Gary mentions that the passages from Knight "rightly emphasize the cost   
side without tracing the issue back to the classicals, which I suspect   
is necessary to solve the puzzle." Although Marshall may have kept at   
least a finger in the pot of the classicals, I do not believe that this   
is so of Knight. In other words, Knight was not interested in tracing   
the issue back to the classicals because he believed that this mode of   
thinking about demand and supply was rendered obsolete by the   
"neoclassical."  
  
Knight (and Davenport before him) emphasized the entrepreneur point of   
view because he adhered to the revolution ushered in by the 19th century   
subjectivists. To the subjectivists, all economic value could be traced   
to subjective utility as perceived by minds that knew about goods,   
resources and the /causal connections/ among them (technology). This   
idea was most clearly stated by Menger (1871) in his definition of a good.  
  
In the image of an economy that was built from this point of view, the   
function of the consumer is to attach utility to goods. The function of   
the entrepreneur, or producer, is to appraise goods and resources by   
using his knowledge of consumer demand and his knowledge of the causal   
connections. The judgments and decisions of interacting entrepreneurs   
can be conveniently called the "entrepreneur process." It is conceived   
as one in which entrepreneurs transform consumer demand for all   
commodities, emanating from the minds of consumers, into money   
opportunity cost, which is in the entrepreneur's mind.  
  
It was important to the users of this point of view and of this   
conception of the entrepreneur process to be able to trace every market   
price through the entrepreneur's mind back to the subjective utility of   
the consumer. To be able to do this was a test of one's success in   
mastering the new theory. It was in this sense that one might say, as   
some of the Austrians tended to do, that utility is the source of all   
value. A good intermediate reference on the theory of value referred to   
here is Bohm Bawerk.  
   
B?Bawerk, E. (1894), "The Ultimate Standard of Value," Annals of the   
American Academy of Political and Social Science (September), in Shorter   
Classics of Eugen von B?Bawerk, South Holland, Ill.: Libertarian   
Press, 1962.  
  
In that article, Bohm tries to provide a clear distinction between the   
subjectivist approach to the demand-supply problem and Marshall's   
approach. In addition, he presents what seems to be one of the earliest   
effort to work through the problem of tracing price back to utility   
through the mind of the entrepreneur -- i.e., through the entrepreneur   
process.  
  
In the old classical theory, price was determined by demand and supply.   
In the new theory, a single price was determined by the demands of   
consumers for the good and by the collectivity of entrepreneurs via an   
entrepreneur process that takes account of (1) all of the demands for   
all of the goods and (2) all of the knowledge of the means of supplying   
those goods (technology).  
  
Finally, although the interrelationships between demand and supply can   
be represented by (or derived from) a general equilibrium model of the   
Walrasian type, it is evident that unless the economist treats such a   
model only as an auxiliary (as I hope most teachers do in the   
classroom), she risks losing touch with the essence of the new theory --   
i.e., with the entrepreneurial process.  
  
Pat Gunning