimal allocation of labor is permanently stifled.” (Salerno 2010: 210–211).So what is wrong with this fundamental Austrian theory? Why is it flawed?
It is wrong for the following reasons:
(1) we have already seen above that Mises’s views on whether economic calculation can still occur properly when there is a credit expansion on the part of banks is confused and inconsistent.All in all, there is not much left of the Austrian vision of economic calculation: it is based on a deeply unrealistic theory of prices, does not consider the reality of fixprices, and fails to even accurately understand how supply and demand are equated in the real world.
Mises’s assertions on the 19th century entail either (a) that a modern market economy even with moderate money supply and credit expansion and low inflation can presumably have effective economic calculation, or (b) that Mises must abandon the idea that 19th century had reasonably effective economic calculation.
The consequences of (b) entail that modern capitalism has never had any effective economic calculation! If any Austrians want to take this option, then they must explain how real output has expanded at all over the past 200 years and how stunning growth in real output and investment as in, for example, 1945 to 1973 were able to occur.
I take it that few sensible Austrians will opt for (b), and (a) will be their chosen response. But option (a) entails that modern market economies, even with mild to moderate credit expansion, can still achieve economic calculation.
(2) the role of the price system in Mises’s vision of economic calculation is deeply flawed. Mises sees the price system as having flexible prices that move towards their market-clearing values: this is how supply and demand are equated.
But that is most certainly not the reality in vast swathes of modern market economies where fixprices and administered prices are the norm. Many prices in consumer goods, capital goods, retail trade, and service industries are administered prices. They are not adjusted towards their market-clearing values by businesses.
Administered prices are generally not changed in response to demand, and so most of the private sector itself does not behave in the way posited and required by Austrian theory. Money supply growth and credit expansion do not generally “distort” fixprices away from their market-clearing values, because fixprices are not even set to attain those market-clearing values at all.
Yet supply and demand are coordinated in modern capitalist economies, but by businesses making direct adjustments in their output and employment in response to demand.
It is direct changes to supply that equate supply and demand, not flexible prices.
(3) the whole notion that there exists a universal set of market-clearing values for prices and wages just waiting to be discovered by adjusting prices or Walrasian tâtonnement is itself little more than a quasi-theological superstition of modern neoclassical and Austrian economics, because no economist can prove that the law of demand is universally true.
It is not just that the law of demand, with its ceteris paribus (or “[all] other things being equal”) assumption, is defined at a level of abstraction so high that in practice it is unrealistic, but that even in an abstract sense it cannot be proven. Steve Keen demonstrates that the law of demand can be proven only in the case of a single consumer (Keen 2011: 51).
Nor can we generalise the law of demand and prove that it necessarily applies to a whole market either (Keen 2011: 51). A market demand curve “can take any shape at all – except one that doubles back on itself” (Keen 2011: 52).
Note that even if you do not accept this radical critique of the law of demand, factor (2) above – the existence of fixprice markets – is sufficient to refute the Austrian theory of economic coordination.
(4) the employment of labour by business is a much more complicated process than just the demand for labour as predicted by labour supply and demand curves.
Expectations of businesses are subjective, and liable to cycles of pessimism and optimism. Lowering the interest rate or lowering the real wage does not induce the necessary investment when business expectations are shattered or weak. So many businesses depend on demand, sales orders or sale volume (or what can be called “quantity signals”) as the factors that induce them to employ labour.
This means that it is aggregate demand that is the major factor in inducing additional employment in modern economies, not necessarily wage cuts.
The real world, with its extensive fixprices and direct output adjustments, is better modelled and understood by Keynesian economics.
Keen, S. 2011. Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn). Zed Books, London and New York.
Mises, Ludwig von. 1990. Money, Method, and the Market Process: Essays. Kluwer Academic Publishers, Norwell, Mass.
Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition. Ludwig von Mises Institute, Auburn, Ala.
Rothbard, Murray Newton. 2008. America’s Great Depression (5th edn.). Ludwig von Mises Institute, Auburn, Ala.
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.
Salerno, Joseph T. 2010. Money, Sound and Unsound. Ludwig von Mises Institute, Auburn, Ala.
You keep talking about fix-price as though Post-Keynesians are the only one to notice that most businesses do not auction of their product but have prices that tend to be fixed in the short-term, and keep a buffer of stocks to allow them to deal with short-term fluctuations in demand. There is a whole literature on why this is optimizing behavior.ReplyDelete
This in no way undermines the fundamental working of the price system though (its just a feature of it). The truth of this can be shown by looking at economies that experience a high-level of inflation. In this situation fix-price stops being optimal behavior and firms will start repricing much more frequently - if necessary daily or even hourly.
You keep talking about fix-price as though Post-Keynesians are the only one to notice that most businesses etc..Delete
I do nothing of the sort. Didn't you read this post with the history of fixprice literature amongst non-Post Keynesians?:
" The truth of this can be shown by looking at economies that experience a high-level of inflation."
First, hyperinflationary situations do not change the normal reality of administered prices.
And, secondly, even when high inflation occurs the prices are changed because factor input prices have changed, not necessarily prices in general.
There is no challenge to or refutation of fixprice theory here.
Have you considered making a FAQ page for your blog? One where you link to topics you have discussed in an organized way. You have covered quite a few topics over the years, but it can be hard to find a good post from way back.ReplyDelete
There is an index of sorts here to the posts criticising Austrian economics:Delete
you say that prices are cost-driven and so they are not a result of supply and demand, but you fail to understeand that a cost-driven price is itself a result of sup-dem. if we have a though competition this can lower prices to the cost level but this is just a sign of a huge supply/huge potential supply and has nothing to do with sup/dem law not working.ReplyDelete
even price-stickyness does not invalidate any of the classical points. in today's world there is the expectation that the central bank would intervene to prop up prices trough monetary policy so entrepreneurs have no interest in underselling their products. note that in such an envirnment we are not changing the economic law but only adding a hidden factor to demand (entrepreneur's desire to build up inventory due to expectations)
as far as economic calculation goes I think you are missing the point. it's tecnological advancement which delivers economic growth, while working more just delivers more goods. both of them boost gdp but only a tecnological advance is real economic growth. I wont discuss here what delivers tecnological advance cause my point is on economic calculus. economic calculus is needed to produce what the consumer wants which is the biggest amount of goods given a certain level of tech. when economic calculus is wrong this just means that there will be a shortage of useful goods, a creation of bubbles, and squandered resources. long story short the economy will produce less usefull goods in comparison to what it could have produced. normally free marcket forces will clean the mess and liquidate the malinvestments but in our current environment we have both bad laws and government intervention that stifle this proces. the result is a permantly depressed level of output, while in 19th century absent all this madness the marckets could repair themselfs. so yes even in 19th century there were errors but they were solved. now they are not solved. this is the real problem.
p.s. I apologize for my bad english
"you say that prices are cost-driven and so they are not a result of supply and demand, but you fail to understeand that a cost-driven price is itself a result of sup-dem."Delete
I say flexprices are cost driven, plus profit markup -- as does everyone who studies real world economies. That does not deny the existence of flexprice markets, by the way.
Administered prices are not driven by the dynamics of supply and demand curves with adjustment to market clearing prices. That is a fact.
If by the statement "cost-driven price is itself a result of sup-dem", all you mean is that nobody would produce things people do not demand, that is true, but does not refute anything I have said.
"the result is a permantly depressed level of output, while in 19th century absent all this madness the markets could repair themselfs. so yes even in 19th century there were errors but they were solved. "
The idea that the 19th century had superior economic growth, less disastrous business cycles, or was free from many periods with a "depressed level of output" is false.
"Administered prices are not driven by the dynamics of supply and demand curves with adjustment to market clearing prices. That is a fact."Delete
my point is that if a price is formed within the private sector it is always a result of sup-dem, even when it is cost-driven or whatever. I dont know what you exactly mean with "administered" but if it's a price fixed with government intervention we can both agree that sup-dem law no longer abide. nonetheless we can still see economic laws enforcing themselfs in supply or demand side, whichever is not disrupted by government intervention. if the government makes mandatory for you to buy a certain good you will see supply adjusting for demand, and if government meddles with supply you will see the demand adjusting.
of course we won't reach market clearing price as long as you don't remove the roadblocks (i.e. govt intervention).
"The idea that the 19th century had superior economic growth, less disastrous business cycles, or was free from many periods with a "depressed level of output" is false."
I can't really understeand how you can claim this.
the 19th century displayed a huge improvement in the standards of living but this has little to do with economic calculation. it was a byproduct of technology.
the frequent business cycles were the result of wrong economic calculation (which btw is not strictly limited to financial markets and can be the result of other factors beside credit expansion) and to me is undeniable that post central bank business cycles are far more disruptive although less frequent than the former ones. great depression and great recession have these names for a reason.
as for the "depressed level of output" we can just look at the level of unemployment and compare the current one to the one that was back then.
why the economy it's not recovering? why 19th century economy did recovery faster from a random slump?
I will start with the 19th centuryDelete
(1) "the 19th century displayed a huge improvement in the standards of living "
It did -- but only compared with previous centuries, not with the later years.
For example, here is OECD real per capita GDP growth rate estimates over the past three centuries:
1700–1820 – 0.2%
1820–1913 – 1.2%
1919–1940 – 1.9%
1950–1973 – 4.9%
1973–1990 – 2.5%
Davidson, P. 1999. “Global Employment and Open Economy Macroeconomics,” in J. Deprez and J. T. Harvey (eds), Foundations of International Economics: Post Keynesian Perspectives, Routledge, London and New York. 9–34. p. 22).
Do you notice how the highest growth ever seen happened in the era of classic Keynesianism? far higher than in the 19th century.
"and to me is undeniable that post central bank business cycles are far more disruptive although less frequent than the former ones."
That is untrue. Post-1945 business cycles have generally been less frequent and less severe than pre-1914 ones, and with fewer financial crises.
Fro macroeconomic stability 1946-1973 -- the era of classic Keynesianism -- was unprecedented.
Thing have became more unstable because crucial elements of that system -- effective financial regulation, commodity buffer stocks, full employment, stabilising fiscal policy -- have been attacked, changed or abandoned by revived neoclassical economics.
"as for the "depressed level of output" we can just look at the level of unemployment and compare the current one to the one that was back then.
why the economy it's not recovering? why 19th century economy did recovery faster from a random slump?"
19th century economies did not recover faster from slumps as compared with the 1946-1973 period. There is evidence of terrible economic crises in the 1870s and 1890s.
“US Unemployment in the 1890s,” January 24, 2012.
“US Unemployment, 1869–1899,” January 26, 2012.
“Per Capita GDP Growth Rates During the Gold Standard Era,” September 11, 2012.
“Rothbard on the US Economy in the 1870s: A Critique,” September 24, 2012.
1890s Australia had a terrible depression actually worse than Australia's 1930s depression:
"I dont know what you exactly mean with "administered" but if it's a price fixed with government intervention"Delete
No, I am not even talking about government price controls or anything like that above.
I am talking about private businesses normally setting their prices based on cost of production plus profit markup, and generally not changing the price in response to demand changes. The latter is called "administered pricing" in economics literature.
given your definition of administered prices there is no way this contradicts the law of supply and demand.ReplyDelete
assume a private firm that witnesses a permanent increase in demand while costs are still the same.
your point is: the firm will not increase prices AND supply despite the increase in demand, instead it increases only supply.
how can it be?
- maybe the firm's owner is stupid. hardly.
- maybe the firm acts in the consumer's interest. even harder.
the only reasonable reason left is that rising prices would be detrimental to the firm's profitability.
so how could it be?
the only explanation is that if it raises prices she would lose tremendous market share or it expects to do so.
this could only be a byproduct of a strong competition.
in graphic terms you can describe this situation with an elastic (horizontal) supply curve.
so administered prices are just the result of supply and demand when supply is elastic due to an inferior bound(cost of production) and a superior bound (competition) and you can draw this situation with a right triangle with the hypotenuse being demand curve and the horizontal cathetus being the supply curve.
as for the unemployment and growth all the data i've seen so far are really different from the one you point at in your links.
we should also remember that data as we know them now were not avaiable in the 19th century so what we have is just a bunch of statistics.
this could be seen pretty well here http://socialdemocracy21stcentury.blogspot.it/2012/01/us-unemployment-in-1890s.html
where the unemployment's estimates are all widly different.
it should be interesting to review their methodology, just for kiks.
it's also interesting that OECD estimates america's growth in the 1820-1913 period to be as low as 1.2%. we should remember that in the 19th century america transformed from a country of farmers to the strongest industrial powerhouse in the world. it's really weird to me that 1.2 number in light of the fact that it's not absolute growth we are looking at but percentual growth and the starting point was so low.
this means just a meager 203.24% increase in the standards of living during the 93 years of the industrial boom. sorry, but it doesn't make sense at all. remember where you started.
"so how could it be?Delete
the only explanation is that if it raises prices she would lose tremendous market share or it expects to do so.
this could only be a byproduct of a strong competition. "
That does not follow at all.
They do not raise prices because they might:
(1) have nominal contracts with customers that need to be honoured;
(2) feel bound to consider the factor of good relations with customers or business goodwill;
(3) be able to increase profits perfectly well just by increasing output;
(4) be in a market where competition is not strong, but the few competitors' own markups set a limit on the original firm's markup. But even here actual "competition" need be only weak or limited, not strong.
"it's also interesting that OECD estimates america's growth in the 1820-1913 period to be as low as 1.2%. "Delete
No, it doesn't. Those figures are averages throughout all OECD nations.
America's average per capita GDP:
Average 1871–1900: 1.78%
Average 1871–1914: 1.63%
Average 1873–1879: 1.64%
Average 1879 to 1896: 1.36%
Roaring 20s, Average Growth Rate 1920–1929: 2.04%
Recovery from Depression 1934–1940: 5.75%
Average 1948–1973: 2.30%.
As you can see, the gold standard era average was lower than 1948–1973. And a lot of other OECD nations had much higher growth rates 1946-1973 than figures in the 19th century.
all your 4 points are correct and very possible, but they in no way invalidate sup/dem law.ReplyDelete
1)this is just a case in which sup/dem has been already applied
2)a firm only does this if it thinks that this very behavior will lead to more profits. this is just a case of horizontal supply curve, nothing strange, nothing new. doesn't invalidate supply and demand, it's just a special case of the law
3)same here. an horizontal supply curve and nothing that invalidates theory
4)ok let the competition be as weak as you please. as long as competition stifles price growth nothing changes and sup/dem still applies
supply curves may be horizontal, nothing prevents them. but they will stay horizontal as long as the conditions that made them so remain the same. in an ever changing environment a yesterday horizontal supply curve could become a very steep today curve, while the law of supply and demand still applies.
what i'm trying to explane is that a cost-driven price is by no means outside the bounds of economic law and in no way is guaranteed to remain cost-driven forever just because it was so yesterday.
"No, it doesn't. Those figures are averages throughout all OECD nations."
ok, my bad. didn't see it.
my point is that good economic calculus is not a sine qua non condition on technological improvement which delivers per capita long term economic growth, it just helps the allocation of resources. in a society where resources are allocated in a better way there is a higher output of USEFUL goods and this frees up labour and capital that can be eventually used in r&d.
note that a better allocation does not guarantee a higher overall output, but just a higher useful output. this difference is very important.
note also that every time you change the allocation of resources although improving it the economy suffers and it only benefits in the long run, so i.e. if a today country returns to gold standard you will see a huge crisis
If you haven't already I'd make your reply about the 19th C taken from Global Employment and Open Economy Macroeconomics into a postReplyDelete