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In reply to Larry Moss' message:
My understanding of the subjective theory of value (i.e., of prices),
which Marshall never accepted in full, had the effect for those who
understood it, of making the human actor the foremost "exogenous
variable" in the theory of "the market." According to this theory,
changes in such things as the physical environment and in peoples'
behavior had effects only because actors perceive such changes and
take them into account in their judgments about what are factors of
production, in their appraisals of the factors, and in their decisions to
produce and invest. In other words, these changes have effects only
because entrepreneurs include them in their plans to produce goods
that are ultimately used to satisfy what they perceived to be the wants
of individuals acting in the role of consumers. As the theory developed
from Menger through writers like Wicksteed, Davenport, Knight,
Schumpeter, and Mises; the characteristic of active, imaginative,
inventive entrepreneurship came to be the fundamental driving force, or
"exogenous variable," of the market economy.
My comment on Larry's post is that with respect to the problem of
describing the "market process" or, more correctly, the system of
exchange under the conditions of strict private property, use of money
and specialization; there was at least one major transformation in the
history of economic thought: the replacement of the labor or cost
theory of value (prices) with the subjective theory. For those who
understood this transformation, the nature of the "exogenous variables"
changed radically from material, physical, potentially quantifiable things
to the non-quantifiable human mind and volition.
I can agree that in giving examples of the "market process" we make
ceteris paribus assumptions. If this is what Larry means when he says
that we may assume in some cases that the banks of the river do not
change, I have no objection.
The main concern of this post is with the broader issue. With respect
to this issue, I think Alan is right. The first step is to define "the
market." This indeed is what the subjective value theorists were trying
to do, albeit in a different way than had been previously done. The
second step, which is perhaps implied in the above, is for the
economist to tell his aims. Is he trying to describe the market economy
in general or is he trying to give examples of particular actions in a
market economy in which many other actions, which the example-giver
is not concerned with, may have an influence?
A remarkable fact about professional economics is that the exogenous-
endogenous terminology developed without any obvious
acknowledgment of the subjective theory of value. On this basis, one
might question the use of this terminology to refer to the "market
process."
Pat Gunning
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