Property Rights, Consumption and the Market Process

Property Rights, Consumption and the Market Process

New Horizons in Institutional and Evolutionary Economics series

David Emanuel Andersson

Property Rights, Consumption and the Market Process extends property rights theory in new and exciting directions by combining complementary insights from Austrian, institutional and evolutionary economics. Mainstream economics tends to analyse property rights within a static equilibrium framework. In this book David Andersson reformulates property rights theory as an evolutionary theory of the market process.

Chapter 4: Production Attributes and the Capital Structure

David Emanuel Andersson

Subjects: economics and finance, evolutionary economics, institutional economics


Most expositions of theories of production start with a set of assumptions. Neoclassical economics for the most part uses a specific set of assumptions that implies that firms maximize profits through the efficient combination of labour, capital and land. I do not use that set of assumptions in this chapter, and consequently there is neither an explicit nor an implicit focus on profit-maximizing or ‘efficient’ firms. A compelling argument for rejecting profit maximization is that businesspeople do not have access to perfect information, which is one of the assumptions of the profit-maximizing model. This is an argument that Harrod (1939) made long ago. We should also note that even if people had access to all the relevant information, the common assumption of perfect information additionally implies that nothing is ‘lost in translation’. Individuals are assumed to possess powers of perfect interpretation as well as perfect access to raw data. Economists subscribing to profit-maximizing models do not defend the indefensible. Instead, instrumentalist defences abound. Friedman (1953) uses a variant of ‘survival of the fittest’, where selection mechanisms act to exclude those firms that do not act as if they were maximizing profits. But since Friedman (ibid.) also claims that prediction is the only goal of science (see Chapter 1), he considers the realism of whatever assumptions the economist makes irrelevant. Nevertheless, the predictive performance of the profit-maximization assumption depends on the absence of change in the selection environment. Any changes to...

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