Both the prominent traditions in neoclassical,
that comprise the neoclassical mainstream,
that is the Walrasian as well as the Marshallian tradition
have just one conception of equilibrium.
That which Mises called the final state of rest.
So the prices also, which you can call final prices
that prevail in the final state of rest have two properties.
So firstly, they equate the overall quantity demanded
in the market with the overall quantity supplied in the market.
So the law of one price for every good prevails.
But also, more importantly, the underlying valuations,
that is the underlying maximum buying prices
and minimum selling prices of the buyers and sellers
on the market are free of all error.
So the underlying market demand and supply curves
which intersect to give you the final price
are free of all types of error.
and there are two types of error,
the errors in valuation and errors in appraisement.
So what do we mean by errors in valuation?
It's basically that buyers and sellers
do not make any mistake with respect
to the ranking of their ends.
So for example, you don't engage in an exchange,
you don't spend $50 on buying, let's say,
a ticket to a basketball game and then realize
that you made a mistake that you would rather
have not parted with the $50 for the basketball game.
Similarly, a seller, oops, sorry,
a seller could do the opposite, for example,
so he could part with a good, let's say a TV,
on the used goods market for whatever, $100, $200,
but then realize that he had made an error
in his ranking of ends, that he would have preferred
not to give up the TV for that sum of money,
that he had made an error.
But also, more importantly,
that it's also free of errors in appraisement.
So why do buyers and sellers appraise on the market?
Well, because you come into the market
with your underlying valuations of the maximum buying
and minimum selling prices,
which are derived from your ranking of ends,
your marginal, based on marginal utility.
But of course, buyers don't just want to buy,
they want to buy at the lowest price possible
and sellers want to sell at the highest price possible.
and in order to achieve that they appraise
or they try to evaluate the prevailing conditions
in the marketplace.
And of course in the final state of rest
there are no errors of appraisement.
So that means that all buyers and sellers
correctly evaluate the prevailing market conditions
both at the present period but also for future periods.
So what are the conditions which need to prevail
for buyers and sellers to actually engage
in that correct appraisement.
So firstly, there has to be perfect knowledge
of the stock of the good that is available for sale.
So for example, so no seller goes into the marketplace
with a misconception that the stock,
the good he's trying to sell, let's say wheat,
that there was a poor harvest,
and that the stock of wheat is actually half
of what it really is.
So he's willing to accept a different price
and what he would ideally be willing to accept, similarly with the buyers, but also that all buyers and sellers know of each other's existence, and knowing each other's existence, they also can read, you know, have perfect, you know, they can read each other's minds, they can look into each other's minds, they can construct, so each buyer can, or each seller can reconstruct the individual demand curves of every buyer, as well as the individual supply curve of every seller, and that means that each individual
In short, that means basically that each buyer and seller is blessed with perfect information
and perfect foresight.
So they can make a correct assessment of the price that will ideally clear the market.
And so what they do is they readjust their maximum buying prices and minimum selling
prices.
So all the supra-marginal buyers and the marginal buyers reduce their maximum buying price to
that ideal equilibrium price.
Similarly, all the supra-marginal sellers as well as the marginal sellers readjust their
minimum selling prices upwards to the true equilibrium price.
What this means of course is that these assumptions of perfect foresight and perfect information
means that there's no higgling and haggling on the market, there's no room for bargaining
because there's no point in bargaining or because everyone knows the true market conditions
and that also means that there's an instantaneous attainment of the true final state of rest
or final price and of course these assumptions are unrealistic but a lot of Walrase models
do employ these unrealistic assumptions.
In fact, there is quite a broad consensus
in the history of thought literature
that Walras himself, over the many additions
of the elements of pure economics,
ended up making just these assumptions
in both his exchange as well as production models,
largely because he realized that if there's any trade
at non-equilibrium prices that will change
change the underlying data and therefore change the theoretical equilibrium and then the practical
equilibrium that you know the result of the Tat-An-Mont or the grouping in real time will
not attain the theoretical equilibrium price.
Now on the other hand, Marshall and Marshallians, I mean starting with Marshall himself tend
to be a little more realistic.
So they acknowledge that these assumptions are unrealistic, that you know the final state
of rest or final prices are really unattainable on the marketplace, there are always errors
in valuation and errors in appraisement, but what they say is that, well, yeah, so they
acknowledge that you can have trading at what Hicks in value and capital called false prices,
that is prices which are not equilibrium prices in the sense that I've just talked about.
So there is room for higgling and haggling and bargaining, but what they claim is that
at these false prices, market demand is not equal to market supply.
So that means there is market rationing or rationing, but also that basically all the
welfare properties of the free market, that is there is no maximization of consumer and
producer welfare because that is linked only to the equilibrium, the final state of rest
price.
And of course, what they also claim is that even though there is, Marshall claimed this,
he made this assumption of the constant marginal utility of money, that basically any exchanges
is that non-equilibrium prices or these false prices does not in any way affect the movement
of the market towards the final state of rest, which also means basically that the movement
towards the final state of rest takes place in real historical time.
The market tends over time to reach that final state of rest.
So in a sense, the mainstream of both these traditions are caught between the devil of
of Unrealism, because the assumptions that underlie the instantaneous attainment of the
final state of rest, so unrealism, market clearing and welfare maximization go on the
one side, and they're stuck on the other side with realism, which is the Marshallians allowing
for trade at hiddling and haggling, bargaining at non-FSR or final state of rest prices,
are also allowing for rationing and no maximization of welfare.
Of course, the Marshall was criticized and has been criticized by many authors for that
assumption that equilibrium is actually attained, that the market is actually moving in real
historical time towards equilibrium.
Philip Wickstead, for example, said that any trade at disequilibrium prices will necessarily
change the underlying data or the valuations of buyers and sellers and therefore there
There will be a different theoretical equilibrium price, and that's also, I mean, other people
who have criticized Nicholas Caldor have also made the same point.
But as Professor Salerno has pointed out in a number of papers in the 90s and also Professor
Klein recently, there is a different tradition of equilibrium theorizing and what is broadly
called the causal realist tradition, and it finds its most explicit treatment in the work
Works of Ludwig von Mises and Arthur Marquette.
Now both, I mean, Mises and Marquette acknowledge that the final state of rest is a completely
unrealistic and imaginary construction.
It cannot ever be attained, you know, in the real world.
So for example, Mises, these are quotes from Human Action.
He says, the final state of rest is an imaginary construction, not a depiction of reality.
He says the final price is a hypothetical price.
The market prices are historical facts and we're therefore in a position to note them
with numerical exactitude, the final price can only be defined by defining the conditions
required for its emergence.
In this tradition, Mises and Margat, and actually also some economists before, such as Wigstead
and Fetter, they acknowledge that all market prices are not final state of rest prices
in the sense that in the market and at any given point in time, you always have errors
of valuation and errors of appraisement.
The underlying maximum buying prices and minimum selling prices, which comprise the prevailing
demand and supply curves in any market, contain error of both these kinds.
So for example, people do not have perfect knowledge of the existing stock.
So a buyer, for example, might accept a higher price than what he actually needs to accept
because he's under the impression that the stock of the good is much lower than what
So you go into the supermarket and you find that chicken is selling at $10 a pound and you think that, oh, that makes sense because the bird flu killed off half the chickens in the world or something.
But that's the wrong knowledge. Well, because that didn't happen and you've made an error in your evaluation of how much you're willing to pay or how much you need to pay for the chicken.
Also, you can, so for example, buyers and sellers might not know of each other's existence.
Markets might be fragmented.
So when you're buying that chicken, you don't realize you're buying it at $10 in Kroger,
but you don't realize that at Walmart, it's selling for $8 or $7 or $6.
I mean, we've all made these errors when we buy a good and then we realize, oh, right
next door, it was selling at half the price.
That just means that the market, buyers and sellers don't know, so as a buyer, I didn't
And of course, even if we knew of the existence of all buyers and sellers, we could not reconstruct
the prevailing market demand and market supply curve simply because we don't know, we have
to still make, understand or try to figure out what are the valuations.
And of course, there's also the whole question of speculation about future trading dates.
So a seller might decide to hold on to his stock and not sell at a certain price simply
because he thinks he'll get a higher price tomorrow, but he's wrong in his assessment
and tomorrow comes and he doesn't get that higher price.
Similarly, a buyer might do otherwise.
Well, does that mean, so given that these prices which prevail on the marketplace are
not final state of rest prices, does that mean that, like the Marshallians, Mises and
in the market think that there's market rationing.
So, for example, that demand does not equal supply
on the market at realized prices.
Well, no, because both of them are clear in saying
that at any realized price on the market
is an equilibrium price, in the sense that it's always
brought about by the intersection of certain prevailing
demand and supply curves, even though those demand
and supply curves contain error.
So they are not the final state of rest prices,
it's what Mises called the plain state of rest.
So Mises, in Human Action, he says the plain state of rest is not merely an imaginary construction, it comes to pass again and again.
When the stock market closes, the brokers have carried out all orders which could be executed at the market price.
Only those potential sellers and buyers who consider the market price too high or too low respectively have not sold or bought.
The same is valid with regard to hold all transactions in the market economy.
In fact, Arthur Margat is much, much more explicit on this.
He says, for example, that the only type of equilibrium necessarily involved in the establishment
of any realized price is an equilibrium between, in the sense of equality of, the quantity
demanded and the quantity supplied at a given price.
The characterization of such a price as an equilibrium price is warranted only in the
sense that in the higgling and haggling on bargaining, which may take place before a
price is realized, transactions may be impossible at certain prices.
The very fact that some transactions are actually realized at a given price may therefore be
is only said to indicate that the price thus realized must have affected an equilibrium
between quantity demanded and quantity supplied, but the equilibrium between the quantity demanded
and quantity supplied are as a result of the prevailing, what market differentiates between
the prevailing demand and supply curves, which could be different from the theoretical or
correct market demand and supply curves, which would result in the final state of rest.
So in a sense, Mises and Market would claim that the market is always in equilibrium,
in this sense.
Well, what about the second property of equilibrium,
the welfare maximization property?
As Professor Salerno has pointed out in his paper,
Mises and Hayek be homogenized, the market is always,
we are always maximizing our welfare in an exante sense.
I mean, just the way individuals are always,
when we make errors in valuation,
we're still optimizing in an exante sense.
We're still trying to attain the highest
and on our value scale.
Similarly, on the market, entrepreneurs,
when they are assessing, when they are praising
the marketplace, deciding how to allocate resources,
they too are engaged, so the market in an exante sense
is always maximizing welfare.
And in fact, it is this conception of the plain state
of rest which underlies Rothbard's welfare economics,
even though he doesn't explicitly state it,
because it's only then can you say that when you intervene
and stop any exchange taking place on the market
that you'd necessarily minimize or reducing market welfare
because that only follows from this sense
of an ex-ante welfare maximization
which takes place in the market.
So I quote from Professor Salerno's paper,
from the ex-ante standpoint,
the market economy is perfectly efficient
because entrepreneurial decisions
based upon monetary calculation
always result in the appraisal and allocation of resources
in strict accordance with anticipated consumer preferences
in the same manner in which the choices
of an individual actor produce a pattern of resource use
reflecting his value rankings of expected satisfactions.
Now,
well, I also want to argue,
and as Professor Hulsman pointed out when he spoke,
that actually these deductions which Menger,
I mean, sorry, which Mises and Margret have made
actually are completely consistent
with the way Menger and Boehm-Bawerk treated price theory.
They did not explicitly make any assumptions
about appraisal, except Boehm-Bawerk
who made one assumption when he said that
everybody knows the stock of the good in existence.
But what Menger and Boehm-Bawerk gave
Mises and others who followed in that tradition
was the explicit treatment of the bargaining process
that occurs on the marketplace.
In fact, Murray Rothbard in Man Economy State
actually tries to push the Boehm-Bawerkian price theory model
to actually account for speculation and appraisement.
Menger and Boehm-Bawerk literally did not deal
with appraisement at all because,
as Professor Hulsman pointed out,
they largely are talking about trade which occurs
in auctions, in stock markets, where buyers and sellers
have lesser need to appraise because,
through the active bidding and counter bidding,
they actually reveal their true preferences.
And in fact, actually, even Walra,
in his Elements of Pure Economics,
is largely dealing with auction markets.
He studied the French auction markets very carefully.
And in fact, William Jaffa, the great Walra scholar,
in one of his papers, he points out in a revealing footnote
that actually Walra had studied a French auction market
where there was an auctioneer.
So he actually took the demands and supplies
and that actually happened.
Well, anyway, so the whole point of,
I mean, my argument is that the Austrians
or the causal realists are not stuck between this devil
on the one hand of unrealism and welfare maximization
and no market clearing and the deep sea
of realistic assumptions like the Marshalling's
but no market rationing and lack of welfare maximization.
And I think the works of Professor Salerno and Klein
have clarified that to us who follow in the footsteps of Mises. Thank you.