Ludwig Von Mises' neoclassical analysis of dumping.
Ludwig von Mises analyzes dumping, or international price discrimination, in Human Action: A Treatise on Economics (1949), although he uses a different term, margin monopoly, to describe it. His analysis of margin monopoly focuses on equilibrium and comparative statics, which places it in the neoclassical mainstream. Mises generally examined economic activity in disequilibrium and was dismissive of comparative statics. Hence, his neoclassical analysis of margin monopoly is an anomaly. In many respects his treatment of margin monopoly replicates Joan Robinson's treatment of dumping in The Economics of Imperfect Competition (Robinson 1933), although Mises does not cite Robinson.
The present paper contributes to the history of economic thought by exploring similarity in the analysis of international price discrimination by two icons with widely different ideologies and approaches to economic analysis. The paper is organized as follows. Robinson's treatment of dumping is presented, followed by a discussion of how it contrasts with the Austrian conception of competition as a discovery process. Then Mises' treatment of margin monopoly is presented, and the similarity of the two treatments is explored. Five suggestions are made why Mises does not acknowledge Robinson. Finally, the paper addresses what difference it would have made if Mises had used an Austrian analysis instead of a neoclassical one to examine margin monopoly.
Robinson provides the classic analysis of price discrimination in The Economics of Imperfect Competition. International price discrimination, or dumping, is treated as a special case: a domestic monopolist exports a good at the world price and sells in the protected domestic market at a higher price. Robinson's analysis builds on the work of Pigou (1920), Viner (1922a, b; 1923), Graham (1924), and Yntema (1928). (1)
The relevant graph in The Economics of Imperfect Competition (1933, p. 184) is redrawn in Fig. 1, which uses the same lettering. [D.sub.2] is the perfectly elastic foreign demand for the good. [D.sub.1] is the domestic demand in the protected home market. M[R.sub.1] is the marginal revenue curve to [D.sub.1] and MC is the domestic monopolist's marginal cost. The firm sets M[R.sub.1] equal to [D.sub.2] equal to MC to determine the profit-maximizing price and quantity in each market. Total output is 0 M units, with 0[M.sub.1] units sold domestically at price [P.sub.1] and [M.sub.1] M units exported at price [P.sub.2]. Robinson observes that if [D.sub.2] falls below the intersection of M[R.sub.1] and MC, then the firm sells only in the home market.
The Difference Between Robinson's Neoclassical Treatment of Imperfect Competition and the Austrians' Conception of Competition as a Discovery Process
Robinson's treatment of imperfect competition was path breaking, as she focused rigorously on firms that were price makers (or searchers) as opposed to price takers. Robinson used comparative statics, that is, the movement from one equilibrium to another caused by a change in circumstances confronting the firm.
Austrian economists, on the other hand, view equilibrium as an imaginary construct, consistent with an evenly rotating economy where human action ceases. Entrepreneurs are not present in the evenly rotating economy since there are no opportunities to profit and no risks of loss. Equilibrium is not the focus of human action.
Entrepreneurs function in disequilibrium, anticipating market conditions by attempting to arbitrage; i.e., to buy inputs low and sell the resulting output high, the resulting output. Or they may attempt to arbitrage by shifting a product from one market to another where they anticipate a higher price. Note they cannot arbitrage by just observing the differences in prices in the two markets, since the markets are not perfectly competitive, and the prices are not given. The entrepreneur begins selling in the new market trusting to reap higher prices for his product, but there is no guarantee. He will discover through trial and error whether the prices will be higher. If so, he shows profit. If not, the entrepreneur bears losses and moves his product to other markets or ceases producing it.
The discovery process is continuous as profits and losses guide the entrepreneur. Whether profit is earned, and how much, depends on how alert the entrepreneur is in anticipating the reception of potential customers to his product and the strength of would-be competitors. Equilibrium itself guides no decisions.
Analysis of Mises
Mises describes various types of monopoly, including incomplete monopoly, license monopoly, limited space monopoly, local monopoly, and failure monopoly. But he devotes most attention to margin monopoly (1949, pp. 361-362): "Let us illustrate margin monopoly by referring to its most frequent instance in present-day conditions, the power of a protective tariff to generate a monopoly price under special circumstances." Mises labels Atlantis as the home economy.
"Atlantis puts a tariff t on the importation of each unit of the commodity p the world price of which is 5. If domestic consumption of p in Atlantis at the price s+t is a and domestic production of p is b, b being smaller than a, then the costs of the marginal dealer are s+t. The domestic plants are in a position to sell their total output at the price s+t" (1949, pp. 361-362).
The example described above is the standard case of a competitive industry facing imports that receives tariff protection. But then Mises discusses margin monopoly.
"But if b is greater than a, things are different.... the tariff, in discriminating between domestic and foreign production of p, accords to the domestic plants a privilege which can be used for a monopolistic combine, ... If it is possible to find within the margin between s+t and s a monopoly price, it becomes lucrative for the domestic enterprises to form a cartel. The cartel sells in the home market of Atlantis at a monopoly price and disposes of the surplus abroad at the world market price" (1949, pp. 361-362).
Although Mises does not draw the graph, Fig. 2 illustrates his analysis. [D.sub.1] is the domestic demand; MC is the domestic industry supply; 5 is the world price; and s + t is the world price plus tariff where point b is at a greater quantity than point a. The cartel exports at the world price s and sells in the domestic market at a price between s and s + t. (The other letters in the graph should be ignored for now.)
The analysis of Mises, where b is a lower quantity than a and where b is a greater quantity than a, represents comparative statics, since changes in equilibrium are examined. In the former case, a tariff is introduced to protect an import-competing industry. In the latter case, a tariff is introduced not to reduce imports but to allow an export industry to form a cartel to charge a domestic price above the world price. The resulting change in equilibrium is examined in both cases; i.e., the change in domestic price, domestic consumption, domestic production, and trade flows. (2) There is no discussion of disequilibrium or entrepreneurial activity.
Note the sentence in the previous quote by Mises: "If it is possible to find within the margin between s+t and s a monopoly price, it becomes lucrative for the domestic enterprises to form a cartel" (1949, pp. 361-362). A useful concept in finding a monopoly price is marginal revenue, although Mises does not refer to it. See Fig. 2 where marginal revenue M[R.sub.1] to [D.sub.1] is added to the diagram. Marginal revenue is set equal to the world price s to determine the domestic price, [P.sub.1]. 0[M.sub.1] units are sold domestically, and [M.sub.1] M units are sold abroad at the world price s (equal to [P.sub.2]). (If s + t were lower than [P.sub.1], then s + t would be the domestic price set by the cartel.) With marginal revenue included, Mises' analysis of a domestic cartel protected by a tariff essentially duplicates Robinson's analysis of a domestic monopolist protected by a tariff.
Mises' Failure to Recognize Robinson
First, Mises in his treatment of margin monopoly did not cite The Economics of Imperfect Competition,(Robinson 1933), even though the book predated Human Action (Mises 1949), by 16 years. One reason was that Mises did not accept the concept of prices pertaining to imperfect competition or monopolistic competition. (1949, pp. 356-357). For him, it was either a competitive price or a monopoly price and no third possibility of prices.
Second, Mises did not use marginal revenue in his analysis of margin monopoly. He used the term "marginal price" (1944, unpublished manuscript, 1998, p. 15) when discussing a textile producer increasing production until incremental cost equals marginal price under the "'perfect' competition fallacy." What harm then for him to use marginal revenue to discuss production decisions under margin monopoly?
It was Robinson who popularized the marginal revenue curve. "The introduction of the marginal revenue curve at Cambridge was an auspicious event for Robinson, who became the first economist to make serious use of it" (Aslanbeigui and Oakes 2009, p. 7). Paul Douglas, an economist at the University of Chicago, wrote a letter to Robinson in January, 1935, stating: "Your introduction of the marginal revenue curve gives us a most powerful weapon in the analysis of monopoly price and as you well bring out alters greatly the discussion of the problem of distribution" (Aslanbeigui and Oakes 2009, p. 239). Mises may not have wished to use marginal revenue, since it was Robinson who received credit for its general introduction to the profession. (Note, though, that Robinson does not claim that she discovered marginal revenue; see her discussion in the Forward (pp. vi-vii) of The Economics of Imperfect Competition on a history of the concept of marginal revenue.)
Third, Mises (1944, unpublished manuscript, 1998, p. 16) cited ideology as a reason for him to reject Robinson's concept of imperfect competition (1933):
"The doctrine of 'imperfect' competition was a desperate attempt of fanatical foes of free enterprise to refute the economists' demonstration that in a competitive market, i.e., in a market where there are no monopoly prices, a surplus of sales proceeds over production costs is always the result of the entrepreneur's success in providing the consumers with those commodities for which their demand is most intense. The champions of the doctrine of 'imperfect' competition were deluded by their fanaticism and their zeal to disparage free enterprise. Their prosocialist bias made them blind to the fundamental facts of economic activity and the characteristic features of any production under the division of labor."
Robinson and Mises had different ideologies. Robinson was a Cambridge economist, wrote a classic book on imperfect competition, was a Keynesian in macroeconomics, and wrote extensively on Marxian economics. Mises wrote in the tradition of Austrian economics, (3) was associated with the ideas of Friedrich von Hayek, and was a staunch free market advocate.
Fourth, Mises may have believed his analysis was different from or better than Robinson's. Margin monopoly was one of six types of monopoly that Mises distinguished, and perhaps he considered his classification unique on its own account. Further, he had a different context than Robinson. He has a detailed discussion in Human Action (1949, p. 363) of government prolabor policies and relates the discussion to margin monopoly and cartels.
"In the last decades of the nineteenth century the German Reich embarked upon a vast scheme of Sozialpolitik. The idea was to raise the income and the standard of living of the wage-earners by various measures of what is called prolabor legislation, by the much glorified Bismarck scheme of social security, and by labor-union pressure and compulsion for the attainment of higher wage rates."
Mises distinguishes three cases related to public policy associated with prolabor legislation, the third of which deals with margin monopoly and is described below:
"Only cartels could free Germany from the catastrophic consequences of its 'progressive' prolabor policies. The cartels charged monopoly prices at home and sold abroad at cheaper prices. The cartels are the necessary accompaniment and upshot of a 'progressive' labor policy as far as it affects industries dependent on foreign markets (p. 364)."
Mises perhaps felt no compulsion to link his concept of margin monopoly to Robinson's analysis, since he was considering a specific historical question that related to cartels and labor policy in Germany. To that extent, Mises was conducting empirical research in the Austrian tradition, (4) which focuses on "historical case studies" (Rosen 1997, p. 148), seeks "possible validity in specific historical circumstances" (Yeager 1997, p. 157), and invokes "anecdotal evidence" (Beaulier and Subrick 2013, p. 456).
Fifth, Robinson's imperfect competition gave specific meaning to business exploitation of labor, where workers receive less than the value of their marginal product. Mises was criticizing prolabor policies as motivating the German government to encourage cartel formation to protect workers' wages at the expense of domestic consumers, who now pay a monopoly price. Robinson focused on business exploiting labor while Mises focused on government exploiting consumers.
Austrian Economics and Neoclassical Economics
What if Mises had used a discovery process to analyze margin monopoly instead of comparative statics? How would the analysis have looked, and what difference would it have made? Mises' analysis might have run as follows. The product would not have been homogeneous, and neither the world price nor the domestic market demand would have been given. Firms would have had to enter the world market and domestic market before knowing the prices they would be receiving.
Before the imposition of the tariff, the price of the product in the home market would differ across firms, as each firm grapples with discovering a profitable price for its product over any given period. Hence, whether the tariff is specific or ad valorem would make a difference, since it would have a differential effect on the profitability of each firm. An ad valorem tariff benefits more the firms selling higher quality-higher price versions on the product.
It would be more difficult for the firms to agree on a cartel price after the tariff was levied, since prices were not uniform to begin with, and the tariff affects each firm differently. Entrepreneurs with competitive instincts and different degrees of alertness are not apt easily to agree on a pricing structure in the industry, which would imply some distribution of cartel profits across the firms. Further, the competitive struggle among firms may continue at some level even after the tariff- is levied and the cartel is formed. Hence, it is unlikely that industry profits would be maximized as they were under Mises' comparative statics analysis with a homogeneous product.
However, the qualitative conclusions of the (proposed) Austrian analysis and neoclassical analysis are the same with respect to the tariff and cartel formation. Domestic prices rise, domestic consumption falls, exports rise, and industry profits rise.
The analysis in the present paper suggests an answer in the affirmative to the query posed by Rosen (1997, p. 139) "Austrian and Neoclassical Economics: Any Gains From Trade?" Mises and other Austrian economists explain the importance of disequilibrium, the entrepreneur, and the competitive process, which can be overlooked by focusing only on equilibrium positions. Their writings add richness to the understanding of a market economy that neoclassical economists should appreciate. Neoclassical economists can still use comparative statics, since it is more precise regarding prices and quantities, lends itself to mathematical formulation, such as the basic graphical analysis shown above, and allows for more empirical testing. In the other direction, the Austrian economist Mises demonstrated how neoclassical analysis worked for him in the case of dumping.
Acknowledgments The author would like to thank Peter Z. Grossman, Robert S. Main, and an anonymous referee for helpful comments.
William J. Rieber (1)
[mail] William J. Rieber
(1) Lacy School of Business, Butler University, 4600 Sunset Avenue, Indianapolis, IN 46208, USA
Published online: 24 October 2016
(1) Subsequent literature on international price discrimination between 1933 and 1949 includes Beach (1936), McDiarmid (1938), Leontief (1940), Lovasy (1941), and Enke (1946). Cantono and Marchionatti (2012, p. 193) cite Pasquale Jannaccone (who wrote before Viner and in Italian) as being responsible for the "theoretical origin of dumping, in the context of imperfect competition."
(2) Mises (1943, unpublished manuscript, 1990, p. 147) also discusses tariffs that protect domestic cartels.
(3) Negru (2013, p. 995) identifies Mises as one of the four important members of the Austrian school, along with Carl Menger, Friedrich von Hayek, and Murray Rothbard. Neck (2014) contrasts the work of Menger, the founder of the Austrian school, with contributions of recent thinkers in the Austrian tradition.
(4) Robinson also has agreement with Mises on the importance of economic history. "It is only by interpreting history, including the present in history, that economics can aspire to be a serious subject" Robinson (1980, p. 224).
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|Author:||Rieber, William J.|
|Publication:||Atlantic Economic Journal|
|Date:||Dec 1, 2016|
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