Setting up Hayek’s Revolution: extending the logic of choice from consumer goods to production goods (draft)

Thomas Kuhn describes how science precedes working on normal science puzzles which have anticipated, non-problematic solutions. When those don’t work out, scientists begin to rethinking the conceptual space, the empirical problem to be explained, and the possible explanatory solutions to these re-thought problems, see for example, what Darwin, Einstein, and Copernicus did.

Hayek worked on a set of normal science problems which arose when Menger, Walras, and  Jevons came up with a new way to think about the logic of the valuation of directly consumable goods. The task was to apply the new logic of valuation to old problems having to do with what was called “distribution theory”.  There were several standard problems which the old Smith/Ricardo account of value theory helped answer about the valuation of various non-consumable resources used in production.

When Copernicus rethought the cosmos, our conceptions of what stars and planets were changed, and were placed in a new problem situation with a new explanatory apparatus.  When Darwin rethought the biological world, he reconceptualized our species concept and our understanding of what an adaptation was, all placed within a new empirical problem / explanatory mechanism nexus.

When we first see Hayek taking up the challenge of extending the value logic of Menger et al to production goods in the effort to answer the standard questions of distribution theory, we see him assuming that much of the old conceptual scheme is non-problematic, and that the problem and solution set has not much need for revision. By the time he is finished, Hayek is living in another world, one which economists today still don’t grasp, living as most of them are closer to the classical world of Ricardo than to the new world of post-revolutionary Hayek.  It was hard for many biologists to grasp and accept what Darwin and Copernicus were doing when they re-conceived the problems and explanatory schemes of biology and astronomy.  The same has been true of Hayek and economics, perhaps more so given the special, difficult conceptual and empirical issues which arise in the social science.

Hayek’s Dissertation for Wieser

The problem of exploiting the new Mengerian logic of valuation to tackle the old problems of the valuation of the resources used in production, conceived by Ricardo as the theory of distribution, was first taken up by Eugen Bohm-Bawerk and Friedrich Wieser.  Wieser directed Hayek’s dissertation at the U. of Vienna, which took up the specific problem of extending the logic of marginal valuation from the case of directly consumed goods to non-labor production goods.

Menger had established the paradigm which illustrates how the value of distinguishable tokens of a category of items, e.g. individual apples among a basket of apples, derives from our ability to set before our minds an ordering of alternative preferred uses. That is, the value of any particular apple in the basket comes down to the last preferred use of any particular apple, e.g. feeding the last remaining apple to your horse as a treat versus earlier, more preferred uses on direct consumption eating up individual apples yourself.

The task Hayek set before himself was the problem of laying out the logic of ordering the preferred alternative uses of production goods used in the making of consumption goods, e.g. the shovels, fertilizer, land, seeds, water, trees, ladders, buckets, insecticide, etc. which go into the production of consumable apples.

We can think of a simpler example to isolate some of the issues at hand. If we own two barrels, we can lay out before our mind alternative preferred uses for the barrels with different consumable outcomes, we can use it to store water or we can use it to make wine, if one of our barrels burns up, the value of that barrel is the preferred use would would choose to give up, e.g. give up the wine and use the remaining barrel to store water. In the language made famous by Weiser, the opportunity cost of losing one of a number of barrels is the benefit lost made possible by the barrel in its least preferred production use.

So that it the paradigm case of the logic of imputation, we impute value to the barrel by the consumption uses that the barrel at the margin of choice makes possible for us.

The pure logic of valuation is about the ordering of preferences and uses in one’s own head involving a private closed personal economy of goods and alternative uses. In the old economics of Smith, Ricardo and others, valuation theory was used to explain changing patterns in the public money economy, things like changing prices relations and changing incomes and  changing stores of saved wealth.

“In seeking to determine the value of a given quantity of consumer goods, although the answer overcame the spurious contraction between value and utility and simultaneously laid the groundwork for all value theory, the problem thus solved constituted only a part of the problems of theoretical economics. The foundations for answering the question of the structure of the economy as a whole and hence the problem of distribution are only addressed by the theory of imputation.” (Hayek, 1926/2015, p. 3.)

“A satisfactory solution of the imputation problem is thus a precondition for a distribution theory based on the theory of subjective value.” (Hayek, 1926/2015, p. 2)

“According to the modern theory of subjective value, the determination of prices is basically explained by individual valuation. At the same time, since Ricardo, it has been widely agreed that the objective of economic theory is to discover the determinants of income, primarily by investigation what determines the prices of factors of production.” (Hayek, 1926/2015, p. 2)

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