Austrian Perspectives on Economic Organization
Edited by Nicolai J. Foss and Peter G. Klein
Chapter 1: Explaining Firms
CHAPTER 1 4/7/02 1:47 PM Page 1 1. Explaining firms Brian J. Loasby Nicolai Foss (1999a, p. 5) has pointed out that the distinction between production and exchange approaches to economic organization is not very satisfactory, because both contribute to the maximization of joint surplus. This was Menger’s (, 1976) view, though he preferred to call them both means of meeting human needs; both were incorporated in his analysis of economic systems. This should therefore be an appropriate starting point for an exploration of Austrian perspectives on economic organization. Menger began, neither with production nor exchange, but with direct consumption of what is already to hand, followed immediately by what is now called ‘household production’ of consumables from what is already to hand. In Menger’s scheme items used in this way are identified as goods of higher order; their value in such a use is derived from the needs that are satisfied. By his scheme for ordering goods by their place in a sequence of production and exchange, Menger, unlike Walras, provides an explanation for the structure of prices in the structure of economic activity, though its application is greatly complicated by the ability of a particular good to appear at different stages in many sequences. Only when the goods which are to hand cannot be used, either directly or indirectly, for meeting that person’s (or family’s) needs does exchange begin to be substituted for household production. Anything used for exchange thereby becomes, in Menger’s system, an indirect means...
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