The Irrelevance of Equilibrium and Disequilibrium in Böhm-Bawerk’s Price Theory

    

As I noted in my first response, Böhm-Bawerk’s theory of price explains the determination of prices actually paid on every kind of market at every moment of what Arthur Marget called “clock time.” The primary virtue of this approach is that it obviates the need to parse the vexed equilibrium/disequilibrium distinction.  Equilibrium is a (useful) mental construct in which action is absent and time is meaningless; disequilibrium is the negation of equilibrium and, at best, depicts a state of affairs (e.g., reverse valuations of the same good on the part of at least two persons) existing immediately before the actions comprising the pricing process have been initiated.   Action therefore does not take place either in equilibrium or in disequilibrium, but in historical, or better yet, “lived” time.    

This is the reason that Böhm-Bawerk and other Austrian price theorists such as Menger, Mises, and Rothbard all begin their analyses at a specific moment in clock time and avoid reference to conditions of short-run or long-run equilibrium when explaining “realized” prices paid by living human actors.[105]   At the moment when a Robertsonian “market day” begins, all sellers in the market have a fixed stock of goods determined by past production decisions.  Any elasticity of their supply curves is due solely to their speculations about future prices of the good. Similarly all buyers arrive in the market with demand schedules conditioned by anticipated prices of the same good in future markets and by the expected array of prices of other goods they may desire.  The realized price that emerges is one that exhausts all mutual gains from exchange in this market at this moment in time, given the existing disparate knowledge and expectations held by fallible market participants. 

There are a number of important properties of this price.  First it is necessarily a market-clearing price, for if it were not, then there would be additional gains from exchange to be exploited in which case the market would not have come to a close at this price but at another price.  Second, it is for this reason that Böhm-Bawerk called the situation that exists when this price has been realized a “momentary equilibrium.” (Mises called it a “plain state of rest.”).  Last, market-clearing prices that yield temporary exchange equilibria are the only kind of prices that come into being in the real world and as such are the only prices that entrepreneurs are concerned with in the economic calculations that guide their production plans.   In this specific and narrow sense, the market is a process that moves through time from the state of “disequilibrium” to a state of “equilibrium.”  Action thus destroys the state of disequilibrium and comes to a close in equilibrium and, while absent from both states, constitutes the temporal link between them.   But it is better to avoid these terms when analyzing the real-world pricing process.

It is noteworthy Carl Menger well understood these qualities of the market price.  He found “in each instance and at any given point in time, a limit up to which two persons can exchange their goods to their mutual economic advantage.“[106]  Recognizing that stocks of goods, value scales, etc. change from one moment to the next, Menger argued further that market-clearing prices and momentary exchange equilibria could be observed to come into being again and again.  Wrote Menger:

And one can easily observe Mengerian points of rest by standing outside of, for example, Walmart and observing customers pushing shopping carts to their vehicles.  One shopper may emerge with a cart containing 4 DVDs, 2 gallons of milk, one dozen lemons, 5 pounds of flank steak and 6 lbs. of potatoes.  She could have bought more or less. The fact that she did not indicates that, at least temporarily, she is in equilibrium, as is Walmart.  The observation also indicates that the reservation prices temporarily posted by Walmart and paid by the shopper, which are based on Walmart’s speculation on the prospective pattern of demand over the next few days or weeks, are indeed market-clearing, realized prices. 

I close with Klaus Hennings perceptive summary of the difference between Böhm-Bawerkian and Marshallian price theory in terms of the marginal cost concept.  Hennings pointed out: 

In Böhm’s model, producers are not able to adapt production except in the long run, so that . . . Böhm runs the Marshalllian long and short periods in to the momentary period.  This means that in Böhm’s model momentary supply is always relatively inelastic with respect to price changes.[108]

Of course, given the focus of Austrians on what Rothbard called the “immediate run” in price theory, Austrians have never had much use for the marginal cost curve.  According to Hennings, Böhm-Bawerk knew of but was not “particularly keen on” the concept of increasing marginal costs.  In contrast to Marshall, “he did not need it” to establish the stability of his momentary model.[109] In other words because Böhm-Bawerk focused on the momentary period with fixed stocks of goods and inevitably upward-sloping supply curves, the configuration of the total cost schedule is relevant for market stability.  Nor does the marginal cost concept play a role in discussions of price theory in the works of Fetter, Davenport, Wicksteed, Mises, or Rothbard.  In fact as Hennings further explained, Böhm-Bawerk only deployed long-run analysis and costs of production to explain the production decisions made by capitalist-entrepreneurs that give rise to the momentarily fixed stocks of goods.  The latter, in turn, interact with contemporaneous value scales to establish the observed moment-to-moment prices that are the ultimate determinants of the success or failure of all past entrepreneurial endeavors and the starting point for calculating future entrepreneurial projects.

[105.] As Marget argued, “[T]he prices we must ultimately explain are the prices ‘realized’ at specific moment in clock time [and] the only demand and supply schedules which are directly relevant to the determination of these ‘realized prices’ are market demand and supply schedules prevailing at the moment the prices are ‘realized.’”  Arthur W. Marget, The Theory of Prices: A Re-Examination of the Central Problem of Monetary Theory, 2 vols. (New York: Augustus M. Kelley), pp. 239-40.

[106.] Carl Menger, Principles of Economics, trans. James Dingwall and Bert F. Hoselitz  (Auburn: Mises Institute, 2007), p. 187.

[107.] Ibid., p. 188.

[108.] Klaus H. Hennings, The Austrian Theory of Value and Capital: Studies in the Life and Work of Eugen von Böhm-Bawerk (Brookfield, VT: Edward Elgar, 1997), p. 94.

[109.] Ibid., p. 95.