Man, Economy, and State With Power and Market, Scholar's Edition by Murray N. Rothbard

Author:Murray N. Rothbard [Rothbard, Murray N.]
Language: eng
Format: epub, pdf
Tags: Finance, Business, pol_guide
ISBN: 9781933550275
Google: WKxInwEACAAJ
Amazon: 1933550279
Publisher: Ludwig von Mises Institute
Published: 2009-03-10T00:00:00+00:00

FIGURE 72. DETERMINATION OF PRICE AT A POINT OF MINIMUM COST

There is another way for this pseudo problem to disappear, and that is to call into question the entire assumption of tan-gency. The tangency of average cost and demand at equilibrium has appeared to follow from the property of equilibrium: that total costs and total revenues of the firm will be equal, since profits as well as losses will be zero. But a key question has been either overlooked or wrongly handled. Why should the firm produce anything, after all, if it earns nothing from doing so? But it will earn something, in equilibrium, and that will be interest return. Modern orthodoxy has fallen into this error, for one reason: because it does not realize that entrepreneurs are also capitalists and that even if, in an evenly rotating economy, the strictly entrepreneurial function were no longer to be required, the capital-advancing function would still be emphatically necessary.

Modern theory also tends to view interest return as a cost to the firm. Naturally, if this is done, then the presence of interest does not change matters. But (and here we refer the reader to foregoing chapters) interest is not a cost to the firm; it is an earning by a firm. The contrary belief rests on a superficial concentration on loan interest and on an unwarranted separation between entrepreneurs and capitalists. Actually, loans are unimportant and are only another legal form of entrepreneurial-capitalist investment. In short, in the evenly rotating economy, the firm earns a “natural” interest return, dictated by social time preference. Hence, Figure 72 must be altered to look like the diagram in Figure 73 (setting aside the problem of curves vs. angles). The firm will produce 0K, its optimum production level, at minimum average cost, KE. Its demand curve and cost curve will not be tangent to each other, but will allow room for equilibrium interest return, represented by the area EFGH.

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