4. Mises and Value Theory

4

Mateusz Machaj

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Mises and Value Theory

Introduction

Value theories are murky waters in economic science, because the word “value” denotes several meanings. In some works it aspired to be “Value” with capital “V.” The key economic variable, a universal fundamental, is to explain prices, exchanges, equilibrium paths, perhaps even social relations, and unavoidable laws of history. We plan to show Ludwig von Mises did not adhere to this view, yet still believed that the theory of value (without capital “v”) plays an important role in economics. The first section briefly describes the importance and definitional nature of the problems of value. The second section recaps the connection between Mises and Čuhel on the theory of value. The third section reviews Mises’s criticism in Theory of Money and Credit of one of the founders of neoclassicism, Irving Fisher. The fourth section examines the relation between value and price formation. The last section offers concluding comments.

Mises’s theory of value, in a nutshell, can be found in his first major work, The Theory of Money and Credit ([1912] 1981, pp. 51–60). It was further developed and then shaped into full form in Epistemological Problems of Economics ([1933] 2003, pp. 155–93), where he carefully filled in the gaps and corrected errors by Carl Menger and Eugen von Böhm-Bawerk. The final phase of Mises’s work was Human Action (1966, pp. 327ff.; or its German forerunner Nationalökonomie) where he fully integrated his theory of value with the pricing process.[1] Here we deal with the roots of his theory, which can be found in his treatise on money.

The Role of Value in Economic Theory

“Value” is one of the most used, and overused terms, in economic reasoning, despite the fact that it is an indirectly observable quantity. Its role has been highlighted by many economic writers, and much discussed before the modern era. “Value” in many of its versions served as an explanation for market prices. In a way it could be called a “driving force of the market.” Even though economic writers differed in their understanding of “Value,” and in their definition of “Value,” all the theories had one thing in common: “Value” was supposed to serve as a market price explanator.

Obviously all prices depend upon each other. The price of iron influences the price of the hammer produced from it. The price of the hammer has an indirect influence on prices of other consumption goods, because there is interdependency in the area of market prices. At the same time there is uncertain dynamics of market prices. They change continually and so the entrepreneurs constantly make attempts to adjust them. There is nothing eternal in prices. One feature of prices is: no price is everlasting and perfectly foreseeable. Every single price will be altered in the future in one way or another.

Endless and indeterminate movements of all prices could lead one to conclude that no economic science is possible. If prices are modified in an unpredictable manner, how can one say anything universal about them? Any discipline, which aspires to be “scientific,” has to recognize and describe “universal” principles governing particular phenomena. Without such general rules, which identify “universalities” in various differing cases, the discipline cannot be scientific. Only by discovering common and repeatable threads, which on the surface are poles apart, can one build science. Therefore, if prices are to be subjected to scientific analysis, and if economics is to be a science, there has to be a universal force driving the prices. Even if they move in different directions and at different speeds, they have to share some universal qualities.

In the classical era the determining “force” of prices was Value. Value as an ultimate factor explains the mechanisms of price movements. Various theories of value share this commonality. Austrians, Marxists, Neoclassicals, and the Classics, they all believed that their value theory has to be a starting point for economic theory, since Value needed to be a vital explanatus for otherwise chaotic monetary prices. Henceforth not surprisingly, if clashing schools of thought offered radically dissimilar explanations for monetary prices, their theories of value had to radically differ. Additionally, because Value is not a directly visible or an obviously noticeable quantity, even their definitions of Value had to differ. Most of the debates about “Value” could be settled by understanding this simple fact.

A worthy example is shown by the disagreement between Condillac and Jean Baptiste Say. Say sincerely believed that in commerce two commodities of equal value were exchanged between the parties. Condillac, on the other hand, argued that trade encompasses a value increase, since both parties expect to benefit from the transaction. For Say this could not be the case, because it would need to involve a form of fraud. If there were no equivalence of values, a seller would play a rogue, and a buyer would become a fool (Say [1880] 2001, p. 28). “Value” once created had to circulate in economic relations, and had to be a setting force behind the market. In the case of physics and conservation laws, in market exchanges equal value is given for equal value. For the modern reader, a close investigation of the Condillac-Say clash ends with the conclusion there was no real controversy between them. It was all about the chosen definition and understanding of what Value really meant. Condillac understood that people exchange goods, because they expect a subjective profit, hence some value increase must happen. For Say on the other hand, trade was an activity in which both sides are on an equal level. Agreed price sets a market equivalence of values. If wine is traded for 10 silver coins, then both the seller and the buyer agree that wine is “worth” 10 silver coins. In modern times people constantly use the word “worth” in this way (even the Austrians do so). Both Say and Condillac may well be right. One reflection does not undermine the other; only their definitions collide.

St. Clair commented on the debate:

Lord, how these economists do misunderstand one another! Condillac does not suggest that the wine merchant is a rogue and the customer a fool; he does not suggest that the merchant robs either the consumer or the producer; his doctrine is that products increase in utility and value by being transferred from the producer to the consumer. (quoted in Rothbard 1995, p. 20)

Probably the best example of definitional war could be shown by controversies over Marx’s labor theory of value. Marx wanted to offer an analytical inquiry on how market prices are driven by the amount of (“necessary”) labor hours. His main goal was vindication of the “proletariat” and downplay of the positive roles of capitalists. A natural fruit of this approach was the “labor theory of value.” Its main proposition was that working hours are a true source of Value, which in turn determines how market prices are formed in the long run (Marx 1887, pp. 29–32).

The market prices of goods do not correspond to the amount of labor time necessary to produce those goods. Karl Marx was well aware of this undeniable fact and throughout the first and the third volumes of Das Kapital he tried to address this issue. The notion of discrepancy could not be contested, since all empirical observations demonstrated that profits of capitalists have, in the long run, a tendency to equalize. If labor is a true source for market prices, then labor-intensive sectors should reap higher profits than capital-intensive sectors. In reality no such difference between the sectors exists. The return on capital has a tendency to be equalized throughout the economy without any form of discrimination against more industrialized firms. The great Eugen von Böhm-Bawerk (in Karl Marx and the Close of His System) was one of many who brilliantly pointed out the shortcomings of Marx’s proposals in trying to solve this puzzle.

The labor theory of value could not therefore aspire to be an elucidation for market prices. Apparently labor efforts (however understood) could not explain long-run dynamics of economic systems. Prices were the result of something else. Labor power and effort were not the philosopher’s gemstone that Marx was looking for. Labor could not be “Value” in the universal sense. It had to be something other than the ultimate market price determinant. Marxian sociologists went to great lengths to reinterpret Marx and to argue what his “Value” may really, really mean. Whatever it does mean, it is no longer an explanation for prices.

On this definitional quarrel Alexander Gray comments:

In particular, there is no one to tell us what Marx thought he meant by “value.” And indeed, what all these conjectures reveal is somewhat astounding, and, one would like to think, unique. Capital is, in one sense, a three-volume treatise, expounding a theory of value and its manifold applications. Yet Marx never condescends to say what he means by “value,” which accordingly is what anyone cares to make it as he follows the unfolding scroll from 1867 to 1894. (Gray 1946, p. 321)

Why bother with the notion of Value at all? Why not simply study market prices? Philip Mirowski (1989) seems to have provided the answer: because Value to economics in the nineteenth century was like Energy to physics. In physics, Energy was a fundamental variable, ultimate potential for physical movements or emissions. In economics, Value was a fundamental variable, which after creation circulated in the economic system. This Value-centered view is especially noticeable in the works of Quesnay and his followers, Marx included.

Through history economic discipline aspired to become an “exact” science, hence theorists searched for a general factor, which would describe dynamics of the market system. “Value” became this factor. Just as in physics a law of conservation of energy represents our double entry bookkeeping way of thinking, so it was supposed to be with Value in economics. Unfortunately it could not be objectively recognized as something directly measurable and separate from market prices. Despite tremendous efforts, Value was not a real tool establishing exact and eternal economic laws; it was only a smokescreen to do so. It is no surprise then, that against the mainstream of economic thought an alternative tradition flourished. A tradition, started by Turgot and Condillac, could be seen as a deconstructivist approach. From the mainstream perspective followers of the tradition could be seen as denialists of Value (Mirowski 1989, p. 163).

Subjectivism and Čuhelian Deconstructivism

The tradition was subjectivism. The essence of subjectivism is that value (or something matching that: utility) is “subjective”; that it depends on personal preferences, which cannot be reduced to any objective and generally valid denominator. Value and utility are matters of individual likings and decisions. Sometimes it is said that values cannot be “interpersonally compared.” This seems to be an overstatement. One can compare anything to anything else in any way. The point is that values and utilities cannot be measured in universal units as “objectively” as physical quantities.

This subjectivist tradition evolved in two stages. The first stage recognized the role of personal and individual wants in determining use-values of goods and services. “Value” was to be nothing inherent in the thing being possessed. Nothing which could be inferred from labor hours, or from kilograms of natural resources. It purely resulted from a connection between man’s mind and the owned good. Carl Menger was one of the economists who contributed to this by emphasizing the relationship between needs and resources (Menger [1871] 1994, p. 116).

Yet the more radical was the second stage, which grew as a natural conclusion of the previous one. If values are subjective, then it follows that objective measurement is impossible. They cannot be subjected to a truly “scientific” analysis (as in natural sciences). This radical conclusion was put forth by the important Czech economist Franz Čuhel (1907). His insights could be portrayed as deconstructivist for most value theories, for they attacked any price theory which was grounded in utility or value measurements. Čuhel’s sweeping investigation was immediately accepted by Mises as fundamentally sound, despite the fact that value measurements were used by the Austrian School representatives (Mises 1981, p. 54). Although Menger did not use them, his framework did not preclude such possibility. Böhm-Bawerk used utility measurements frequently in his writings. He was even criticized by Čuhel himself and admitted that he only believed in soft measurability of sensations.[2]

Values cannot be subjected to measurements, but they can be compared to each other. One can assign importance to any single good according to subjective preference rankings. Those rankings can change and goods can change places as actors decide whether one allocation is better than the other. Mises, following Čuhel, argued that value always consists of comparisons (Mises 1981, p. 52; Mises 2003, p. 158). Value exists because of a triangular relationship between possessed good and at least two (or more) possible goals that can be achieved by employment of the good (Hülsmann 2003, pp. xxxvi–xxxvii).[3] In other words, value comes from choice. It is necessarily linked to the notion of opportunity costs. Some things are more or less valuable, because people allocating them have different perceptions and ideas of how to satisfy their subjectively chosen aims. No inherent Value with capital “V” exists.

Expected consequences of this inference are both radical and potentially disruptive for policy recommendations. Values cannot be quantitatively estimated for any person, therefore there is nothing to be compared between the individuals. No auxiliary process can be performed in order to arrive at a meaningful concept of “total social welfare.” Or perhaps it is better to state that in terms of economic science anything named “total social welfare” has to be subjective for any observer, and any person is free to construct his own such index (for example, according to his ethical beliefs).

At times many economists following Mises and Čuhel use phrases which are contrary to the idea of non-measurability. Even Mises himself makes such mistakes. He claimed the following:

. . . with an unchanged supply, the marginal utility of several units taken together is not equal to the marginal utility of one unit multiplied by the number of units, but necessarily greater than this product. The value of two units is greater than, but not twice as great as, the value of unit. (Mises 1981, p. 57)

It is understandable what the message is. Yet the formulation is in clear contrast to the statements a few pages earlier that “subjective use-value is not susceptible of any kind of measurement” (p. 55). If no measurement is possible, we cannot perform an act of “multiplication,” since there is nothing to be multiplied. Multiplication is only possible with cardinal numbers, and those ones were excluded from utility analysis by Čuhel’s revolutionary ideas. Obviously Mises did not have in mind a mathematical operation. What he probably meant was the following. Suppose that an actor can satisfy 5 needs with his 5 units of bread. If he satisfies all of them, then he will gain more than if he satisfies only the fifth need, but somehow does it five times. This is the meaning hidden in Mises’s formulation of “multiplying.” Nevertheless it stands in opposition to his radically realistic notion of marginal analysis in the praxeological background. The reason for this is that an individual cannot satisfy the same need five times. Our “somehow” in italics in the previous sentence leads to a praxeological oxymoron.

Mises in his article on the impossibility of socialism referred similarly to the idea of utility multiplication:

Marginal utility does not posit any unit of value, since it is obvious that the value of two units of a given stock is necessarily greater than, but less than double, the value of a single unit. (Mises 1990, p. 11)

Again, if as Mises correctly states, utility does not posit any value unit, then it is not possible to “double” something which does not exist.[4] What Mises in fact means is that the second satisfied need is less important than the first need, because by the act of choice it is less urgent. The proposition of decreasing marginal utility can be phrased this way. One does not have to refer to any mathematical tools. No multiplications, doubles, or any forms of additions are needed. They do not enrich the analysis significantly, but instead encounter the danger of smuggling in mistakes.

As in the case of Theory of Money and Credit, the quote about doubling in no way represents a conscious violation of the rule that utility is subjective and ordinal. Mises did stay faithful to Čuhelian insights. He was not open to possibilities of value measurements. Imprecise statements about values are merely linguistic inconveniences, not truly formal mistakes, undermining the strength of praxeological formulations. Utility comes with human conscious choice that merely establishes grades and scales, not cardinal numbers.

The consequences of Čuhelian deconstructivism go well beyond welfare analysis, and are particularly important for the theory of “imputation.” This theory explains how the prices of producers’ goods are formed in the market by consumer preferences, or morphologically speaking, how prices are “imputed” from consumer goods to production goods.

In some cases a physical metaphor in economics went so far as to argue that values or utilities represent potential backward imputation. Such a perspective can be inferred from another Austrian thinker, Friedrich von Wieser (1891, pp. 112–13). Just as energy was transformed within the physical world, utility was to change forms and move within the economic sphere. Wieser was among thinkers who believed in such utility imputation (see also Ekelund 1992, pp. 181–82). Mises accepted the contrary idea. Utility cannot be measured, and consequently there is no auxiliary process, which could describe the market in terms of utility imputations (or Value imputations).[5] The traditional approach to utility could only lead to conclusions that some choices for subjective reasons are favored over the others. Yet the importance of various needs could only be presented in the framework of existing monetary prices.[6]

As a result, Mises’s theory of value is very short and requires little explanation. It is only a minor part of his work, as it was a short chapter in the Theory of Money and Credit. There is no reason to write a lengthy book about it, as there would be lots of reasons to write such a book about the neoclassical theory of value. More important in the realm of Mises’s value theory is continuity of Čuhelian deconstructivism: it is more vital to use the proper theory of value to spot errors in the works of other thinkers and demonstrate why their sophisticated value theories are incorrect. Sophisticated and complicated theories of values are at most times a sign that something is wrong.

Mises versus Fisher on Value

One of the proponents of a sophisticated and complicated value theory was Irving Fisher. His publication Mathematical Investigations in the Theory of Value and Prices is a major building block in neoclassical theory. The book contains the essence of modern consumer theory (1892, pp. 25, 70–75). Mises devotes only a few pages in his chapter on value to Fisher’s insights, and only in order to defend Čuhel’s achievements.

Fisher admitted that there are problems with utility (or value) measurements. According to Fisher one can avoid this difficulty by inventing some form of “util.” A util is when two subjective utilities are compared to a third utility (Fisher 1892, pp. 14–16).[7] Let us assume we are interested in arriving at the ratio of utility between the 100th loaf of bread and the 150th loaf. Fisher advises us to contrast them with (say) the utility of B gallons of oil. He further assumes that utility of the 100th unit of bread is equal to the utility of the last unit of B, and the utility of the 150th unit of bread is equal to B/2 unit of gallons of oil:

Utility of 100th loaf = utility of B; and Utility of 150th loaf = utility of B/2.

From these two equations Fisher infers that he is capable of arriving at such a ratio that the 100th loaf is two times more useful than the 150th loaf. Thus:

Utility of 100th loaf : utility of 150th loaf = utility of B : utility of B/2 = 2.

Now the same process can be repeated for all the goods, and the util is thus provided (Fisher 1892, p. 18). In this way even though utilities are subjective and ordinal, utilities of various goods can be expressed in terms of each other. One good provides the standard. Every other good’s utility is expressed as a multiplication or a division of this basic good.

The mistake in this thinking is quite clear, the final result, “2,” is a non sequitur. There is no reason to believe that the supply of B gives two times more utility than half of that supply,[8] unless one is implicitly assuming such a thing. But if that is the case, then Fisher did not arrive at a proper ratio of utilities from ordinal rankings. Instead he assumed that there is some form of measurement that can be performed. Mises recognized this and commented: “Just as justifiably as he assumes that the utility of B is equal to twice the utility of B/2, he might have assumed straightaway that the utility of the 150th loaf is two-thirds of that of the 100th” (Mises 1981, p. 56).

These considerations, even if relevant, appear as minor details. Evidently there are other theoretical issues of much greater importance. Something more here is at stake: consumer theory. The above is not merely a quarrel over nonexistence (or half-existence) of a util. Fisher was interested in arriving at ratios in terms of continuous functions, which could be used to describe consumer preferences, and choices. He was noticeably interested in mimicking physics, since he recognized that concepts such as equilibrium, stability, elasticity, expansion, inflation, force, level, distribution, reaction, and friction are directly inspired by the science of mechanics. At the same time he was dissatisfied with the fact that hardly anybody went far enough in the mechanical metaphor to describe economic equilibrium (Fisher 1892, p. 24).

Fisher’s book is filled with continuous functions, derivates, and water cisterns. Cisterns particularly match his liking. Just as “water seeks its own level” a similar case is with the economic world, where “marginal utilities” are equalized (Fisher 1892, p. 28). Under such economic equilibrium something additional happens. With arrival at proportionality of all marginal utilities, the continuous ratio becomes the scale of prices of goods and services (ibid., p. 37). The economic system has therefore some regular tendencies to move toward equilibrium, even though it is never achieved, because preferences change (Fisher 1892, p. 21). The device works as a physical system:

This corresponds to the mechanical equilibrium of a particle the condition of which is that the component force along all perpendicular axes should be equal and opposite . . .

The above is completely analogous to the laws of composition and resolution of forces.

If the marginal utilities and disutilities are thus in equilibrium “gain” must be a maximum. This is the mere application of the calculus and corresponds exactly to the physical application of the calculus which shows that at equilibrium the balancing of forces implies that energy is at maximum. Now energy is force times space, just as gain is marginal utilities times commodity. (Fisher 1892, p. 85)

If Mirowski’s thesis could be verified, Fisher’s work would amount to perfect evidence for it. The whole purpose of Fisher’s neoclassical theory (taught in a modified form in modern microeconomics) is to portray economic systems as mostly systems independent of human will and activity (human action is either nonexistent or negligible). Each individual becomes a particle positioned by external forces which determine various equilibriums.

Mises opposed such methods of calculus, which dealt with infinitesimal quantities, stating two arguments. According to the first argument, infinitesimals are inapplicable to economic problems, because an individual valuing goods and services has to reckon them significantly important enough to value them. If things become infinitesimal, they cannot affect any judgment, and cannot explain actor’s behavior. They are too insignificant. The second argument is that even assuming away the previous problem, “it is obviously impossible to find the proportion between two finite marginal utilities by equating them with two infinitesimal marginal utilities” (Mises 1981, p. 57).

The second argument is either invalid, or a repetition of the first one. Mathematically it is certainly possible to find a ratio between two finite numbers, which will be equal to a ratio between two infinitesimal numbers. On the level of pure arithmetic there are no obstacles to that. What Mises meant was an economic content in the two ratios, but then this second argument is the same as the first one: infinitesimals cannot be related in a praxeologically meaningful way to real human activities.

The discrepancies between Mises and Fisher are traced back to differences between Menger and Walras. Even though it is being said that both of these thinkers dealt with “marginal” utilities and units, they have radically different things in mind. For Walras “marginal” meant negligible, infinitesimal quantity, which cannot affect economic decisions.[9] For Menger on the other hand “marginal” unit was the last relevant unit affecting people’s decisions. It was not a matter of differences in language, but a clear difference in content (Jaffé 1976, p. 521).

Fisher was well aware of criticism raised against calculus in economics by Mises (and others). Infinitesimals are not under consideration by economic actors. Yet similar objections could be raised for other applications of calculus. After all, the whole world is discontinuous. Even water that appears to be fluid and full of a infinite number of particles, consists as a finite number of particles which are physically extended. They are not infinitely small (Fisher 1892, p. 22). Despite that, continuous models of physical reality have useful applications in the real world analysis. Similarly, neoclassical functions of consumer behavior can be good approximations of economic “forces.” In discussing the limitations of sciences Fisher even admits that indifference curves are based on a flawed idea, since two utilities can never be equal (ibid.; henceforth the notion of indifference is anti-empirical).

Mises did not incorporate a response to this counterargument. Almost no phenomenon is infinitesimal, but physical models use such mental constructs. Why should this be justified in the natural sciences, and not in the social sciences? The answer: physical models do work, and have direct application to the real world. Functional relationships in physics are operational (Jabłecki 2007, pp. 14–17). This is not the case with neoclassical models of consumer behavior. Certainly physical models abstract from various insignificant factors, as economic models desperately try to do the same. In the neoclassical framework the abstraction goes far because it omits significant factors, such as the relevance of marginal unit for satisfaction of a particular need, or the individual’s power to influence valuations and market prices. Blaug (1986, p. 297) considered this to be a minor detail, whereas Stigler (1946, p. 81) thought that continuity is indispensible for economics. As Menger and his followers demonstrate both of those statements are questionable.

Neoclassicism also fails, because it narrows the world down to two goods, as if the consumer could only choose between them. Fisher argues that the model could be built with n axes representing n amount of goods, for example, 50 axes for 50 goods (Fisher 1892, p. 79). Matters become clearly much more complicated, but “this space is simply the ‘economic world’ in which we live” (ibid., p. 80). Fisher was not aware of the fact that mapping all possible preferences (and solving the maximization criteria) for 50 goods would take a supercomputer over three years. The fastest possible human being (limited only by the speed of neurons) would take longer than the universe’s age.[10] And yet, a normal human being is capable of going into the store and choosing the proper item for himself in a much shorter amount of time. Without using continuous indifference curves (he does not even act “as if” he was using those curves). This is well described by laying praxeological foundations (with concepts of demonstrated preference, understanding, ranking, appraisement, categorization, etc.), not by mathematical economics (simplified functions).

Fisher is right that infinitesimals are used in physics despite the finite nature of all molecules, but this is not an argument for using them in economics. It is astonishing that such unrealistic consumer theory, as the neoclassical theory, survived wide criticism and is taught in almost all modern courses, despite the fact that it cannot help in explaining real consumer behavior.

Mises’s rejection of the functional approach to value theory paved the way for his much bigger contribution. This is already indicated in the chapter on value where we learn that value “can rightly be spoken of only with regard to specific acts of appraisal” (Mises 1981, p. 60). Value exists in relation to appraisal, and there is no value without the process of valuation performed by particular individuals. It also leads, contra Fisher, to the conclusion that prices are consciously formed by acts of appraisals, which cannot be reduced to any functional relation-mimicking physics.

Monetary Calculation and Valuation

If values are formed deliberately and are not transferring any inherent economic energies in the economic system, then prices are formed deliberately, too, and they do not act as water levels in connected cisterns. As acts of valuation are done subjectively by actors, so is the case with pricing of goods and services. Yet even though the act of pricing is done “subjectively,” it is done in objective numbers, i.e., monetary prices. The “subjective” nature of prices comes from the fact that there is no objective source for monetary prices disconnected from the subject’s mind.[11]

In physics gravitational forces can be reduced to other variables and constants. This cannot be done with prices, because they are purposeful decisions. Will is the ultimate cause. That is why prices have their objective and subjective features. They are objective, because they are expressed in terms of an accepted medium of exchange (therefore can be compared vis-à-vis each other). They are subjective, because their cause is always an act of individual (and unique) choice.

Mises rejected the idea of units of utility, and consequently utility imputation. He still thought that the market process can be described in terms of imputation, but monetary imputation, not value imputation. Values are subjective and cannot be imputed in numerical terms. Only money units can be imputed in such a way (from consumer prices to factor prices), and in a subjective manner:

. . . in monetary theory, as in every other branch of economic investigation, it will never be possible to determine the quantitative importance of the separate factors. Examination of the influence exerted by the separate determinants of prices will never reach the stage of being able to undertake numerical imputation among the different factors. All determinants of prices have their effect only through the medium of the subjective estimates of individuals; and the extent to which any given factor influences these subjective estimates can never be predicted. (Mises 1981, p. 218)

Fisher’s neoclassical approach allowed for the possibility of value imputation. Fisher acknowledged that mathematical theory of pricing cannot, of course, predict prices, and that no mathematical economist ever tried to do this (Fisher 1982, p. 118). At least that was the case when he wrote the book. This gap was later filled by the writings of socialist economists working in the Walrasian tradition. “Calculus” and imputation could be performed theoretically by the proper usage of carefully selected equations. Even Oskar Lange (1967), in his later years, believed that his market socialism model could be disposed of in favor of supercomputers which can solve all the necessary equations to impute values directly from consumer preferences.

Later in his life Mises opposed such attempts to impute value: any such value imputation is based on past conditions. Economic activity is directed toward the future. Current conditions are related to current disequilibrium, therefore they cannot directly help us to establish future equilibrium conditions (Mises 1966, pp. 712–13). Since all actions require speculation about the future state of affairs, the only way to “solve” the problem is to constantly speculate about future prices. Or to be precise, the problem can never be “solved,” because nobody knows for sure the future state of the markets. Entrepreneurs just attempt to “solve” the problem by constantly speculating.

Here lies one of the misfortunes of economic language. To describe entrepreneurial activity Mises used the term “economic calculation.” This term can be very misleading. Why? Because for some it may mean a form of calculus, computation, or accounting (as it did for Mises’s opponents). “Calculation,” on the other hand, means an appraisal and subjective monetary valuation in terms of cardinal units as was later explained in Human Action:

Cost accounting is therefore not an arithmetical process which can be established and examined by an indifferent umpire. It does not operate with uniquely determined magnitudes which can be found out in an objective way. Its essential items are the result of an understanding of future conditions, necessarily always colored by the entrepreneur’s opinion about the future state of the market. (Mises 1966, p. 349)

The successful undertaking of a particular economic project does not become a question of arithmetic. Surely one can add “costs” together and subtract them later from summed up revenues. The challenge of proper economic “calculation” is different. When the entrepreneur is “calculating” he is not operating on existing cardinal numbers. The objective cardinal numbers he has at hand are of two categories: (1) past market prices, which represent past conditions, and, (2) current price offers, which represent current market expectations about the future. This objective information is not sufficient to perform economic “calculation.” The biggest part of that activity is speculation and guessing about the future state of the market.

To use a neoclassical analogy, consider the famous rule that marginal revenue has to equal marginal cost (MR=MC), so profits are maximized (or losses minimized). Assuming away many problematic features of this analysis, one essential issue remains. To some extent the curve of MC can be drawn on the graph, because it is based on current price offers; the curve of MR cannot, because it is a derivate of future consumer choices, therefore it cannot be drawn. Rather than that, many various possible MR curves could be drawn, and each of them with assigned case probabilities (immeasurable probabilities). The true graph of neoclassical maximization criteria would therefore have to present only MC curve and a blurred cloud of many possible MR scenarios. That would be a much truer illustration of the problems that entrepreneurs face constantly.

In many of his writings Mises acknowledged the fact that economic calculation is possible, because of cardinal numbers and double entry bookkeeping. The main benefit to society is that those numbers are being used by private entrepreneurs. Numbers are not sufficient and in themselves mean nothing. The whole point of economic calculation is not “calculation” at all. It is the possibility of finding the common denominator for entrepreneurial competition in the realms of private-property arrangements.

This is the only way to “socially appraise” (and value) capital goods, in order to employ them to the best extent possible. No other successful process for this aim has been provided by any theory of value or Value. Despite many undertakings to do so. The alternate choice is abolition of social appraisement process in favor of dictatorship and political decrees (even if they are based on the form of cost accounting).

Reaching this conclusion, Mises combined Čuhelian deconstructivism in the field of value theory with his constructive and positive approach to price analysis. He also achieved something else: economic science is possible without Value. Ironically he was attacked by Lange for that and almost got accused of being a Schmollerite! Lange (1936, p. 55) was surprised to learn Mises thought that successful appraisements could be tied to specific institutional set ups (private property). After all, if one believed in aprioristic and universal economic science, one also had to believe that there is universally penetrating phenomenon of Value (natural, or inherent, or whatever . . .), which could be recognized under any institutional set up, couldn’t it?[12]

Not really. And that is the whole point of Mises’s pathbreaking contribution.

Conclusion

It may be tempting to reduce the clash between Austrian theory of value and neoclassical theory value to narrower technical issues of measurement of utility (or quasi-measurement). As the discussion between Mises and Fisher proves, it is definitely more. It is about how the behavior of economic agents is being portrayed and described in detail. The main goal of value theories was to be a proper basis for the explanation of monetary prices in the real world. To Mises the ultimate given in value theory is human choice (a source for value), that is, the potential for deliberate value judgments and for the appraisal of things we call “goods.” To manifest this full potential a specific legal framework (private-property arrangements) is necessary. In the neoclassical framework “value” (not choice) seems to be something ultimately given, independent of institutional arrangements, which can be imputed throughout the economic system. Henceforth, we see that the essence of the socialist calculation debate can be hidden somewhere in the realm of value disputes.

Literature

Blaug, Mark. 1986. Economic Theory in Retrospect. Cambridge: Cambridge University Press.

Böhm-Bawerk, Eugen von. 1959. Capital and Interest. Three Volumes. South Holland, Ill.: Libertarian Press.

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Mateusz Machaj is an assistant professor at the Institute of Economic Sciences at the University of Wroclaw.

[1] On the role of value theory in Mises’s evolution, see Hülsmann 2003. On Human Action as the final stage in Mises’s thought, see Salerno 1999.

[2] In his own words “I never maintained the practical realizability of exact, objectively correct measurement of such intensities, but merely the existence of processes that subjectively estimate, no matter how erroneously and imprecisely, the intensity of feelings” (Böhm-Bawerk 1959, vol. III, p. 136).

[3] In neoclassical analysis utility is also a triangular phenomenon (indifference curves are used in order to compare at least two options).

[4] Mises proves that when he attacks Schumpeter, who made a statement that he could get satisfaction from consumption a “thousand times as great” as some other satisfaction. To which Mises replied “. . . a few words must be devoted to Schumpeter’s attempt to set up as a unit the satisfaction resulting from the consumption of a given quantity of commodities and to express other satisfactions as multiplies of this unit. . . . Is there really anybody on earth who is capable of adumbrating such mental images or pronouncing such judgments? Is there any sort of economic activity that is actually dependent on the making of such decisions? Obviously not” (Mises 1981, p. 58). Qualitatively there is no difference between multiplying two and a thousand times. Mises criticized Schumpeter partially because of the scale (1000 is certainly bigger than 2), but his criticism is qualitative and general. Therefore it applies also to multiplications smaller than 1000.

[5] Wieser stated that direct measurement of utilities is impossible, but still believed it could be done in some indirect way by comparing goods against each other (Wieser 1927, p. 124). He was similar to Fisher in this belief. For Fisher see below.

[6] As stated earlier, Böhm-Bawerk also used utility measurements in his approach. Rothbard’s great project in Man, Economy, and State was integration of Böhm-Bawerk’s production theory with Mises’s theory of money. Rothbard replaced utility numbers with money prices and consequently added money market considerations to Böhm-Bawerk’s illustration. In effect he created an amazing textbook which integrated Austrian theory of production with Mises’s monetary writings.

[7] Wieser thought so, too.

[8] Actually there is a simple omission in Fisher’s book. Suddenly “utility of B : utility of B/2” is changed into “B : B/2.” Certainly the latter is “2,” but the former is not.

[9] Actually in Walras there was no difference between marginal and submarginal, since the two are equal (Stigler 1937, p. 241). It does not matter whether we add or subtract a “marginal” unit.

[10] The author learned this example from Professor Steve Keen’s lecture (2012).

[11] Even Hayek fell for this narrative approach to prices and believed that prices are approximations of some primary “production functions” and “values” (e.g., Hayek 1982, p. 137).

[12] As Wieser (1891, pp. 119–20) thought.