How do Austrians view the Law of Supply and Demand? Under Mainstream Economics, The Law of Supply and Demand determines price and quantity sold on the market. However, in Austrian Economics, Marginal Utility and Subjective Theory of Value appear as the determinate of price (not exactly sure where quantity comes from, I conjecture the entrepreneurs best guess, come to think of it Marginal Utility STV plays a role from the entrepreneurs point of view.) Do Austrians utilize the Law of Supply and Demand, or is there no such law in the Austrian School?
I hope you don't mind link responses. This article gives some Austrian views on Supply and Demand theory. Nothing beats the textbooks or popularizations in understanding Austrian theory, though.
cheimison:I hope you don't mind link responses.
As long as its pertinent info, anything is fair game in my book. Thanks for the link.
Insightful read, and answered my question. Thx.
ViennaSausage: Insightful read, and answered my question. Thx.
No problem. A message board where information is actually valued, and people take learning as a responsibility for themselves, is a personal relief. Glad to help.
Marginal utility and supply and demand are the same thing. Supply and demand curves just show the entire picture, whereas marginal utility explains the phenomenon on the individual scale.
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krazy kaju: Marginal utility and supply and demand are the same thing. Supply and demand curves just show the entire picture, whereas marginal utility explains the phenomenon on the individual scale.
For clarification, the definition and explanation of supply and demand are different for the Austrians vs. Neoclassicals?
I don't think so. The neoclassical school is also based on the writings of marginalists like Carl Menger. The main difference between the neoclassical and the Austrian school is methodology, AFAIK.
There's a difference in how the Austrians and neoclassicals treat valuation, and this is important to understand, as the Austrians do not acknowledge the validity of concepts such as giffen goods. So whilst superficially similar, the Austrian notion of marginal utility and valuation differs from the neoclassical one.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
Jon Irenicus: There's a difference in how the Austrians and neoclassicals treat valuation, and this is important to understand, as the Austrians do not acknowledge the validity of concepts such as giffen goods. So whilst superficially similar, the Austrian notion of marginal utility and valuation differs from the neoclassical one.
To Austrians, there are only two types of good, capital goods and consumer goods? The value of all goods is subjective, so while a good may be a "giffen good", it is delineated as a consumer good for the consumer based on his subjective value of the good.
krazy kaju:The neoclassical school is also based on the writings of marginalists like Carl Menger.
Correct, but I think the neoclassical take on Marginal Utility was cardinal whereas the Austrians were ordinal.
I very much doubt the validaty of this statement. Possibly there some very sublte details that nobody cares about like the orthogonal and cardinal thing... This is very basic stuff however, that comes from Carl Menger and is not disputable. With regard to giffen goods, there have been actual psycological experiments on this, it's just price elasticity. Imagine that you usually buy 10 pieces of bread at $10 and 5 croissants at $20 (1x4). The price of bread doubles, so you may cut in the superficial good used for the same purpose, and buy instead the bread now 15 pieces at $30 (1x2).
Equality before the law and material equality are not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time. -- F. A. Hayek in The Constitution of Liberty
WTH, I'm confused.
Does anybody know any good books to read about the neoclassical school?
I know that both Austrian and neoclassical economics grew out of the marginalist revolution, but I really don't know any differences besides capital theory and methodology.
It's still not an exception to the law of demand, as the neoclassicals think it is. To illustrate what I mean:
I think Matt is on the right track here. The concept of a Giffen goodmakes sense only within the neoclassical framework of partial equilibriumanalysis. An unexplained change in the price of a given good is posited inwhat is essentially a barter economy and an answer is sought to thequestion of what the effect would be on the quantity demanded of the good,ceteris paribus. In Mengerian causal-realist analysis both the analyticalframework and the question asked are radically different. Price changesare seen as the outcome of the deeper causal forces of value scales andexisting stocks of the various goods and of money and of the (anticipated)purchasing power of the latter. At a given moment in time, the structureof prices and the purchasing power of money are determined by theinteraction of all market agents' individual value rankings of thecurrently existing supplies of goods and money balances (taking intoaccount speculative anticipations of changes in prices). The question isthen posed: What would happen if the supply of a single good were tochange, say increase, ceteris paribus? Since the causal-realist economistis interested in isolating the complete adjustment process of an individualchange, the ceteris paribus qualification is construed as precluding anyother AUTONOMOUS change in the economic data until full adjustment of theoverall economy has been made to the change in supply of the good inquestion. Assuming that the good is well short of the margin of fullsatiation of at least some consumers' wants, the additional units mustcause a decrease in marginal utilities of the good and result in a fall inits price and an attendant increase in its quantity demanded on the market.This is true always and everywhere and for all goods. Giffen goods, in theMarshallian-neoclassical sense, play no role in Mengerian causal-realistanalysis, because the focus of analysis is always on the underlyingfactors determining real money prices. Analyzing an uncaused change in theprice of a good--what neoclassicals call in another context an "individualexperiment"--is mental gymnastics and analytically meaningless. None of this is meant to deny that the series of endogenous changes in thedemand curves and prices of related goods (substitutes and complements),in the purchasing power of money and in the distribution of wealth inducedby this change in supply of a given good may cause some low-income peopleas well as others to purchase less of the good at the lower price than theydid at the higher price in the new final equilibrium. But this is hardlyevidence that demand curves can ever be upward sloping. Rather it is anillustration of the fact that all prices are interconnected and that everysingle change in the fundamental economic data brings about a "revolution"in the structure of demands, incomes and prices. For a causal realist analysis of demand curves, I recommend the relevantchapters of Wicksteed's Common Sense of Political Economy; Arthur Marget'sTheory of Prices; and Rothbard's Man, Economy and State, esp. pp. 280-288(Scholars Ed.)
None of this is meant to deny that the series of endogenous changes in thedemand curves and prices of related goods (substitutes and complements),in the purchasing power of money and in the distribution of wealth inducedby this change in supply of a given good may cause some low-income peopleas well as others to purchase less of the good at the lower price than theydid at the higher price in the new final equilibrium. But this is hardlyevidence that demand curves can ever be upward sloping. Rather it is anillustration of the fact that all prices are interconnected and that everysingle change in the fundamental economic data brings about a "revolution"in the structure of demands, incomes and prices.
For a causal realist analysis of demand curves, I recommend the relevantchapters of Wicksteed's Common Sense of Political Economy; Arthur Marget'sTheory of Prices; and Rothbard's Man, Economy and State, esp. pp. 280-288(Scholars Ed.)
So there are differences, however subtle and hidden, that lead economists from the two schools to divergent conclusions.
And no, neoclassicals do not believe utility is cardinal, they're not that stupid (although some are.)
The Law of suplly and demanda is a praxeological law?
How can we locally deduce the fact that when the demanda increase, the price will increase, ceteris paribus? Is this really deductible from the action axiom? How? Anyone knows how to demonstrate it?
If an artist charge $1000 for his show, and the demand increases, and he keep the price, does it refute the law?
http://mises.org/daily/5014