A Rejoinder to Mr. Murphy
Victor Aguilar

Hayek's and Rothbard's Production Theory of Value 

Having famously accused Hayek of taking the perspective of the owner of the final product looking back on his costs of production, that is, of taking Marx's perspective, let us begin by examining Murphy's defense of Hayek's alleged Marxist leanings. Murphy's response to my claim that the Hayekian triangle is sideways and backwards is classic bait and switch. I raise two objections to the Hayekian triangle:

"Hayek's triangle is printed sideways and backwards. The former problem can be corrected by rotating the graph but the latter problem is more fundamental. Hayek is speaking from the perspective of the owner of the final product looking back on his costs of production. He is speaking from Marx's perspective. The perspective that we want is from right now, at time zero, looking forward into the future" (Aguilar, p. 27).

The first objection, that Hayek defied the convention of mathematicians by putting the independent variable on the vertical axis, is not, as I point out in this quotation, the fundamental problem. That is an expository issue. The fundamental problem is that the Austrians are speaking from the perspective of the owner of the final product looking back on his costs of production. Murphy baits us with the promise of defending against this fundamental objection and then switches to addressing the expository objection.

Then, while Murphy is busy extolling the virtues of sideways graphs, he does not notice that he himself is hopelessly mired in the Marxist perspective. Murphy writes, "the consumer's good is always the 1st order, regardless of how far back we push the analysis, even if we go back to axes carved by prehistoric men" (Murphy, p. 6). How far back we push the analysis??? That sounds like we are speaking from the perspective of the owner of the final product looking back on his costs of production. Think about it: When did copper axes exist? Past, present or future? Obviously, they existed in the past. So why does Murphy, who claims to believe in the subjective theory of value, care about them?

What sort of analysis is Murphy doing that requires knowing the cost of copper axes in millennia past? For that matter, what sort of analysis is he doing that requires knowing the cost of a load of lumber I purchased from Home Depot last week? Maybe it was wisely bought or maybe it was a stupid purchase, but Home Depot is not going to take it back, so what is done is done. Those boards are valued now, according to the subjective theory of value, only for the value attached to the consumer goods they can be made into, discounted for time preference. If my architectural dreams come to naught and I wind up feeding the boards into my stove, then they are valued for no more than I would value a load of firewood. It does not matter how much I paid for them or how much labor was expended at the sawmill cutting them into the proper dimensions.

I insist, "The perspective that we want is from right now, at time zero, looking forward into the future. Thus, the DWCS [Distribution of Wealth over the Capital Structure] is defined from zero to positive infinity’ The DWCS includes all wealth currently in existence, which was (of course) all manufactured in the past. But its date of manufacture is irrelevant since its value is determined entirely by considerations of the future. By the subjective theory of value, all goods are valued for their contribution towards future consumption, not for their past cost of production" (Aguilar, p. 8, 7).

Murphy writes, "Second [after baiting us with the promise of defending Hayek from the charge of Marxism and then switching to defend sideways graphs], Rothbard does not have ’the numbers one through six on his graph printed backwards' (Aguilar, p. 7). Those numbers aren't representing units of time, but rather the stages of production. Following Menger, the lowest order (consumer good) stage is the 1st order, the next highest stage is the 2nd order, and so forth" (Murphy, p. 5). Okay, if (and this is a big "if") we accept the Marxist perspective that value is determined by past costs of production, then it makes sense for Rothbard to enumerate them as follows. Hopefully everybody saved their receipts, as per Skousen's instruction (1990, pp. 184-185), since it may be difficult to explain to them why those yellowing slips of paper are relevant today.

But, the point is, I do not accept this Marxist perspective. My objective is not to quibble with Rothbard over how the costs of production should be labeled (either counting stages or indicating the times, in years gone past, when those costs were incurred) but to reject the whole concept of seeing significance in past costs of production. I believe (and apparently I am the only one who does) in the subjective theory of value. "By the subjective theory of value, all goods are valued for their contribution towards future consumption, not for their past cost of production" (Aguilar, p. 7).

Combining Hayek and Murphy, we get an obvious absurdity: Hayek defines the "average period of production" as half the time since the application of the original means of production:

As the average time interval between the application of the original means of production and the completion of the consumers' goods increases, production becomes more capitalistic, and vice versa. In the case we are contemplating in which the original means of production are applied at a constant rate throughout the whole process of production, this average time is exactly half as long as the time which elapses between the application of the first unit of original means of production and the completion of the process (1967, p. 42).

But Murphy defines the "original means of production" as "axes carved by prehistoric men" (Murphy, p. 6). Therefore, since prehistoric men lived 10,000 years ago, the oft-cited (in Austrian literature) average period of production is 5000 years? For every consumer good? Ridiculous!

Click here for a side-by-side comparison of Garrison's and Aguilar's capital theories.