Study Guide Man, Economy, and State by Robert P. Murphy

Author:Robert P. Murphy [Murphy, Robert P.]
Language: eng
Format: epub
Publisher: Ludwig von Mises Institute

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Technical Matters

Some economists argue that the case of a backward bending supply curve of labor is an example of the elusive “Giffen good.” If we define the price of the good leisure as the wage rate, then a backward bending supply curve would mean that (at least in certain regions) a higher price of leisure leads to consumers buying more of it, an apparent violation of the Law of Demand for the leisure good.

The “market socialists” responded to Mises’s challenge by showing how, with the stipulated technologies, resource supplies, and consumer preferences, a central planner could identify optimal production plans using Walrasian analysis. Hayek admitted that this solution was valid in theory, but claimed that practically it would be impossible to implement due to the volume of equations, and the difficulty of actually transmitting the relevant knowledge to the planners. Rothbard and others have rejected this “concession” and insist that even in principle, the central planners could not calculate without market prices for the means of production.

Someone like Keynes would object to Rothbard’s claims (pp. 581–88) that large-scale unemployment is impossible on a free market, and that more workers can always be hired at lower wage rates. Keynes argues in the General Theory that this “classical” (his term) view overlooks the empirical fact of widespread “involuntary” unemployment during the 1930s, and that it overlooks the possibility that workers in the aggregate will be unable to lower their real wage demands. Roughly, Keynes argues that any individual worker can agree to work for lower money wages (and hence real wages), but if all workers agree to, say, a 10 percent wage cut, then this lowers the amount of purchasing power in the hands of consumers, and prices may also fall by a large amount; hence the real wage of the workers may not fall. (Of course this note is not meant to endorse Keynes’s analysis.)

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