Menno Rol wrote: [As a student, I got entangled in reasonings on what came first, changes in quantities or in prices. Till I discovered that the concept of 'price' in the Marshallian picture is ambiguous.] I had the same problem. It seems to me that the resolution requires a rejection of Marshall, and an embrace of Walras plus Mises, but with further twists. 1. Marshall inherited the classical ambiguity between numeraire and nominal price, and hence did not define price sharply. If we take a Walrasian individual who produces and consumes n different goods under subsistence (without any connection to the market), we must adopt one of the goods or even an imaginary good as the numeraire good. There must be a numeraire factor to convert every other good into units of the numeraire to measure value. That is what the classical authors thought of as nominal price, as distinct from the real or relative price. Confusion can be avoided if we use the term numeraire instead of nominal price, and reserve the term price to denote real or relative price, namely, take price always as a ratio. That ratio of course is the quantity of the second good that pays for the first good. 2. Marshall aborted the umbilical chord between price and income and threw out the classical concern as expressed in Says Law. This abortion occurred because Marshall took the individual away from the market and put him in splendid isolation. A buyer cannot buy anything without an income, and that income must be earned by selling something. Price theory must keep the door open for income theory to see how the change in price affects the income and is in turn affected by income. Marshalls famous pupil Keynes struggled with the problem of bringing income back into the picture of demand and supply. Keynes was correct in seeing that the equality of demand and supply determined income rather than price. But everybody is afraid of the great master, and hence even Keynes did not dispute the master. 3. Taking a clue from Walras, and with further incitement from Mises, we may deal with [what came first, changes in quantities or in prices]. Split the people into separate identities as optimizers and as entrepreneurs. Thus we may imagine that in an evenly rotating economy of Mises, the optimizers (producer, consumers) optimally choose quantities under predetermined prices of yesterday (but not forbidding them to make some guesses about possible price changes). Next, they hand over the output to the entrepreneurs as arbitrageurs to settle the prices. The entrepreneurs or arbitrageurs are not producers or consumers, and they do not optimize at all. Their job is that of the Walrasian auctioneer: clear the market of whatever the quantities are. They find a price that settles both the prices and the incomes such that the value of demand is equal to the value of supply, as well as the quantity of income is equal to the quantity of expenditure. For the next day, rotate the economy again. If the price of today has changed, tomorrow the optimizers will change the quantities in response, and then bring those to the merchants, who will once again change the prices if there is a need to do so for market clearing. The process keeps on going until the economy becomes even: day after day, the same prices persist and the same quantities are optimally chosen. 4. Like the proverbial egg first or chicken first problem, the resolution of the price-quantity sequence is to see that two distinct processes or pursuits are involved in the essentially inseparable procedure: prices and quantities are both determined together. Thus suppose that two neighbors are negotiating over a barter between two goods x and y, and they have not yet produced any. Suppose John says to Paul: I will give so much of x to you, how much y will you give? Then Paul gives an answer and John says, no, you will give more y or I will give less x and so on. At last, they find a mutually agreed bargain. That at once settles the quantities, and the price as a ratio between the quantities. Also inseparably, the market incomes and expenses of the agents are also determined by the same acts. As analysts, we can break down the affair into price theory and output theory, and apply optimization and entrepreneurship in isolation. The key is that optimizers are price takers while entrepreneurs are price makers. 5. The gist of the Misesian market drama is this: let optimizers produce a certain quantity at a presumed price which equates with marginal cost (all measured in terms of the other good to be had in exchange). But as an entrepreneur, the seller tries to get a price higher than marginal cost. It is simpler to pretend that the seller is a pure seller as arbitrageur, who acquires goods at marginal cost, (but does not produce or consume them) and then adds a mark up if possible. The entrepreneurs dictum is to buy cheap and sell dear. The price is set arbitrarily above the sellers marginal cost and below the buyers marginal cost (which may be ranked in terms of utility as well). The arbitrariness of arbitrage remains a debatable issue among the esoteric followers of Mises and Kirzner against Shackle and Lachmann, while all of them dismiss the pretense of determinate price as shown by deterministic algebra. This is a matter of competition, and Kirzner likes it to be seen as a process rather than as a point. The Marshallian intersection of the demand and supply curve of one good is too simplistic to reveal the many complexities. Sadly, lack of formalization keeps the good work of Mises, Kirzner, Hayek and Lachmann out of reach. 6. I no longer worry whether the egg came first or the chicken did. I worry about the richness of the egg and the chicken. The Marshallian egg is not sufficiently nutritious, and it can give birth to a very poor chicken. I want richer ones. Mohammad Gani