Blogger “Lord Keynes” attacks me, saying that my accusation that many economists don’t get the Austrian understanding of economic calculation is a “red herring” and concludes that the emphasis of price distortion is “feeble minded.” In the process, he shows that he still doesn’t really understand the Austrian idea of economic calculation.
I intend for this post to be short. Let me quickly respond to just an excerpt of LK’s post,
But the market system doesn’t require “right” prices in the standard economic sense of equilibrium prices to be successful and dynamic.
This particularly encapsulates LK’s entire post and shows that he isn’t “getting it” — which is strange, given that the one source he includes in the bibliography is Lachmann’s 1986 book. Lachmann, of course, is big on one of the most important features of the pricing process, a process which LK doesn’t mention in the post.
Some Austrians like to talk about the “ex ante” and “ex post” role of prices, but the key one is the latter. The “ex post” role is what economists like Ludwig Lachmann and Ludwig von Mises (Lachmann, of course, getting it from Mises) profit and loss. Within the context of the business cycle, Freidrich Hayek also makes a big deal about profit and loss. Hayek, though, refers to it “indirectly,” or under different terms; profit and loss is what Hayek talks about when discussing changes in the rate of profit. Actual market prices can be far from the “equilibrium price,” but what guides the distribution of resources in the market is profit and loss.
What leads to malinvestment? Changes in the rate of profit. What causes changes in the rate of profit? Changes in nominal valuation of goods — i.e. prices. What reveals malinvestment? Changes in nominal valuation of goods (n.b. Hayek’s term “forced consumption” refers to this).