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Elinor Ostrom
By WALTER BLOCK* and IVAN JANKOVIC†
ABSTRACT. Elinor Ostrom thinks she has discovered a third way apart
from private and government property: the commons. In her view,
there is no “tragedy” associated with this third option. The present
article takes strong issue with her. Our claim is that she has not
properly distinguished between a commons and partnership
arrangements. In the former case, outsiders cannot be excluded from
entry; in the latter, they can. The reason for this confusion between the
commons and private property in Ostrom’s work is that she believes
private property is possible only if government protects and enforces it.
We show by using various historical examples that this assumption is
wrong, and hence the central tenet of Ostrom’s model of the commons
fails.
I. Introduction
*Walter E. Block, Ph.D., is the Harold E. Wirth Eminent Scholar Endowed Chair and
Professor of Economics at the Joseph A. Butt, S.J. College of Business, Loyola Univer-
sity New Orleans.
†Ivan Jankovic is a Ph.D. candidate in political science at Simon Fraser University.
American Journal of Economics and Sociology, Vol. 75, No. 2 (March, 2016).
DOI: 10.1111/ajes.12141
C 2016 American Journal of Economics and Sociology, Inc.
V
290 The American Journal of Economics and Sociology
Ostrom (1990) starts her most well-known book, Governing the Com-
mons, by defining and briefly discussing the “commons” as well as pri-
vate property rights and government intervention. Here, at the first
step, she injects conceptual confusion into the analysis, an error that
plagues and renders untenable the rest of the book. She starts by defin-
ing commons in a conventional way, by citing Hardin (1968: 1244) talk-
ing about the situation with many herders and public land that
becomes overgrazed since nobody has an incentive to limit the exploi-
tation of the common property:
Therein is the tragedy. Each man is locked into a system that compels
him to increase his heard without limit—in a world that is limited. Ruin
is the destination toward which all men rush, each pursuing his best
interest in a society that believes in the freedom of commons.
But, curiously enough, although she mentions that the critical ele-
ment responsible for the tragedy of the property held “in common” is
that it is “open to all” (it is not excludable) Ostrom almost immediately
forgets all about this insight of hers, and in the rest of the book treats
the commons as simply a synonym for group property. The effect of
this is that the very definition of private property, known from the
Roman law until today, is rendered irrelevant; Ostrom offers her own
idiosyncratic definition in which private property means by and large
that only a “single individual” has control over a definite resource. This
is obvious in her argument against privatization of the “commons”: the
only way she can imagine the commons could be privatized is by
292 The American Journal of Economics and Sociology
The obvious problem with this is: Why would the herders necessarily
have to divide the land up into the two separate pieces? This is a com-
pletely arbitrary limitation. It would be the same as to say that the priva-
tization of a formerly state-owned enterprise cannot be carried out by
selling it to two partners who would jointly manage and control the
entire establishment; that there has to be one and only one exclusive
owner of every single asset or firm.4 This is clearly incorrect. However,
Ostrom, without giving us any reason whatsoever, urges us to accept
this constraint in the case of meadows or fisheries and other environ-
mental goods: Why would the two specific contractors, the co-owners
of a meadow, be limited in their contractual options in a way no others
are? Why could not they share the ownership and control rights in the
same way the partners share those rights in the case of other commer-
cial enterprises? We do not assert that these two would do this, merely
that they could. Ostrom does not see this even as a possibility. We do
not find such arbitrary limitations in the case of ownership of any con-
ventional commercial asset, owned by more than one person: actually,
there is a tremendous diversity of contractual arrangements regulating
such kinds of joint ownership.
For examples we have only to look at the variety of contractual
forms in the case of firms: there are unlimited liability partnerships;
partnerships with asymmetrical liability where some partners bear
the full risk while the others have limited liability; corporations that
have limited liability in principle, but their governance mechanism is
rather indirect with hired managers operating the firm (which is far
less common in any kind of partnership). Ostrom assumes, but with-
out offering any evidence whatsoever, that the range of possible
Tragedy of the Partnership 293
One example Ostrom (1990: 62) offers for the alleged non-market
governance of the “commons” is the case of Swiss villagers who control
jointly the Alpine meadows:
All partners retain full access to the asset and the particulars of the
division of proceeds are in various ways agreed upon by all of them
internally. Ostrom never explains what it is that the classical Roman
Communio in indiviso or contemporary law firms are doing that does
not apply to her villagers, fishermen, and herders. Every single example
she offers as “commons” is without exception really a Roman
condominium.
The basic reason for the misconception about property rights that per-
meates Ostrom’s work is the conviction that free markets and private
property rights cannot exist in the absence of government control. In
Ostrom’s view, police, judiciary, contract enforcement, and adjudication
of disputes—all of this is to be provided by the entity called the “state”
or even the “Leviathan” state. As Ostrom (1990: 15) says:
At all times, but especially during the Republic, the Roman government
lacked a police force and other bureaucracies that could check ordinary
crime, much less control behavior that was less dangerous but still disfa-
vored. Attempts have been made to find elements of the Roman govern-
ment that might have taken on those functions, but the evidence has
been lacking. No magistrate had a major responsibility in this area, nor
did any have at his disposal the large number of dedicated employees
that would have been required to police the city the size of Rome.
302 The American Journal of Economics and Sociology
Even the military was private as well as the system of taxation, which
depended mostly on voluntary contributions. Bertrand de Jouvenel
([1949] 1976): 101–102) in this way nicely summarizes the socio-
political set up of the Roman Republic:
Right through her republican period Rome never knew the means of
public coercion and had for force only the people themselves, who
could at need answer the summons of the leaders of society. Only those
decisions were possible on which there was a general agreement, and,
in the absence of any state apparatus, their execution depended solely
on the cooperation of the public. The army was but the people in arms,
and the revenues but the sums gifted by the citizens, which could not
have been raised except by voluntary subscriptions. There was not, to
come down to the essential point, an administrative corps.
Notarial attestation was usually dispensed with and the sign manual was
accepted as sufficient documentary attestation for evidentiary purposes.
Verbal evidence could contradict even a written document where the
amount in dispute exceeded one hundred livres . . . In addition, verbal
agreements were sufficient to found private partnership. No formal deliv-
ery was necessary in passing the property in a thing from the seller to
the purchaser. The use of an agent did not require formal authorization.
Nor the agent acquired any independent rights or liabilities on his own.
(Trakman 1980: 14)
Further, the judges in these merchant courts were not lawyers but the
merchants themselves! It was believed that attorneys lacked sufficient
knowledge of the substance of trade disputes to be able to contribute.
As well, they were inclined to take a too formalistic approach, which
304 The American Journal of Economics and Sociology
At the height of the Law Merchant era, the Merchant Guild, together with
the courts of “fairs” and “staples”, held substantial sway over matters of
commerce. Guild or city members, citizens and foreign merchants, all
received commercially oriented justice within the jurisdiction. Often this
power was substantial, even to the total exclusion of the ordinary courts
of the land . . . Under this commercial regime, the value of mandatory
law, pre-emptory in nature and in effect, was rendered subservient to
the business demands dictated by the trade environment. (Trakman
1980: 16)
banished from this district” (Anderson and Hill 1979: 20). Instead of
government lawyers and statist adjudicating procedures, the miners
used their own private courts. Does that mean the California gold min-
ers were actually somehow managing the “environmental commons”
by creating those private institutions, instead of protecting their lives,
liberty, and property? Hardly.
If we do not want to reach such an absurd conclusion, then Ostrom’s
entire argument about “commons” has to be rejected as untenable. The
fact that some institutional arrangement does not perfectly fit the mod-
els of contemporary political science or neoclassical economics requir-
ing “public goods” does not mean the arrangement is not one of private
property rights. As we have seen, there had been some very important
and long-lasting systems of private and contractual rights that were nei-
ther created nor enforced by governments. In order to assess the char-
acter of the institutional regime in question we should not look at the
agency of enforcement but at the content and the logic of the arrange-
ment itself. The fact that the Swiss villagers or Indonesian irrigators for
the most part manage their contractual arrangements themselves with-
out government’s help does not tell us anything about the nature of
their arrangements. For that we have to study their economic and legal
content. This analysis clearly shows that they represent private prop-
erty, not a “commons.”
In her paper “Neither Market nor State,” Ostrom (1994) formulates
eight conditions that a governance system has to fulfill in order to effi-
ciently control the problem of the commons. This only reinforces skep-
ticism about the theoretical viability of the very concepts of commons
and common pools resources, at least as she uses them. According to
Ostrom (1994: 6–11), in order to function properly, the “commons”
must be “governed” according to the following criteria:
justified and even to what extent it was Misesian at all,17 but the impor-
tant thing to bear in mind is that Hayek developed a theory he thought
could better articulate Mises’s argument for markets and against social-
ism. Hayek is quite explicit about that: his emphasis on decentralized
knowledge and his critique of concentration of power in the hands of
central planners is not an end in itself. Hayek argues that the free mar-
ket is efficient because it allows us, via market prices, to utilize signifi-
cantly more knowledge that anyone in isolation could have at his
disposal. As he says in the paper “Competition as a Discovery
Procedure,” the function of market competition is to discover the most
useful allocation of resources and patterns of investment. Here is one
of the crucial examples of the decentralized use of knowledge that
Hayek (1945: 525) gives to explain what kind of knowledge the “man
on the spot” has to have and why:
There is hardly anything that happens anywhere in the world that might
not have an effect on the decision he [the entrepreneur] ought to make.
But he need not know of these events as such, nor of all their effects. It
does not matter for him why at the particular moment more screws of
one size than of another are wanted, why paper bags are more readily
available than canvas bags, or why skilled labor, or particular machine
tools, have for the moment become more difficult to obtain. All that is
significant for him is how much more or less difficult to procure they
have become compared with other things with which he is also con-
cerned, or how much more or less urgently wanted are the alternative
things he produces or uses. It is always a question of the relative impor-
tance of the particular things with which he is concerned, and the causes
which alter their relative importance are of no interest to him beyond the
effect on those concrete things of his own environment.
IV. Conclusion
She was the very first woman to have done so. She had no degree in
economics, but rather in political science. Even if those were the only
facts of the case, we would still not be warranted in dragging her
through the intellectual mud as we have done, at least not so assidu-
ously. What really justifies our method in regard to her is that, seem-
ingly, the entire professions of economics, public policy, political
science, and social science in general have been taken in by her siren
song of the commons. If we are to correct the record, and rescue the
concept of the tragedy of the commons from her pillaging of it, we can
do no less than offer a page-by-page, paragraph-by-paragraph, and, in
some cases, line-by-line refutation of her errors. This is precisely what
we have done.
Notes
1. A particularly egregious example of this slavish unthinking hagiographic
devotion is Boettke (2009). This comes from a scholar who really should have
known better, since he usually favors private property rights and Austrian eco-
nomics. Ostrom singles out Smith (1981) for special criticism, since Smith sup-
ports the free-market doctrine of the “tragedy of the commons,” while Ostrom
rejects it. One would have thought that Boettke, otherwise a supporter of free
enterprise, would have sided with Smith, not Ostrom; in the event, we are sadly
disappointed.
2. The only exception is a critical review of Ostrom (1990) by Block (2011).
3. Ellickson (1994) studies one such case. Pinker (2011) maintains that this
example is unimportant. For a critique of the latter, see Block (2013).
4. On privatizations in Canada, see Ohashi (1980) and Ohashi et al. (1980).
A particularly interesting example is the Eastern European privatization after
the collapse of communism in 1989. Many countries employed the models of
privatization that included a transfer of ownership from the government to mul-
tiple persons. For example, in Seribna there had been two different laws gov-
erning privatization: first in the mid-1990s the former government ownership
was transferred to the employees and the directors of the firms. Later on, since
2000, new legislation was passed according to which 70 percent of the owner-
ship was sold to a single buyer on a public auction, while the remaining 30 per-
cent of the shares were given to the employees. Was this a privatization
according to Ostrom? No. For they divided a single resource, a firm, among
many people, sometimes dozens, scores. If she stuck to her principles, she
would have to characterize the result as a “commons.”
5. An analogy is the Herfindahl Index, or the four (or eight) firm concentra-
tion ratio utilized by neoclassical economics (Bork 1978; Brozen 1982; Posner
312 The American Journal of Economics and Sociology
(2001), versus the Austrian view (Rothbard 1962; Block 1994) that eschews
mere numbers of competitors in favor of the criterion of legal entry. Another
difference is the end state views of Rawls (1971), which engages in the numeri-
cal counting of shares of income or wealth, in contrast to the process theory of
Nozick (1973).
6. This is a right that can be exercised by one or more persons, depending
upon the form of ownership
7. Two or more hands, it matters not one bit.
8. Are the present authors merely having a verbal dispute with Ostrom? We
think not. We claim she is making a substantive error, not merely a definitional
one.
9. Holcombe (1994, 2005) makes an identical error. For a critique, see
Block (2010).
10. If the present authors tried to sneak our own cattle (we do not have any
now, but we could purchase some) onto this “commons,” which is presumably
open to all and sundry, we might even succeed for a short time while the actual
owners (this means it is not a commons where all are welcome) were doubled
up in paroxysms of laughter at our temerity and idiocy. But, as soon as they
recovered from their stomach cramps (likely, they would not have had as good
a belly laugh like that in years), we and our cattle would be summarily booted
out of this commons. Well, maybe not. Probably, they would tar and feather us,
and keep our newly bought cattle for themselves as a penalty for our trespass.
11. The present authors of course do not deny that there is such a thing as a
commons: not private owned, not controlled by government, where no one is
precluded from entry. For example, the middle of the ocean.
12. For a critique of the “public goods” market failure argument, see Barnett
and Block (2007, 2009); Block (1983, 2000, 2003); Cowen (1988); De Jasay
(1989); Holcombe (1997); Hoppe (1989); Hummel (1990); Osterfeld (1989);
Pasour (1981); Rothbard (1985, 1997); Schmidtz (1991); Sechrest (2003, 2004a,
2004b; 2007); Tinsley (1999). Rothbard’s (1997: 178) reductio ad absurdum of
public goods is as follows: “A and B often benefit, it is held, if they can force C
into doing something. . . . [A]ny argument proclaiming the right and goodness
of, say, three neighbors, who yearn to form a string quartet, forcing a fourth
neighbor at bayonet point to learn and play the viola, is hardly deserving of
sober comment.”
13. The present authors do not support the restrictive elements of the guild
system. We are here concerned only with their functioning as private courts.
14. Other examples of functioning anarchist societies may be found here:
Benson (1990); Clay (1997); Davies (2002); Friedman (1979, 2006); Leeson
(2007); Long (1994); Peden (1977); Powell, Ford, and Nowrasteh (2008); String-
ham (2003); Solvason (1992); Thompson (2006).
15. However, there is a de-homogenization literature that emphasizes not
the compatibility of the views of these two Austrian economist, but rather their
Tragedy of the Partnership 313
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Abstract
In this paper some recent improvements and refinements of the mainstream Austrian
theory of the firm are analyzed (Foss and Klein, 2012; Foss et al, 2007). Those refinements
attempt to fuse the old Austrian-Coasean theory of the firm with a sophisticated analysis of
entrepreneurship and capital theory, in order to broaden the scope and the application of
the original intuition behind the Coasean theory that governance, planning and hierarch-
ical mode of relationship are necessary features of an efficient market system. I criticize
this strategy by combining the insights of the Austrian capital theory and the standard
neoclassical theory of the firm, to show how the Coasean firm, both in its original and Aus-
trian derivations misrepresents the real reasons and function of the firm in a market society.
The main problem of this new synthesis is that it just broadens the old error committed by
Mises and Rothbard, treating Coasean theory of the firm as central planning hierarchy to
be consistent with Austrian argument against planning, and for economic calculation and
entrepreneurship. In my analysis, the ingenious inclusion of the Austrian capital theory into
the Coasean framework by Foss and Klein only adds another layer of errors to the original,
untenable conception of the firm as a hierarchical and organizational entity by arguing that
the firm is needed to handle the problem of heterogeneity of capital goods.
Keywords
1 Doctoral candidate in political science , Simon Fraser University, Vancouver; email: ijankovi@sfu.ca.
The conventional treatment of the theory of the firm in the modern literature of the Aus-
trian school combines Mises’, Hayek’s and Rothbard’s emphasis on entrepreneurship and
economic calculation with the concept of the firm proposed by Ronald Coase and is widely
accepted among the students of economic organization (Foos and Klein, 2012; Foss et al,
2007; Ionadies, 1999). This theory depicts the firm as a central planning and hierarchical
entity, supplementing or rather supplanting the market as a coordinating mechanism. Prin-
cipally, it combines Coase and Mises, i.e develops a theory of the firm as a commanding
authority serving the purpose of “organizing the entrepreneurial judgement” as Foss and
Klein like to say. This dominant tradition of organizational thinking within the Austrian
school will be called “Austrian Coaseanism” or simply the “mainstream Austrian theory of
the firm”. A minority of authors writing in the Austrian tradition question this amalgama-
tion of Misesian and Coasean traditions and argue that the firm should be understood as a
specific market mechanism (Salin, 2002; Mathews, 1998; Jankovic, 2010).
There are many other aspects related to the Austrian theory of the firm treated in other
works, but they are only tangentially related to the main problem of the theory of firm. For
example, Dulbeco and Garrouste (1999) propose a unification between the capital theory
and theory of entrepreneurship, but here the firm is conceptualized just as a kind of black
box with the tools necessary to explain the main problems such as individual knowledge
and asset specificity. The theory is a functional one in the same sense the neoclassical
theory of the firm is functional, striving to explain the exchange on an open market. Salin
(2002), ties the discussion of the firm to the problem of division of labor; Walsh (2009)
offers an ingenious Mengerian invisible-hand explanation of the origins of the business firm
trying to strike a balance between the notions of spontaneous order and conventional treat-
ments of the firm; Cowen and Parker (1997) explore the problems of reconciling the theory
of the firm and the process-character of the market exchange. Garrouste (2002) analyzes
the implication of the Hayekian problem of knowledge in conjunction with the institutional
theory of the firm: how the knowledge within the firm grows and how it is distributed
among the participants in the enterprise. An entire array of other Austrian works of the
firm explores various aspects of this relationship between knowledge and organizational
structures (Foss, 1999; Tsoukas 1996; Minkler, 1993).
The problem that I want to analyze in this paper is much narrower: it concerns some lim-
ited (in scope) refinements of the orthodox Austrian theory of the firm – the one combin-
ing Coase’s concept of the firm with the Austrian arguments about entrepreneurship and
prices. This new approach most notably pursued by Nikolai Foss and Peter Klein (Foss et
al, 2007; Foss and Klein, 2012) strives to include into the analysis the theory of capital and
to show that initial synthesis of Coase and Mises was justified by arguing that the Coasean
notion of the firm is the best environment to accommodate the Austrian theory of heteroge-
neous capital, developed by Menger and Bohm-Bawerk. This is a broadening and strength-
ening of the theory insofar as it implies that there is a deeper structural affinity between
Coaseanism and Misesianism, which concerns the very heart of the Austrian theory – the
One of the most critical facts about the Coase’s theory of the firm, which is very seldom
emphasized, is that it represents just a special application of the general market socialist
and market failure theories (Bylund, 2014). Coase writes his famous paper in 1937 in the
middle of the controversy over the possibility of rational economic planning in socialism.2
And he sides squarely with socialists and against Mises and Hayek in this debate by accept-
ing the perfect competitive theory as the standard for judging the efficiency of the market.
Coase tries to rehabilitate central planning as a mechanism of coordinating economic activ-
ity, badly damaged by the Austrian critique in the 1920s and 1930s.
This is quite obvious at the very beginning of the article when Coase contrasts price
mechanism and planning, and ponders their relative usefulness:
It is easy to see when the State takes over the direction of an industry that, in plan-
ning it, it is doing something which was previously done by the price mechanism.
2 Useful reviews of the debate are given in Rothbard (1991), “The End of Socialism and the Calculation Debate
Revisited”, The Review of Austrian Economics, Volume 5, Issue 2, pp 51–76; and Kirzner (1988), “The Eco-
nomic Calculation Debate: Lessons for Austrians”, The Review of Austrian Economics. 1988, Volume 2, Issue
1, pp 1–18.
Thus, Coase argues that an efficient economic system represents some kind of market so-
cialist combination of planning and price mechanism; what the entrepreneurs do is the
same thing that the central planners in Russia are doing. The only difference is that social-
ists may have pushed things too far, whereas firms in capitalism provide for an ‘optimal’
amount of planning.
To what extent is Coase reiterating the position of market socialists, primarily Lange
and Lerner in the debate about the rational planning in socialism, is best seen by the fact
that he identifies the model of perfect competition as a relevant description of the process
of market exchange, any departure from which is seen as a market failure. He then identi-
fies a problem with one of the conditions of perfect competition, namely the absence of
free prices on the real market (as opposed to the model) and then argues that this requires
a limited central planning through the firms to remedy this market failure. This is the es-
sence of the famous Coasean formula about the firm as a tool of “minimizing transaction
costs”: “The main reason why it is profitable to establish a firm would seem to be that there
is a cost of using the price mechanism. The most obvious cost of “organising” production
through the price mechanism is that of discovering what the relevant prices are. This cost
may be reduced but it will not be eliminated by the emergence of specialists who will sell
this information.” (Coase, 1937: 4).
Coase clearly believes that the only imaginable situation in which the price mechanism
would operate efficiently is the one conforming to the preconditions of perfect competitive
equilibrium, including free information. Since this condition is not met in reality, the price
mechanism ‘fails’, and the firm represents a correction of this ‘failure’; planning has to
come to the rescue by its intervention in the form of the entrepreneurial firm, which per-
forms exactly the same kinds of function all other government interventions are designed to
perform in all market failure theories: bringing about the conditions of perfect competitive
markets. The real markets are deficient, because of the transaction costs of using the price
mechanism and “planning” corrects this deficiency.
Coase sees the price mechanism and “planning” as two competing coordinating mecha-
nisms that peacefully coexist. Depending on the specific circumstances of a given society,
one of them could have been dominant or ‘supersede’ the other in a certain area or certain
branch of industry, but from his point of view there is no necessary contradiction between
the two. As he emphasizes, in an economy there is always equilibrium between the marginal
Compare this now with how Murray Rothbard explains economic irrationality of socialism,
with price controls and government ownership:
We here clearly see that Rothbard and Coase describe essentially the same phenomenon,
the spread of the non-market, planning coordination within a free market environment,
using the same imagery of “islands” and seas. But, the differences in assessment of this phe-
nomenon could not be more striking: Coase sees the ‘islands of planning’ as a welcome cor-
rective to the inefficiencies of the market system reflected in high transaction costs, whereas
Rothbard, on the contrary, sees in the same islands of planning the areas of ‘incalculability’
and economic irrationality, which, if allowed to spread over a sufficiently large part of the
economy, could wreak havoc on it, even before we get to the point of full socialism (which is
just a state in which there is nothing but irrationality of planning, encompassing continents
now, instead of mere ‘islands’).
It is nothing short of astonishing that irrespective of this, Rothbard accepts Coase’s
theory of the firm! And, moreover, he offers the Austrian arguments on price calculation
as a supplement to Coase’s theory in determining the optimal size of the firm.3 Namely,
according to Rothbard, the firm as a central planning island in the sea of price coordination
could exist only insofar as the independent, outside markets for capital goods are preserved
that would protect the integrity of the internal pricing mechanism within the firm (Roth-
bard, 2009).
3 See Rothbard, 2009, pp. 609–617, and further development by Klein 1996.
4 The only attempt to do this, as far I can tell, is Lewin (1998). But, although the paper promises to answer the
following questions: “On the one hand, if socialism is indeed irrational, in the sense of precluding the ability
to perform the necessary calculations, how is it that the firm is not similarly encumbered? After all, is not a
state socialist system simply one large firm? And are firms not islands of socialism in a market sea?” (Levin,
1998: 500–501). The ensuing analysis does not tell us anything about this set of issues. Instead, Levin argues
that the entity called the “firm” is necessary to provide an environment for entrepreneurial calculations of cost
and profit. But, this is perfectly consistent with the nexus-of-contracts view of the firm and does not explain
at all why we would have to understand the firm as a commanding entity, rather than as a legal fiction for vol-
untary contracts. Moreover, he equivocates about the very meaning of the key term “planning”. At the begin-
ning, this term means the relationship between the owner and employees. Later on, he switches to the notion
of planning as entrepreneurial anticipative calculation of costs and benefits. This is close to what Mises would
call the ‘praxeological’ meaning of planning: simply, every market agent plans, i.e. anticipates his own costs
and benefits. If this is so, it’s not clear why then the employees would not be “planning” as well. And if every-
body is “planning”, what is then the point of making an analytical distinction between the “planning” and the
“market” in the first place?
5 This is the criticism that Demsetz (1988; 2011) levels against Coase.
We now turn to the refinements of this Rothbard’s mistaken acceptance of the Coasean
theory of the firm by the authors who tried to incorporate the Austrian discussion of the
capital heterogeneity into the system (Klein and Foss, 2012, Foss etl 2006; ). It is safe to say
that what they achieved was simply to generalize and amplify Rothbard’s initial mistake of
treating central planning as a cure for market failure by infecting even the Austrian capital
theory with Coaseanism.
Let’s start by discussing the differences between the Austrian and neoclassical capital
theories, and then explore what conclusions the Rothbardians derive from those differences
in the context of the theory of the firm. Heterogeneity of capital stems from the general
analysis of value, price, and the market process by Menger and Bohm Bawerk. Carl Menger
revolutionized economic theory by reinterpreting the origins of value and reversing the flow
of economic causation in his famous book ‘The ‘Principles of Economics’, as compared to
earlier theories. Unlike his classical predecessors, Menger argued that the source of value
is individual human valuation of consumer goods’ utility for the satisfaction of his needs,
and that the standard of evaluation is marginal utility which is decreasing (Menger, 2007).
This helped solve the paradox of value that plagued classical economics, mired in the cost
of production and labour theories of value, which were unable to explain the market value
of non-reproducible goods, or natural goods.
However, the critical corollary of this revolution in the theory of value was Menger’s
theory of imputation that shifted the causal arrow from the classical cost theories, by claim-
ing that the cause of all material production and the source of their value are human needs
and human evaluations of the material goods, and that all other goods that are used at
some point to produce those final consumption articles derive their utility and their price
from the value of the final goods. Marginal utility determines the price of the final goods,
whereas the marginal productivity in producing those final goods determines the price of in-
termediate capital goods. The value is, so to speak, imputed backwards to the capital goods
and land from the consumer goods, rather than prices of final goods being determined by
the objective, ex ante given costs of their production (Menger, 2007: 51–74).
A further consequence of this shift is that production is not seen any more through the
lenses of an input-output analysis, depicting the process of production as a transformation
of a given set of inputs (factors) into the set of final goods, but rather a complex inter-
temporal process that starts with the higher order goods, as Menger names them, and then
proceeds through a series of intermediate steps to the final stage of consumption goods
(Menger,ibid. ).
Bohm-Bawerk describes this as a “roundabout” process of capitalist production, and
at each level of production a large-scale process of selection and specialization of capital
goods is taking place; the further we go from the stage of final goods along the chain of
production structure, the less specialized goods become: land, raw materials or products of
nature could be put in very many uses; some intermediate goods such as the refined metals
and some machines are less specialized than some others such as more narrowly special-
One aspect of the Austrian capital theory we are here most interested in is how it interacts
with the conventional and nonconventional theories of entrepreneurship and the firm. In
the Austrian literature, this issue is pursued with vigilance in the last couple of decades,
and we are going now to explore some of the results that are achieved and their limita-
tions. As already suggested, the Austrian literature pursuing those kinds of complications
is mostly Misesian-Rothbardian in its direction, and the exposition and critique here would
be directed to the entire tradition, although I would single out a couple of the most promi-
nent and canonical authors of this tradition. Primarily, I have in mind the refinements and
broadening of the paradigm brought about by Nicolai Foss and Peter Klein, and some other
authors following their lead.
The basic thrust of their argument is an attempt to broaden the application of the Roth-
bardian dubious reconciliation of the Coasean “organizational” theory and Austrian price
theory by including the theory of capital into the synthesis. And although impressive in its
learning and comprehensiveness, this attempt is untenable for the same reasons Rothbard-
ian initial argument for Coaseanism is wanting. Klein and Foss (2012) as well as Foss et al
(2007) start from the fact of heterogeneity of capital in the Austrian tradition and contrast
it with the treatment of capital in the mainstream neoclassical tradition. This is, in a sense,
an already explored possibility; for example Dubleco and Garrouste (1999) are trying to
bridge the gap between the Hayekian-Kirznerian entrepreneurial knowledge and the Bohm-
Bawerkian asset specificity. However, they use the firm just as a functional black box to per-
form the feat, avoiding any explicit Coasean themes for analysis of the inter-firm structure.
They are not interested in the structure of the firm.
6 For a good summary of the debates on capital theory between Austrians and neoclassicals see Hayek (1935)
and Cohen (2008). The debate was waged over the period of more than 30 years. For the Austrian expositions
see, Bohm Bawerk (1895), Hayek (1935) and Machlup (1935). For the neoclassical “fund of value” position
see Clark (1895) and Knight (1934).
5. Critique
The gist of the Foss/Klein revision of the standard Austrian framework is best expressed
in their previously quoted statement “In a world of shmoo capital economic organization
is relatively unimportant. All capital assets possess the same attributes, and thus the costs
of inspecting, measuring and monitoring the attributes of productive assets is trivial. Ex-
change markets for capital assets would be virtually devoid of transaction costs” (Foss et
al, 2007: 1168). This statement is essentially just a translation of the basic Coasean claim
about the absence of the firm in the neoclassical paradigm into the language of capital
theory. Coase imagines that the only reason why the firm could emerge is to minimize the
transaction costs,7 and since the transaction costs in the neoclassical model are zero, then
neoclassical theory ‘fails’ to explain the very existence of the firm. In the same manner,
Foss et al claim that the only reason why the “organizational forms” of governance could
emerge is to deal with the transaction costs of operating the capital assets, and since the
capital assets are identical in the neoclassical treatment, the transaction costs are minimal
and hence the firm is unnecessary.
But, both claims are equally dubious. As Harold Demsetz (2011a) demonstrates, the
firm in the neoclassical model is meant to perform a functional role as a part of the sys-
tem of exchange between the open market and households. Firms emerge not because the
market is characterized by high transaction costs but because it is characterized by a high
extent of division of labor; the reason for a firm’s existence is that it provides a large degree
of specialization which increases productive efficiency and represents an alternative to the
self-sufficient provision within a household. The firm is an instrument of production and
exchange which becomes more important as the extent of market specialization and divi-
sion of labour increases, not less. The opposition in the neoclassical theory is not the one
between the market driven by price signals and the firm driven by commands and planning,
but the one between the markets with the firms as the instruments of specialization and
exchange and households as self-sufficient and non-market environments of production and
distribution.
Contrary to what Coase claims, the firm could exist even in the zero transaction cost
world, and moreover it is likely that the extent and the reach of the firm production in such
a world would have increased rather than decreased, because it would have made the provi-
The basic claim of this paper is that the only way of making sense of the notion that a free
market is superior to central planning in the context of a world characterized by heterogene-
ity of capital is to reject Coasean theory of the firm as a centrally planned ‘organization’.
Contrary to some new attempts to show that heterogeneity of capital stock (asset specifi-
city) entails various forms of opportunistic behaviour that invite the substitution of or-
ganizational forms of governance for market transactions (Klein and Foss, 2012; Foss et al,
2007), I affirm that heterogeneity is actually an additional reason why the market prices are
indispensable and why organizational and planning thinking is a wrong way to conceptual-
ize the problem. Austrian economists who tried to fuse Misesian arguments on economic
calculation and market prices with the Coasean theory of the firm never addressed the basis
and fundamental disconnect between these two theories: the fact that Coase argues that
central planning represents a remedy for the failure of market prices efficiently to coordi-
nate the economic activity. The newest attempt by some Austrians to use the upgraded form
of Bohm-Bawerkian capital theory as a new way of reconciling the two is equally untenable.
All the problems and contradictions this brand of Austrian theory faces could be avoided
very simply: by rejecting the Coasean notion that a firm represents an instrument of central
planning, but rather a form of voluntary and contractual market cooperation.
REFERENCES
Alchian Armen, Demsetz Harold (1972) ‘Production, Information Cost and Economic
Organization’, American Economic Review 62(5): 777–95.
Bohm-Bawerk von, Eugene (1959) Capital and Interest: Volume II – Positive Theory of Capi-
tal. South Holland, Illinois: Libertarian Press.
Bohm-Bawerk, E. (1895) ‘The Positive Theory of Capital and Its Critics I.’ Quarterly Jour-
nal of Economics 9 (January): 113–31.
Bylund Per (2014) ‘Ronald Coase’s “Nature of the Firm” and the Argument for Economic
Planning’, Journal of the History of Economic Thought 36(3): 305–329.
Clark, John Bates (1893) ‘The Genesis of Capital’, Yale Review 2: 302–315.
Clark, John Bates (1895) ‘The Origin of Interest’, Quarterly Journal of Economics 9 (April):
257–78.
Coase, Ronald (1937) ‘The Nature of the Firm’, Economica, New Series, 4(16): 386–405.
Cohen, A. (2008) ‘The Mythology of Capital or a Static Equilibrium: The Bohm-Bawerk/
Clark Controversy’, Journal of the History of Economic Thought 30(2).
Cowen, Tyler and David Parker (1997) Markets in the Firm: A Market Process Approach to
Management. London: The Institute of Economic Affairs.
Demsetz Harold (1983) ‘The Structure of Ownership and the Theory of the Firm’, Journal
of Law and Economics 26(2).
Abstract: This paper examines the economic contribution of Italian philosopher Benedetto Croce. Although deservedly cred-
ited as a great philosopher of the 20th century, he is seldom thought of as an economist. Yet, he is one. Croce’s approach to
economics most closely aligns with the “Austrian” school of economics, emphasizing the deductive method, a “praxeological”
view of economics as a science of “human action”, a subjective theory of value and economic facts, a radically subjectivist the-
ory of cost, and resistance to positivism and naturalism. In many of these areas Croce formulated the principles of Austrian
economics decades earlier than Mises, Hayek and other key members of this school.
known and appreciated, is that Croce was a first-rate econo- developed decades earlier. Rothbard mentions Croce’s great
mist of a speculative, theoretical bent. He developed a very polemic with Pareto in a footnote to his article “Towards
sophisticated economic conception which in many respects a Reconstruction of Utility and Welfare Economics”, and
anticipated the basic tenets of what has come to be known correctly describes Croce as a “praxeologist”, but without
as the modern “Austrian” economics. any further analysis or wider appreciation of Croce’s contri-
The purpose of this essay is to explore Croce’s contribu- bution (Rothbard 1956, p. 9).
tion to economic theory and to show that he was respon- The only significant exception to this trend seems to be
sible for the development of many of the crucial theoretical Israel Kirzner. In his book Economic Point of View he de-
concepts of the “Austrian” school of economics most nota- votes a couple of pages to the debate Croce-Pareto, and cor-
bly formulated by Ludwig von Mises, Lionel Robbins and rectly argues that Croce understood economic science in a
Murray Rothbard in the 20th century, but mostly ignored Misesian aprioristic and deductive way, as opposed to the
by historians of economic ideas. What is particularly sur- positivist Pareto. He even deservedly criticized Mises for
prising and peculiar, is that this contribution went almost not recognizing the significant similarities between his and
unnoticed even among the Austrian economists them- Croce’s understandings of economic science:
selves. They could have found any number of antecedents
and sometimes ready-made formulations for their own Professor Mises has not recognized the close similar-
theories in Croce but for a variety of reasons, mostly hav- ity to his own position which is evidenced in Croce’s
ing to do with the fragmentary nature of Croce’s economic writing (see L. Mises, Theory and History, p. 308).
writings (just two letters to Pareto and some isolated com- What appears to be the principal point of difference
ments) and professional skepticism of economists toward between their positions has little relevance to the con-
the economic acumen of a philosopher, have chosen not to ception of the character of economic science. Both
do so. For example, Ludwig von Mises thought that no phi- writers emphasize the rationality of all human action;
losopher, save for perhaps Collingwood, had any serious both recognize that a chosen program may fail to be
grasp of economics. He disparagingly talked about Croce adhered to either because of a technical error (an er-
as just one more among philosophers ignorant of econom- ror of knowledge) or because of the choice of a new
ics (Mises 2007, p. 308). In Hayek’s works, I was unable to
program of ends with respect to which action will be If we speak of conscious choice, we have before us a
“rational” (Kirzner 1976, p. 214). mental fact, if of unconscious choice, a natural fact;
and the laws of the former are not those of the latter. I
What I will attempt to show in this paper is that Kirzner’s welcome your discovery that economic fact is the fact
account was essentially correct, but incomplete, that he un- of choice; but I am forced to mean by choice, volun-
derestimated the extent of Croce’s neglected contribution. tary choice. Otherwise we should end by talking not
not only in that there was a striking similarity between only of the choices of a man who is asleep (when he
Mises and Croce, but also that Croce developed many of the moves from side to side), but of those to animals, and
crucial theorems of Austrian economics, especially as per- why not? of plants and why not again? of minerals…
taining to methodology, welfare economics and price the- (Croce 1966, p. 181).
ory. In Croce’s works at least four crucial arguments could
be identified that came to be known to us, in some cases Mises formulates the same idea at the very beginning of
in very similar versions, via the works of Mises, Hayek, Human Action by suggesting that the “opposite of action
Robbins, Rothbard and others. In some cases, particularly is not irrational behavior but a reactive response to stimu-
when it comes to the utility theory and the doctrine of dem- li on the part of bodily organs and instincts which cannot
onstrated preferences, Croce went further than the stan- be controlled by volition of the person concerned” (Mises
dard theory and developed an original interpretation that is 1998, p. 20).
in tension with the conventional Misesian praxeology. At the same time however, this conscious human action
Croce’s arguments that will be explored are: as the subject matter of economics is value free: action is an-
• Economics is a science of conscious human action alyzed as action, not as being miraculously “coordinated”
• Subjective character of economic data and radically with any moral, ethical, or utilitarian consequences that 43
subjective theory of cost. it might have. Just as Mises and Robbins would later do,
COSMOS + TAXIS
• Apriori character of all economic theorems (rejection Croce analyzes economic action as embedded in an abstract
of empiricism) ends-means structure, not as containing any particular
• Unification of the doctrine of demonstrated preference specification or normative evaluation of either human ends
with subjective utility. or means to achieve them. He criticizes Pareto for trying to
isolate economic choices as a distinct category of human ac-
I will explore Croce’s contribution to each of these areas. tion, which is strictly morally indifferent, i.e. neither mor-
al nor immoral. On the contrary, argues Croce, economic
choices are indifferent not in terms of being a separate cat-
I. ECONOMICS AS A SCIENCE OF egory, but in virtue of being philosophically emptied of any
CONSCIOUS HUMAN ACTION moral content: “since choices are necessarily either altruis-
tic or egoistic, either moral or immoral, you have no way
Both in the letters to Wilfredo Pareto and in his Philosophy of escaping from the difficulty except the one I suggest: to
of the Practical, Croce develops a detailed theory about regard economics as concerned with practical activity in so
what he calls the “economic principle” and what we may far as it is (abstractly) emptied of all content, moral or im-
call “the subject matter of economic theory”. This analysis moral” (Croce 1966, p. 172). In other words, the category of
seeks to separate economic principle from ethical, philo- economic action abstracts from any moral or motivation-
sophical, naturalistic and psychological principles. Croce al considerations and thereby sharply delineates economics
eventually ends up defining economics in the same abstract from other humanistic disciplines such as ethics, political
way as Mises: as a science of human action qua human ac- theory or even psychology.
tion. In the same neo-Kantian fashion as Ludwig von Mises, As an illustration of this abstract character of economic
Benedetto Croce insists that economics could analyze only action, as opposed to moral and immoral ones, Croce offers
conscious human choices, and not the reflective, uncon- in his second letter to Pareto a telling example:
scious reactions that belong to the animal realm. In a letter
to Wilfredo Pareto he says: I will give you another example: that of a knave who
thinks it ofelimo to himself to murder a man in order
to rob him of a sum of money. At the moment of as-
with any ends as such. It is concerned with ends in so far as stance, dualism that there are two; pluralism that
they affect the disposition of means” (Robbins 1932, p. 29). there are many. There is no point in quarrelling about
All this is directly Crocean theory, but neither of them ever these problems. Such metaphysical disputes are in-
mentions Croce in the context of their definitions of eco- terminable. The present state of our knowledge does
nomics as a science of human action which “economizes” not provide the means to solve them with an answer
scarce means to achieve ethically indeterminable ends. which every reasonable man must consider satisfacto-
Mises spends quite a bit of time defending both the value- ry (Mises 1998, p. 17).
free status of economics and also its independence from the
errors of psychologism and empiricism. This is another typ- However, this does not mean that economists can avoid
ical Crocean theme. The most basic tenet of Misesian prax- using use the theoretical vocabulary and postulates that
eology, the “fundamental action axiom”, is just a different stem from a specific metaphysical point of view: namely,
rendition of the Crocean idea of economics as a science of from “idealistic” philosophy. Mises only points out that this
abstract human action: “man acts and uses means in order acceptance of methodological dualism is a pragmatic, rath-
to achieve ends”—the famous Misesian formula he uses in er than epistemological choice, and that indeed the debate
order to deduce (with the help of an auxiliary assumption about the final metaphysical issues, does not belong to eco-
of the disutility of labour) the entire body of economic the- nomics.
ory. He describes the fact of human action as an “ultimate In his letter to Pareto, Croce develops exactly the same
given” of economics, as the last irreducible fact of econom- line of argument. He accuses Pareto of smuggling a meta-
ic theorizing (Mises 1998). However, he never gives proper physical assumption into the purely economic theorizing,
credit to Croce as the first clear expositor of this fundamen- which he considers unscientific and unjustifiable:
tal idea. Consider for example Croce’s most pregnant defi-
nition of economic value: …the disagreement between us consists in your wish
to introduce a metaphysical postulate into economics
there is nothing in the universe that is valuable, ex- science; whereas I wish here to rule out every meta-
cept the value of human activity. Of value as of activ- physical postulate and to confine myself entirely to
ity you cannot demand a so called genetic definition. the analysis of the given facts…Your implied meta-
physical postulate, is, however, this: that the facts of highly critical of Pareto’s attempt at abstracting the narrow
man’s activity are of the same nature as physical facts; “economic” range of phenomena from a wider praxeologi-
that in the one case as in the other we can observe reg- cal whole into which they have to be logically embedded:
ularities and deduce consequences therefrom, without
ever penetrating into the inner nature of the facts; that Would it for instance be in conformity with the na-
these facts are all alike phenomena (meaning that they ture of the thing, to cut away, as you wish to do, only
would presuppose a noumena, which evades us, and that group of economic facts which relates to objects
of which they are manifestations) (Croce 1966, p. 178). capable of measurement? What intrinsic connection
is there between this merely accidental attribute, mea-
However, not only does Croce reject this interjecting of surability, of the object entering into an economic ac-
metaphysical monism into economics, he justifies the ac- tion, and the economic action itself? Does measur-
ceptance of methodological dualism by using essentially the ability lead to a modification in the economic fact by
same “Misesian” pragmatist arguments. He does not offer changing its nature, i.e. by giving rise to another fac-
any philosophical reasoning to support the contrary mo- tor? If so, you must prove it. I, for my part, cannot see
nist idea of the physical world being an “epiphenomenon” that an economic action changes its nature whether it
of the mental, but simply says that the ‘experience’ teaches relates to a sack of potatoes, or consists in an exchange
us about the irreducible difference “between external and of protestations of affection! (Croce 1966, p. 176).
internal, between physical and mental, between mechan-
ics and teleology, between passivity and activity” (ibid.). So, On the most obvious level, this is an anticipation of the
the unavoidable dualism is just a methodological pragmatic standard argument, developed by Hayek and Mises among
convention, not a conclusion based on any full-scale onto- others, against the ideas of measurement in economics. 45
logical theory of reality, or any such ‘metaphysical’ super- Hayek’s rejection of this idea in his Nobel Prize speech
COSMOS + TAXIS
structure. It is rather a convenient tool we use to make sense (1974) and in his Counter-Revolution of Science (1952), is
of the world, a language we inherited from everyday experi- particularly prominent and influential:
ence, and for which we do not have any substitute in prac-
tice. It is the way how our social world works. It is a “given The correlation between aggregate demand and total
fact” of our reality we cannot escape in the scientific analy- employment, for instance, may only be approximate,
sis of economics (Misesian “ultimate given”). but as it is the only one on which we have quantita-
tive data, it is accepted as the only causal connection
II THE SUBJECTIVE CHARACTER OF THE that counts. On this standard there may thus well ex-
ECONOMIC DATA ist better “scientific” evidence for a false theory, which
will be accepted because it is more “scientific”, than for
We now come to one of the critical points in Croce’s eco- a valid explanation, which is rejected because there is
nomic theory—his completely Misesian idea of econom- no sufficient quantitative evidence for it (Hayek 1974).
ic data as being subjective: “The data of economics are the
practical data of human activity in so far as they are con- The measurability is thus only one accidental feature of
sidered as such, independent of any moral or immoral de- economic data, which oftentimes might not be relevant at
termination” (Croce 1966, p. 173). This is a wholesale rejec- all for understanding the true causal relationship that ex-
tion of empiricism, not only in its cruder positivist forms, ist between the various economic facts. What really consti-
but equally of the more subtle attempts to deny the subjec- tutes the causal relationship in economics is the teleological
tive character of economic science by the dissident attacks connection between the different objects, material or not
on praxeology by some Austrians. One of the most signif- (Crocean “potatoes” or “protestations”), created by human
icant hallmarks of this praxeological approach is Croce’s mind and its purposeful action. Dixit Hayek:
critique of the very concept of measurability as applied to
economics, which is closely related to the attempts to iso- Take the concept of a “tool” or an “instrument”…It is
late something which would be treated as “economic phe- easily seen that these concepts cannot be interpreted
nomena” as opposed to the non-economic ones, that are al- to refer to ‘objective facts’, that is, to things irrespec-
legedly “purely subjective” and hence not measurable. He is tive of what people think about them. Careful logical
III. APRIORI CHARACTER OF ECONOMIC truths, but rather that they contain the introspective facts
THEOREMS of our experience that would be very difficult to abandon.
Economic laws express a “rational necessity” of life, for ex-
This is maybe the area in which Croce’s development of ample that people would prefer more to less of a same eco-
praxeology went furthest and came closest to the formu- nomic good, ceteris paribus. Economic laws allow us to un-
lations of Mises. Taking the lead from Menger and Bohm derstand reality, and not only to analyze the mental content
Bawerk, Croce defines economics as “mathematical” and of our representations. In this regard they are similar to the
“pure” science. This does not mean that economics has to theorems of geometry; although abstract and general in na-
use mathematical formulae in its analysis but only that the ture, they nevertheless have a practical purpose:
method of reasoning has to be axiomatic-deductive, the
method by which complex theoretical statements are de- [w]ithout geometry we should not have been able to
rived by using deductive logic from unquestionable first build the house in which we dwell, nor to measure
principles. Squarely in the Mengerian tradition, Croce this star upon which we live, nor the others that re-
equally rejects empiricism and historicism as the appropri- volve around it or around which we revolve. Thus it
ate methods in economic analysis because of their accep- would be impossible to find one’s way in empirical
tance of the doctrine that economic laws are contingent reality without these economic formulae, and that
upon some particular circumstances of time and place, dif- would happen which happened when economic sci-
ferent historical conditions and so on. For Croce, economic ence was in its infancy, namely that by its means mea-
laws are just like the theorems of Euclidean geometry, apo- sures of government were adopted, which were ad-
dictically true, independent of all experience and all differ- mirably suited to produce in the highest degree those
ent circumstances: evils which it was thought could be avoided by its help 47
(Croce 1967, pp. 372-73).
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The propositions of the Science of Economics are rig-
orous and necessary. Granted that soils of different A good analogy and illustration for this argument could
degrees of fertility are cultivated, their possessors will be Quine’s reformulation of traditional epistemology de-
all obtain besides the absolute rent, a differential rent, veloped in his paper “Epistemology Naturalized” (Quine
with the exception of the possessor of the least fertile 1969). In this famous essay, Quine accepts the Kantian dis-
soil” (Ricardo’s law). “Bad money drives out good” tinction between the conceptual form and empirical con-
(Gresham’s law). Now, it is not conceivable in any case tent of our consciousness, but relativizes them: the dichot-
that soils of different fertility, all of them cultivated, omy between the conceptual scheme and sensory content
should not give a differential rent. It will be said that in Quine’s reformulation ceases to be a standard Kantian
the State can confiscate the differential rent, or that metaphysical dichotomy between apperception and percep-
the possessor, owing to his bad cultivation or to his tion and is taken to mean just biologically and historically
bad administration, may lose it; but the proposition conditioned dynamics of conceptual scheme and empirical
does not remain less sound on this account (Croce content.
1967, pp. 369-70). In other words, the Kantian forms remain, but under-
stood as biological and practical capabilities of human be-
It is important to note two things in this connection. ings rather than as transcendental characteristics of human
First, economic laws are necessarily true, but nevertheless mind. In a similar way, the Crocean and Misesian concept
they are not mere tautologies; they tell us something about of apriori knowledge refers to the same Kantian synthetic
the real, outside world. The concept of a differential rent or apriori forms, just liberated from their metaphysical con-
the concept of Gresham’s law, or that of marginal utility, are tent, and reduced to practical “necessity of life” as Croce has
not mere logical statements, mere analytical reformulations nicely put it, or to the hallmarks of biological and historical
of some logical truths. They convey new information about existence of man.
the real world in a way the tautological statements do not. This should not be taken as a claim that the validity of
The second important implication is that the reason why economic laws depends upon their practical application.
economic laws are apriori is not that they are metaphysical On the contrary, the laws are apriori, and the beneficial ef-
fects of their application represent just an illustration, rath-
The apriori theoretical knowledge of economic laws allows Croce always argued that the application of deductive rea-
us to avoid harmful public policies by abstaining from ac- soning in economics was a form of “applied mathematics”.
tions that on the purely aprioristic grounds are clearly ir- However, this did not mean the application of mathemati-
rational: cal methods in detail, but just the logical, or apriori mode
of reasoning. His theory is at odds with the application of
Such for instance would be the proposal for fresh ex- mathematics as it is being done in the contemporary treat-
penditure on public works that are useless or of little ments of general equilibrium, as well as in the neoclassical
use during a period of economic depression in a coun- utility theory. The basic assumption that underlies those
try, and instead of relieving, increase the general de- contemporary applications of mathematics is that in human
pression; or the increase of protective tariffs, when action there is constancy, consistency as well as transitiv-
industrial progress is slow, which ought to encour- ity of preferences. Only if those assumptions are satisfied,
age industry, but on the contrary produce an indus- the use of differential equations in the general equilibrium
try that is unstable and artificial, in place of one that models, or of the infinitesimal calculus in utility theory,
is spontaneous and durable (Croce 1967, pp. 373-74). make any sense. It is not necessary to emphasize that re-
jection of these assumption is the cornerstone of Misesian
So it is impossible to empirically test whether the theory. As we shall see shortly, Croce rejects all of these as-
Keynesian fiscal ‘stimulus’ as a means of countercyclical sumptions as well.
policy is justified or not; for Croce, this concept is simply The whole basis of functional analysis in neoclassical eco-
nonsense, because it goes against the deductive logic of eco- nomics is the assumption of there being some constant re-
nomics based on empirically and pragmatically self-evident lationships between the measurable magnitudes and on the
axioms, more geometrico demonstrata. preference rankings being transitive. Mises attacked these
Note that the strong analogy between geometry and assumptions in his numerous works. For example in Mises
praxeology that Croce exploits is the same analogy Mises 2000, he argues that impossibility to apply the equations of
is using time and again to demonstrate that scientific no- mechanics to economics stems from the fact that human ac-
tions could be aprioristic, and yet to convey the real positive tion does not possess the behavioral constants analogous to
knowledge of the real world capable of practical application. the physical constants one uses in the equations of physics.
For example, the gravitational constant. In praxeology, as rationale to welfare economics (Herbener 1997). However,
Mises says, “everything is a variable”, so mathematical anal- Robbins (1932) is widely acclaimed as having refuted car-
ysis cannot render any new knowledge which is not already dinal utility. Mises, Hayek and other Austrians in the
contained in the verbal formulations of it (Mises 2000, p. 1930s, 1940s were assuming the Robbinsian refutation to
99). Mathematics can model past data if they are given, and be the last word on cardinal utility. And yet, Croce predat-
express the state of static past equilibrium through the sys- ed Robbins by more than 25 years. Robbins essentially de-
tems of differential equations: the problem in economics is rives the untenability of cardinal comparisons of utility by
that what has to be understood is how one state of equilib- widening the scope of economic principles to include psy-
rium gives way to another through the actions of real indi- chic income alongside the monetary and tangible income.
viduals. This process always creates the new data that do not And in this regard, the subjective utilities of two different
belong to the modeled past state of equilibrium and hence persons could not be compared because nobody could pen-
render the entire mathematical treatment of equilibrium etrate the consciousness of another person and then com-
useless. Every moment is a new moment, with new data pare the level and intensity of some feeling with his own.
bringing about the new momentary equilibrium (“the plain Hence, any public policy based on such interpersonal com-
state of rest” in Misesian terminology). parisons embedded into marginal analysis is unjustified.
Croce developed this same idea in 1900! In developing However, we can say that Croce’s analysis is more consis-
his counter-argument to Pareto’s idea of the scales of val- tent in terms of rooting every concept in the subjective util-
ue, Croce asserts that the reason why the concept of a value ity and individual choice, and tying tightly value and utility
scale is nonsensical has to do with the fact that economic in the act of choice in time, rather than in some theoreti-
action is always happening in a given moment. All valua- cal generalizations about the way preferences are formed.
tions are momentary: when a person performs action A, When a person decides to take an action a, all other pos- 49
instead of B, C or D, this does not mean that she prefers sible choices are simply non-actions. In an act of exchange
COSMOS + TAXIS
A to B, and B to C, and C to D, which would require her for example, what is being exchanged is not the greater for
to choose B in the moment after A was done. No, argues smaller value (as the conventional Austrian theory would
Croce, the fact that the person had chosen A over all oth- have it) but a value for a non-value:
er alternatives means only that she preferred A to all other
choices, which are actually non-choices in this context. In A is worth B, the value of a is b, does not mean (the
the next moment, she could easily decide to choose C over economists of the new school knew it well) that a=b;
B, or B over D; the fact of a person choosing A does not im- nor even as is said a>b; but that a has values for us,
ply any further choice among other alternative in some later and b has not. And value—as you know—exists only
moment: at the moment of exchange, i.e. the choice (Croce
1966, p. 174).
The absurdity involved in the notion of greater or
smaller values is, in short, the assumption that an in- So, he goes a step further in elaborating the subjective
dividual may be at the same moment under different character of marginal analysis than either of the great lights
conditions. The homo economicus is not at the same of Austrian economics. Croce rejects the idea of ordinal
moment in a, b, c, d, e, f,….but when he is in b, he is utility as intra-personal comparability of different actions
no longer in a; when he is in a she is no longer in b. he or choices in time, as it has been developed by the Austrian
has before him only one action, approved by him; the school; the notion that in every moment we can have a clear
action rules out all the others which are infinite, and picture that we prefer A to B, and B to C, and the only re-
which for him are only actions not preferred (non-val- striction is that we cannot extrapolate from this to the next
ues) (Croce 1966, p. 165). moment. Croce, however, does not accept even this: he con-
sistently insists that if the value is demonstrated only in ac-
The implications of this are enormous. One of the most tion, than everything that we can say about relative valua-
obvious would be that cardinal utility is untenable. The tions of different things or different choices is that an action
idea of interpersonal comparisons of utility is closely asso- A at time t was preferred to all other actions. Not that at this
ciated with the Lausanne school to which Pareto belonged given moment we preferred this action to something else,
and it was throughout the 1920s and early 1930s used as a even in an unquantifiable fashion. Not only that we cannot
not prefer either Pepsi or Canada Dry, and nothing more. matical behavior of any individual component of this com-
That is what Croce has in mind when he says that the value posite called “overall utility gained by consuming an ad-
scales (be they ordinal or cardinal) are absurd. ditional unit of bread”: the reason being that an additional
How is this reconciled with the theory of diminishing unit of bread is never consumed in isolation from dozens
marginal utility which seems to require at least some form of other factors that influence its increasing or decreasing
of intra-personal comparison of utility? Croce provides a utility. The second and third mouthfuls of bread are not the
brilliant answer, quite consistent with his extreme action- same goods with diminishing marginal utility, but differ-
oriented subjectivism, in the Philosophy of Practical: ent goods with incommensurable utilities! In economics
we cannot speculate about the psychological dispositions of
If the individual A eats the bread that he has bought people vis a vis different classes or different quantities of ar-
for seven soldi, when swallowing the second or the bitrarily defined “goods” (i.e. arbitrarily abstracted features
tenth or the last mouthful, he has a pleasure, not in- of the decision-making environment). We can only observe
ferior to that which he had when swallowing the first, their demonstrated preference in subsequent moments of
but different: the last was not less necessary for him, time. We can see that a person demonstrated her preference
in its way, than the first; otherwise he would have re- for a can of Coke over a can of Pepsi by choosing one over
mained unsatisfied in his normal want, in his habit, the other. But, we cannot say that an additional can of Coke
or in his caprice. The economic man seeks the maxi- would have for that person a lower marginal utility, because
mum of satisfaction with the least effort (Croce 1967, this is impossible to demonstrate in action in time.
p. 367). Hence, Marginal analysis is a necessary abstraction in
economics, but Croce’s analysis demonstrates how narrow
Croce here poses a very difficult problem that later lit- and almost non-existent its value is for predictive purposes;
erature both in Austrian and non-Austrian versions did how essentially complex and irreducible human action is.
not address satisfactorily: how to reconcile the concept of Croce does this in a much more consistent fashion than any
marginal utility with the concept of economizing choices? other Austrian economist. We can say that Croce’s theory
Marginal utility as a demonstrated fact of human action of utility and choice poses a difficult question for (any type
would mean un-economic behavior, the failure to maxi- of) economics: if an act of choice is the only material of eco-
nomic theory and if marginal valuations could not be dem- anti-trust policy. If not, it can only be because the
onstrated in an act of choice, is there any practical value of non-Chiquita bananas are substitutes for Chiquita’s
marginal analysis? What is the difference between marginal bananas. But if this is so, then how can mere owner-
valuation and cardinal utility in this regard? ship of all the oranges confer a monopoly? For, are not
A good practical application of this type of reasoning is grapefruits, watermelons, tangerines and other fruits
Walter Block’s critique of the prevailing (Mises-Kirzner) substitutes for oranges? (Block 1977, p. 275).
theory of monopoly in Austrian economics. Block argues
against the Kirzner’s view that although the conditions of a So monopolization of the supply of oranges does not
true market monopoly tend to be very rare on the free mar- mean monopolization of market in any relevant economic
ket they could occur if a single supplier monopolizes the en- sense, since the unit of satisfaction or utility is not the unit
tire supply of a good. Kirzner argues that if a single produc- of homogenous good called a can of orange juice, but rather
er monopolizes all the oranges in the world (very unlikely a can of some drink capable of satisfying in a similar man-
but possible event) then that monopolist of oranges would ner the needs the orange juice is satisfying.
become a monopoly supplier of the orange juice. This situa- However, the Crocean argument here would have been:
tion would require government action. why stop at grapefruits, watermelons or tangerines? What
Block’s objection is an interesting one: he says basically about the other non-tangible components of every single
that the oranges are not some isolated homogenous goods choice? How about the satisfaction of consuming oranges,
that satisfy some homogenous market need called “demand instead of watermelons? Or of consuming any kind of juice
for orange juice”. No, orange juice is just one of the possi- as long as it is provided by an unhampered market, irre-
ble products that can satisfy demand for a certain type of spective of how this affects the narrower physiological reac-
drinks; for example for the soft drinks. If a monopoly sup- tion of our body to the different kinds of juice? Or drinking 51
plier increases price of the orange juice, the orange juice juice provided by domestic manufacturers? Or foreign ones,
COSMOS + TAXIS
consumers would turn to the substitutes, such as the ap- if a consumer is a free-trade zealot who enjoys reward-
ple juice, or peach juice, or even the carbonated drinks or ing foreign suppliers and fostering free-trade, irrespective
beer. The main point is that the demand for orange juice is of price? Are we supposed to attach a higher utility to the
not infinitely inelastic, or to put it differently, the relevant bodily reactions over the emotional or intellectual satisfac-
market in which the orange juice producers are selling is tions accompanying the enjoyment of differently produced
not the market for orange juice, but rather the market for and marketed kinds of juice? If a monopolist of orange
soft drinks, or in some cases maybe even the market for all juice “withholds” the supply or charge higher price, and the
drinks. Dixit Block: quantity sold drops, the only praxeological conclusion we
are allowed to draw from this is that one component of the
Professor Kirzner, in attempting to show that mar- typical pattern of satisfying the need for drinking increased
ket monopoly implies exclusive control over a re- in price and decreased in quantity sold. Nothing more.
source, states, “Without access to oranges, entry into People changed their preferences for buying a given quan-
the production of orange juice is blocked”. But, in the tity of orange juice. That does not imply anything about the
real world, consumers distinguish between biologi- juice’s contribution to their subjective utility today, in two,
cally and chemically identical things: Chiquita banan- four days or in a month.
as and Perdue chickens being the most famous cases
in point. Now, the Chiquita banana company by no CONCLUSION
means controls all bananas, but it is the complete and
full monopolist of the resource known as “Chiquita Benedetto Croce developed many essential features of the
bananas”. Is the company a monopolist in the Mises- high theory of Austrian economics, especially theory of val-
Kirzner view (assuming the demand elasticities neces- ue, cost and method of economic science. He anticipated
sary for monopoly price)? If yes, then there is an aw- and in some respects maybe offered a superior formulation
ful lot of monopoly running loose on the free market. than Mises, Robbins, Rothbard, Kirzner and other authors
Consumers’ sovereign desires are being balked at al- who were written, to various degrees, in the Mengerian
most every turn, and perhaps we will soon be faced causal-realistic tradition of economics. This is particular-
with the specter of an Austrian supported government ly the case with Croce’s theory of utility and demonstrat-
REFERENCES
52
Block, Walter. 1977. Austrian Theory of Monopoly: A Critique.
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