I am honored and I feel privileged to be here at the Mises Institute for the Austrian Economics
Research Conference 2013. It's my third time already and in many ways it feels like home.
The Mises Institute and the Austrian School are more certainly my intellectual home. I
would like to thank Dr. Salerno, the head of this event, and Dr. Herbiner, the chair
of this panel, for giving me the opportunity to mismanage some presentation time for a
and of course to all those who were not at immediate interface with me but of whom I know make this event and this beautiful institute possible.
My talk today tackles the specific problem of what Mises calls the catalytic function.
It's a co-authorship with a colleague of mine from Romania. Some Austrians live in Romania, too, in terms of economics.
The paper can be said to discuss issues on the theory of the firm.
As an aside, when my wife asked me what I would talk about at the conference and I told her, she said, well, it's obvious.
The presentation will follow the now projected outline, after a brief session of question raising concerning the place of the theory of the firm in the general body of economic theory,
At point one, I will briefly introduce the praxeological concept of catallactic functions and explain in what sense they are not one and the same with real persons at point two.
At point three or four, out of which I will probably just manage to tackle point three, I will try to apply the concepts to two issues or problems.
The creditors versus the stockholder problem and, if time permits, the fully borrowed entrepreneur problem.
After all this I will conclude suggesting some possible lines of development in the theory of the firm, the Austrian type of it of course.
The theory of the firm can be a very frustrating field especially for an Austrian economist.
One can very easily get to the point of considering that there is no need for a theory of the firm at all.
Two things can contribute to such a feeling.
On the one hand, the field of the theory of the firm includes so many somewhat overlapping and somewhat contradictory paradigms and research programs that it is not at all very clear what the field purports to explain and conceptually describe.
Thus, there are knowledge-based and resource-based approaches, transaction cost approaches, managerial property rights based or nexus of contact ones.
and this is to name only a few, while leaving aside the more eccentric ones such as the organic view or the Marxist exploitation theory based view.
In the midst of this firm theory jungle, to paraphrase Harold Koontz, one cannot stop feeling that the intuitive view underlying the common usage of the word firm has not gained a great deal in conceptual and theoretical clarity.
On the other hand, when one turns to the Austrian paradigm, the situation is somewhat the opposite.
Considerations on the firm as such are scarce in the works of the great masters.
Even though Mises, for instance, uses the term firm more than 80 times in Human Action, for example,
only in a handful of these instances is he treating topics pertaining to or relevant for the theory of the firm as such.
And the understandable reason for this is that they simply had more important problems to solve,
money or economic calculations, business cycles, method, methodology, so on and so forth.
In such a situation, it is legitimate to flirt with the idea that maybe, maybe, it is possible to explain whatever a theory of the firm is supposed to explain by means of the already existing body of knowledge and concepts, such as entrepreneurship, uncertainty, economic calculation, capital, capital structure, so on and so forth, and that behind a firm concept nothing hides. Now this would be a drastic solution, but one must in all honesty have it on his intellectual radar for everything that one investigates. Nevertheless, it should not be
to swiftly and easily embraced. If a frontal attack on the issue and the clear-cut exposition
of the theory is not feasible or possible yet, maybe some side-kicks would help. What specific
and important questions is the theory or the concept, no matter how poor or tentative in
question answering? Or what specific problem is it solving? Of course, questions and problems
of importance and which could not be answered otherwise. The mainstream theory of the firm,
speaks, since Coase's 1937 article on the nature of the firm, of three questions that any theory of the firm has to answer.
The nature, why the firms exist, the size, how big or small firms are and why, and the internal structure, how firms are organized and why.
But within the Austrian paradigm, there are no standard questions, specifically raised by this paradigm, the answer of which to demand or imply an Austrian theory of the firm or concept.
and the Cossian challenge one could against as an Austrian, again as an Austrian, answer in at least two ways.
First, that the questions are interesting and legitimate and valid and that the Austrian paradigm provides important insights and then to immediately proceed to provide those insights.
Or alternatively, one could blame the general implicit or explicit Cossian framework as being flawed and as raising false questions,
The answer of which is not needed, or maybe it lies somewhere else, in other fields, like law for instance.
In this paper we try to ask some Austrian questions, the answer to which might imply, might suggest an Austrian theory of the firm.
And for instance, what is the difference between creditors and shareholders?
Can there be an entrepreneur with fully borrowed capital?
And I could think of a few others. What is profit and loss? What are foreign direct investments?
Well, I don't know if this is specifically an Austrian question. But what is a bank?
For instance, presumably the concept of a bank implies the concept of a firm.
And of course, I'm hoping to find probably other questions.
And actually recently I discovered that the firm might even be needed to clearly explain the money supply.
But that's another issue. Before tackling the first two problems, let me briefly introduce
the catalytic function concept. And I'll try to go as quickly as possible. Mises borrowed
the term catalactics, according to his own confession, from Richard Wetley, a 19th century
British economist. It means something like the theory of exchange in Latin. He then coined
the derived concept of catalytic functions to analytically describe the possible economic
Catallactic roles that individual can play or fulfil in the exchange economy. Thus, these functions are aspects or facets of human action and they comprise, in a more or less standard enumeration, the productive catalytic functions such as entrepreneur, capitalist, labourer or landowner, and the catalytic function of the consumer. As aspects of man's effort to better his lot in this world, they might also, and probably they also, exist in the crucial model of the isolated individual, but they are way less obvious or visible.
To consider a development of the good contributions of the classical school, Mises developed his own brand of the so-called theory of distribution, which, following insights of forerunners such as Frank Fetter or John Bates Clarke, evolved into a genuine theory of factors of production pricing.
Thus, each function designating a productive aspect of human action and effort is paired with a specific income share, which is one and the same with the price of that production factor.
Profit, interest, wages or rents become functional incomes under the implied principle of one
function receives one income.
And of course, Mises nicely integrated this theory with his own theory of economic calculation,
which kind of adds a great deal of value to it.
But again, that's a separate topic.
One can immediately notice that for Mises, catalytic functions are not one and the same
with Real Persons or with the ideal types behind the similar terms employed in business
history.
Every real person necessarily cumulates catalectic functions.
One could even argue that every person accumulates all catalectic functions, some being more
pronounced or visible than others.
An interesting consequence of this fact is that every personal income is necessarily
composite.
What we would call market interest rates, for instance, or market wage rates are actually
Composite Incomes containing elements of wage, interest rent, profit loss, again, some part
being more exacerbated, visible than others. I would have given the floor to Mises, I have
some quotes, he already in socialism expresses these issues, but for better time management
And hopefully I will only read this messy slide a little bit because here I have the
occasion to mention the content of the functions which I have not already.
So for Mises, entrepreneur means acting man in regard to the changes occurring in the
data of the market.
The key point or the key concept behind this is uncertainty, uncertainty bearing.
Capitalist and landowner, Mises sees as acting man with regard to changes brought about by
by the mere passing of time, given time preference and worker means many regard to employment of the factors of production, human labour, again given the disutility of labour.
And then the respective incomes.
As the term entrepreneur, capitalist, landowner, worker can refer both to economic functions and real persons or ideal types
and this even in hypothetical examples or mental experiments as will be seen below the possibility of inconsistent usage and of confusion arises.
Moreover, and this is an important part of our thesis in this paper, consistent usage might require, we think it requires, the concept of the business unit or firm and therefore a theory of the firm.
In order to illustrate this assertion, let us proceed to a discussion of creditors and stockholders that Rothbard makes at one point in Chapter 6 in his Man Economy and State.
Thus, in subchapter 9 of the said chapter, entitled Joint Stock Companies and the Producers' Loan Market, Rothbard asserts that essentially the role of the creditor is, from an economic point of view, equivalent to that of the shareholders.
for Shareholders. He's doing this in the context of a number of subchapters dedicated to arguing
against the Keynesian idea that there could be a hiatus between savings and investment,
the first too many and the other too little, due to pessimistic animal spirits. Coextensive
with this line of argument, which stands for an essential identity between savings and
investments, is the idea that the loan market is not an independent driving force in itself,
but just a part and not necessarily the most important one of the broader time market.
Let us give the floor to Rothbard.
He says things like the following, economically and even in basic law, there is no difference
between shareholders and productive creditors.
The differences between the two, I'm reading the red stuff, are only technical and semantic.
And even in the real world of uncertainty and entrepreneurship, while matters are more
complicated, the discussion or the analysis essentially remains the same.
And he goes on and on like this in a few instances, expressing the same idea that the difference
between investing in stock and lending money to firms is mainly a technical one, okay,
and I will not more dwell upon it.
Even Mises, and Rothbard of course, tries to conscript Mises into his line of argument,
says something similar in some places in Human Action.
I chose two quotes, one which is a weaker thesis and the second one a stronger thesis.
So Mises says something of the sort, the creditor is always a virtual partner of the debtor or
a virtual owner of the pledged and mortgage property.
But then he says something even stronger as a thesis, the creditor is less exposed to
loss and failure than the debtor, only in so far as this legal and institutional framework
makes it possible for him to enforce his claims against refractory debtors.
And maybe I should have read it also the other part.
There is, however, no need for economics to enter into a detailed scrutiny
of the legal aspects involved in bonds and debentures, so on and so forth.
So the stockholder creditor distinction is not one of interest for economic theory.
The above sounds somewhat counterintuitive,
because then I would look at the stockholder and the creditor represented there by the bondholder
from the point of view of various strands of theory and I just can make no difference, no
essential difference between them and it's puzzling in a sense, it's counter-intuitive,
so they both wait, they both bear uncertainty, they both employ monetary calculation, so on and so
and so forth. So I can find no theoretical difference. Is there any relevant theoretical
difference between the two in the end? Because I think at the intuitive answer of my wife.
Of course there is a difference. So maybe there is some substance there or maybe not.
So, if creditors, if I take the assertion at face value, problems might appear.
If creditors are the equivalent of capitalists and shareholders of the entrepreneurs, then
it follows that capitalists are equivalent in all respects to entrepreneurs.
If this is contemplated and analyzed in terms of catalytic functions, it is problematic,
as it equates two distinct functions.
If it is contemplated in terms of real persons, it is not necessarily wrong, but it's somewhat
fuzzy and can be misleading.
We argue that the thesis is correct from an aggregate or, if I may say so, macro perspective.
Yes, there is no capital surplus over possible entrepreneurial project.
Yes, there are no savings that cannot be channeled into profitable investment on the free market.
And yes, in an important sense, all capitalists are entrepreneurs and all entrepreneurs are
also capitalists.
But if we zoom into the microsphere, the creditor-sharehold-equivalence thesis is problematic.
We suggest that to make sense of this relation, one needs a concept of the business unit,
or firm, such that the stockholders are considered to be inside the firm, while the creditors
as such are considered to be outside the firm.
Of course, while the latter could very well be considered to be inside their own business
unit, the bank, let's say.
One very important, in our opinion, difference, and it's an economic difference between creditors
and stockholders, is that the latter are the ones to incur first any losses. Or, to put
it otherwise, there is a non-zero level of losses by which the shareholders are hit,
but creditors are not, as they can be repaid more or less swiftly from the capital of the
first. And this proves, in an important sense, that they are in different businesses. Thus,
A person can accumulate catalytic functions in more ways than one. First, in his own firm, or simply as a private person, one is entrepreneur, capitalist, and maybe other things, self-employed and landowner.
In addition to that, one can be only a capitalist, functionally, with respect to a particular firm business unit that, of course, is not, therefore, his own.
To conclude, all capitalists are entrepreneurs and all entrepreneurs are capitalists, but
not necessarily with respect to the same business unit. Entrepreneurs, who are also necessarily
capitalists with respect to their own firm, bear specific uncertainty, associated to a
The specific particular business project. Thus, taking again the example of a credit relationship between a bank and a widget producing firm, we can describe the situation as follows.
The bank bears the uncertainty of that particular operation of money lending and as a bank of money lending in general. Let's call it uncertainty one.
The firm bears the uncertainty of widget production. Let's call it uncertainty two. Uncertainty one and uncertainty two are connected, but they are not identical.
Again, the widget firm might have a loss, while the bank at the same time might have a profit, maybe even from the very loan to that particular firm, if the creditor has wisely assessed the collateral pledged by the debtor or his equity in general.
Thus, on the one hand, the bank's shareholders are entrepreneurs and capitalists, at least with respect to the banking business unit, but only capitalists with respect to the widget producing firm.
On the other hand, the widget-producing firm's shareholders are entrepreneurs and capitalists with respect to the widget-producing business unit.
They are just debtors with respect to the bank.
Just might be a grave thing.
Thus, in our judgment, the creditor-shelholder distinction implies both equity-debt distinction and the idea of a business unit.
The task of the theory of the firm in explaining the nature of the firm becomes one of describing
the role of the persons who fulfill the entrepreneurial function, those who incur the first losses,
with regard to a stock of capital goods brought together by those very same persons in what
thereby becomes a business unit.
At the end of it all, and with this I conclude, we find in the middle of a framework suggested
and developed in recent past works by Professor Salerno, Professor Klein and Professor Foss.
As for possible practical implications of an Austrian entrepreneurial theory of the firm,
which is at the same time truly praxeological, let me briefly suggest but two.
First, for business practice or corporate governance consultancy, it becomes relevant
to check the following.
To what extent decision-making in the business unit resides or is directly and strongly connected
with the persons who fulfill the entrepreneurial function.
Along this line, one could speak of badly structured versus well-structured firms.
Of course, this would be a judgment or an interpretation of an actual situation based on theory, with all its perils.
Second, for policy purposes, the theoretical framework suggested could be used to engage in a critic of positive legislation, for instance,
namely to see whether corporate and business law in general unleashes or hampers the expression through action.
Of course, of those who fulfill the entrepreneurial function in a business unit, and one could
distinguish between good and bad business law.
In the hope that the above made some sense, I thank you.