Lachmann and Objective Value

This is a response to the discussion in Lord Keynes’ blog about measurable vs immeasurable things.

I see that an anonymous user has taken what I have said and tried to make sense of it.  Where he/she states:

Ok but what about the disequilibrium issue that Issac brings up? At least how I understood it, one cannot aggregate the price of a good in disequilibrium.

In a response to Lord Keynes’ (LK’s) comment here:

The problem was the neoclassical aggregate production function using homogeneous capital as an assumption. In essence, it is the aggregation of capital goods as though they are homogeneous that was the issue.

The aggregation of the sale price of consumer goods in money terms in one year is a different thing: we know such goods are heterogeneous.

If you couldn’t, say, meaningfully aggregate the value of sales of heterogeneous goods in one year for a firm, how could a firm calculate its total income from sales?

Which LK responds back:

This is about the expected future yield/value of a capital good being difficult to calculate ex ante, because that expected future value is subjective.

The value, in monetary terms, of the actually sold items – say, consumer goods – in a time period x is not subejctive, is it.

It is quite clearly an objective figure, which you can aggregate, say in aggregate consumption spending as in GDP.

The anonymous user is puzzled about objective value given what I said (although the credit goes to Lachmann). And he/she should be. LK is only half right in my opinion, or at least only looking at one side of Lachamann’s claim. While Lachmann, in Capital and It’s Structure, did put heavy emphasis on heterogeneity of capital, his argument goes much further than that since he talks about the disequilibrium aspect on prices. Lachmann challenged the idea that prices are meaningful in the real world. Relatively, they might serve a purpose to an individual, but it does not follow that aggregating these relative prices are meaningful as a whole. This is at least my interpretation of what Lachmann was saying, and the same interpretation as other Radical Subjectivists. As one pro-Lachmann blogger states:

It is impossible to measure capital because relative prices are incorrect in situations outside equilibrium. From this it follows that it is also impossible to measure a country’s GDP or the history of its productivity.

I recommend reading Chapter 2: “On Expectations” for a further explanation. This post is to show Lachmann’s position more than a post critiquing LK. I am just making it clear that Austrians do in fact think that overall, “our subject cannot be measured.” It has nothing to do with being ‘market apologetics,’ as ‘Hank’ claims, rather it about how we view economics.

-Isaac Marmolejo

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4 responses to “Lachmann and Objective Value

  1. This is obviously an important issue. I enjoyed your post.
    I want the remarks below to be taken as constructive. I am happy to see criticisms.

    GDP = C + I + G + (X-M)

    (1) I do not think anything above refutes the view that C is meaningful. As I said, the aggregation of the sale price of consumer goods in money terms in one year appears perfectly valid and meaningful to me: moreover, we know such goods are heterogeneous.

    If you couldn’t, say, meaningfully aggregate the value of sales of heterogeneous goods in one year for a firm, how could a firm calculate its total income from sales?

    (2) (X-M)
    Since value of exports minus imports give you the earnings from exports or your trade deficit, I again fail to see how this isn’t meaningful.

    (3) I
    This appears to be the most troublesome.
    Gross investment is new housing, replacement purchases, net additions to capital assets and investments in inventories.
    Obviously, these goods are heterogenous.
    Obviously, not all capital goods investments in one year will lead to a profit in the future either, but you still have the sale price aggregated of these new capital goods bought (or value of new capital goods added into the capital stock). Since I in GDP doesn’t include an aggregated valuation of already existing capital stock, doesn’t it mostly evade the problem Lachmann raises?

    Yes, we know that not all capital goods in the new flow of investment in GDP for year x won’t all yield profits, but no one said GDP must be perfect. It is a reasonable approximation of the value of national output.

    In cases where the volume and value of output collapses severely (e.g., 1929-1933) we observe real world consequences associated with the fall in GDP: soaring unemployment and business failure.

    If Austrians think it is “impossible to measure a country’s GDP” how can they possibly know whether there is expanding or contracting output?

    How you declare Keynesianism a failure if you have no way of knowing whether output expanded or contracted?

  2. I was the anonymous user and your post is what I was getting at. The validity of aggregation only applies to equilibrium states, it’s really that simple.

    • Anon,
      LK knows the basic claim that I make: that disequilibrium prices are wrong, and it follows that GDP cannot be measured for the prices are ‘incorrect’. But the claim deserves more analysis because it is an important issue. This is basically LK’s response, and I agree with it. It takes more than that claim to completely ‘debunk’ something like GDP. So in this sense, it really isnt “that simple”

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