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Machlup and Hayek: Filiation of Ideas and Ambition: Part XV: The Chicago School of Economics, Hayek’s ‘luck’ and the 1974 Nobel Prize for Economic Science
Abstract
Fritz Machlup was a lifelong friend of Friedrich Hayek and an important contributor to the latter’s body of work and worldwide recognition. Machlup was a taxonomist of ideas. This is clear from his categorization of economists (including Hayek and himself) in terms of their contribution to the notion of the production period; his categorization of Hayek’s accomplishments in his report leading to Hayek’s Nobel Prize; his categorization of ideas leading to economic integration and his categorization of his own contributions to economics in terms of economists with whom he might share a Nobel Prize should the Committee seek to nominate him. Always the critic and editor, Machlup also contributed to Hayek’s clarity around concepts like the services of resources and the phases of production/investment. These concepts proved as important to Machlup as to Hayek and Machlup’s student, Edith Penrose. Long-associated with a Penrosean notion of capabilities-driven growth of the firm, the services of resources and phases of production/investment owe their existence to the penetrating discussions of Machlup and Hayek over capital theory, prices and production—and hence invite a deeper investigation of the Austrian influence on her work. Important to a larger theory of economic growth—which became Penrose’s major interest after the publication of a The Theory of the Growth of the Firm, while Machlup was still her mentor—the Machlup and Hayek discussions and publications support the integration of capital theory into the trade cycle. This chapter focuses on a few of those places where Machlup engaged with Hayek on ideas—change, time, production/investment, services of resources, capital theory and the trade cycle—as well as their joint effort to secure a position for Ludwig von Mises, Machlup’s effort on behalf of the US publication of the Road to Serfdom and his work on Hayek’s Nobel Prize.
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The resource-based view (RBV) of the firm has been around for over twenty years - during which time it has been both widely taken up and subjected to considerable criticism. The authors review and assess the principal critiques evident in the literature, arguing they fall into eight categories. They conclude the RBV’s core message can withstand criticism from five of these quite well provided the RBV’s variables, boundaries and applicability are adequately specified. Three critiques that cannot be readily dismissed call for further theorizing and research. They arise from the indeterminate nature of two of the RBV's basic concepts – resource and value – and the narrow conceptualization of a firm's competitive advantage. The authors feel the RBV community has clung to an inappropriately narrow neo-classical economic rationality, thereby diminishing its opportunities for progress. Their suggestions may assist with developing the RBV into a more viable theory of competitive advantage, especially if it is moved into a genuinely dynamic framework.
According to the advocates of a "Generalized Darwinism" (GD), the three core Darwinian principles of variation, selection and retention (or inheritance) can be used as a general framework for the development of theories explaining evolutionary processes in the socioeconomic domain. Even though these are originally biological terms, GD argues that they can be re-defined in such a way as to abstract from biological particulars. We argue that this approach does not only risk to misguide positive theory development, but that it may also impede the construction of a coherent evolutionary approach to "policy implications". This is shown with respect to the positive, instrumental and normative theories such an approach is supposed to be based upon.
Over the last two decades the resource-based view (“RBV”) has become dominant in the strategic management field. It has often been observed that the RBV is lacking in the dynamic dimension. For example, processes of building competitive advantages by means of combining existing complementary resources in novel ways are not inquired into. We argue that the RBV may profitably draw on insights in entrepreneurship and capital theory, drawn from Austrian economists as well as Frank Knight, in order to strengthen its dynamic dimension. We link the RBV and Austrian ideas in the context of the theory of complex systems pioneered by Herbert Simon. We draw a number of implications for strategic management from this synthesis, notably into resource value and sustainability of competitive advantage.
My first publications were in this field and I am still cultivating it, 55 years later. My first book was on the gold-exchange standard. This book had developed from a seminar paper, done in 1922, and from my doctoral dissertation, completed in 1923. It was published in 1924, with the imprint 1925. Perhaps a brief description of Europe at that time can show how the book fitted in its time.
On 11 December 1926, Friedrich August Hayek wrote to Oskar Morgenstern, then at Harvard on a Rockefeller Research grant:
You will wonder that it is just Professor Mises and me, having always been rather sceptical of such research methods based on statistical inquiries, who are responsible for creating this thing.1
This book discusses the development of a theory on the growth of the firm. It is shown that the resources with which a particular firm is accustomed to working will shape the productive services its management is capable of rendering. The experience of management will affect the productive services that all its other resources are capable of rendering. As management tries to make the best use of the resources available, a ‘dynamic’ interacting process occurs which encourages growth but limits the rate of growth.
Purpose
– The central focus of this paper is the mentorship relationship of economist Fritz Machlup and his graduate student Edith Penrose, and specifically how that relationship contributed both to her development as a scholar and to her seminal work, The Theory of the Growth of the Firm.
Design/methodology/approach
– The qualitative research on which this paper is based is the sociohistorical biographical approach, based on a close examination of published works and archival materials. Content analysis is used to draw inferences about Fritz Machlup's mentoring content, style, and impact on Penrose's methodology and argumentation as reflected in The Theory of the Growth of the Firm, and the correspondence exchanged while Penrose was writing The Theory of the Growth of the Firm.
Findings
– The Theory of the Growth of the Firm mirrors Machlup's methodology and methodological framework. The arguments supporting Penrose's theoretic model of the growth of firms were discussed, debated and shaped by the exchange of ideas in the Penrose/Machlup correspondence.
Originality/value
– While Penrose's work has been acknowledged as “breakthrough” in the areas of entrepreneurship and firm growth, there has been little recognition of the role of her mentor in its creation. This study sets out to correct what would appear to be an historical oversight as well as to understand how Machlup practiced mentorship; how he perceived the roles of mentor and mentee; Machlup's contribution to his graduate students, and the extent to which his students incorporated the learning into their own work.
What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses. This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications, and can never be so given. The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.
Lecture to the memory of Alfred Nobel, December 11, 1974
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