Comments (6)

• Bud Hovell

• "Business men appear not to think of their pricing decisions in terms of marginal revenue and marginal cost. Economists had thus found themselves in the embarrassing position of having to try to reconcile the neoclassical theory of the firm, dependent on the concept of marginal revenue, with the actual facts of pricing observed in the real world. Corporations often follow the practice of quoting prices on a 'cost-and-markup' basis. It even seems that markup pricing is now rather generally considered to be the norm in imperfectly competitive markets. Böhm-Bawerk's insights, even if they have largely gone unnoticed in this context, shed a different light on this controversy, and suggest a different conclusion."

  The explanation for this may be more simply explained by the fact that how costs and revenues are calculated in the modern world are based on tax-oriented "Generally Accepted Accounting Principles" (GAAP) rather than any reference to the real world. Full-absorption accounting is basically a fraud as a management tool, but because it is *required* by government tax reporting mechanisms, it has replaced common sense.

  The exception to this practice is what has been called "Direct Costing" (with only one book ever published on the subject, as far as I know), which most certainly does provide management better means to make decisions based on marginal costs and revenues.

  Unfortunately, government imposes upon business the requirement to report in GAAP terms, so direct-costing methods add costs.

  The worst part is that the GAAP approach to figuring costs and revenues has largely displaced any other perspectives, and the entire spectrum of management "thinkers" has been brainwashed into believing GAAP provides the best and most rational view of reality -- rather than a mere collection of myths and faulty assumptions officially perpetrated to optimize government revenues, even at the cost of diminishing actual business profits.

• Published: January 19, 2006 9:30 AM

• gene berman

• Without Menger--no Bohm-Bawerk. Without Bohm-Bawerk--no Mises. And, without Mises, in all probability--no Bohm-Bawerk or Menger. A linking of extraordinary intellects for a result of incomparable importance to the future of civilization.

• Published: January 19, 2006 8:33 PM

• The Economist

• I vaguely remember from intermediate micro class that you can reformulate the marginal cost/marginal revenue model to yield a cost-markup model based on the inverse of the elasticity of demand. In that case producers would be estimating what this optimal markup is when making their pricing decision.

• Published: January 19, 2006 10:05 PM

• van den Hauwe

• As I understand it, in cases like those envisaged by Böhm-Bawerk, the cost determining price is marginal cost, but determined by supply and demand and marginal utility operating across the whole of the relevant market, not just by the specific demand for and supply of the individual good in question. This insight is also consistent with the thesis of Hayekians that the price system works like a communications network. Cost is what communicates to the narrow individual market the state of supply and demand and marginal utility in broader factor markets.

• Published: January 23, 2006 1:30 PM

• van den Hauwe

• The formula, which in textbooks is to be found in the chapter on monopoly, is: MR=P.(1 - 1/e); after rearranging this provides (P - MR)/P = 1/e; at the monopoly quantity where MR=MC this becomes (P - MC)/P = 1/e, which indeed defines a concept of margin. If I remerber well the formula first appeared in Joan Robinson´s analysis of monopoly.

• Published: January 27, 2006 5:56 AM

• gene berman

• Dr. van den Hauwe:

  In developing, step by step, the system of indirect exchange, of "the market," our species was not aiming at the establishment of a method for all to quickly read the minds of all others with respect to their value opinions of things vendible. But, nonetheless, that's what we've got.

  ALL the available information is transmitted instantaneously to everyone concerned at the very moment of that concern in the form of a synopsis (as opposed to an analysis): to the "man in the street" as well as to the entrepreneur faced with the making of weighty, far-reaching decisions. Just as the effects of the decision of the latter are momentous and individually visible, so the combined effects of the decisions of the former may be even more momentous, though less specifically attributable.

  It is this exquisitely integrated and balanced, nearly "cybernetic" (in the sense of constant adjustment on the basis of "feedback") system with which all schemes of "economic policy" attempt (and claim to do so successfully) to tinker. The claim of economic policymakers (and enforcers) is as simple as it is spurious: that they know everyones' minds about everything economic than those very same minds do. It's sad, really (and, though Lord Keynes didn't mean to do so, his "in the long run..." statement probably is as close to comfort as we Austrians are liable to get).

• Published: January 30, 2006 7:43 AM