Prices, and Production: Lecture II, Part I

Lecture 2: “The Conditions between the Production of Consumers' Goods, and the Production of Producers' Goods”

In order to understand how prices influence the amount of goods produced, it is necessary to understand the causes behind variations in industrial output. Economic theory at the publication of Prices of Production (1933) offered three explanations:

1. The willingness of individuals to expand effort.

2. The changes in the amount of factors of production.

3. Changes in the methods of using existing productive forces.

The first explnanation is a highly artificial explanation that finds its roots in the fallacious labor theory of value. Hayek wrote that he would only be willing to resort to this thesis “when all other explanations had failed,” and he did not bother directly refuting it, only writing that he would elucidate a better theory later on. The second  Hayek mocked as “no explanation at all” for it does not offer an explanation from a status already sufficiently analyzed by economic theory: the condition of equilibrium. The entire reason why a theory is desired in the first place is to explain why there is an alteration in production in an economy where there is assumed to be no idle factors of production – an economy in the condition of equilibrium. Ergo, the second theory is merely a description of the phenomenon that economics is desiring to explain, not a thesis to explain why an economy at equilibrium has experienced a variation in output.

Starting from the assumption of equilibrium has an advantage in that it aids the theorist in investigating causes of changes that might otherwise have been brushed aside, the most important one being the methods of utilizing existing resources, which Hayek credits for causing industrial fluctuations, and the third explanation. The fluctuations referred to here are not the result of technological progress, but rather they are that of a transition to more capitalistic methods of productions, in Hayek's words: “organizing productions so that, at any given moment, the available resources are employed for the satisfaction of the needs of a future more distant than before,” otherwise known as a transition to a more “roundabout” process of production, or the process to less capitalistic methods. For this lecture, Hayek restrains the investigation into the consideration of the conditions under which an equilibrium between the production of producer's goods, and consumers' goods is established, and how this relation influences the flow of money. The rest of the lecture is indeed dedicated to how the transition to a more, or less capitalistic economy results in the variation of industrial output.