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Recollections Re a Kindred Spirit, William A. Paton - Friedrich August von Hayek, Toward Liberty: Essays in Honor of Ludwig von Mises, vol. 2 [1971]

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Toward Liberty: Essays in Honor of Ludwig von Mises on the Occasion of his 90th Birthday, September 29, 1971, vol. 2, ed. F.A. Hayek, Henry Hazlitt, Leonrad R. Read, Gustavo Velasco, and F.A. Harper (Menlo Park: Institute for Humane Studies, 1971).

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Recollections Re a Kindred Spirit
William A. Paton

I didn't have the good fortune to be a pupil of that great scholar and teacher, Ludwig von Mises, but it was my privilege to study under a master logician, a superb critic, an outstanding instructor, and an unexcelled expositor of the neoclassical position: Fred Manville Taylor. Professor Taylor never achieved the world-wide renown of von Mises, partly because of the paucity of his writing, but he was a kindred spirit in breadth of background, thoroughness of analysis, and devotion to the “automatic” mechanism of the free competitive market as the major means of directing man's economic activities. Hence it does not seem to be inappropriate to include some notes on Taylor in a volume designed to honor the foremost living economist.

Brief of Taylor's Education and Career. Professor Taylor, born in Northville, Michigan, July 11, 1855, received his bachelor's and master's degrees from Northwestern University (1876 and 1879). He did graduate work at Johns Hopkins and abroad, and later (1888) received the Ph. D. from Michigan. His brilliant doctoral dissertation was entitled “The Right of the State To Be”—an interesting subject for a scholar devoted to the view that an economic order characterized by individual initiative and freedom of exchange, with government playing a limited role, is more productive and more conducive to the advancement of all classes of citizens, and especially the poor, than any form of socialism or communism.

In 1892, after a period of teaching history at Albion College, Professor Taylor joined the Department of Economics of the University of Michigan, where he was in charge of the basic course in principles, as well as of the advanced work in economic theory, until his retirement in 1929, at the age of seventy-five. He died in South Pasadena, California, on August 7, 1932.

Professor Taylor's writing was limited, as already mentioned, partly because of his conservative evaluation of his own contribution to economic thinking, his passion for thoroughness, his devotion to teaching, and also because of his high regard for the writings of his predecessors in the field, particularly in Austria and England. Aside from his “Principles of Economics” (discussed later) his major written work was his “Chapters on Money”, appearing in 1906.

Taylor as Teacher—His “Principles” Course. As a teacher Professor Taylor was truly outstanding. His main concern, always, was to provide a well-organized, meaty, and sound body of subject matter for the student, but he also gave much attention to teaching methods, especially in his beginning course in principles. He took great care in preparing assignments, problem material, and examinations, and had no patience with the view that the in-charge professor should not be troubled by such prosaic chores. To an unusual degree he had the knack of telling his students what was what and at the same time stimulating them to express their understandings and raise questions. He also showed much skill in adjusting his teaching techniques to the level of attainment represented by those in a particular class. Thus there was a marked contrast between the rather rigid program of the basic course, and the exciting breadth of outlook encountered by students in his graduate seminars.

There was never another course in principles of economics like Taylor's, which he operated for many years as a rigorous five-hour, one-semester foundation in theory. (I won't undertake to tell about the departmental complications which led to this somewhat unusual arrangement.) There was a joint meeting once a week for all hands, at which the three or four hour-tests for the term were given. (The lectures were excellent, and entertaining, from the standpoint of graduate students and assistants sitting in the back row, but finding ways of holding the attention of 500 or more sophomores was a problem that Professor Taylor—like most other teachers in similar situations—never solved to his complete satisfaction.) For the other four hours the class was divided into “quiz” sections, as we called them. Size was strictly limited to twenty per section, in part because this would facilitate participation by each class member every session and in part to assure active control by the instructor. The twenty-five or more sections (in a typical term) were manned by a corps of assistants, recruited largely from graduate students, but Professor Taylor kept a tight rein on the over-all operation, in part by taking charge of every section once or twice during the course. (He was also suspected of occasionally listening through an open transom to check on what was going on.) A great believer in graphic presentation, he saw to it that each classroom was provided with an array of large charts. I recall particularly those showing illustrative demand and supply schedules, under various assumed conditions, in which the increments were displayed in squares, with appropriate labeling and shading for those that were crucial. I liked these charts, and have always considered them superior to the typical intersecting curve presentations. Another feature of the program was the requirement that students turn in written answers—once a week or oftener—to particular assigned problems and pointed questions. These papers were read by another group of assistants, also graduate students as a rule but somewhat less far along than the instructing staff, who noted major errors and limitations before returning the papers—promptly—via the section teachers.

Examination procedure in the principles course was unique, and deserves a brief description. Professor Taylor prepared the questions, generally without consultation with the assisting staff (although he did not object if some enterprising instructor proposed a question that might be included). The assistants did not see the examination questions until going on duty to hand out the exam sheets and an accompanying series of numbered cards, and to help with proctoring. Students were previously directed not to write their names on their “blue books” (used for exams in those days). At the exam period each student wrote his name on his card, in the space provided, and put the number of his card on the front cover of his “blue book”. The cards were then collected by the assistants. The purpose of this arrangement was to render the examination papers anonymous as they were graded. (The practice was to have each participating instructor grade the results of a particular question, on a numerical scale decided upon, for all students taking the exam.) Professor Taylor was a stickler for this feature. In his view recognition of a name by a grader was likely to have some impact on his judgment of the writer's performance, regardless of how determined he might be to remain strictly impartial. He also stressed the importance of very careful grading of exam papers, in fairness to our students, since final marks for the course were based almost entirely on examination performance. This was not quite the whole story. It was Taylor's practice to compute separately the combined showing of all the students of each instructor, in the hour-tests and final examination, as well as the level of performance of all the students in the course, and we all knew that he considered this evidence important in his appraisal of the accomplishments of the several instructors. I don't think he was unduly suspicious of the integrity of his young men, but he may well have decided that it was desirable to keep them free of the temptation to be too generous—or perhaps too severe—in grading their own students.

The Taylor Text. Early in his teaching career at Michigan Professor Taylor prepared reading material for the principles course, which he revised annually. For some years this was in loose-leaf form, and later was issued in a paper-bound volume. Printing was done by the University and the excess of the fees charged to the students over the cost of printing was accumulated in a fund to be used in improving instruction in the courses in economics. Not until 1921—when he was past sixty-five—was Taylor persuaded to have his “Principles of Economics” published commercially, on a royalty basis. The last major revision of this book, I believe, appeared in 1925, although it remained in print for another twenty years or more.

Not a best seller in the field, the Taylor book was nevertheless highly regarded by many teachers and had a substantial use through the twenties and early thirties. In my view it is the best basic textbook in economics ever written—assuming that careful organization, clear and precise statement, and thoroughgoing analysis, are desired earmarks. Among the noteworthy features is the penetrating discussion of “immediate” and “normal” price determination, and the pricing of the “primary factors”. Especially in his probing of the pricing of labor Professor Taylor stresses the importance of “disutility” as well as marginal “significance”. Mention may also be made of the clarity and insight displayed in his treatment of the nature and function of “capital as capital”, and the distinctive role of the entrepreneur. He doesn't make the common mistake of including the function of day-to-day management (a “labor” activity) in the “ultimate responsibility” assumed by the capital-furnisher and risk-bearer. Sprinkled throughout the book are terse, italicized “principles” and “corollaries”, and stimulating “problems” are included at the ends of chapters. We teachers under Taylor also liked the brief chapter summaries provided.

Professor Taylor considered that the essential purpose of the principles course was to give the student an understanding of the “present economic order”. Here and there he has a comment that might appear to the strict libertarian to be unduly friendly to government meddling in economic affairs, but a careful reading of his “Principles” makes it very clear that his judgment of socialism is unfavorable. The book abounds with statements such as: “In general, industrial efficiency is greater under a regime of freedom, noninterference, laissez faire, than under one of much government regulation”. One of his favorite admonitions, indicating the danger that interference would impair the function of the price system, resulting from the free market, was: “Don't monkey with the thermostat”. He concludes his “critique” of the prevailing market system with:

“We set out ... by asking whether the system of regulating production through freely determined prices works out reasonably satisfactory results. What answer may we draw from the facts presented ...? We ... are compelled to draw an affirmative answer—an affirmative qualified, but still an affirmative. The results are certainly below the best conceivable. Nevertheless ... we must still hold that a verdict for the substantial soundness of the system is practically inevitable ... a thoroughly humane despot with power to substitute any other system ... might very probably—if he took all the facts into consideration—decide that the system now operating was on the whole the very best one possible”.

It is probably fair to add that if Taylor were writing now, nearly a half-century later, his appraisal of the current state of affairs would presumably be quite different. I think he might object to the continuing references by business leaders, politicians, and others to “our free enterprise system”, in view of the degree to which this system has been eroded.

The Graduate Theory Courses. As I have taken pains to point out Professor Taylor was justly noted, among discerning teachers, for his thoroughgoing course in principles. From time to time he also taught an effective intermediate course in theory. But it was in his graduate seminars that his leadership and instruction reached the level of brilliance, and it was his performance in this area that attracted able students from all over the country and on which his great reputation as a “teacher of teachers” was founded. In this graduate program it was his practice to tether the work of the particular seminar to some general concept or issue, such as “value”, “interest”, “capital”, “wage theory”, “foreign trade”, “money”, “business cycles”, and so on. Taylor generally set a limit on seminar enrollment of ten or twelve students. I attended six such classes over a three-year period and I wouldn't trade the experience for all my other schooling put together. As I remember it these seminars met for a two-hour session weekly throughout a semester. The reading assignments per course were heavy—perhaps three or four books and a dozen articles—and if anyone neglected the assigned reading this fact was shortly exposed by our teacher. He had an extraordinary talent for probing the mental make-up and the understanding of each of us with pointed questions, and keeping us on our toes, while at the same time doing a major part of the talking himself, and directing and dominating the discussion, throughout the session. Written work during the term was seldom required and rating in the course depended almost entirely on a rigorous final examination.

As in the basic course in principles, Professor Taylor maintained a down-to-earth point of view in his seminars. He saw little merit in mystical speculation or wheel-spinning analysis that had no relation to the “real world”. He regarded each course in theory as dedicated to a thoroughgoing and critical exploration of actual—not imaginary—problems and issues. A point he always emphasized was the need to sort out the truly salient and significant factors from the trivial and unimportant—bring to light the wheat and discard the chaff.

Professor Taylor was a great reader and student himself, all through his career, and he was amazingly well acquainted with the writings of all economists of any stature in the western countries from the Physiocrats on through the ranks of his own contemporaries. He gave a top rating to Carl Menger and other early leaders of the “Austrian School”, and of course there was careful consideration—in one or more seminars—of the works of Eugen Boehm von Bawerk, especially “Capital and Interest” and “The Positive Theory of Capital” (William Smart's translation). Much less time, as I recall it, was spent on the work of Friedrich von Wieser. Close behind the Austrians in his appraisal were the major English economists. In addition to the famous trio of Adam Smith, David Ricardo, and John Stuart Mill, whose principal works, beginning with “An Inquiry into the Nature and Causes of the Wealth of Nations”, appeared in the seventy-five years prior to 1850, Taylor thought well of a number of the later English writers, including William Stanley Jevons (noted as both logician and economist, and remembered—if not honored—for his speculations about the relation of commercial crises and sun-spots). And it is hardly necessary to say that Professor Taylor regarded Alfred Marshall's “Principles of Economics”, first appearing in 1890, as a truly outstanding treatment of the subject, and that references to Marshall were a commonplace in the seminars. Dennis H. Robertson appeared on the scene much later, but he had started his brilliant writing while Taylor was still teaching and came in for strong praise.

In his seminars Professor Taylor often took note of the special contributions by particular writers, even if their writings were not intensively covered. Thus he did not overlook the stress laid by N. W. Senior on “abstinence”, in connection with capital formation and interest, the famous “Essay on Population” by Thomas R. Malthus as well as his contributions to value theory, the emphasis on “Gresham's law” by H. D. Macleod, and—along with all his contemporaries taking the neoclassical stance—did not fail to credit J. B. Say for his notable contribution to an understanding of the fundamental identity of over-all supply and demand. Among French writers Frederic Bastiat received attention from time to time, and Taylor often recommended “Histoire des Doctrines Economiques”, by Charles Gide and Charles Rist, to those who wanted to improve their skills in reading French. Frederich List was not forgotten but was awarded no great praise for his protectionist position. He introduced us to Gustav Cassel's excellent “The Nature and Necessity of Interest”, and one term—as I recall it—a bit of time was devoted to reviewing Arthur C. Pigou's “Wealth and Welfare”.

Professor Taylor was quite willing to expose his advanced students to the writings of leading socialists, notably Sidney (and Beatrice) Webb and Karl Marx. I remember struggling to read “Das Kapital”, in German, and my initial aversion to Marxist theory was perhaps partly due to the difficulty I experienced in this chore. In trying to fortify my German, I might add, I made some poor choices. In addition to tackling Marx I read “Soziale Theorie der Verteilung” by Michael Tugan-Baranowsky (a small book, fortunately), and I spent many weary hours on Johann H. von Thünen's “Der Isolierte Staat”. I must admit, however, that Thünen was an illustrious Austrian economist, skilled in mathematics and sometimes referred to as the founder of econometrics. And the book I read was his most widely known work.

On the whole Professor Taylor did not hold American economists of his time in very high esteem. He regarded Frank W. Taussig as worthy of respect, but did not place John Bates Clark on a pedestal. For two or three years he assigned Thomas N. Carver's “The Distribution of Wealth” for study in an intermediate theory course. He occasionally referred, not unfavorably, to the work of Francis A. Walker. In our discussion of rent Henry George had his innings and was disposed of. We were of course required to dig into Irving Fisher's work, especially “The Nature of Capital and Income”, in the days before this able man became something of a crank. He found points to commend in Henry R. Seager's textbook. Taylor assigned for review “Economics of Enterprise”, by H. J. Davenport, when this book was published, but his appraisal was not favorable. Wesley C. Mitchell came in for some study—and praise—for his monumental work on business cycles. Not a few well-known professors and writers got scant attention in the seminars because Taylor did not view them as theorists in any legitimate sense; examples were John R. Commons, Richard T. Ely, Thorstein B. Veblen, and Henry Carter Adams, a colleague at Michigan. Professor Taylor had some favorites among the younger American economists coming into prominence in the twenties, including Frank H. Knight, whose excellent “Risk, Uncertainty and Profit” appeared in 1921, and Howard S. Ellis and Edward Chamberlin—both students of Taylor's for a time.

Not reluctant to bestow praise where he considered it due, Professor Taylor was a critic par excellence. Of the many writers whose books were dealt with intensively in his graduate courses there were few if any who were not found wanting at some point in accuracy, consistency, and thoroughness. Undoubtedly his tactics helped us to develop our own critical powers. Occasionally, however, the thought would occur to some of us students that perhaps he overworked his talent for discovering weak spots.

How would Professor Taylor react to the models, diagrams, and mathematical arrays that dominate current presentations in the field of economics? Would he, for example, assign to a graduate group such a book as Kenneth E. Boulding's “A Reconstruction of Economics”, with its more than eighty complex diagrams? Professor Taylor was well grounded in mathematics, and—as I've already noted—relied heavily on graphic presentation in his basic course, but he did not resort to the types of figures now widely used. Sometimes it seems as if the modern theorists are in a contest to see who can produce the most obscure and recondite displays of charts and equations. I recall one seminar in which we were taking a look at a somewhat elaborate chart in one of Francis Y. Edgeworth's books. After, with our teacher's guidance, we had decided what Edgeworth was driving at Professor Taylor leaned back in his chair and remarked, meditatively: “I wonder if he couldn't have told us that in four or five well-written sentences”. It is noticeable that our brilliant Milton Friedman, although fully capable of matching diagrams and mathematics with anybody, generally leans heavily on language as the means of presenting the results of his researches and analyses. And the master economist whom we are honoring with this volume finds writing a quite adequate means of expression.

More on the Personal Side. Professor Taylor was recognized by his associates as a man of the most precious intellectual and social gifts. Some appreciation of the esteem in which he was held may be indicated by recalling the circumstances of a banquet in his honor held at the Michigan Union the evening of August 1, 1925. On that memorable occasion some 150 of his colleagues and friends gathered to pay their respects and express their affection. His portrait—recently completed—was presented to the University (it now hangs in the library of the Graduate School of Business Administration at Michigan), and a new Buick was presented to him as a personal gift. The following is a free rendering of the remarks of a member of the Department of Economics:

“It would be difficult to describe the spontaneity, the whole-heartedness, and the enthusiasm with which the enterprise which has culminated in this happy occasion has been pursued by all concerned. You will hear, in the course of the evening, many sincere expressions of appreciation of Professor Taylor. They will all reflect a genuine delight in this opportunity to show our esteem and affection for him. If the influence of personalities is the dominant factor in the moulding of our destinies, we regard Professor Taylor as one of the choicest spirits whose impact upon our lives has been fruitful and satisfying. For more than thirty years he has labored in these academic precincts. His students are numbered by the thousands. In every corner of the land may be found men and women in all walks of life who recall with gratitude the inspiration they received from him. And I dare say there is no one among the professional economists in this country who has made a larger contribution than Professor Taylor to the teaching of the science of economics. In practically every important college and university—east and west, north and south—his students have gained a fruitful foothold as propounders of the faith and as searchers of the truth. In a very real sense these economists—ranging from early manhood to upper middle age—are the products of Professor Taylor. It was he who laid the foundation stones of their knowledge; it was he who first kindled their interest in economic speculation. And, quite apart from the matter of specific views and opinions, these teachers are warm disciples of Professor Taylor in this: they are ever striving to approach his high standards of scholarship, his refreshing intellectual honesty, his uncompromising devotion to truth, his keenness of mind, his breadth of spirit, his genial helpfulness, his modesty of demeanor. To do such a man honor is a high privilege”.

Even to his intimates Professor Taylor's breadth of scholarship and range of interests were a continuing revelation. He was equally at home in history, philosophy, and economics, and was solidly grounded in many other fields. The accuracy of his information and the penetration of his thought were noteworthy. But he was entirely lacking in ostentation, in intellectual matters as in all others. He was noted for the hobbies and avocations which he pursued with the intensity and thoroughness which characterized his academic work. Whether devoting himself to golf, boating, fishing, cycling, dancing, rose culture, or some other interest or activity he found opportunity for the application of analytical power and for the achievement of high standards of performance. As I recall it, he usually dropped a particular hobby after two or three years, but he never abandoned his roses, and I suspect he knew more about this field than anyone else in Ann Arbor or even in the state of Michigan.

Although not prominent in social activities, Professor Taylor was an expert in friendship. In addition to his contacts with students and colleagues he made a host of friends in his own community and in other parts of the country—especially in the various areas in which he spent the mid-summer months, in an effort to escape the attacks of hay fever. Inclined to shun formal occasions such as faculty meetings and commencement exercises he was nevertheless recognized as one of the most potent members of the faculty—one who was able to marshal his case so clearly and convincingly as to silence the opposition. He was not active in politics (a field which he regarded as outside the professorial province) but he was drafted in the critical campaign of 1896 and made a number of effective addresses in Michigan in support of the maintenance of a sound monetary system (and he published several short articles in the monetary field in the late nineties). He loved his teaching, and never asked for a leave of absence. His conception of the position of the scholar and teacher was a bit on the ivory-tower side. Thus he never undertook a consulting job of any kind throughout his long career.

I mustn't forget to mention Professor Taylor's kindliness. Although exacting in the management of his staff of instructors and readers, he was both fair and friendly, took a keen interest in the progress and personal welfare of his helpers and went out of his way on many occasions to give us a pat on the back, or some good advice. To illustrate in my own case, I remember walking across the campus shortly after taking the final examination in my first advanced theory course. Professor Taylor passed me on his bicycle, then slowed down and called back to me over his shoulder: “That was an excellent paper you wrote, Mr. Paton”. I walked on air the rest of the day and I truly believe that this was the marginal factor in starting me in the direction of a teacher of economics.

Son of a devout Methodist minister, Professor Taylor as I knew him was not theologically inclined, although he was well acquainted with the writings of religious leaders and philosophers from the ancients to those of his own time. Like Mises, he didn't find it necessary to drag the Deity into an examination of price determination either in the broad view or in a particular set of circumstances. When in the mood, however, he enjoyed metaphysical discussion. He always emphasized the basic point that the ultimate raw stuff of the universe, whatever it is, like time and space has neither beginning nor end (“from everlasting to everlasting”), and he rejected the running down theory of the whole, which had some support in my student days, as well as the notion of a contracting or expanding totality. He accepted what might be called a cyclical view of what was going on, over-all, with respect to the temperature, size, density, and other properties of the stars and other bodies making up the galaxies scattered through space.

Taylor's AEA Presidential Address—and the Sequel. Professor Taylor never sought honors or preferment, and was not active in national or international societies (although holding membership in several), and it was not until 1928, not long before he retired, that he was elected president of the American Economic Association. At that time each president of the several organizations meeting together for their annual conventions was given a half-hour for his presentation at the joint evening meeting devoted to presidential addresses. It was characteristic of Professor Taylor that he took this allotment of time seriously, and he worked hard at condensing and polishing his prepared paper until he could read it in twenty-eight minutes. The subject he selected was “The Guidance of Production in a Socialist State”. It was a closely-reasoned statement of the position that those in charge in such a state must employ value judgments, akin to the determinations afforded by a free market, and founded on trial and error procedure, if efficiency in utilization of available resources were to be a major objective in directing production. The address appeared in print in the March, 1929, issue of The American Economic Review.

There is an interesting sequel that should be considered here. In 1938, a decade after Taylor's address was delivered, the University of Minnesota Press published a small volume under the title “On the Economic Theory of Socialism” and authored, according to the title page, “by Oskar Lange and Fred M. Taylor”; Benjamin E. Lippincott (an assistant professor of political science at Minnesota) was listed as editor. Actually the book consists of an “Introduction” by the editor (38 pages), followed by a reprint of Taylor's address (14 pages), and then Lange's essay which gives the book its title (85 pages), including an appendix dealing with “The Allocation of Resources under Socialism in Marxist Literature”, and a selected bibliography. (The references include writings by F. A. Hayek, F. H. Knight, Ludwig von Mises, and Lionel Robbins, as well as pieces from the pens of Enrico Barone, A. F. Lerner, A. C. Pigou, A. R. Sweezy, and others.)

Before commenting further on this volume, a few words on Oskar Lange's career are needed. Lange came to this country from Poland in the thirties and taught at several major universities. He held a post at the University of Michigan in 1936 and was later a full professor at the University of Chicago. He was an able scholar and instructor (although not a pleasant person); I can testify as to his ability, especially from hearing him speak more than once while we were both on the economics faculty at the University of California, in 1937–1938. He became politically active with the onset of World War II, underground to begin with, gave up his U. S. citizenship, was recalled to Poland, and became heavily involved in the communist cause. From 1946–1949 he was Poland's delegate to the United Nations.

To couple Fred Taylor with Lange in the authorship of “On the Economic Theory of Socialism” was nothing short of literary knavery, and both Lange and Lippincott were undoubtedly aware of this. The “editor” does indeed refer to Taylor as “an orthodox economist”, but his lengthy introduction is full of bias and misinterpretation.

A primary object of both Lippincott and Lange is to discredit “Professor von Mises, the well-known Viennese economist, and the leading opponent of socialism among economic thinkers”, and also to shoot down “Professors Hayek and Robbins of the London School of Economics”, whom they rank next to Mises as supporters of the view that rational allocation of resources is impracticable in a socialist state. Professor Taylor—no longer around to defend himself—is then pushed forward as a successor to Barone and his brief presidential address is glorified, particularly for the purpose of demolishing the position taken by Hayek and Robbins.

In Lange's essay, which is essentially the framework and content of the book, the first half-dozen pages are devoted to Professor Mises. To indicate the flavor of his comments on this truly great thinker and writer I will quote from the first paragraph:

“Socialists have certainly good reason to be grateful to Professor Mises, the great advocatus diaboli of their cause. For it was his powerful challenge that forced the socialists to recognize the importance of an adequate system of accounting to guide the allocation of resources in a socialist economy. Even more, it was chiefly due to Professor Mises' challenge that many socialists became aware of the very existence of such a problem ... Both as an expression of recognition for the great service rendered by him and as a memento of the prime importance of sound economic accounting, a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or of the Central Planning Board of the socialist state. I'm afraid, however, that Professor Mises would scarcely enjoy what seems the only adequate way to repay the debt of recognition incurred by the socialists ... he might have to share his place with the great leaders of the socialist movement, and this company might not suit him”. There is more in the paragraph in the same nasty vein.

After trying to ridicule Mises for claiming, allegedly, “to have demonstrated that economic calculation is impossible in a socialist society”, Lange turns his attention to the modified position he attributes to Hayek and Robbins that even if “rational allocation of resources in a socialist economy” is viewed as a ‘theoretical possibility’ there is no “satisfactory practical solution of the problem”. He regards the Hayek-Robbins position as “a much more fruitful approach than Professor Mises' wholesale denial of the possibility of economic accounting under socialism”. He then gets nasty again with: “Whether they, too, will merit an honorable statue, or at least a memorial tablet ... remains to be seen”.

The main body of Lange's essay is aimed at undermining the view that under socialism there is no workable method of securing a reasonable allocation of resources. As Lange puts it: “It is, therefore, the purpose of the present essay to elucidate the way in which the allocation of resources is effected by trial and error on a competitive market and to find out whether a similar trial and error procedure is not possible in a socialist economy”.

As a student and colleague of Professor Taylor for a period of fifteen years, and quite intimately acquainted with him for a considerable part of this period, I can say with confidence that he was firmly and consistently committed to the position that an economy regulated through the price system resulting from a free competitive market is superior on all counts to any form of collectivism or socialism. And I have long resented the misinterpretation and misuse of his AEA presidential address by the unscrupulous Oskar Lange, aided and abetted by B.E. Lippincott and the University of Minnesota Press.

Defining the Marginal Producer. I have already referred to some of the areas in which Professor Taylor's analyses were noteworthy. In my judgment his total contribution was substantial, particularly in clarifying and sharpening concepts that have been dealt with inadequately, or confusedly, by many writers. But I don't want to conclude these “recollections” without considering an example of his acute insights and formulations, with some comments on its present-day application. For this purpose I have selected the problem of the definition of the marginal producer or firm.

One reason for selecting this topic for brief attention is the popularity nowadays of stressing break-even points and “analyses” at both business management and economic theory levels. I am getting very tired of looking at breakeven charts and noting the persistent preoccupation with this subject. In particular I'm annoyed by the view, frequently encountered, that the break-even producer or firm is in the marginal position. This is sheer nonsense. To paraphrase Professor Taylor, from recollection rather than quoting written material (and I unfortunately threw away my extensive seminar notes years ago): The marginal producer is the one who is just barely induced to stay in the field by the existing conditions and circumstances, and who is so situated with respect to volume of production that his dropping out will influence the price-determining forces and tend to bring about a change in product price.

In pondering this definition perhaps the first point to observe is that producers who are operating at a loss often hang on for years. This is particularly true in the case of relatively small or medium-sized operators with ownership and control residing in a family or small local group. But the condition is not unknown among large concerns. As long as revenues cover current expenditures, including salaries for executives and wages for other employees, immediate management has a tendency to continue operations, even if the outlook is gloomy or not particularly promising. This accounts for the phenomenon of corporations that are worth more dead than alive. There are numerous examples of substantial companies whose shares have been quoted for long periods at less than net liquidation value (that is, at less than could be realized if the concern disposed of all assets for what they would bring, paid all liabilities, and distributed the balance to shareholders). And there are not a few examples of cases where the announcement of a program of liquidation by the directors has caused a sharp advance in the price of the outstanding shares. I recall one example where the price of the stock moved from $1 ½ to $16 per share when liquidation was decided upon and announced. The low price of $1 ½ was of course predicated on the assumption—by those trading in the company's stock—that the management would continue to fritter away the company's resources in unsuccessful operation. (These observations do not deny, of course, that there are many examples where tenaciously staying in there has resulted in a turnabout.) Thus we find that even a producer suffering persistent losses may not be in the marginal, price-influencing position.

The basic difficulty with the so-called break-even approach, from the standpoint of good economic theory, lies in an improper conception of what it means to “break even”. If capital-furnishing is a primary, essential factor in the productive process it shouldn't be ignored in the computation of total cost, in the broad sense of price-influencing cost, and if in a given situation this cost is omitted the producer is not really breaking even. Instead he is operating at a loss (even if this is not the way the accountants look at it). Here is a crucial point in the case for the free market economy as opposed to socialism, and those of us who strongly prefer control by the market to authoritarian directives shouldn't use terms and concepts that play into the enemy's hands.

It follows that the producer who regards an earning rate of 10$ per annum as the necessary lure for capital in a particular field, in view of all the conditions, and who finds that he is consistently achieving a return of only 4$ on the capital employed (computed in terms of current value of resources less liabilities) may well decide to terminate his operations—as fast as practicable—and thus be in the position of the marginal producer.

In practice, of course, the identification of the marginal producer in a given industry and time period may be difficult if not impossible. But this does not justify an improper concept of adoption of an unsound method of identification. We can be almost certain, indeed, that the marginal position is seldom occupied by the concern whose capital-furnishers are willing to continue operations if there is even a trace of compensation for capital above the zero point.

If I were not running out of alloted space I would add a brief statement of my own views on a related but broader subject, the relation of interest and profits. I have long been dissatisfied with the analyses in this area of economists, in so far as I know them, including the work of my revered mentor, Fred M. Taylor. I object, in the first place, to the tendency to treat interest and profits as distinct and separate phenomena. By discussing “profits” as a special factor, apart from interest, the door is opened to the view that this factor is hardly necessary, scarcely justified, and will probably disappear when we once get rid of exploitation and “profiteering” (whatever this widely used term may mean). I prefer to substitute the single concept of the market “price” of capital-furnishing (recognizing—of course—that both decision to save and act of investing are included). This price or cost of capital, varies with the package—the conditions and circumstances under which the commitment of funds is made. One major group of cases includes all the “hired” or contractual money—bonds, notes, current payables (where the capital compensation is often implicit), installment accounts, and so on—plus the subdivision of senior stocks in corporate enterprises. In all these cases there is some legalistic shelter for the fund furnisher, although the risk element is never completely absent, and often is substantial. The second major class of fund furnishers are found in the owners (so-called) in unincorporated enterprises, and the stockholders in corporations who occupy the exposed or buffer position (but in many enterprises having a more secure status than their contractual brethren in other concerns). In this situation the pricing is done by the over-all fabric of the market, which provides a prospect, a lure, sufficient to attract the capital-furnisher. And in high risk situations the lure may be in the form of the possibility—if not probability—of a jackpot type of reward. These few comments, needless to say, do nothing more than suggest an alternative approach.