Economic Interrelatedness: Austrian Production Theory

Abstract

"[C]oncentration on a single firm and the reaction of its owner is not the appropriate route to the theory of production; on the contrary, it is likely to be misleading…In the current literature, this preoccupation with the single firm rather than with the interrelatedness of firms in the economy has led to the erection of a vastly complicated and largely valueless edifice of production theory (Rothbard 2009 [1962], 455)."This paper analyzes a recently reconstructed proto-chapter of Rothbard’s Man, Economy, and State (2009 [1962]) tentatively titled "Chapter 5: Producer’s Activity" (Rothbard [2015] 1953). In it, Rothbard used many concepts of standard Neoclassical firm analysis that he would later criticize, such as perfectly competitive markets and the isolated firm. This paper juxtaposes the proto-chapter with Rothbard’s finished work and argues that after grappling with the problems of Marshallian partial equilibrium production theory, Rothbard substituted it with an Austrian general equilibrium. This distinctive approach did not construct production theory from the vantage point of an isolated price taking firm, but rather viewed the overall economy as a temporal and dynamic production structure from the perspective of the capitalist-entrepreneur. This Austrian production theory has important consequences for understanding the efficiency of markets, the formation of output and input prices, and the profit maximizing output level of an isolated firm.