Jankovic Block Ostrom

Tragedy of the Partnership: A Critique of
Elinor Ostrom
By WALTER BLOCK* and IVAN JANKOVIC†
ABSTRACT. Elinor Ostrom thinks she has discovered a third way apart
from private and government property: the commons. In her view,
there is no “tragedy” associated with this third option. The present
article takes strong issue with her. Our claim is that she has not
properly distinguished between a commons and partnership
arrangements. In the former case, outsiders cannot be excluded from
entry; in the latter, they can. The reason for this confusion between the
commons and private property in Ostrom’s work is that she believes
private property is possible only if government protects and enforces it.
We show by using various historical examples that this assumption is
wrong, and hence the central tenet of Ostrom’s model of the commons
fails.
I. Introduction
The academic reception of Elinor Ostrom’s work in the social sciences

is a curious one. One could rarely find an example of an economic
theory so widely and overwhelmingly praised and accepted among
such a diverse and often hostile group of authors. It is more than pass-
ing curious not only that Elinor Ostrom, a political scientist, was
awarded a Nobel Prize in Economics, but that her work is equally
praised by a wide spectrum of authors, from the far left to the far right.1
Socialists like her argument because it seems to show that free markets
and private property are not the magical solutions for all economic
problems, while some free-market-oriented authors do so because it
seems to support the Hayekian (1945) philosophy of using the local
*Walter E. Block, Ph.D., is the Harold E. Wirth Eminent Scholar Endowed Chair and
Professor of Economics at the Joseph A. Butt, S.J. College of Business, Loyola Univer-
sity New Orleans.
†Ivan Jankovic is a Ph.D. candidate in political science at Simon Fraser University.
American Journal of Economics and Sociology, Vol. 75, No. 2 (March, 2016).
DOI: 10.1111/ajes.12141
C 2016 American Journal of Economics and Sociology, Inc.
V
290 The American Journal of Economics and Sociology
and tacit, spontaneous-order knowledge for social cooperation and

coordination, instead of one-size-fits-all government-imposed solutions
(Pennington 1997). In reviewing the literature on Ostrom we were
unable to locate a single critical paper or comment on her work in any
academic journal or book.2 When we add to this that her major argu-
ment is considered to be a radical and path-breaking revision of both
classical state-centered environmentalism and free-market doctrines,
this remarkable lack of critical scrutiny becomes somewhat of a
mystery.
The purpose of this article is to try to correct this uncritical accep-
tance of Ostrom’s work by concentrating on one of the essential ele-
ments of her theory: the doctrine of “governing the commons” as a
solution for the famous problem of the “tragedy of the commons.” As
we hope to demonstrate more in detail, Ostrom makes two errors that
undercut the basis for her entire project.
First, she seems to conceptually misunderstand the very notion of
private property rights and therefore to conflate one specific contractual
variation of those rights, namely, partnership or condominium, with an
allegedly new form of “governance” that is neither under government
control nor that of free-market participants. All the time, Ostrom thinks
she is talking about the “commons” and how it is “governed,” whereas
in reality she is discussing various forms of private partnerships.
Second, this error is based on and is actually reinforced and ampli-
fied by a further mistake of assuming that any viable system of commer-
cial self-regulation or enforcement of private property rights always has
to be based on government force and imposed on individuals from
without. We demonstrate that this is not the case and that historically
many legal and economic frameworks regulating market activities
emerged spontaneously in the market system with voluntary coopera-
tion.3 Therefore, the fact that what Ostrom calls “governance of the
commons” is not enforced by the government does not deny it is a
form of private property.
In conclusion, we argue that the unjustified support for Ostrom’s
allegedly revolutionary findings is ill-advised: her research is significant
and illuminating but its character was radically misunderstood by both
the author and her many and diverse admirers. She did not discover
any “new” form of governance beyond private property and
Tragedy of the Partnership 291
government control. Rather, she discussed some interesting variations

in contractual regulation and enforcement of private property rights.
Her enterprise properly belongs to the sociology of contracts, rather
than to economic theory.
In Section II we present her model, and some of its deficiencies. Sec-
tion III is given over to an examination of the sources of Ostrom’s error.
The subject of Section IV is Ostrom’s misguided Hayekianism. We con-
clude in Section V.
II. The Model and the Problems with It
Ostrom (1990) starts her most well-known book, Governing the Com-
mons, by defining and briefly discussing the “commons” as well as pri-
vate property rights and government intervention. Here, at the first
step, she injects conceptual confusion into the analysis, an error that
plagues and renders untenable the rest of the book. She starts by defin-
ing commons in a conventional way, by citing Hardin (1968: 1244) talk-
ing about the situation with many herders and public land that
becomes overgrazed since nobody has an incentive to limit the exploi-
tation of the common property:
Therein is the tragedy. Each man is locked into a system that compels
him to increase his heard without limit—in a world that is limited. Ruin
is the destination toward which all men rush, each pursuing his best
interest in a society that believes in the freedom of commons.
But, curiously enough, although she mentions that the critical ele-
ment responsible for the tragedy of the property held “in common” is
that it is “open to all” (it is not excludable) Ostrom almost immediately
forgets all about this insight of hers, and in the rest of the book treats
the commons as simply a synonym for group property. The effect of
this is that the very definition of private property, known from the
Roman law until today, is rendered irrelevant; Ostrom offers her own
idiosyncratic definition in which private property means by and large
that only a “single individual” has control over a definite resource. This
is obvious in her argument against privatization of the “commons”: the
only way she can imagine the commons could be privatized is by
dividing up a territory among the two or more herders. And then

Ostrom (1990: 12) argues that this is an economically inefficient system:
Those recommending the imposition of privatization on the herders

would divide the meadow in half and assign half of the meadow to one
herder and the other half to the second herder. Now each herder will be
playing a game against nature in a smaller terrain, rather than a game
against another player in a larger terrain. The herders now will need to
invest in fences and their maintenance, as well as in monitoring and
sanctioning activities to enforce their division of the grazing area.
The obvious problem with this is: Why would the herders necessarily
have to divide the land up into the two separate pieces? This is a com-
pletely arbitrary limitation. It would be the same as to say that the priva-
tization of a formerly state-owned enterprise cannot be carried out by
selling it to two partners who would jointly manage and control the
entire establishment; that there has to be one and only one exclusive
owner of every single asset or firm.4 This is clearly incorrect. However,
Ostrom, without giving us any reason whatsoever, urges us to accept
this constraint in the case of meadows or fisheries and other environ-
mental goods: Why would the two specific contractors, the co-owners
of a meadow, be limited in their contractual options in a way no others
are? Why could not they share the ownership and control rights in the
same way the partners share those rights in the case of other commer-
cial enterprises? We do not assert that these two would do this, merely
that they could. Ostrom does not see this even as a possibility. We do
not find such arbitrary limitations in the case of ownership of any con-
ventional commercial asset, owned by more than one person: actually,
there is a tremendous diversity of contractual arrangements regulating
such kinds of joint ownership.
For examples we have only to look at the variety of contractual
forms in the case of firms: there are unlimited liability partnerships;
partnerships with asymmetrical liability where some partners bear
the full risk while the others have limited liability; corporations that
have limited liability in principle, but their governance mechanism is
rather indirect with hired managers operating the firm (which is far
less common in any kind of partnership). Ostrom assumes, but with-
out offering any evidence whatsoever, that the range of possible
contractual variations in the case of a multi-person ownership over

the environmental assets would be far narrower and actually reduced
to the physical division of the resource into as many parts as there are
the co-owners.
Ostrom (1990: 22) makes her analysis even less consistent when she
concedes at one point that privatization actually does not have to mean
dividing up the resource: “privatizing may not mean dividing up at all.
Privatization can also mean assigning the exclusive right to harvest
from a resource to a single individual or firm.” This serves only to fur-
ther weaken her argument and underlines our previous objection: If
privatization could mean the right to harvest (usus fructus in Roman
law), why could this right be assigned only to individuals or single
firms? Why not to a group of individuals, forming a firm organized as a
partnership? If harvesting a resource by one man is private property
how come it is no longer private property when done by 10 people? By
what magic does this get converted into a “commons?” Both one man
and a group have a right to exclusively harvest the resource and to pre-
vent anyone else from doing so. The only difference is that in the latter
case several people would have to draw up rules determining how to
divide the proceeds and how to control and monitor the orderly opera-
tion of the agreement. But, this has to be done by the individuals form-
ing any kind of business enterprise, including corporations, private
partnerships, and so on. It is not clear what is different in the case of
Ostrom’s “commons”?
There is no basis for such an assumption at all, and moreover,
Ostrom herself unintentionally provides plenty of evidence to the con-
trary. Simply, the legal and economic essence of private property is not
“single individual ownership”; the critical elements, rather, are transfer-
ability and excludability—the ability to prevent non-owners from the
use and exploitation of the resource in question. Something can be
owned by more than one owner, and this is called a private partner-
ship: the contractual arrangement in which two or more people share
the proceeds of the use of a given resource or good, according to the
stipulations of an agreed upon contract. What places the arrangement
under the rubric of private property is not the number of actors
involved, but the character of the legal relationship that they have
among themselves and towards outsiders.5 Unlike the commons where
the resource in question is “open to all,” as Hardin clearly says, so no

person can lawfully exclude anyone else from its utilization, the private
property regime, whether in the form of partnership or any other,
allows a person or a group of people to exclude all the outsiders and
regulate their own rules of using the resource as they see fit, without
any physical or legal division of property whatsoever. There is not a sin-
gle, one-size-fits-all template of how partnership relations are to be
defined and regulated. Rather, there is a general, one-size-fits-all legal
and economic principle governing all such arrangements: the partners
each own a certain percentage of a thing, or a resource, divide the pro-
ceeds and obligations among themselves according to a formula freely
agreed upon, and can together legally exclude any other persons from
utilizing the resource in question. If 20 herders graze their cattle on a
meadow, this might mean that a meadow is a “commons,” if they sim-
ply found a piece of land and let their cattle graze it. If the 21st and 22nd
herders later show up with their flocks, the previous 20 herders in this
scenario would not have any lawful means of excluding them. How-
ever, if those 20 people share the private property right over a meadow,
then the self-same 21st and 22nd herders could be lawfully excluded
from grazing and the meadow is not a “commons” anymore. The basic
problem with Ostrom’s treatment of private property and the commons
is that she simply does not make the distinction between these two
cases. This is such a crucial point that we will risk the charge of repeti-
tiveness, and make it again in other words: If Ostrom were to realize,
be aware of, admit, this distinction, her entire edifice would fall to the
ground.
Therefore, we surmise, Ostrom does not seem to understand the
basic definition of private property as a right to control a certain thing
and to exclude all others from controlling and using it.6 This is best
seen by the fact that Ostrom (1990: 23) describes the form of gover-
nance that is the main subject of analysis of her book as a “limited
access common pool resource.” But, the “commons” cannot be a
resource with “limited access.” The very fact of limitation of access indi-
cates that the resource in question is transferred from the status of
“commons” into private hands.7 Being open to all is the very definition
of a commons; abolish open access, introduce excludability and there
can no longer be a commons.
One example Ostrom (1990: 62) offers for the alleged non-market
governance of the “commons” is the case of Swiss villagers who control
jointly the Alpine meadows:
Written legal documents dating back to 1224 provide information regard-

ing the types of land tenure and transfers that have occurred in the vil-
lage and the rules used by the villagers to regulate the five types of
communally owned property: the alpine grazing meadows, the forests,
the “waste” lands, the irrigation systems, and the paths and roads con-
necting privately and communally owned properties. On February 1,
1483, Torbel residents signed articles formally establishing an association
to achieve a better level of regulation over the use of the alp, the forests
and the waste lands . . .. The boundaries of the communally owned lands
were firmly established long ago, as indicated in a 1507 inventory docu-
ment. Access to well defined common property was strictly limited to
citizens who were specifically extended communal rights.
Ostrom is here simply employing a definitional8 sleight of hand:

instead of talking about the “principals” or “partners” (as she did when
she was talking about the case of a law firm), who contractually manage
the use of their jointly owned private property, she suddenly changes
the language and in an obfuscating way describes exactly the same kind
of economic activity in terms of political phraseology (“governance,”
“self-government,” “communal rights,” and “commons”). Ostrom contin-
ues to call the arrangement a “commons” although her own description
and the citations she provides make it plainly obvious that it is not a
commons at all; it is rather a specific form of partnership of the villagers
of Torbel. First, they can exclude anyone else from using their so-called
communal property. As one of the authors Ostrom cites says, it was not
enough to have private agricultural land in the village or around it to be
admitted as a co-owner of the alpine “commons”; one has to be admit-
ted by the existing owners. The simple question is: What kind of
“commons” is it that has the owners capable of excluding anyone else
from its utilization?9
Further, Ostrom herself describes the legal arrangements of this
alleged case of governing the commons, which make it clear that she is
talking about private property arrangements: “Four fifths of the alpine
territory is owned by some form of common property; by local villages
(Gemeinden), by corporations or by cooperatives. The remaining
alpine territory belongs either to the cantons or to private owners or

groups of co-owners” (Ostrom 1990: 64). The first problem here is:
What is exactly the economic difference between the “local villages”
and the “groups of co-owners”? Every village is a group of people. If a
“village” has a property right over a certain resource this only means
that a given group of people are the co-owners of the resource in ques-
tion. A “village” or a “group” — they are from the legal and economic
point of view one and the same thing. The only way to make any sense
of this curious distinction is to assume that if the co-owners are not
from the same village, that is private property (groups of “private co-
owners”), but if they come from the same village, then that is
“governing the commons.”10
The supreme irony of this is that Ostrom’s main claim is that her
“governance” mechanisms represent a thus far unheard of alternative to
both private property and government control: the evidence she
presents shows, however, that in the Swiss alpine region those alleged
“mechanisms” are either some form of private property (corporations,
cooperatives, individual ownership, partnerships) or government own-
ership and control.11 Instead, “beyond the market and the Leviathan,”
as the subtitle of one of the chapters of Ostrom’s book says, the evi-
dence she presents says clearly, “either market or Leviathan, and noth-
ing beyond these two.” Simply, the alpine meadows, wastelands, and
other “communal assets” in Switzerland that she discusses are in most
cases owned and operated by the associations or partnerships of pri-
vate persons, and their voluntary arrangements are mostly recognized
as legitimate by the government. The associations Ostrom describes
(partnerships, condominiums, or cooperatives) exercise all the rights
of control and use of resources characteristic of any other form of
private property: they have a right of usus fructus (operating the
asset and using the proceeds—income derived from that utilization),
the exclusion of other non-owners from using the same asset, exit
and entry controls, and, finally, control of the mechanisms of prop-
erty title transfers.
We encounter exactly the same situation in other examples Ostrom
offers as a means to substantiate her concept of alleged local
“governance of commons.” For example, Ostrom (1990: 19) describes
the management of a fishery in Alanya, Turkey as follows:
1. Each September, a list of eligible fishers is prepared, consisting

of all licensed fishers in Alanya, regardless of co-op membership.
2. Within the area normally used by Alanya fishers, all usable fish-
ing locations are named and listed. These sites are spaced so
the nets set in one site will not block the fish that should be
available at the adjacent sites . . .
3. In September, the eligible fishers draw lots and are assigned to
the named fishing locations.
Ostrom (1990: 19) further explains how the fishermen in question

sign a formal contract every year, and how they themselves create
workable mechanisms for monitoring and enforcing the agreement.
Yet, she does not consider relevant the fact that the arrangement in
question excludes all other “non-eligible” fishermen from using the
resource! She keeps calling the model a “commons”! This, despite the
fact that the members of this industry, according to the arrangement,
can even sell their fishing rights to other people, which is the critical
element of transferability for establishing private property rights. Not
only can they exclude others but they also can trade their private shares
in the enterprise.
The lack of any serious concept of private property rights in Ostrom’s
analysis is best demonstrated by the fact that she explains several typi-
cal, even canonical, forms of private partnership in terms of mythical
forms of “collective governance.” For example, in order to bolster her
case that there could be some third format for resolving the tragedy of
the commons apart from government and the markets, she points to
law firms, a canonical example of private partnerships if ever there was
one. Ostrom argues law firms demonstrate that people are sometimes
capable of resolving the problem of free riding by non-market forms of
coordination. So, instead of treating this quintessentially private part-
nership as a typical form of free market coordination Ostrom deals with
it as a rudimentary and imperfect form of “governing the commons.”
Yes, a law firm is not really a commons, she concedes, but nevertheless
it uses in an imperfect form the governance mechanism she thinks goes
beyond anything the free markets would do and that is much better
realized in the environmental cases she analyzes. Ostrom (1990: 23–24)
avers:
What is [needed is] . . . an adequately specified theory of collective action

whereby a group of principals can organize themselves voluntarily to
retain the residuals of their own efforts. Examples of self-organized
enterprises abound. Most law firms are obvious examples: A group of
lawyers will pool their assets to purchase a library and pay for joint sec-
retarial and research assistance. They will develop their own internal
governance mechanisms and formulas for allocating costs and benefits to
the partners. Most cooperatives are also examples.
What is really important here is that Ostrom properly characterizes the

people who together form a law firm as “partners.” But she does not call
the people who create different governance mechanisms to prevent the
tragedy of the commons “partners,” despite the fact that what they typi-
cally do, as Ostrom herself demonstrates, is nothing less than creating a
multi-person private ownership agreement over an asset, and then sup-
plementing it by a contractually agreed upon mechanism of governance
and enforcement in order to provide for the division of proceeds and
allocation of costs among the partners. Every single example Ostrom
uses in her book to demonstrate the allegedly new and specific “non-
market” nature of her mechanism of “governing the commons” involves
a group of people with joint, exclusive, private ownership over an asset
(usually an environmental good, such as meadows, water springs, fish-
eries, and so on). Just like the partners in a law firm who use internal
mechanisms to coordinate their joint use of the firm’s library, offices, or
secretarial services, the fishermen or herders use internal contractual stip-
ulations to coordinate the use of their assets held in partnership.
But, quite inconsistently, Ostrom, as we had seen in the case of Swiss
villagers, does not count as private property either cooperatives or con-
dominiums, nor even corporations! Every single form of ownership that
includes more than one person is for her magically transformed into a
mythical case of “communal ownership.” This does not make any sense
from a legal point of view. Joint private ownership is as old as Western
civilization and survives, even prospers, to this day. The very concept
of condominium or Communio pro indiviso originated in the Roman
law and pertained to a joint ownership by more than one person over a
certain asset that is either purchased or inherited together. As Mousour-
akis (2012: 156), a contemporary scholar of Roman law notes, this
system
arose when two or more individuals purchased or acquired through

inheritance or legacy the same property in common. This form of co-
ownership was often voluntarily entered into by partners engaged in a
joint business venture. In this case each joint owner had a share in the
common property and could use, alienate, pledge or otherwise burden
his share as he saw fit. Moreover, in proportion to his share, he had a
right of enjoyment of common property. However, he did not have a
right of disposal in respect of the property as a whole because such dis-
posal required an agreement among all the co-owners.
All partners retain full access to the asset and the particulars of the
division of proceeds are in various ways agreed upon by all of them
internally. Ostrom never explains what it is that the classical Roman
Communio in indiviso or contemporary law firms are doing that does
not apply to her villagers, fishermen, and herders. Every single example
she offers as “commons” is without exception really a Roman
condominium.
III. The Sources of Error
The basic reason for the misconception about property rights that per-
meates Ostrom’s work is the conviction that free markets and private
property rights cannot exist in the absence of government control. In
Ostrom’s view, police, judiciary, contract enforcement, and adjudication
of disputes—all of this is to be provided by the entity called the “state”
or even the “Leviathan” state. As Ostrom (1990: 15) says:
Both centralization advocates and privatization advocates accept a central

tenet that institutional change must come from outside and be imposed
on individuals affected . . . A competitive market—the epitome of private
institutions—is itself a public good. Once a competitive market is pro-
vided, individuals can enter and exist freely whether or not they contrib-
ute to the cost of providing and maintaining the market. No market can
exist for long without underlying public institutions to support it.
Obviously, Ostrom is a proponent of the standard political science

orthodoxy that identifies the very possibility of peaceful individual
cooperation, including market cooperation, with the existence of
“public goods,” primarily government judiciary adjudication of dis-
putes, as well as police enforcement of contracts and punishment of
lawbreakers. If any of these elements are missing, there could not be

private property rights in force. Hence, whenever she sees an institution
that looks like private property, but in whose functioning some of these
elements of government public goods to “support” it are lacking, she is
puzzled. She then seeks to find some new name and concept to explain
it. She cannot accept the possibility that there could be a market with-
out government and that there could be and are private contracts that
are not enforced by this institution:
Private-property rights depend upon the existence and enforcement of a

set of rules that define who has a right to undertake which activities on
their own initiative and how the returns from that activity will be allo-
cated. In other words, rules and rulers are required to establish, monitor
and enforce a property system. (Ostrom 2000: 342)
The best and perhaps quickest way to demonstrate the absurdity of

this notion of the Leviathan state as the only viable system of enforce-
ment of private property rights is to look historically at some prominent
examples of private property rights being protected by private associa-
tions and without conventional “public goods.”12
The first striking example of such systems is the Roman Republic.
First, the courts and judges in the Roman Republic were mostly private;
there was a government official called praetor whose function it was to
monitor the judicial process. But his role was rather limited: to draw up
the list of potential judges (iudexes) from the private citizenry and then,
after a trial was finished, to formalize, rubber stamp the verdict, without
the right to change it. The judges were private citizens paid by the litigat-
ing parties, not bureaucrats on the payroll of the government. The prose-
cutor was also a private entrepreneur who would take on this role for
money on behalf of the plaintiff. There was no public prosecutor who
would protect the law on behalf of the state. The entire legal process
was controlled by private persons (Riggsby 2010; Mousourakis 2012).
Further, the very “law” according to which the judges were adjudicat-
ing for the most part was a product of private commentaries and studies
by the legal scholars, who were not working for the state but for private
parties, and whose prestige depended only on their knowledge, quality
of reasoning, and public approval. The written law of the Roman
Republic, the so called Law of 12 tables, emerged as a codification of
the ancient Roman common law. But it was interpreted in accordance

with the concepts and theories of private legal scholars who developed
the body of doctrine known as Roman law over the centuries. It was not
a product of government edict or legislation, but of the long process of
private scholarly refinement, adjustment, and acceptance by the commu-
nity. As Cicero said, the good iurisprudence (legal scholar) should have
the ability to perform three functions: agere, cavere, and respondere,
which meant, respectively, to be a good attorney, to serve as a legal advi-
sor, and, finally, to be able to offer an expert opinion if invited by the pre-
ator or iudex (Mousourakis 2012). The Roman legal scholars could be
compared to U.S. Supreme Court judges, the only difference being that
their theories were not enforced by government foree, but rather by their
scholarly prestige and voluntary acceptance of their interpretations by
the market participants. Hence, Roman law was not a “public good” at
all. Yet, it gave us the most perfect and penetrating definitions of private
property (in its many forms and shapes), private contracts, and the entire
remaining universe of what has come to be known as “private law.”
Not only were Roman law and judicial processes not public but pri-
vate goods; the enforcement of verdicts and contracts was also entirely
private. The Romans did not have the institution of “police” at all. Sim-
ply, it was up to the plaintiff both to provide the presence of the
defendant in court, as well as to enforce the verdict once it was
reached, by using force, if necessary. Nobody had a “monopoly of vio-
lence” in the Roman Republic. For the most part, judicial proceedings
amounted to a private arbitrage among the willing parties. Alternatively,
the plaintiff would use force to drag the defendant to the courthouse.
But, in neither case had government any role to play whatsoever.
Riggsby (2010: 67), a leading scholar of Roman law, clearly concedes
this, although with certain level of amazement:
At all times, but especially during the Republic, the Roman government
lacked a police force and other bureaucracies that could check ordinary
crime, much less control behavior that was less dangerous but still disfa-
vored. Attempts have been made to find elements of the Roman govern-
ment that might have taken on those functions, but the evidence has
been lacking. No magistrate had a major responsibility in this area, nor
did any have at his disposal the large number of dedicated employees
that would have been required to police the city the size of Rome.
Even the military was private as well as the system of taxation, which
depended mostly on voluntary contributions. Bertrand de Jouvenel
([1949] 1976): 101–102) in this way nicely summarizes the socio-
political set up of the Roman Republic:
Right through her republican period Rome never knew the means of
public coercion and had for force only the people themselves, who
could at need answer the summons of the leaders of society. Only those
decisions were possible on which there was a general agreement, and,
in the absence of any state apparatus, their execution depended solely
on the cooperation of the public. The army was but the people in arms,
and the revenues but the sums gifted by the citizens, which could not
have been raised except by voluntary subscriptions. There was not, to
come down to the essential point, an administrative corps.
If we judge the Roman republican institutions and practices by the

criteria Ostrom offers we would be hard pressed to avoid the conclu-
sion that the Romans could not have known of private property or free-
market competition at all, since they did not have any “public goods” to
“sustain” them, or at least none of the sorts we have been discussing.
They were living in a pure anarchy, at least from the point of view of
the conventional economic theory Ostrom uses to study what she calls
the “commons.” We would have to rename the Roman contract and
property law as “the system of governing the commons” were we to
apply her “insights” to this historical epoch.
Let us analyze another canonical example of a universally accepted
legal system that originated entirely as a private practice over the centu-
ries and yet was perfectly capable of governing people’s interactions
across many continents and centuries—the so-called Law Merchant.
This law emerged from the remnants of Roman legal tradition during
medieval times, and was created primarily as an international quasi-
legal mechanism to regulate international business; to enforce contracts
and obligations and adjudicate disputes among merchants irrespective
of the place and country. This law was a codification of the existing cus-
tomary practices of international traders; as Trakman (1980: 3), a medie-
val scholar, notes, “merchants have acquired their own ability to govern
their affairs on the basis of good faith and reciprocity.”
The Law Merchant was not a form of legislation legislated by any
national or local assembly, but rather an informal private code created
by an international community of merchants and used to govern their

own affairs. It provided no legal penalty in national laws, and the prin-
ciples of the law were just the formalization of the customary practices
that made the law understandable and legitimate in the eyes of mer-
chants across the Mediterranean region. From the very beginnings this
private, customary quasi-law actually took precedence over “national”
laws:
Merchants were obliged to observe their commitments. Good faith was

the essence of the mercantile agreement. Reciprocity and the threat of
business sanctions compelled performance. The ordinary undertakings of
merchants were binding because they were “intended” to be binding,
not because any law compelled such performance. Mandatory law was
not to impede the self-sufficient pacts of merchants. (Trakman 1980: 7)
However, not only did the private, customary codes of merchants

take precedence over local legislation, the procedures of enforcement
were also private and free from any political interference. The merchant
court did not follow the same rules of procedure devised and observed
by the civil courts; theirs were much quicker, more informal (“from tide
to tide”) because the needs of merchants required that business would
not be interrupted by elaborate bureaucratic formalities. Here are just
some of the specific features of the Law Merchant that were not
accepted under any civil law statute of civilized countries:
Notarial attestation was usually dispensed with and the sign manual was
accepted as sufficient documentary attestation for evidentiary purposes.
Verbal evidence could contradict even a written document where the
amount in dispute exceeded one hundred livres . . . In addition, verbal
agreements were sufficient to found private partnership. No formal deliv-
ery was necessary in passing the property in a thing from the seller to
the purchaser. The use of an agent did not require formal authorization.
Nor the agent acquired any independent rights or liabilities on his own.
(Trakman 1980: 14)
Further, the judges in these merchant courts were not lawyers but the
merchants themselves! It was believed that attorneys lacked sufficient
knowledge of the substance of trade disputes to be able to contribute.
As well, they were inclined to take a too formalistic approach, which
could have jeopardized the business by prolonging the adjudications.

As trade increased during medieval times, this merchant imperio within
imperii also grew stronger and became much more entrenched. The
merchant courts, which in the beginning were normal courts with spe-
cial privileges and rules, became completely privatized and converted
over time into the so-called Guild Courts, the bodies entirely governed
by merchants themselves that regulated all trade-related issues in a
community.13 They constituted a completely parallel legal system to the
existing civil law of many countries:
At the height of the Law Merchant era, the Merchant Guild, together with
the courts of “fairs” and “staples”, held substantial sway over matters of
commerce. Guild or city members, citizens and foreign merchants, all
received commercially oriented justice within the jurisdiction. Often this
power was substantial, even to the total exclusion of the ordinary courts
of the land . . . Under this commercial regime, the value of mandatory
law, pre-emptory in nature and in effect, was rendered subservient to
the business demands dictated by the trade environment. (Trakman
1980: 16)
The Law Merchant was a completely private system of law, devel-

oped by the merchants in the region of the Mediterranean, that took
precedence over the local legislation and civil courts, and was enforced
by the completely private, parallel legal apparatus composed of mer-
chants themselves. If we follow Elinor Ostrom’s intellectual lead, this
was a pure anarchy, with no “public goods” anywhere in sight to
“sustain” the market, so this medieval international market simply could
not exist. The Mediterranean merchants of the 12th or 13th centuries
must have misunderstood their own enterprise as trade and commerce,
unaware that what they were actually doing was just managing and
governing the medieval “commercial commons.”14
But Ostrom did not have to go that far into the past nor around the
world in order to discover similar phenomena: taking a quick look at
some experiences in the American “wild West” in the 19th century
would suffice to dispel her notion about the necessity of public goods
to sustain free markets and private ownership. Throughout a prolonged
period before the formation of the states in the West, their settlement
and economic development were completely anarchic. The function of
protection and creating “public goods,” such as physical protection or

guaranteeing property rights, was performed by private associations
and agencies. For example, the land settlement in the West was plagued
by occasional disputes over boundaries and ownership titles. The set-
tlers themselves created so-called land clubs, completely private associ-
ations that successfully arbitrated in settling the disputes and regulating
the relationships between the farmers. The land clubs provided not
only the services of policing but also of court adjudication for a fee paid
by the “insurers,” i.e. farmers. For everything that we now know, those
private “governments” performed their protection services mostly with-
out violence (Bogue 1963). There were no government “public goods”
financed by tax extortion there.
Another example is even more telling. It covers exactly the kind of
arrangements Ostrom discusses in her book: local farmers managing
their common problems of excluding unwanted outsiders. The cattle-
men in the West created associations to protect their pastures from the
new intruders once the land became scarce. They hired so-called stock
detectives, which is to say— professional gunmen—to defend their
property against intruders, an American-style “governance of the
commons” (Osgood 1929). Are we really to believe that ruggedly indi-
vidualistic American frontiersmen of the mid-19th century misunder-
stood their businesses as private enterprises, instead of properly
characterizing them as “governing the prairie commons?” For the most
part, they did not amalgamate into partnerships, but rather constituted
themselves into individual ownership formats, but yet, just like Ostrom’s
fishermen, cattlemen, and farmers all over the world, they did not need
any “public goods” or bureaucracy to protect their property rights.
In the case of the mining camps in California, Colorado, Idaho, and
other Western territories, many permanent territorially organized pri-
vate “governments” were established in the 19th century with their own
“constitutions,” laws, and rules. The entire state of Colorado was
divided up among numerous independent, private local authorities,
and in many mining camps all over the West, the government lawyers
or any other of its agents were not welcome at all. A statute of one of
those territorial units, the Union Mining District, provided: “Resolved,
that no lawyer be permitted to practice law in this district under penalty
of not more than fifty, nor less than twenty lashes, and be forever
banished from this district” (Anderson and Hill 1979: 20). Instead of
government lawyers and statist adjudicating procedures, the miners
used their own private courts. Does that mean the California gold min-
ers were actually somehow managing the “environmental commons”
by creating those private institutions, instead of protecting their lives,
liberty, and property? Hardly.
If we do not want to reach such an absurd conclusion, then Ostrom’s
entire argument about “commons” has to be rejected as untenable. The
fact that some institutional arrangement does not perfectly fit the mod-
els of contemporary political science or neoclassical economics requir-
ing “public goods” does not mean the arrangement is not one of private
property rights. As we have seen, there had been some very important
and long-lasting systems of private and contractual rights that were nei-
ther created nor enforced by governments. In order to assess the char-
acter of the institutional regime in question we should not look at the
agency of enforcement but at the content and the logic of the arrange-
ment itself. The fact that the Swiss villagers or Indonesian irrigators for
the most part manage their contractual arrangements themselves with-
out government’s help does not tell us anything about the nature of
their arrangements. For that we have to study their economic and legal
content. This analysis clearly shows that they represent private prop-
erty, not a “commons.”
In her paper “Neither Market nor State,” Ostrom (1994) formulates
eight conditions that a governance system has to fulfill in order to effi-
ciently control the problem of the commons. This only reinforces skep-
ticism about the theoretical viability of the very concepts of commons
and common pools resources, at least as she uses them. According to
Ostrom (1994: 6–11), in order to function properly, the “commons”
must be “governed” according to the following criteria:
1. Clearly defined boundaries, 2. Congruence between Appropriation

and Provision Rules, 3. Collective Choice Arrangements, 4. Monitoring, 5.
Graduated Sanctions, 6. Conflict Resolution mechanisms, 7. Minimal rec-
ognition of rights to organize, and 8. Nested Enterprises.
This again shows that Ostrom’s understanding of the distinction

between private, commons, and government property is at best tenu-
ous. The main problem is that most, if not all of them, equally, or even
better, could be applied to private property rights. Take, for example,

“clearly defined boundaries”: this describes perfectly the conditions for
privately owned land. Is there an individual in the world who currently
could own a piece of land with unknown boundaries? If not, what is
the purpose of listing this condition as peculiar for “common-pool”
resources?
The second condition is just as dubious: it represents a fancy formu-
lation of the simple concept that those who reap the benefits of exploit-
ing a resource should bear the costs. Rules have to be put in place to
make sure this is the case. But, every private property regime does
exactly the same thing: implements mechanisms to provide for the
“congruence” of who gains and who pays. Moreover, this is one of the
main defining features of a successful private property rights model in
neo-institutional economics. Those rules may vary, depending upon
different circumstances and the type of the organization at hand. A cor-
porate firm would have a board of directors, use stock market prices,
deal with threats of a “hostile” takeover, award stock options to the
managers, and so on. Partnerships typically employ other internal
mechanisms, such as unanimous decision making. How a group of 20
farmers are going to control joint exploitation of a meadow is from the
economics point of view no different and no more interesting than
how a group of 20 law firm partners are going to monitor and control
the use of the firm’s jointly owned library or secretarial services.
The third condition also yields obfuscation: by “collective-choice
arrangements,” Ostrom presumably means that the members of the group
or partnership in question have to formulate the rules governing the oper-
ation of their enterprise together, consensually. But, this is equally true of
any conventional private partnership or condominium. Ostrom merely
uses political language in describing purely private economic relations
among a group of individuals who together own and manage an eco-
nomic resource. This gives the impression to the unwary, of whom there
are altogether too many, that we are witnessing a political mechanism,
but we are not. Otherwise, we can with equal justification claim that trad-
ing at the stock market represents a “collective choice arrangement.”
The next three conditions are even more peculiar: sanctions, moni-
toring, and conflict resolution. What kind of private property rights
regime lacks any of these?
IV. Ostrom’s Misguided Hayekianism
One of the curious elements in Ostrom’s theory of commons

“governance” is her appropriation of the Hayekian theory of decentral-
ized knowledge used by local actors as more efficient than centralized
government control. However, the way Ostrom uses this theory is very
lax, offering a version of it that misrepresents the basic thrust of the
theory at critical points. Most significantly, Hayek’s (1945) theory was
developed as a response to the socialists and reinforced the argument
by von Mises (1922) against the possibility of economic calculation
under socialism.15 It is part and parcel of the argument that private
property rights and market prices are the only efficient mechanisms for
coordinating economic activity. Ostrom’s pop-Hayekianism, in sharp
contrast, uses his argument for decentralization in order to “prove” that
market prices and private property are inefficient and actually unneces-
sary in regulating certain areas of economic activity.
The intellectual battle that gave rise to Hayek’s argument started with
Mises’s path-breaking paper “Economic Calculation in the Socialist
Commonwealth,” in which he showed that a socialist economy, devoid
of private property in the factors of production, could not calculate
market prices and hence would be unable to rationally economize on
the use of scarce resources (Mises [1933] 1975). Shifting the emphasis
from the ethical and legal to the economic and calculational aspects of
private property, Mises had shown that private property is an indispen-
sable instrument for economizing resources, which is necessarily based
on meaningful market prices. In their absence, as he said, the economic
activity would have been a “leap in the dark” (Mises [1922] 1951: 122).
Socialists were struck by this critique. They had never thought of the
calculational problem and the coordinating role played by private prop-
erty. Their attempts to salvage the doctrine from the Misesian challenge
included the mathematical reformulations of their theory, and an
attempt to improve the ideas of market socialism that would combine
centralized allocation with decentralized management.16
Hayek’s contribution in this debate was to analyze the problem of
socialism in terms of centralization of knowledge. In a sense he refor-
mulated the Misesian argument in a more epistemological and psycho-
logical manner. It is questionable to what extent this revision was
justified and even to what extent it was Misesian at all,17 but the impor-
tant thing to bear in mind is that Hayek developed a theory he thought
could better articulate Mises’s argument for markets and against social-
ism. Hayek is quite explicit about that: his emphasis on decentralized
knowledge and his critique of concentration of power in the hands of
central planners is not an end in itself. Hayek argues that the free mar-
ket is efficient because it allows us, via market prices, to utilize signifi-
cantly more knowledge that anyone in isolation could have at his
disposal. As he says in the paper “Competition as a Discovery
Procedure,” the function of market competition is to discover the most
useful allocation of resources and patterns of investment. Here is one
of the crucial examples of the decentralized use of knowledge that
Hayek (1945: 525) gives to explain what kind of knowledge the “man
on the spot” has to have and why:
There is hardly anything that happens anywhere in the world that might
not have an effect on the decision he [the entrepreneur] ought to make.
But he need not know of these events as such, nor of all their effects. It
does not matter for him why at the particular moment more screws of
one size than of another are wanted, why paper bags are more readily
available than canvas bags, or why skilled labor, or particular machine
tools, have for the moment become more difficult to obtain. All that is
significant for him is how much more or less difficult to procure they
have become compared with other things with which he is also con-
cerned, or how much more or less urgently wanted are the alternative
things he produces or uses. It is always a question of the relative impor-
tance of the particular things with which he is concerned, and the causes
which alter their relative importance are of no interest to him beyond the
effect on those concrete things of his own environment.
Hayek uses the concept of decentralized knowledge to develop a

theory of production process in the capitalist economy—namely, to
explain how numerous changes in local circumstances affect the rela-
tive prices of various productive factors and how and why the detailed
technological knowledge of all these changes is neither possible nor
necessary for a successful price calculation and allocation of the factors
to their alternative uses. This theory allows Hayek to downplay the
importance of improvements in technological and scientific knowledge
for economic coordination and to emphasize the relatively much more
important role of tacit knowledge of local circumstances of time and

place.
However, note the critical element here: this “tacit” knowledge is rel-
evant only insofar as it gives rise to market prices that serve to coordi-
nate and rationalize the distribution of productive factors. The local
character of knowledge is irrelevant per se; what is really crucial is that
this information accumulates the crystalized information through the
myriad of individual interactions across time and space into the market
price signals that serve to guide the investment and production deci-
sions by the entrepreneurs, capitalists, and workers. It is part and parcel
of the theory of developed capitalist production.
However, Ostrom transforms all of this into a free-floating sociologi-
cal theory, completely divorced from economic analysis. What she got
from Hayek’s theory can best be summarized as the notion that the
local communities know better what is good for them than some distant
government or corporate bureaucrat. At least half of her argument goes
directly against Hayek’s theory. For Hayek, tacit knowledge and decen-
tralization were the preconditions for efficient market functioning. For
Ostrom, the very use of local knowledge shows that the market is inef-
ficient. Ostrom believes that local knowledge is not a basis for a large-
scale process of market production and coordination but rather an end
in itself: local people know “their local stuff” and they will take care of
their problems all on their own. They do not need any larger coopera-
tion. The introduction of market prices will actually jeopardize their
efforts, if anything.
IV. Conclusion
Ostrom is a brilliant scholar. Her research is meticulous. She intimately

and interestingly describes important economic and legal phenomena
in several places around the world. But her contribution is fatally
flawed by failure to understand basic concepts of property rights.
Have we been spending a lot of time and space with our incessant
piling up of evidence in support of this contention of ours? Yes, we
confess, we have been doing just that. Is this practice of ours justified?
Were Ostrom some run-of-the-mill scholar who made this error, it
would not be defensible. But she won the Nobel Prize in economics.
She was the very first woman to have done so. She had no degree in
economics, but rather in political science. Even if those were the only
facts of the case, we would still not be warranted in dragging her
through the intellectual mud as we have done, at least not so assidu-
ously. What really justifies our method in regard to her is that, seem-
ingly, the entire professions of economics, public policy, political
science, and social science in general have been taken in by her siren
song of the commons. If we are to correct the record, and rescue the
concept of the tragedy of the commons from her pillaging of it, we can
do no less than offer a page-by-page, paragraph-by-paragraph, and, in
some cases, line-by-line refutation of her errors. This is precisely what
we have done.
Notes
1. A particularly egregious example of this slavish unthinking hagiographic
devotion is Boettke (2009). This comes from a scholar who really should have
known better, since he usually favors private property rights and Austrian eco-
nomics. Ostrom singles out Smith (1981) for special criticism, since Smith sup-
ports the free-market doctrine of the “tragedy of the commons,” while Ostrom
rejects it. One would have thought that Boettke, otherwise a supporter of free
enterprise, would have sided with Smith, not Ostrom; in the event, we are sadly
disappointed.
2. The only exception is a critical review of Ostrom (1990) by Block (2011).
3. Ellickson (1994) studies one such case. Pinker (2011) maintains that this
example is unimportant. For a critique of the latter, see Block (2013).
4. On privatizations in Canada, see Ohashi (1980) and Ohashi et al. (1980).
A particularly interesting example is the Eastern European privatization after
the collapse of communism in 1989. Many countries employed the models of
privatization that included a transfer of ownership from the government to mul-
tiple persons. For example, in Seribna there had been two different laws gov-
erning privatization: first in the mid-1990s the former government ownership
was transferred to the employees and the directors of the firms. Later on, since
2000, new legislation was passed according to which 70 percent of the owner-
ship was sold to a single buyer on a public auction, while the remaining 30 per-
cent of the shares were given to the employees. Was this a privatization
according to Ostrom? No. For they divided a single resource, a firm, among
many people, sometimes dozens, scores. If she stuck to her principles, she
would have to characterize the result as a “commons.”
5. An analogy is the Herfindahl Index, or the four (or eight) firm concentra-
tion ratio utilized by neoclassical economics (Bork 1978; Brozen 1982; Posner
(2001), versus the Austrian view (Rothbard 1962; Block 1994) that eschews
mere numbers of competitors in favor of the criterion of legal entry. Another
difference is the end state views of Rawls (1971), which engages in the numeri-
cal counting of shares of income or wealth, in contrast to the process theory of
Nozick (1973).
6. This is a right that can be exercised by one or more persons, depending
upon the form of ownership
7. Two or more hands, it matters not one bit.
8. Are the present authors merely having a verbal dispute with Ostrom? We
think not. We claim she is making a substantive error, not merely a definitional
one.
9. Holcombe (1994, 2005) makes an identical error. For a critique, see
Block (2010).
10. If the present authors tried to sneak our own cattle (we do not have any
now, but we could purchase some) onto this “commons,” which is presumably
open to all and sundry, we might even succeed for a short time while the actual
owners (this means it is not a commons where all are welcome) were doubled
up in paroxysms of laughter at our temerity and idiocy. But, as soon as they
recovered from their stomach cramps (likely, they would not have had as good
a belly laugh like that in years), we and our cattle would be summarily booted
out of this commons. Well, maybe not. Probably, they would tar and feather us,
and keep our newly bought cattle for themselves as a penalty for our trespass.
11. The present authors of course do not deny that there is such a thing as a
commons: not private owned, not controlled by government, where no one is
precluded from entry. For example, the middle of the ocean.
12. For a critique of the “public goods” market failure argument, see Barnett
and Block (2007, 2009); Block (1983, 2000, 2003); Cowen (1988); De Jasay
(1989); Holcombe (1997); Hoppe (1989); Hummel (1990); Osterfeld (1989);
Pasour (1981); Rothbard (1985, 1997); Schmidtz (1991); Sechrest (2003, 2004a,
2004b; 2007); Tinsley (1999). Rothbard’s (1997: 178) reductio ad absurdum of
public goods is as follows: “A and B often benefit, it is held, if they can force C
into doing something. . . . [A]ny argument proclaiming the right and goodness
of, say, three neighbors, who yearn to form a string quartet, forcing a fourth
neighbor at bayonet point to learn and play the viola, is hardly deserving of
sober comment.”
13. The present authors do not support the restrictive elements of the guild
system. We are here concerned only with their functioning as private courts.
14. Other examples of functioning anarchist societies may be found here:
Benson (1990); Clay (1997); Davies (2002); Friedman (1979, 2006); Leeson
(2007); Long (1994); Peden (1977); Powell, Ford, and Nowrasteh (2008); String-
ham (2003); Solvason (1992); Thompson (2006).
15. However, there is a de-homogenization literature that emphasizes not
the compatibility of the views of these two Austrian economist, but rather their
divergences: Block and Garschina (1996); Ebeling (1992); Herbener (1991);

Hoppe (1996); Knott (2012); Rothbard (1991, 1992); Salerno (1990a; 1990b,
1991, 1992, 1993, 1995); Stalebrink (2004); for a critique, see Kirzner (1996).
16. See on this Lange (1936, 1937), Lange and Taylor (1936, 1938), and
Lerner (1934); these socialist critics of Mises were so impressed with the impor-
tance of his critique that they actually proposed building a statue of him, and
giving it the place of honor in their future socialist planning hall. See on this
Hulsmann (2007) and Rothbard (1991).
17. See the Misesian critiques of Hayek in endnote 16, supra.
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Heterogeneous Capital and the Coasean Firm – A Critique of Some Recent

Developments in the Austrian Theory of the Firm
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Heterogeneous Capital and the Coasean
Firm – A Critique of Some Recent
Developments in the Austrian Theory of
the Firm
Ivan Jankovic1
Abstract
In this paper some recent improvements and refinements of the mainstream Austrian
theory of the firm are analyzed (Foss and Klein, 2012; Foss et al, 2007). Those refinements
attempt to fuse the old Austrian-Coasean theory of the firm with a sophisticated analysis of
entrepreneurship and capital theory, in order to broaden the scope and the application of
the original intuition behind the Coasean theory that governance, planning and hierarch-
ical mode of relationship are necessary features of an efficient market system. I criticize
this strategy by combining the insights of the Austrian capital theory and the standard
neoclassical theory of the firm, to show how the Coasean firm, both in its original and Aus-
trian derivations misrepresents the real reasons and function of the firm in a market society.
The main problem of this new synthesis is that it just broadens the old error committed by
Mises and Rothbard, treating Coasean theory of the firm as central planning hierarchy to
be consistent with Austrian argument against planning, and for economic calculation and
entrepreneurship. In my analysis, the ingenious inclusion of the Austrian capital theory into
the Coasean framework by Foss and Klein only adds another layer of errors to the original,
untenable conception of the firm as a hierarchical and organizational entity by arguing that
the firm is needed to handle the problem of heterogeneity of capital goods.
Keywords
Capital theory, firm, Coase, Austrian School.
1 Doctoral candidate in political science , Simon Fraser University, Vancouver; email: ijankovi@sfu.ca.
A bilingual interdisciplinary journal 29

1. Introduction
The conventional treatment of the theory of the firm in the modern literature of the Aus-
trian school combines Mises’, Hayek’s and Rothbard’s emphasis on entrepreneurship and
economic calculation with the concept of the firm proposed by Ronald Coase and is widely
accepted among the students of economic organization (Foos and Klein, 2012; Foss et al,
2007; Ionadies, 1999). This theory depicts the firm as a central planning and hierarchical
entity, supplementing or rather supplanting the market as a coordinating mechanism. Prin-
cipally, it combines Coase and Mises, i.e develops a theory of the firm as a commanding
authority serving the purpose of “organizing the entrepreneurial judgement” as Foss and
Klein like to say. This dominant tradition of organizational thinking within the Austrian
school will be called “Austrian Coaseanism” or simply the “mainstream Austrian theory of
the firm”. A minority of authors writing in the Austrian tradition question this amalgama-
tion of Misesian and Coasean traditions and argue that the firm should be understood as a
specific market mechanism (Salin, 2002; Mathews, 1998; Jankovic, 2010).
There are many other aspects related to the Austrian theory of the firm treated in other
works, but they are only tangentially related to the main problem of the theory of firm. For
example, Dulbeco and Garrouste (1999) propose a unification between the capital theory
and theory of entrepreneurship, but here the firm is conceptualized just as a kind of black
box with the tools necessary to explain the main problems such as individual knowledge
and asset specificity. The theory is a functional one in the same sense the neoclassical
theory of the firm is functional, striving to explain the exchange on an open market. Salin
(2002), ties the discussion of the firm to the problem of division of labor; Walsh (2009)
offers an ingenious Mengerian invisible-hand explanation of the origins of the business firm
trying to strike a balance between the notions of spontaneous order and conventional treat-
ments of the firm; Cowen and Parker (1997) explore the problems of reconciling the theory
of the firm and the process-character of the market exchange. Garrouste (2002) analyzes
the implication of the Hayekian problem of knowledge in conjunction with the institutional
theory of the firm: how the knowledge within the firm grows and how it is distributed
among the participants in the enterprise. An entire array of other Austrian works of the
firm explores various aspects of this relationship between knowledge and organizational
structures (Foss, 1999; Tsoukas 1996; Minkler, 1993).
The problem that I want to analyze in this paper is much narrower: it concerns some lim-
ited (in scope) refinements of the orthodox Austrian theory of the firm – the one combin-
ing Coase’s concept of the firm with the Austrian arguments about entrepreneurship and
prices. This new approach most notably pursued by Nikolai Foss and Peter Klein (Foss et
al, 2007; Foss and Klein, 2012) strives to include into the analysis the theory of capital and
to show that initial synthesis of Coase and Mises was justified by arguing that the Coasean
notion of the firm is the best environment to accommodate the Austrian theory of heteroge-
neous capital, developed by Menger and Bohm-Bawerk. This is a broadening and strength-
ening of the theory insofar as it implies that there is a deeper structural affinity between
Coaseanism and Misesianism, which concerns the very heart of the Austrian theory – the
30 New Perspectives on Political Economy

theory of capital. As we know, the main dividing line between Bohm-Bawerkian and neo-
classical theories of capital was over the issue whether capital should be conceptualized as
a homogenous fund of value, consisting of identical and perfectly substitutable elements or
rather as a collection of heterogeneous, imperfectly substitutable goods that incur signifi-
cant costs of changing the employment of different parts of the capital stock over time. The
latter position is accepted by Foss and Klein, and it is argued that the firm understood as
a Coasean planning-hierarchical organization is needed in order to manage the costs of re-
utilizing the heterogeneous capital goods. To further broaden their theory, Foss and Klein
argue that the capital owner’s managing of capital goods is necessary in order to discover
the new attributes of those goods amenable to different prospective entrepreneurial utiliza-
tions (Fos et al, 2007 ). In a sense, Klein and Foss theory attempts to combine Misesian
and Hayekian-Kirznerian concepts of entrepreneurship and to merge that composite with
the Coase’s theory of the firm.
I criticize this project in two steps. First, I offer an analysis of the reasons why the
general attempts to synthesize Coase’s firm and Mises’ entrepreneur are untenable. In the
second part, I follow up with an analysis of why and how Foss-Klein refinement actually
adds just another layer of mistakes to the originally mistaken idea that Misesian entrepre-
neur needs the firm understood as a planning hierarchy.
2. Coase’s theory of the firm and Misesian entrepreneurship
One of the most critical facts about the Coase’s theory of the firm, which is very seldom
emphasized, is that it represents just a special application of the general market socialist
and market failure theories (Bylund, 2014). Coase writes his famous paper in 1937 in the
middle of the controversy over the possibility of rational economic planning in socialism.2
And he sides squarely with socialists and against Mises and Hayek in this debate by accept-
ing the perfect competitive theory as the standard for judging the efficiency of the market.
Coase tries to rehabilitate central planning as a mechanism of coordinating economic activ-
ity, badly damaged by the Austrian critique in the 1920s and 1930s.
This is quite obvious at the very beginning of the article when Coase contrasts price
mechanism and planning, and ponders their relative usefulness:
It is easy to see when the State takes over the direction of an industry that, in plan-
ning it, it is doing something which was previously done by the price mechanism.
2 Useful reviews of the debate are given in Rothbard (1991), “The End of Socialism and the Calculation Debate
Revisited”, The Review of Austrian Economics, Volume 5, Issue 2, pp 51–76; and Kirzner (1988), “The Eco-
nomic Calculation Debate: Lessons for Austrians”, The Review of Austrian Economics. 1988, Volume 2, Issue
1, pp 1–18.

What is usually not realised is that any business man in organising the relations be-
tween his departments is also doing something which could be organised through
the price mechanism. There is therefore point in Mr. Durbin’s answer to those who
emphasise the problems involved in economic planning that the same problems
have to be solved by business men in the competitive system…The important dif-
ference between these two cases is that economic planning is imposed on industry
while firms arise voluntarily because they represent a more efficient method of
organising production, In a competitive system, there is an “optimum” amount of
planning!” (Coase, 1937: 3)
Thus, Coase argues that an efficient economic system represents some kind of market so-
cialist combination of planning and price mechanism; what the entrepreneurs do is the
same thing that the central planners in Russia are doing. The only difference is that social-
ists may have pushed things too far, whereas firms in capitalism provide for an ‘optimal’
amount of planning.
To what extent is Coase reiterating the position of market socialists, primarily Lange
and Lerner in the debate about the rational planning in socialism, is best seen by the fact
that he identifies the model of perfect competition as a relevant description of the process
of market exchange, any departure from which is seen as a market failure. He then identi-
fies a problem with one of the conditions of perfect competition, namely the absence of
free prices on the real market (as opposed to the model) and then argues that this requires
a limited central planning through the firms to remedy this market failure. This is the es-
sence of the famous Coasean formula about the firm as a tool of “minimizing transaction
costs”: “The main reason why it is profitable to establish a firm would seem to be that there
is a cost of using the price mechanism. The most obvious cost of “organising” production
through the price mechanism is that of discovering what the relevant prices are. This cost
may be reduced but it will not be eliminated by the emergence of specialists who will sell
this information.” (Coase, 1937: 4).
Coase clearly believes that the only imaginable situation in which the price mechanism
would operate efficiently is the one conforming to the preconditions of perfect competitive
equilibrium, including free information. Since this condition is not met in reality, the price
mechanism ‘fails’, and the firm represents a correction of this ‘failure’; planning has to
come to the rescue by its intervention in the form of the entrepreneurial firm, which per-
forms exactly the same kinds of function all other government interventions are designed to
perform in all market failure theories: bringing about the conditions of perfect competitive
markets. The real markets are deficient, because of the transaction costs of using the price
mechanism and “planning” corrects this deficiency.
Coase sees the price mechanism and “planning” as two competing coordinating mecha-
nisms that peacefully coexist. Depending on the specific circumstances of a given society,
one of them could have been dominant or ‘supersede’ the other in a certain area or certain
branch of industry, but from his point of view there is no necessary contradiction between
the two. As he emphasizes, in an economy there is always equilibrium between the marginal

utility of an additional transaction carried out within a firm and marginal utility of an ad-
ditional market transaction (Coase, ibid. p. 405). Moreover, which one of them would rela-
tively prevail primarily depends on the technical characteristics of the industrial structure
in question. Some technological innovations could drastically increase the marginal gains
of using entrepreneurial, ‘non-market’ solution, while the costs of using the market are stag-
nating: “Inventions which tend to bring factors of production nearer together, by lessening
spatial distribution, tend to increase the size of the firm. Changes like the telephone and
the telegraph which tend to reduce the cost of organising spatially will tend to increase the
size of the firm. All changes which improve managerial technique will tend to increase the
size of the firm.” (Coase, ibid. p.397).
It follows from here that market is understood almost like a nuisance or a necessary
evil, which characterizes the less technologically advanced industrial stages: the more the
technological and organizational capabilities of a society increase, the more the firm be-
comes able to ‘supersede’ the market and the price mechanism. Coase even offers a telling
example of Russian emancipation from serfdom and the zigzag movement from “central
organization” to “market” and all the way back again, all depending on the technical and
technological characteristics of the production process: “It seems important to realise that
the passage from the domestic system to the factory system is not a mere historical acci-
dent, but is conditioned by economic forces. This is shown by the fact that it is possible to
move from the factory system to the domestic system, as in the Russian example, as well as
vice versa. It is the essence of serfdom that the price mechanism is not allowed to operate.
Therefore, there has to be direction from some organiser. When, however, serfdom passed,
the price mechanism was allowed to operate. It was not until machinery drew workers into
one locality that it paid to supersede the price mechanism and the firm again emerged”
(Coase, ibid. 397).
Therefore, the capitalist firm is just a new form of the same model of organizing produc-
tion known from slavery or serfdom, the form which re-emerged as soon as the favorable
economic and technological conditions allowed for the formation of the factory system. An
untrammelled “market” dominated by the price mechanism was just a short and relatively
insignificant intermezzo.
Having all this in mind, it is very peculiar that the mainstream of the Austrian school
accepted wholeheartedly Coasean theory of the firm and moreover attempted to integrate
it with the Austrian models of monetary calculation, capital heterogeneity, and economic
entrepreneurship. This starts with Mises and Rothbard who were first to appropriate the
Coasean notion of the firm as a hierarchy and a planning instrument, and then the same
error was echoed and further amplified by the whole host of their followers (Klein, 1992;
Foss, 1996; Ioanniddes, 2002; Langlois, 1995; Klein and Foss, 2012). The basic and obvi-
ous problem with all the attempts to reconcile the Austrian theory of monetary calculation
with Coase’s theory of the firm is that the latter had been devised as one of the arguments
against the former. And the same thing that Coase explains as beneficial and remedial
features of the commanding authority within the firm is described by the Austrians as a
form of economic inefficiency and chaos; after all, what else “superseding the price mecha-

nism” by planning could be within the Austrian framework? For example, Coase this way
describes the operation of the firm:
As D. H. Robertson points out, we find islands of conscious power in this ocean of

unconscious co-operation like lumps of butter coagulating in a pail of buttermilk.”
But in view of the fact that it is usually argued that co-ordination will be done by
the price mechanism, why is such organisation necessary? Why are there these “is-
lands of conscious power”? Outside the firm, price movements direct production,
which is co-ordinated through a series of exchange transactions on the market.
Within a firm, these market transactions are eliminated and in place of the compli-
cated market structure with exchange transactions is substituted the entrepreneur-
co-ordinator, who directs production. (Coase, 1937: 388).
Compare this now with how Murray Rothbard explains economic irrationality of socialism,
with price controls and government ownership:
...islands of non-calculable chaos swell to the proportions of masses and conti-

nents. As the area of incalculability increases, the degrees of irrationality, misal-
location, loss, impoverishment, etc., become greater. For each governmental firm
introduces its own island of chaos into the economy: there is no need to wait for
full socialism for chaos to begin to work. (Rothbard, 2009: 953)
We here clearly see that Rothbard and Coase describe essentially the same phenomenon,
the spread of the non-market, planning coordination within a free market environment,
using the same imagery of “islands” and seas. But, the differences in assessment of this phe-
nomenon could not be more striking: Coase sees the ‘islands of planning’ as a welcome cor-
rective to the inefficiencies of the market system reflected in high transaction costs, whereas
Rothbard, on the contrary, sees in the same islands of planning the areas of ‘incalculability’
and economic irrationality, which, if allowed to spread over a sufficiently large part of the
economy, could wreak havoc on it, even before we get to the point of full socialism (which is
just a state in which there is nothing but irrationality of planning, encompassing continents
now, instead of mere ‘islands’).
It is nothing short of astonishing that irrespective of this, Rothbard accepts Coase’s
theory of the firm! And, moreover, he offers the Austrian arguments on price calculation
as a supplement to Coase’s theory in determining the optimal size of the firm.3 Namely,
according to Rothbard, the firm as a central planning island in the sea of price coordination
could exist only insofar as the independent, outside markets for capital goods are preserved
that would protect the integrity of the internal pricing mechanism within the firm (Roth-
bard, 2009).
3 See Rothbard, 2009, pp. 609–617, and further development by Klein 1996.

The most peculiar contradiction here is that Rothbard in the same breath accepts Mises’
argument about the impossibility of rational economic planning absent the market prices,
and Coase’s theory about central planning as a way to correct the failures of market prices!
But, he cannot have it both ways: non-market “planning” is either a problem, or a solu-
tion; it cannot be both: either it is an ‘island of incalculability’ which, if it grows enough,
destroys the economic system (but even at lower levels of intensity, it impairs the economic
efficiency) or it is a transaction cost-minimizing tool that helps overcome the imperfections
of the market mechanism. There’s no way of squaring the circle here.4
One could say that Rothbard diverges from Coase insofar as he identifies the calcula-
tional chaos with an increase in government control and ownership over the resources,
whereas Coase did not make such a distinction. Not the firms in general, but government-
owned firms are the ones that increase the calculational chaos according to Rothbard. But,
this is irrelevant. From the Coasean point of view, it does not matter at all whether we are
talking about the government-owned or private firms; both are equally the instruments of
organizational planning that equally replace and supersede the market. Rothbard never
tried to refute this; so, he is caught in a vice: if he wants to draw a sharp distinction between
the government-owned firm and the private firm in the context of economic calculation,
then he has to abandon the notion of the private firm as a planning entity (which he does
not want to do); or if he wants to retain the Coasean notion of any firm as an organiza-
tional entity ‘superseding’ the price mechanism, then he has to concede that calculational
chaos equally increases with the emergence and growth of both the private and government-
owned firms. Then the only consistent solution is to look at every single firm, private or not,
as an impediment to market efficiency.5 He cannot constantly equivocate by defining “the
firm” as a “private firm” when trying to demonstrate the supposed advantages of this form
of organization, and as “government firm” when trying to demonstrate the ‘calculational
chaos’ to which any central planning inexorably leads.
4 The only attempt to do this, as far I can tell, is Lewin (1998). But, although the paper promises to answer the
following questions: “On the one hand, if socialism is indeed irrational, in the sense of precluding the ability
to perform the necessary calculations, how is it that the firm is not similarly encumbered? After all, is not a
state socialist system simply one large firm? And are firms not islands of socialism in a market sea?” (Levin,
1998: 500–501). The ensuing analysis does not tell us anything about this set of issues. Instead, Levin argues
that the entity called the “firm” is necessary to provide an environment for entrepreneurial calculations of cost
and profit. But, this is perfectly consistent with the nexus-of-contracts view of the firm and does not explain
at all why we would have to understand the firm as a commanding entity, rather than as a legal fiction for vol-
untary contracts. Moreover, he equivocates about the very meaning of the key term “planning”. At the begin-
ning, this term means the relationship between the owner and employees. Later on, he switches to the notion
of planning as entrepreneurial anticipative calculation of costs and benefits. This is close to what Mises would
call the ‘praxeological’ meaning of planning: simply, every market agent plans, i.e. anticipates his own costs
and benefits. If this is so, it’s not clear why then the employees would not be “planning” as well. And if every-
body is “planning”, what is then the point of making an analytical distinction between the “planning” and the
“market” in the first place?
5 This is the criticism that Demsetz (1988; 2011) levels against Coase.

3. Heterogeneity of capital and the firm
We now turn to the refinements of this Rothbard’s mistaken acceptance of the Coasean
theory of the firm by the authors who tried to incorporate the Austrian discussion of the
capital heterogeneity into the system (Klein and Foss, 2012, Foss etl 2006; ). It is safe to say
that what they achieved was simply to generalize and amplify Rothbard’s initial mistake of
treating central planning as a cure for market failure by infecting even the Austrian capital
theory with Coaseanism.
Let’s start by discussing the differences between the Austrian and neoclassical capital
theories, and then explore what conclusions the Rothbardians derive from those differences
in the context of the theory of the firm. Heterogeneity of capital stems from the general
analysis of value, price, and the market process by Menger and Bohm Bawerk. Carl Menger
revolutionized economic theory by reinterpreting the origins of value and reversing the flow
of economic causation in his famous book ‘The ‘Principles of Economics’, as compared to
earlier theories. Unlike his classical predecessors, Menger argued that the source of value
is individual human valuation of consumer goods’ utility for the satisfaction of his needs,
and that the standard of evaluation is marginal utility which is decreasing (Menger, 2007).
This helped solve the paradox of value that plagued classical economics, mired in the cost
of production and labour theories of value, which were unable to explain the market value
of non-reproducible goods, or natural goods.
However, the critical corollary of this revolution in the theory of value was Menger’s
theory of imputation that shifted the causal arrow from the classical cost theories, by claim-
ing that the cause of all material production and the source of their value are human needs
and human evaluations of the material goods, and that all other goods that are used at
some point to produce those final consumption articles derive their utility and their price
from the value of the final goods. Marginal utility determines the price of the final goods,
whereas the marginal productivity in producing those final goods determines the price of in-
termediate capital goods. The value is, so to speak, imputed backwards to the capital goods
and land from the consumer goods, rather than prices of final goods being determined by
the objective, ex ante given costs of their production (Menger, 2007: 51–74).
A further consequence of this shift is that production is not seen any more through the
lenses of an input-output analysis, depicting the process of production as a transformation
of a given set of inputs (factors) into the set of final goods, but rather a complex inter-
temporal process that starts with the higher order goods, as Menger names them, and then
proceeds through a series of intermediate steps to the final stage of consumption goods
(Menger,ibid. ).
Bohm-Bawerk describes this as a “roundabout” process of capitalist production, and
at each level of production a large-scale process of selection and specialization of capital
goods is taking place; the further we go from the stage of final goods along the chain of
production structure, the less specialized goods become: land, raw materials or products of
nature could be put in very many uses; some intermediate goods such as the refined metals
and some machines are less specialized than some others such as more narrowly special-

ized capital equipment or half-products (Bohm-Bawerk, 1959: 3–15). And this is the source
of heterogeneity of capital in the Austrian theory.
The most obvious feature of this theory puts it at odds with the now conventional neo-
classical understanding of capital. All those theories, in various forms depict capital as a
homogenous fund of value which serves the purpose of automatically converting the inputs
into the output. The production process is understood as instantaneous and capital goods
as perfectly substitutable. The factors of time and heterogeneity of inputs are done away
with.6
4. Klein and Foss reinterpretation
One aspect of the Austrian capital theory we are here most interested in is how it interacts
with the conventional and nonconventional theories of entrepreneurship and the firm. In
the Austrian literature, this issue is pursued with vigilance in the last couple of decades,
and we are going now to explore some of the results that are achieved and their limita-
tions. As already suggested, the Austrian literature pursuing those kinds of complications
is mostly Misesian-Rothbardian in its direction, and the exposition and critique here would
be directed to the entire tradition, although I would single out a couple of the most promi-
nent and canonical authors of this tradition. Primarily, I have in mind the refinements and
broadening of the paradigm brought about by Nicolai Foss and Peter Klein, and some other
authors following their lead.
The basic thrust of their argument is an attempt to broaden the application of the Roth-
bardian dubious reconciliation of the Coasean “organizational” theory and Austrian price
theory by including the theory of capital into the synthesis. And although impressive in its
learning and comprehensiveness, this attempt is untenable for the same reasons Rothbard-
ian initial argument for Coaseanism is wanting. Klein and Foss (2012) as well as Foss et al
(2007) start from the fact of heterogeneity of capital in the Austrian tradition and contrast
it with the treatment of capital in the mainstream neoclassical tradition. This is, in a sense,
an already explored possibility; for example Dubleco and Garrouste (1999) are trying to
bridge the gap between the Hayekian-Kirznerian entrepreneurial knowledge and the Bohm-
Bawerkian asset specificity. However, they use the firm just as a functional black box to per-
form the feat, avoiding any explicit Coasean themes for analysis of the inter-firm structure.
They are not interested in the structure of the firm.
6 For a good summary of the debates on capital theory between Austrians and neoclassicals see Hayek (1935)
and Cohen (2008). The debate was waged over the period of more than 30 years. For the Austrian expositions
see, Bohm Bawerk (1895), Hayek (1935) and Machlup (1935). For the neoclassical “fund of value” position
see Clark (1895) and Knight (1934).

Klein and Foss, on the contrary, make the Coasean structural theory, appropriated by
Mises and Rothbard, the center piece of their synthesis, and then build further from there
by enriching the synthesis with the Kirznerian and Bohm-Bawerkian themes. Their ap-
proach is to correct the neoclassical theory not only in one point (the structure of capital)
but in two: the structure of capital and the structure of the firm. First, the functional theory
of the firm which serves to transform the given set of inputs into outputs is simplistic and
actually wrong since it depicts the process of production as a one-stage enterprise; capital
is instantaneously transformed into a set of final, consumer goods. Foss et al argue, in
line with Bohm Bawerk that production process unfolds in the numerous stages, and is
diachronical rather than instantaneous. Also, in order to understand the entire process
of production, it is not sufficient to postulate the firm as the production function, but one
needs to explain its internal structure and working: when does firm emerge, how and why it
grows, when it ceases growing, why certain transactions are carried out within the firm and
certain others outside of it, and so on.
Foss et al (2007) attempt to establish the rationale for Coasean firm as the only solution
for those problems by using the tools provided by Frank Knight. Namely, they emphasize
the importance of entrepreneurial judgement which is not based on any given criterion or
probability distribution among the given entrepreneurial choices. Judgement is a qualita-
tively different kind of decision-making than ‘optimizing’ in the neoclassical framework;
starting from Knightian distinction between risk and uncertainty, they argue that entre-
preneurial decision-making includes the handling of the situations which are not subject
to ordinary risk, and hence uninsurable. An entrepreneur deals with what Knight calls
uncertainty and Mises the class probability (as opposed to case probability). This is a set of
circumstances in which the array of possibilities is not closed and a great deal of what the
entrepreneur does has to do with the anticipation of future gains from qualitatively different
possible entrepreneurial initiatives with unpredictable results: “Judgment primarily refers
to the process of businessmen forming estimates of future events in situations in which
the relevant probability distributions are themselves unknown. Entrepreneurship represents
judgment that cannot be assessed in terms of its marginal product and which cannot, ac-
cordingly, be paid a wage.” (Foss et al, 2007: 1167).
The second great innovation that Foss and Klein offer is the claim that in the world of
homogenous capital goods of neoclassical theory, the identical and perfectly substitutable
“shmoos”, in the parlance of Paul Samuelson, there would be no need for corporate govern-
ance, industrial organizations such as firms or any other non-market (in the Coasean sense)
forms of governance: “In a world of shmoo capital economic organization is relatively un-
important. All capital assets possess the same attributes, and thus the costs of inspecting,
measuring, and monitoring the attributes of productive assets is trivial. Exchange markets
for capital assets would be virtually devoid of transaction costs” (Foss et al, 2007: 1168).
Hence, the very existence of the firm is dictated not only by standard Coasean transaction
costs but also by Bohm Bawerkian capital transaction costs.
However, Foss and Klein refine the theory further yet by making it more subjectivist and
less ‘Ricardian’. Heterogeneity of capital is not understood only in the standard Menger-

Bohm Bawerkian way, as a reflection of the multitudes of purposes to which any physical
piece of equipment or factor could be put, but also includes the concept of heterogeneity
of a single and seemingly homogenous capital asset. Using Kirzner’s and Hayek’s concep-
tualizations of the process of market competition, they argue that capital goods are not just
separate and purpose-specific physical things whose replacement or reutilization is costly,
and hence it does not make much sense to talk about capital as a homogeneous fund of
value; even more importantly, a single physical asset is a bundle of numerous attributes,
many of which are not always understood or utilized as economic goods (Foss and Klein,
2012: 116–131). So, heterogeneity of capital goods is also seen in the fact that different
entrepreneurs have different ideas of how a multitude of attributes that any physical item
has could be combined and exploited to make profit. Utilization of capital goods is a con-
tinuous and never-ending process of discovery of the useful characteristics of every single
capital asset that is used in the production process. The same capital good could be radi-
cally different to the two different entrepreneurs, depending upon which concrete attributes
any one of them perceives as important for the production processes at hand. A very large
number of entrepreneurial discoveries consist not in finding a new material or a new capital
good to serve the given purposes (or new purposes for the same attributes of a given good),
but in discovering some new feature of the already existing capital asset which had not been
perceived before as suitable for such purposes.
This way, Klein and Foss combine in a sense the best of both worlds; from the Misesian,
essentially Bohm Bawerkian, tradition they take the concept of entrepreneurship as eco-
nomic utilization of heterogeneous physical capital, as human action on the real markets
which is concentrated on production, exchange, investment using monetary calculation
and market prices to allocate physical resources to alternative uses. From the Hayekian
and Kiznerian theory of competition as a discovery procedure, and the entrepreneur as a
knowledge economizer, they take a radical subjectivist emphasis on specific tacit knowledge
and gradual discovery of unknown data to develop the notion of capital goods as being
subjectively structured by the information, knowledge, and perception of the entrepreneurs
themselves. That way, heterogeneity of capital is a pervasive fact of economic life; it is not
seen only in objectively different physical characteristics and purposes to which different
goods could be put, but also in subjective attributes that different entrepreneurs assign to
the physically same capital goods.
The function of the entrepreneur in this picture is to embark upon a process of produc-
tion with physical capital by using his own judgement in the conditions of radical uncer-
tainty in order to discover a set of attributes of the given assets, allowing him to provide
the marginal value to the consumer. Their emphasis on capital theory and their ingenious
reinterpretation of the concept of heterogeneity allows Klein and Foss to offer a brilliant
synthesis of the Misesian and Hayekian perspectives within the theory of entrepreneurship.
On the one hand, an entrepreneur is not just the discoverer and arbitrageur who passively
reacts to the changes in market data and by his prompt and skillful use of his specific and
tacit knowledge beats the competition in the race for profit. An entrepreneur is also some-
one who directs and employs physical capital, the transformation of which takes time, cop-

ing with uncertainty and requires judgement and planning. Organizing physical production
is an even more important element of entrepreneurial activity than a mere epistemological
function of price and opportunity discovery. The conceptualization of the unity of those
two aspects of entrepreneurial activity is a signal contribution of Klein and Foss.
5. Critique
The gist of the Foss/Klein revision of the standard Austrian framework is best expressed
in their previously quoted statement “In a world of shmoo capital economic organization
is relatively unimportant. All capital assets possess the same attributes, and thus the costs
of inspecting, measuring and monitoring the attributes of productive assets is trivial. Ex-
change markets for capital assets would be virtually devoid of transaction costs” (Foss et
al, 2007: 1168). This statement is essentially just a translation of the basic Coasean claim
about the absence of the firm in the neoclassical paradigm into the language of capital
theory. Coase imagines that the only reason why the firm could emerge is to minimize the
transaction costs,7 and since the transaction costs in the neoclassical model are zero, then
neoclassical theory ‘fails’ to explain the very existence of the firm. In the same manner,
Foss et al claim that the only reason why the “organizational forms” of governance could
emerge is to deal with the transaction costs of operating the capital assets, and since the
capital assets are identical in the neoclassical treatment, the transaction costs are minimal
and hence the firm is unnecessary.
But, both claims are equally dubious. As Harold Demsetz (2011a) demonstrates, the
firm in the neoclassical model is meant to perform a functional role as a part of the sys-
tem of exchange between the open market and households. Firms emerge not because the
market is characterized by high transaction costs but because it is characterized by a high
extent of division of labor; the reason for a firm’s existence is that it provides a large degree
of specialization which increases productive efficiency and represents an alternative to the
self-sufficient provision within a household. The firm is an instrument of production and
exchange which becomes more important as the extent of market specialization and divi-
sion of labour increases, not less. The opposition in the neoclassical theory is not the one
between the market driven by price signals and the firm driven by commands and planning,
but the one between the markets with the firms as the instruments of specialization and
exchange and households as self-sufficient and non-market environments of production and
distribution.
Contrary to what Coase claims, the firm could exist even in the zero transaction cost
world, and moreover it is likely that the extent and the reach of the firm production in such
a world would have increased rather than decreased, because it would have made the provi-
7 For a critique of this assumption see Demsetz 1988.

sion of goods within the household less appealing (since the cheaper firm-produced goods
are more widely available than otherwise), and would have, hence, allowed the firms to
serve a much wider circle of people (Demsetz, 2011a: 10). Coase completely neglects the
productive efficiency in studying the origins, boundaries and growth of the firm. The only
costs allowed in his model are transaction and managing costs, and the balance of those two
costs on the margin determines the extent of the firm’s growth and size. But, we can have
the enormously large firms in the world of zero transaction costs because of a higher degree
of specialization and productive efficiency which makes the production for the market more
profitable than self-sufficient production. A firm can continue growing if the transaction
costs are zero just as it can shrink if the transaction costs skyrocket.
Foss et al (2007) make the analogous mistake in their treatment of the ‘shmoo’ capital.
Just as Coase wrongly imagined a world of zero transaction costs in which all the market
agents would just trade and exchange goods using the price mechanism, Foss et al imagine
a world of perfectly substitutable capital assets in which the entrepreneurs would cease to
control and own any capital goods and would communicate simply through the spot con-
tracts on the market, making firms all but disappear: “The possibility of specifying all possi-
ble uses of an asset significantly reduces the costs of writing complete, contingent contracts
between resource owners governing the uses of the relevant assets. Contracts would largely
substitute for ownership, leaving the boundary of the firm indeterminate” (ibid. 1168).
But, this also completely neglects the effects of specialization and productive efficiency: in
the world of perfectly identical and substitutable capital goods, the production within a firm
would become infinitely more rather than less appealing. If we accept that the firm allows
for greater specialization and a decrease in per unit costs, then the world of shmoo would be
an Eldorado for the firm as an organization. Heterogeneity of capital is a cost that the intra-
firm production faces, rather than an incentive to it. It makes the functioning of the market
system less smooth and more complicated than it would have otherwise been; if heterogene-
ity is assumed away, i.e. the assets are assumed not to be specific and substitution easy and
quick; then the firm could exploit all the advantages of production that it already has, but on
a much grander scale. In the world of shmoo the firm would be much more important and
widespread than it is now. Transaction costs, however we define the term, represent just one
element of the environment in which the firms operate, whereas productive efficiency, the
extent of the market specialization, oftentimes represents more important factors influenc-
ing the size and growth of the firm. In other words, in the world of shmoo capital, the trans-
action costs of switching the uses of a given capital good would be negligible, which would
provide a tremendous incentive to the firms to widen the scope of their operation, instead
of shrinking it. Lower transaction costs of exchanging the capital assets across the stages
and branches of production would facilitate the cheap production within the firm, reducing
the unit costs and increasing the productive efficiency. Just as in the case of Coase’s theory,
households would minimize the extent of self-sufficient production and increase their reli-
ance on the outside markets, i.e. on buying the cheaper products from the firms.
It has already been observed (Demsetz, 1988; Hulsmann, 2004; Jankovic, 2010) that
the very concept of transaction cost lacks any serious explanatory and predictive power.

Limited knowledge, costs of monitoring, difficulty in discovering prices – all those diverse
forms of costs are arbitrarily subsumed under the generic rubric of ‘transaction costs’. But,
all these cognitive and behavioral limitations of human beings are with us with or without
the firms, and it is not clear why only those costs would be relevant and not some others
that Coase did not specify. Is lifting a pen to sign a contract transaction cost or not? Or
waiting for the elevator that would take us to the floor where the firm headquarters are?
(Hulsmann, 2004) Everything and anything could qualify as a transaction cost depending
on how far we are willing to go in calling every obstacle we encounter a transaction cost.
We essentially end up with a notion of ‘transaction costs’ which approximately means: ‘any
kind of reason or problem that we can think of why a particular transaction had not taken
place’. ‘Transaction costs’ become indistinguishable from the ‘costs of resolving problems’
(Demsetz, 1988:) As Demsetz bluntly puts it: “A cost is cost whether we name it trans-
action cost or fertilizer cost. Consider a manufacturer who does not ship his product to
another firm because the other firm is unwilling to pay the costs of producing the product.
What difference does it make to efficiency if the high cost is due to the price of labor or to
the cost of shipping the product – and is not the cost of shipping the product a transaction
cost?” (Demsetz, 2011b: 13). In the final instance, this entire line of reasoning leads to the
claim that we need hierarchical planning and commands to replace market prices since we
live in an imperfect world.
Foss et al just add one more item to this unending list of poorly defined “transaction
costs” – the costs of shifting various specific, heterogeneous capital goods from one use to
another. They assume the same Coasean critique of the markets in which the precondition
of its efficient functioning is the absence of transaction costs. In this context, the require-
ment is that capital be the homogenous blob, shmoo capital, seamlessly fluctuating between
the various stages of production and various branches of industry: management, entrepre-
neurship, vertical integration of production, all those phenomena the Austrian Coaseans
see as the effect of capital being heterogeneous and specific. Somewhat crudely, but cor-
rectly put, they see, like Coase, central planning as a mechanism for coping with imperfect
information and limited knowledge.
However, although this new theory faces the same kind of critique we developed for the
original Coasean position, the situation is much worse for Klein, Foss and others than for
Coase. Namely, Coase never claimed that his purpose was to vindicate Misesian theory of
economic calculation and entrepreneurship; on the contrary, as we have seen, his paper
could be read at one level as a polemic against Mises and Hayek. Austrian Coaseans on
the other hand tied themselves in a knot by claiming on the one hand that market prices
are generally superior to central planning, and at the same time that central planning is
superior to the market prices within the firm. However, they follow Rothbard in the failure
to provide any Austrian justification for the notion that planning and non-market comman-
deering could be more efficient than a market in any circumstances. You can claim that
Coase is right in assuming that transaction costs represent the market failure that has to be
remedied by planning, or you can claim that prices are always better than non-market com-
mandeering. But, you cannot claim both in the same time!

Contrary to Hayek and in accordance with Coase, they see the perfect information and
zero transaction costs as the conditions of market price efficiency; only in the world of sh-
moo economic coordination would be carried out by contracts and market transactions. In
the real world of positive transaction costs, we need ‘planning’. But, is not the basic Hayek
lesson that we need price system and market competition exactly because we do not live in
a world of perfect information, and capital goods are not shmoo? The fact that information
in reality, as opposed to the assumptions of the model, is imperfect and limited, prompted
many economists to believe that market coordination was inefficient and had to be supple-
mented or supplanted by the conscious and deliberate control of economic activity in order
to approximate the economic outcomes to the properties of the model. Hayek’s critique
of that conception was that the very essence of market is to economize and optimize the
use of scarce resources including knowledge: free competition is the best mechanism so far
discovered allowing individual people with limited information and bounded rationality
to extract from society more knowledge about the appropriate use of resources than any
one of them could have possibly possessed in isolation (Hayek, 1945). The very essence
of free competition is to discover the new knowledge about the ways to use and combine
the resources, not in applying the knowledge that we already have. The less perfect the
information is, the more we need the market prices and competition! In a world of perfect
information, we would not need markets and prices at all. We have them precisely because
information is costly, scarce, and limited.
By the same token, the fact that capital goods are heterogeneous does not mean at all
that the mechanisms of control and transformation of those goods into the final consumer
products should be guided to a larger degree by a conscious authority and withheld from
the domain of market transactions. The fact that there are positive transaction costs of
changing the modes of utilization of capital goods (the costs of ‘asset specificity’ or of ‘at-
tribute discovery”) does not mean that the market in capital goods is ‘inefficient’ or that we
need to supplement it by some form of central planning to correct its failure. The fact of
specificity-heterogeneity of capital goods is equally irrelevant for justifying the concept of
a firm as hierarchical organization as the imperfection or asymmetry of information is ir-
relevant for justifying government regulation of the insurance business. The more heteroge-
neous the capital goods are, and higher the transaction costs of switching the uses of those
goods are, the “thicker” the market in which the entrepreneur operates has to be. He needs
more information, not less, to deal with the more complicated situations, and the firm
understood as a central planning instrument would, by definition, provide less information
than the ‘market’. This does not mean that in the world of more heterogeneous capital we
would need firms less, but that firms are not central planning entities.
As we have seen, Klein and Foss enrich the theory tremendously by combining in very
creative ways Kirznerian, Knightian and Bohm-Bawerkian themes with the old Rothbardian
and Misesian theories. However, the final result is, paradoxically, to even more undercut the
initial Rothbardian position, instead of strengthening it. For example, if heterogeneity of
capital is not just the old, good, run-of-the-mill “asset specificity”, but also includes the sub-
jective evaluations of the various attributes of the same goods, then it is not clear what pur-

pose the notion of transaction costs as a cost of switching the uses of single heterogeneous
goods could play in the entire scheme. If transaction costs mean the costs of unpredictable
discovery of the new features of a given good, what is the basis for belief that this discovery
would be more likely to occur within the Coasean firm rather than outside it? One million
entrepreneurs cooperating via prices and spot contract could do an equally good job of
discovering the new features of capital goods as can do the entrepreneurs organizing the
team production. There is no basis, at least in the framework developed by Foss and Klein,
to believe otherwise. Instead of offering further support for Austrian Coaseanism, Foss’ and
Klein’s refinement actually additionally illustrates its unviability.
Another downside of this refinement is that it makes some problems vis-à-vis owner-
ship over the firm that the Austrean-Coasean theory has had even worse. Namely, in the
standard Austrian theory a very sharp distinction is made between the entrepreneur and
manager; The entrepreneur is a creative force which initiates business plans, takes up and
recovers credit, makes decisions about what production processes to initiate, how much
money to invest here or there, how many workers to employ, whether to expand or scale
back the operations of the firm and so on (Mises, 1998). A manager, on the contrary, is
limited to the delegated and routine tasks. In addition to this, the entrepreneurial function
is tightly connected to the ownership of the firm: “the entrepreneur is nearly always also a
capitalist and the capitalist is also an entrepreneur”, says Peter Klein (2010). This means
that entrepreneur must hold ownership over the assets whose different attributes are to be
discovered. Klein and Foss (2012: 120) emphasize “ownership is a low cost form of allo-
cating the rights to attributes of assets that are created or discovered by the entrepreneur-
owner.” In Foss et al (2007) they use a similar argument, but expressed in Knightian terms:
“…there is no market for the judgment that entrepreneurs rely on, and therefore exercising
judgment requires the person with judgment to start a firm…Judgment thus implies asset
ownership, for judgmental decision-making is ultimately decision-making about the employ-
ment of resources. An entrepreneur without capital goods is, in Knight’s sense, no entrepre-
neur.” (Foss et all, 2007: 1167)
One obvious problem with the identification of owner and entrepreneur is that all the
essential functions of the alleged entrepreneur-owner in the modern corporation appear
to be performed by paid employees, rather than by the owners themselves. In the modern
corporation of a great mass of individual shareholders very few of them had any idea about
the production process or the true business of the firm, and they instead hire the other
people to lead the corporation and organize the production process at all stages. In most
cases, those owners are not only excluded from making and executing the business plans,
but have actually a limited liability for the corporate performance. This is really awkward: if
it’s true that entrepreneur=owner, then the corporation represents a really anomalous form
of organization which should be expected to have a dismal record: what kind of organiza-
tion plagued by such moral hazard in which the owner reaps the benefit of a successful
business while being shielded from at least some of the consequences of failure could be
efficient? And yet, the modern corporation seems to dominate the business world. Either
it is somehow artificially privileged by the legislation, or the concept of the entrepreneur

being identical to the owner does not hold, i.e. it must be that “managers” could exercise
successfully the entrepreneurial function.
Klein and Foss try to solve this obvious problem by claiming that there are two differ-
ent types of entrepreneurial judgement: the “original” judgement exercised by the owners
of a firm and “derived” judgement exercised by the managers and other people to whom
the rights to decide about certain issues are delegated by the owners (Klein and Foss,
2012). Obviously struggling with the fact that the CEOs and other senior managers of
modern corporations make the most important decisions about the business operations
of the firm, they redefine the entrepreneur: this is not anymore a person who owns the
corporation, makes the business plans as well as all other critical decisions (as in earlier
Austrian literature), but only the person or persons who have a residual or ultimate deci-
sion making power. In other words, he can fire the CEOs or stop any particular business
plan.
This solution may or may not sound convincing in and of itself, but one thing is certain:
it is very difficult to square with the “attributes discovery” theory of entrepreneurship. For
the purposes of making the dubious Austrian identification of entrepreneur and owner look
more realistic, Foss and Klein are forced to empty the notion of entrepreneur of almost any
concrete content, apart from the ultimate control of assets, which is little more than an
analytic definition of the term “owner”: their “clarification” that the owner is entrepreneur
because he controls the assets amounts to little more than a claim that owner is owner be-
cause he is the owner. And yet, while developing their theory of ownership as a “low cost
form of allocating the rights to attributes of assets that are created or discovered by the
entrepreneur-owner” they seem to have in mind a much richer notion of the entrepreneur,
who actually personally does the job of attribute discovery and is rewarded for this by the
ownership over the attributes he discovered. In other words, in the theory of attributes
discovery, the concept of the entrepreneur is much closer to the person exercising “derived
judgement”, i.e. the manager, rather than to the ‘real’ entrepreneur with his “original judge-
ment”. So, the entire theory is in a sense based on an equivocation: when the problem of
corporation should be solved, the concept of entrepreneurship is emptied of most of its
usual content and identified with a minimalistic “original judgement”; on the other hand,
when the theory of “attributes discovery” is developed this standard content is smuggled
back again into the model.
The basic weakness of the theory mimics the general weakness of the old Austrian-
Caoseanism of Mises and Rothbard: the impossibility to square the logic of individual
entrepreneurship, market prices and market process, with the socialist concepts of organ-
ization, hierarchy and commandeering taken from Coase. In Foss’ and Klein’s revision,
this is even more evident since they emphasize the concept of entrepreneurship, as well
as the heterogeneity of capital, which both fit very nicely the general Misesian paradigm,
thereby making the artificial and convoluted nature of the Coasean firm even clearer.
Foss’ and Klein’ theory, if I am allowed such a metaphor, resembles a man wearing a tail-
coat, a cylinder, the black pants, a white shirt with a bow tie, and –muddy military boots,
instead of shoes.

6. Conclusion
The basic claim of this paper is that the only way of making sense of the notion that a free
market is superior to central planning in the context of a world characterized by heterogene-
ity of capital is to reject Coasean theory of the firm as a centrally planned ‘organization’.
Contrary to some new attempts to show that heterogeneity of capital stock (asset specifi-
city) entails various forms of opportunistic behaviour that invite the substitution of or-
ganizational forms of governance for market transactions (Klein and Foss, 2012; Foss et al,
2007), I affirm that heterogeneity is actually an additional reason why the market prices are
indispensable and why organizational and planning thinking is a wrong way to conceptual-
ize the problem. Austrian economists who tried to fuse Misesian arguments on economic
calculation and market prices with the Coasean theory of the firm never addressed the basis
and fundamental disconnect between these two theories: the fact that Coase argues that
central planning represents a remedy for the failure of market prices efficiently to coordi-
nate the economic activity. The newest attempt by some Austrians to use the upgraded form
of Bohm-Bawerkian capital theory as a new way of reconciling the two is equally untenable.
All the problems and contradictions this brand of Austrian theory faces could be avoided
very simply: by rejecting the Coasean notion that a firm represents an instrument of central
planning, but rather a form of voluntary and contractual market cooperation.
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Benedetto Croce as an Economist
IVAN JANKOVIC
Email: ijankovic@umary.edu
Web: https://umary.academia.edu/IvanJankovic
Abstract: This paper examines the economic contribution of Italian philosopher Benedetto Croce. Although deservedly cred-
ited as a great philosopher of the 20th century, he is seldom thought of as an economist. Yet, he is one. Croce’s approach to
economics most closely aligns with the “Austrian” school of economics, emphasizing the deductive method, a “praxeological”
view of economics as a science of “human action”, a subjective theory of value and economic facts, a radically subjectivist the-
ory of cost, and resistance to positivism and naturalism. In many of these areas Croce formulated the principles of Austrian
economics decades earlier than Mises, Hayek and other key members of this school.
Keywords: Austrian School, Croce, praxeology, subjectivism, positivism.
INTRODUCTION locate a single reference to Croce. Lionel Robbins’ great

methodological book An Essay on the Nature and Method of
Benedetto Croce is deservedly credited as one of the great Economic Science also does not contain any reference what-
42 European philosophers of the 20th century, especially in soever to Croce, although many claims and theorems in
the areas of ethics and aesthetics. What is however, far less that book hold a striking resemblance to Croce’s arguments
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known and appreciated, is that Croce was a first-rate econo- developed decades earlier. Rothbard mentions Croce’s great
mist of a speculative, theoretical bent. He developed a very polemic with Pareto in a footnote to his article “Towards
sophisticated economic conception which in many respects a Reconstruction of Utility and Welfare Economics”, and
anticipated the basic tenets of what has come to be known correctly describes Croce as a “praxeologist”, but without
as the modern “Austrian” economics. any further analysis or wider appreciation of Croce’s contri-
The purpose of this essay is to explore Croce’s contribu- bution (Rothbard 1956, p. 9).
tion to economic theory and to show that he was respon- The only significant exception to this trend seems to be
sible for the development of many of the crucial theoretical Israel Kirzner. In his book Economic Point of View he de-
concepts of the “Austrian” school of economics most nota- votes a couple of pages to the debate Croce-Pareto, and cor-
bly formulated by Ludwig von Mises, Lionel Robbins and rectly argues that Croce understood economic science in a
Murray Rothbard in the 20th century, but mostly ignored Misesian aprioristic and deductive way, as opposed to the
by historians of economic ideas. What is particularly sur- positivist Pareto. He even deservedly criticized Mises for
prising and peculiar, is that this contribution went almost not recognizing the significant similarities between his and
unnoticed even among the Austrian economists them- Croce’s understandings of economic science:
selves. They could have found any number of antecedents
and sometimes ready-made formulations for their own Professor Mises has not recognized the close similar-
theories in Croce but for a variety of reasons, mostly hav- ity to his own position which is evidenced in Croce’s
ing to do with the fragmentary nature of Croce’s economic writing (see L. Mises, Theory and History, p. 308).
writings (just two letters to Pareto and some isolated com- What appears to be the principal point of difference
ments) and professional skepticism of economists toward between their positions has little relevance to the con-
the economic acumen of a philosopher, have chosen not to ception of the character of economic science. Both
do so. For example, Ludwig von Mises thought that no phi- writers emphasize the rationality of all human action;
losopher, save for perhaps Collingwood, had any serious both recognize that a chosen program may fail to be
grasp of economics. He disparagingly talked about Croce adhered to either because of a technical error (an er-
as just one more among philosophers ignorant of econom- ror of knowledge) or because of the choice of a new
ics (Mises 2007, p. 308). In Hayek’s works, I was unable to
VOLUME 6 | ISSUE 1 + 2 2018

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program of ends with respect to which action will be If we speak of conscious choice, we have before us a
“rational” (Kirzner 1976, p. 214). mental fact, if of unconscious choice, a natural fact;
and the laws of the former are not those of the latter. I
What I will attempt to show in this paper is that Kirzner’s welcome your discovery that economic fact is the fact
account was essentially correct, but incomplete, that he un- of choice; but I am forced to mean by choice, volun-
derestimated the extent of Croce’s neglected contribution. tary choice. Otherwise we should end by talking not
not only in that there was a striking similarity between only of the choices of a man who is asleep (when he
Mises and Croce, but also that Croce developed many of the moves from side to side), but of those to animals, and
crucial theorems of Austrian economics, especially as per- why not? of plants and why not again? of minerals…
taining to methodology, welfare economics and price the- (Croce 1966, p. 181).
ory. In Croce’s works at least four crucial arguments could
be identified that came to be known to us, in some cases Mises formulates the same idea at the very beginning of
in very similar versions, via the works of Mises, Hayek, Human Action by suggesting that the “opposite of action
Robbins, Rothbard and others. In some cases, particularly is not irrational behavior but a reactive response to stimu-
when it comes to the utility theory and the doctrine of dem- li on the part of bodily organs and instincts which cannot
onstrated preferences, Croce went further than the stan- be controlled by volition of the person concerned” (Mises
dard theory and developed an original interpretation that is 1998, p. 20).
in tension with the conventional Misesian praxeology. At the same time however, this conscious human action
Croce’s arguments that will be explored are: as the subject matter of economics is value free: action is an-
• Economics is a science of conscious human action alyzed as action, not as being miraculously “coordinated”
• Subjective character of economic data and radically with any moral, ethical, or utilitarian consequences that 43
subjective theory of cost. it might have. Just as Mises and Robbins would later do,
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• Apriori character of all economic theorems (rejection Croce analyzes economic action as embedded in an abstract
of empiricism) ends-means structure, not as containing any particular
• Unification of the doctrine of demonstrated preference specification or normative evaluation of either human ends
with subjective utility. or means to achieve them. He criticizes Pareto for trying to
isolate economic choices as a distinct category of human ac-
I will explore Croce’s contribution to each of these areas. tion, which is strictly morally indifferent, i.e. neither mor-
al nor immoral. On the contrary, argues Croce, economic
choices are indifferent not in terms of being a separate cat-
I. ECONOMICS AS A SCIENCE OF egory, but in virtue of being philosophically emptied of any
CONSCIOUS HUMAN ACTION moral content: “since choices are necessarily either altruis-
tic or egoistic, either moral or immoral, you have no way
Both in the letters to Wilfredo Pareto and in his Philosophy of escaping from the difficulty except the one I suggest: to
of the Practical, Croce develops a detailed theory about regard economics as concerned with practical activity in so
what he calls the “economic principle” and what we may far as it is (abstractly) emptied of all content, moral or im-
call “the subject matter of economic theory”. This analysis moral” (Croce 1966, p. 172). In other words, the category of
seeks to separate economic principle from ethical, philo- economic action abstracts from any moral or motivation-
sophical, naturalistic and psychological principles. Croce al considerations and thereby sharply delineates economics
eventually ends up defining economics in the same abstract from other humanistic disciplines such as ethics, political
way as Mises: as a science of human action qua human ac- theory or even psychology.
tion. In the same neo-Kantian fashion as Ludwig von Mises, As an illustration of this abstract character of economic
Benedetto Croce insists that economics could analyze only action, as opposed to moral and immoral ones, Croce offers
conscious human choices, and not the reflective, uncon- in his second letter to Pareto a telling example:
scious reactions that belong to the animal realm. In a letter
to Wilfredo Pareto he says: I will give you another example: that of a knave who
thinks it ofelimo to himself to murder a man in order
to rob him of a sum of money. At the moment of as-

sassination, and although remaining a knave at heart, The simple and the original is genetically indefinable.
he yields to an emotion of fear or to a pathological Value is observed immediately in ourselves, in our
feeling of compassion, and does not kill the man… consciousness (Croce 1966, p. 179).
the knave will call himself an ass and an imbecile, and
will feel remorse for his contradictory and inconclu- It difficult to find a more convergent view of value to Mises’
sive conduct; but not indeed a moral remorse (of that own than this.
he is by hypothesis incapable), but precisely a remorse Furthermore, Mises (1998) makes the case for the doc-
that is merely economic (Croce 1966, p. 183). trine that could be safely described as epistemological prag-
matism, coupled with methodological dualism. This means
Therefore, Croce comes close to what Kirzner somewhat that he does not believe that the issue of the relationship
misleadingly calls the “Robbinsian economizer”, an actor between the body and the soul, between the physical and
involved in finding out how to achieve the given ends with the spiritual, could be resolved scientifically, and that any
the minimum of invested means, i.e. resources, irrespective kind of reductionist monism—be it a materialist or an ide-
of any moral or ethical considerations involved in the act of alist one—is necessary and proper in economic science.
choice. Nevertheless he accepts the premise that the science of hu-
Compare this with how Mises defines praxeology: man action must use different tools and methods, then the
“Praxeology is indifferent to the ultimate goals of action. Its physical sciences, has to accept methodological dualism.
findings are valid for all kinds of action of the ends aimed Actually, Mises rejects on the metaphysical level even
at. It is a science of means, not ends” (Mises 1998, p. 15). In pluralism, and argues for a pragmatical neglect of these
the most significant hard-core Misesian treatise on meth- metaphysical issues in economics:
44 odology, the first edition of Lionel Robbins’ book we find
the following formulation: “Economics is not concerned Monism teaches that there is but one ultimate sub-
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with any ends as such. It is concerned with ends in so far as stance, dualism that there are two; pluralism that
they affect the disposition of means” (Robbins 1932, p. 29). there are many. There is no point in quarrelling about
All this is directly Crocean theory, but neither of them ever these problems. Such metaphysical disputes are in-
mentions Croce in the context of their definitions of eco- terminable. The present state of our knowledge does
nomics as a science of human action which “economizes” not provide the means to solve them with an answer
scarce means to achieve ethically indeterminable ends. which every reasonable man must consider satisfacto-
Mises spends quite a bit of time defending both the value- ry (Mises 1998, p. 17).
free status of economics and also its independence from the
errors of psychologism and empiricism. This is another typ- However, this does not mean that economists can avoid
ical Crocean theme. The most basic tenet of Misesian prax- using use the theoretical vocabulary and postulates that
eology, the “fundamental action axiom”, is just a different stem from a specific metaphysical point of view: namely,
rendition of the Crocean idea of economics as a science of from “idealistic” philosophy. Mises only points out that this
abstract human action: “man acts and uses means in order acceptance of methodological dualism is a pragmatic, rath-
to achieve ends”—the famous Misesian formula he uses in er than epistemological choice, and that indeed the debate
order to deduce (with the help of an auxiliary assumption about the final metaphysical issues, does not belong to eco-
of the disutility of labour) the entire body of economic the- nomics.
ory. He describes the fact of human action as an “ultimate In his letter to Pareto, Croce develops exactly the same
given” of economics, as the last irreducible fact of econom- line of argument. He accuses Pareto of smuggling a meta-
ic theorizing (Mises 1998). However, he never gives proper physical assumption into the purely economic theorizing,
credit to Croce as the first clear expositor of this fundamen- which he considers unscientific and unjustifiable:
tal idea. Consider for example Croce’s most pregnant defi-
nition of economic value: …the disagreement between us consists in your wish
to introduce a metaphysical postulate into economics
there is nothing in the universe that is valuable, ex- science; whereas I wish here to rule out every meta-
cept the value of human activity. Of value as of activ- physical postulate and to confine myself entirely to
ity you cannot demand a so called genetic definition. the analysis of the given facts…Your implied meta-

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physical postulate, is, however, this: that the facts of highly critical of Pareto’s attempt at abstracting the narrow
man’s activity are of the same nature as physical facts; “economic” range of phenomena from a wider praxeologi-
that in the one case as in the other we can observe reg- cal whole into which they have to be logically embedded:
ularities and deduce consequences therefrom, without
ever penetrating into the inner nature of the facts; that Would it for instance be in conformity with the na-
these facts are all alike phenomena (meaning that they ture of the thing, to cut away, as you wish to do, only
would presuppose a noumena, which evades us, and that group of economic facts which relates to objects
of which they are manifestations) (Croce 1966, p. 178). capable of measurement? What intrinsic connection
is there between this merely accidental attribute, mea-
However, not only does Croce reject this interjecting of surability, of the object entering into an economic ac-
metaphysical monism into economics, he justifies the action, and the economic action itself? Does measur-
ceptance of methodological dualism by using essentially the ability lead to a modification in the economic fact by
same “Misesian” pragmatist arguments. He does not offer changing its nature, i.e. by giving rise to another fac-
any philosophical reasoning to support the contrary mo- tor? If so, you must prove it. I, for my part, cannot see
nist idea of the physical world being an “epiphenomenon” that an economic action changes its nature whether it
of the mental, but simply says that the ‘experience’ teaches relates to a sack of potatoes, or consists in an exchange
us about the irreducible difference “between external and of protestations of affection! (Croce 1966, p. 176).
internal, between physical and mental, between mechan-
ics and teleology, between passivity and activity” (ibid.). So, On the most obvious level, this is an anticipation of the
the unavoidable dualism is just a methodological pragmatic standard argument, developed by Hayek and Mises among
convention, not a conclusion based on any full-scale onto- others, against the ideas of measurement in economics. 45
logical theory of reality, or any such ‘metaphysical’ super- Hayek’s rejection of this idea in his Nobel Prize speech
COSMOS + TAXIS
structure. It is rather a convenient tool we use to make sense (1974) and in his Counter-Revolution of Science (1952), is
of the world, a language we inherited from everyday experi- particularly prominent and influential:
ence, and for which we do not have any substitute in prac-
tice. It is the way how our social world works. It is a “given The correlation between aggregate demand and total
fact” of our reality we cannot escape in the scientific analy- employment, for instance, may only be approximate,
sis of economics (Misesian “ultimate given”). but as it is the only one on which we have quantita-
tive data, it is accepted as the only causal connection
II THE SUBJECTIVE CHARACTER OF THE that counts. On this standard there may thus well ex-
ECONOMIC DATA ist better “scientific” evidence for a false theory, which
will be accepted because it is more “scientific”, than for
We now come to one of the critical points in Croce’s eco- a valid explanation, which is rejected because there is
nomic theory—his completely Misesian idea of econom- no sufficient quantitative evidence for it (Hayek 1974).
ic data as being subjective: “The data of economics are the
practical data of human activity in so far as they are con- The measurability is thus only one accidental feature of
sidered as such, independent of any moral or immoral de- economic data, which oftentimes might not be relevant at
termination” (Croce 1966, p. 173). This is a wholesale rejec- all for understanding the true causal relationship that ex-
tion of empiricism, not only in its cruder positivist forms, ist between the various economic facts. What really consti-
but equally of the more subtle attempts to deny the subjec- tutes the causal relationship in economics is the teleological
tive character of economic science by the dissident attacks connection between the different objects, material or not
on praxeology by some Austrians. One of the most signif- (Crocean “potatoes” or “protestations”), created by human
icant hallmarks of this praxeological approach is Croce’s mind and its purposeful action. Dixit Hayek:
critique of the very concept of measurability as applied to
economics, which is closely related to the attempts to iso- Take the concept of a “tool” or an “instrument”…It is
late something which would be treated as “economic phe- easily seen that these concepts cannot be interpreted
nomena” as opposed to the non-economic ones, that are al- to refer to ‘objective facts’, that is, to things irrespec-
legedly “purely subjective” and hence not measurable. He is tive of what people think about them. Careful logical

analysis of these concepts will show that they all ex- B, and that this value is always subjective, individual and
press relationship between several terms, of which one known only to an actor in the moment of choosing. It is im-
is the acting or thinking person, the second some de- possible to measure the cost by an outside observer, just as it
sired or imagined effect, and the third a thing in the is impossible to measure value or utility.
ordinary sense. If the reader will attempt the defini- Perhaps the clearest exposition of the Austrian theory
tion he will soon find that he cannot give one with- of cost is given in James Buchanan’s great book Cost and
out using some term such as ‘suitable for’, or ‘intended Choice in which he writes:
for’ or some other expression referring to the use for 1. Most importantly, cost must be borne exclusively by
which it is designed by somebody (Hayek 2010, pp. 89- the decision-maker; it is not possible for cost to be
90). shifted to or imposed on others.
2. Cost is subjective; it exists in the mind of the deci-
Hence, not only that the objects of economic theory are sion-maker and nowhere else.
not measurable, they are not objects in the first place, but 3. Cost is based on anticipations; it is necessarily a for-
the synthetic teleological creations of human mind out of ward-looking or ex ante concept.
material that can, but do not have to be, physical and mea- 4. Cost can never be realized because of the fact of
surable in nature. In this way, Croce explains the interplay choice itself: that which is given up cannot be en-
between the teleological and physical constituents of eco- joyed.
nomic data: 5. Cost cannot be measured by someone other than the
decision-maker because there is no way that subjec-
Certainly, physical objects form part of the data of tive experience can be directly observed.
46 economics; and these, just because they are physi- 6. Finally, cost can be dated at the moment of decision
cal, are measurable. But economics does not consid- or choice” (Buchanan 1969, p. 41).
COSMOS + TAXIS
er physical things and objects, but actions. The phys-

ical object is just a brute matter of an economic act; Croce offers a very close formulation of the radical sub-
in measuring it we remain in the physical world, we jectivity of cost in the Philosophy of Practical:
do not pass over to that of economics, or else, when
measured, the economic fact becomes volatile (Croce If A spent seven soldi to buy a loaf of bread yesterday,
1966, p. 165). and today he spend the same amount in making the
same purchase, the seven soldi of today are not for this
So, the measurable, physical aspects of an economic fact reason those of yesterday, nor is the bread the same as
are equally insufficient to establish economic causation as is that of yesterday, nor the want that A satisfies today
the raw sensory or introspective data underlying the non- the same as that of yesterday, nor is the effort that his
physical forms of economizing (such as Crocean “exchange action costs him identical with that of yesterday. If the
of protestations”). This “abstract” (in the Hegelian sense) individual B also spends seven soldi for a loaf of bread,
material has to be organized into a concrete means-ends the action of B is different from that of A, as that of
causal nexus by a human mind and its purposeful decision- the A of today was different from that of yesterday”
making, in order to qualify as “economic”. Therefore, in a (Croce 1967, pp. 365-66).
sense, only the irrelevant aspects of economic facts could be
quantified and measured. According to Croce, not only that the costs of two differ-
Closely related to this is the radically subjectivist theory ent actions are different, but also the costs of the same ac-
of cost. Since value is not objectifiable, neither is the cost; it tion at different times and in different circumstances are
is always embedded into an act of choosing. The Austrian different. Cost is very tightly bound with individual choice
theory contains maybe the clearest exposition of the sub- made in a unique decision-making environment.
jective theory of cost; it unifies subjectivism, methodolog-
ical individualism and praxeological insistence on action
instead on psychological conditions of action. Austrians ar-
gue that the only real costs are the opportunity costs of an
action, the value of utility foregone by doing A instead of

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III. APRIORI CHARACTER OF ECONOMIC truths, but rather that they contain the introspective facts
THEOREMS of our experience that would be very difficult to abandon.
Economic laws express a “rational necessity” of life, for ex-
This is maybe the area in which Croce’s development of ample that people would prefer more to less of a same eco-
praxeology went furthest and came closest to the formu- nomic good, ceteris paribus. Economic laws allow us to un-
lations of Mises. Taking the lead from Menger and Bohm derstand reality, and not only to analyze the mental content
Bawerk, Croce defines economics as “mathematical” and of our representations. In this regard they are similar to the
“pure” science. This does not mean that economics has to theorems of geometry; although abstract and general in na-
use mathematical formulae in its analysis but only that the ture, they nevertheless have a practical purpose:
method of reasoning has to be axiomatic-deductive, the
method by which complex theoretical statements are de- [w]ithout geometry we should not have been able to
rived by using deductive logic from unquestionable first build the house in which we dwell, nor to measure
principles. Squarely in the Mengerian tradition, Croce this star upon which we live, nor the others that re-
equally rejects empiricism and historicism as the appropri- volve around it or around which we revolve. Thus it
ate methods in economic analysis because of their accep- would be impossible to find one’s way in empirical
tance of the doctrine that economic laws are contingent reality without these economic formulae, and that
upon some particular circumstances of time and place, dif- would happen which happened when economic sci-
ferent historical conditions and so on. For Croce, economic ence was in its infancy, namely that by its means mea-
laws are just like the theorems of Euclidean geometry, apo- sures of government were adopted, which were ad-
dictically true, independent of all experience and all differ- mirably suited to produce in the highest degree those
ent circumstances: evils which it was thought could be avoided by its help 47
(Croce 1967, pp. 372-73).
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The propositions of the Science of Economics are rig-
orous and necessary. Granted that soils of different A good analogy and illustration for this argument could
degrees of fertility are cultivated, their possessors will be Quine’s reformulation of traditional epistemology de-
all obtain besides the absolute rent, a differential rent, veloped in his paper “Epistemology Naturalized” (Quine
with the exception of the possessor of the least fertile 1969). In this famous essay, Quine accepts the Kantian dis-
soil” (Ricardo’s law). “Bad money drives out good” tinction between the conceptual form and empirical con-
(Gresham’s law). Now, it is not conceivable in any case tent of our consciousness, but relativizes them: the dichot-
that soils of different fertility, all of them cultivated, omy between the conceptual scheme and sensory content
should not give a differential rent. It will be said that in Quine’s reformulation ceases to be a standard Kantian
the State can confiscate the differential rent, or that metaphysical dichotomy between apperception and percep-
the possessor, owing to his bad cultivation or to his tion and is taken to mean just biologically and historically
bad administration, may lose it; but the proposition conditioned dynamics of conceptual scheme and empirical
does not remain less sound on this account (Croce content.
1967, pp. 369-70). In other words, the Kantian forms remain, but under-
stood as biological and practical capabilities of human be-
It is important to note two things in this connection. ings rather than as transcendental characteristics of human
First, economic laws are necessarily true, but nevertheless mind. In a similar way, the Crocean and Misesian concept
they are not mere tautologies; they tell us something about of apriori knowledge refers to the same Kantian synthetic
the real, outside world. The concept of a differential rent or apriori forms, just liberated from their metaphysical con-
the concept of Gresham’s law, or that of marginal utility, are tent, and reduced to practical “necessity of life” as Croce has
not mere logical statements, mere analytical reformulations nicely put it, or to the hallmarks of biological and historical
of some logical truths. They convey new information about existence of man.
the real world in a way the tautological statements do not. This should not be taken as a claim that the validity of
The second important implication is that the reason why economic laws depends upon their practical application.
economic laws are apriori is not that they are metaphysical On the contrary, the laws are apriori, and the beneficial ef-
fects of their application represent just an illustration, rath-

er than a proof, or demonstration of their truth. The dif- Hence, Croce’s understanding of the apriori character of
ference between Croce and Mises on the one hand and say economic theory is letter philosophically indistinguishable
Friedman on the other, is that empirical content in Mises from Mises’. Economics starts from the axioms, which are
and Croce comes into the theory just on the level of defin- unquestionable, not as logical tautologies, but rather as the
ing the elementary terms, not on the level of testing their apodictic and pragmatic statements pertaining to the real
complex logical consequences. Once this axiomatic con- world. The entire edifice of economic theory is built via the
tent is adopted by a pragmatic convention, the entire work process of deduction of theorems from the set of those apri-
of the theory is solely a deductive one. The only way of em- ori ‘geometrical’ axioms. To test economic theories is im-
pirically challenging the praxeological derivations would possible since they are “necessary” (Croce) and apply irre-
be to insist on different definitions of elementary terms; spective of any experience.
for example, by saying that man does not act, and hence all Unlike some of the other Croce’s contributions detailed
further consequences of the theory are false. On the con- in the next section, this one is important not as original and
trary, in Friedman’s view, empirical considerations come distinct from the mainstream of the Austrian school, but
into play both in this first stage and in the stage of creating as a brilliant anticipation of the common fund of ideas that
the final “product”—the complex theorems or “hypotheses” had been missed and underappreciated by the later econo-
(Friedman 1953). No theory is safe from empirical falsifica- mists of the same orientation, on account of Croce’s status
tion, both on the level of axioms and theorems, which theo- as a philosopher, and not as a professional economist.
rems are just the temporary and tentative hypotheses to be
further “tested”.
Economic laws are hence apriori for Croce, and the ben- IV. DEMONSTRATED PREFERENCE AND
48 eficial effects of their application represent just an illustra- SUBJECTIVE UTILITY
tion, rather than a proof, or demonstration of their truth.
COSMOS + TAXIS
The apriori theoretical knowledge of economic laws allows Croce always argued that the application of deductive rea-
us to avoid harmful public policies by abstaining from ac- soning in economics was a form of “applied mathematics”.
tions that on the purely aprioristic grounds are clearly ir- However, this did not mean the application of mathemati-
rational: cal methods in detail, but just the logical, or apriori mode
of reasoning. His theory is at odds with the application of
Such for instance would be the proposal for fresh ex- mathematics as it is being done in the contemporary treat-
penditure on public works that are useless or of little ments of general equilibrium, as well as in the neoclassical
use during a period of economic depression in a coun- utility theory. The basic assumption that underlies those
try, and instead of relieving, increase the general de- contemporary applications of mathematics is that in human
pression; or the increase of protective tariffs, when action there is constancy, consistency as well as transitiv-
industrial progress is slow, which ought to encour- ity of preferences. Only if those assumptions are satisfied,
age industry, but on the contrary produce an indus- the use of differential equations in the general equilibrium
try that is unstable and artificial, in place of one that models, or of the infinitesimal calculus in utility theory,
is spontaneous and durable (Croce 1967, pp. 373-74). make any sense. It is not necessary to emphasize that re-
jection of these assumption is the cornerstone of Misesian
So it is impossible to empirically test whether the theory. As we shall see shortly, Croce rejects all of these as-
Keynesian fiscal ‘stimulus’ as a means of countercyclical sumptions as well.
policy is justified or not; for Croce, this concept is simply The whole basis of functional analysis in neoclassical eco-
nonsense, because it goes against the deductive logic of economics is the assumption of there being some constant re-
nomics based on empirically and pragmatically self-evident lationships between the measurable magnitudes and on the
axioms, more geometrico demonstrata. preference rankings being transitive. Mises attacked these
Note that the strong analogy between geometry and assumptions in his numerous works. For example in Mises
praxeology that Croce exploits is the same analogy Mises 2000, he argues that impossibility to apply the equations of
is using time and again to demonstrate that scientific no- mechanics to economics stems from the fact that human ac-
tions could be aprioristic, and yet to convey the real positive tion does not possess the behavioral constants analogous to
knowledge of the real world capable of practical application. the physical constants one uses in the equations of physics.

COSMOS + TAXIS
For example, the gravitational constant. In praxeology, as rationale to welfare economics (Herbener 1997). However,
Mises says, “everything is a variable”, so mathematical anal- Robbins (1932) is widely acclaimed as having refuted car-
ysis cannot render any new knowledge which is not already dinal utility. Mises, Hayek and other Austrians in the
contained in the verbal formulations of it (Mises 2000, p. 1930s, 1940s were assuming the Robbinsian refutation to
99). Mathematics can model past data if they are given, and be the last word on cardinal utility. And yet, Croce predat-
express the state of static past equilibrium through the sys- ed Robbins by more than 25 years. Robbins essentially de-
tems of differential equations: the problem in economics is rives the untenability of cardinal comparisons of utility by
that what has to be understood is how one state of equilib- widening the scope of economic principles to include psy-
rium gives way to another through the actions of real indi- chic income alongside the monetary and tangible income.
viduals. This process always creates the new data that do not And in this regard, the subjective utilities of two different
belong to the modeled past state of equilibrium and hence persons could not be compared because nobody could pen-
render the entire mathematical treatment of equilibrium etrate the consciousness of another person and then com-
useless. Every moment is a new moment, with new data pare the level and intensity of some feeling with his own.
bringing about the new momentary equilibrium (“the plain Hence, any public policy based on such interpersonal com-
state of rest” in Misesian terminology). parisons embedded into marginal analysis is unjustified.
Croce developed this same idea in 1900! In developing However, we can say that Croce’s analysis is more consis-
his counter-argument to Pareto’s idea of the scales of val- tent in terms of rooting every concept in the subjective util-
ue, Croce asserts that the reason why the concept of a value ity and individual choice, and tying tightly value and utility
scale is nonsensical has to do with the fact that economic in the act of choice in time, rather than in some theoreti-
action is always happening in a given moment. All valua- cal generalizations about the way preferences are formed.
tions are momentary: when a person performs action A, When a person decides to take an action a, all other pos- 49
instead of B, C or D, this does not mean that she prefers sible choices are simply non-actions. In an act of exchange
COSMOS + TAXIS
A to B, and B to C, and C to D, which would require her for example, what is being exchanged is not the greater for
to choose B in the moment after A was done. No, argues smaller value (as the conventional Austrian theory would
Croce, the fact that the person had chosen A over all oth- have it) but a value for a non-value:
er alternatives means only that she preferred A to all other
choices, which are actually non-choices in this context. In A is worth B, the value of a is b, does not mean (the
the next moment, she could easily decide to choose C over economists of the new school knew it well) that a=b;
B, or B over D; the fact of a person choosing A does not im- nor even as is said a>b; but that a has values for us,
ply any further choice among other alternative in some later and b has not. And value—as you know—exists only
moment: at the moment of exchange, i.e. the choice (Croce
1966, p. 174).
The absurdity involved in the notion of greater or
smaller values is, in short, the assumption that an in- So, he goes a step further in elaborating the subjective
dividual may be at the same moment under different character of marginal analysis than either of the great lights
conditions. The homo economicus is not at the same of Austrian economics. Croce rejects the idea of ordinal
moment in a, b, c, d, e, f,….but when he is in b, he is utility as intra-personal comparability of different actions
no longer in a; when he is in a she is no longer in b. he or choices in time, as it has been developed by the Austrian
has before him only one action, approved by him; the school; the notion that in every moment we can have a clear
action rules out all the others which are infinite, and picture that we prefer A to B, and B to C, and the only re-
which for him are only actions not preferred (non-val- striction is that we cannot extrapolate from this to the next
ues) (Croce 1966, p. 165). moment. Croce, however, does not accept even this: he con-
sistently insists that if the value is demonstrated only in ac-
The implications of this are enormous. One of the most tion, than everything that we can say about relative valua-
obvious would be that cardinal utility is untenable. The tions of different things or different choices is that an action
idea of interpersonal comparisons of utility is closely asso- A at time t was preferred to all other actions. Not that at this
ciated with the Lausanne school to which Pareto belonged given moment we preferred this action to something else,
and it was throughout the 1920s and early 1930s used as a even in an unquantifiable fashion. Not only that we cannot

quantify our preferences for different actions and choices at mize utility, and hence would seem to contradict the basic
a given moment, we do not have, as far as economic science assumptions of economics.
is concerned, any other preferences apart from that which is The most important corollary of this is that there is no a
demonstrated in action! homogeneous class of “goods” (bottles of water, mouthfuls
Croce is actually applying the Rothbardian doctrine of of bread and so on) that have a diminishing marginal util-
the demonstrated preference to the concept of ordinal utili- ity. It is not that the satisfaction from consuming an addi-
ty. If economics deals only with human action and the pref- tional unit of a homogeneous good does not decrease over
erences represent the economic phenomena only as long time, but the problem is that it is impossible to demonstrate
as they are demonstrated through action, then the ordinal consumption of a homogeneous good in action! A mouth-
ranking of different choices or goods in our mind is a mere ful of bread, a can of Pepsi are never the identical or ‘equally
psychological chimera! I can believe at a given moment that serviceable’ units of consumption the preference for which
I prefer Coca-Cola to Pepsi, and Pepsi to Canada Dry. But, is demonstrated through action; they are just one element
this is a mere introspective and psychological fact, not in in an entire complex of different components of choice con-
the least more relevant for economic analysis then the nu- sumed in the same moment: the atmosphere, the feeling of
merical values I might have fancied myself to attach to the moment, the delicate balance of different tastes and so
those choices. on. This finely grained architecture of choice is full of trade-
Actually, from the point of view of the demonstration of offs that prevent any confident assignment of value to any
my preferences, the ordinal rankings of Coke, Pepsi and one individual component of choice in isolation from the
Canada Dry is equally irrelevant, psychological and non- others. The only thing we can say for certain is that in so far
economic as my claim that I like Coke 2 times as much as as a man is economizing at all, the sum of all those subjec-
50 I like Pepsi. The only fact that I am demonstrating through tive factors has to be maximized at any given point of time.
an act of buying a can of Coke is that I prefer Coke and do But we cannot model in economics the particular mathe-
COSMOS + TAXIS
not prefer either Pepsi or Canada Dry, and nothing more. matical behavior of any individual component of this com-
That is what Croce has in mind when he says that the value posite called “overall utility gained by consuming an ad-
scales (be they ordinal or cardinal) are absurd. ditional unit of bread”: the reason being that an additional
How is this reconciled with the theory of diminishing unit of bread is never consumed in isolation from dozens
marginal utility which seems to require at least some form of other factors that influence its increasing or decreasing
of intra-personal comparison of utility? Croce provides a utility. The second and third mouthfuls of bread are not the
brilliant answer, quite consistent with his extreme action- same goods with diminishing marginal utility, but differ-
oriented subjectivism, in the Philosophy of Practical: ent goods with incommensurable utilities! In economics
we cannot speculate about the psychological dispositions of
If the individual A eats the bread that he has bought people vis a vis different classes or different quantities of ar-
for seven soldi, when swallowing the second or the bitrarily defined “goods” (i.e. arbitrarily abstracted features
tenth or the last mouthful, he has a pleasure, not in- of the decision-making environment). We can only observe
ferior to that which he had when swallowing the first, their demonstrated preference in subsequent moments of
but different: the last was not less necessary for him, time. We can see that a person demonstrated her preference
in its way, than the first; otherwise he would have refor a can of Coke over a can of Pepsi by choosing one over
mained unsatisfied in his normal want, in his habit, the other. But, we cannot say that an additional can of Coke
or in his caprice. The economic man seeks the maxi- would have for that person a lower marginal utility, because
mum of satisfaction with the least effort (Croce 1967, this is impossible to demonstrate in action in time.
p. 367). Hence, Marginal analysis is a necessary abstraction in
economics, but Croce’s analysis demonstrates how narrow
Croce here poses a very difficult problem that later lit- and almost non-existent its value is for predictive purposes;
erature both in Austrian and non-Austrian versions did how essentially complex and irreducible human action is.
not address satisfactorily: how to reconcile the concept of Croce does this in a much more consistent fashion than any
marginal utility with the concept of economizing choices? other Austrian economist. We can say that Croce’s theory
Marginal utility as a demonstrated fact of human action of utility and choice poses a difficult question for (any type
would mean un-economic behavior, the failure to maxi- of) economics: if an act of choice is the only material of eco-

COSMOS + TAXIS
nomic theory and if marginal valuations could not be dem- anti-trust policy. If not, it can only be because the
onstrated in an act of choice, is there any practical value of non-Chiquita bananas are substitutes for Chiquita’s
marginal analysis? What is the difference between marginal bananas. But if this is so, then how can mere owner-
valuation and cardinal utility in this regard? ship of all the oranges confer a monopoly? For, are not
A good practical application of this type of reasoning is grapefruits, watermelons, tangerines and other fruits
Walter Block’s critique of the prevailing (Mises-Kirzner) substitutes for oranges? (Block 1977, p. 275).
theory of monopoly in Austrian economics. Block argues
against the Kirzner’s view that although the conditions of a So monopolization of the supply of oranges does not
true market monopoly tend to be very rare on the free mar- mean monopolization of market in any relevant economic
ket they could occur if a single supplier monopolizes the en- sense, since the unit of satisfaction or utility is not the unit
tire supply of a good. Kirzner argues that if a single produc- of homogenous good called a can of orange juice, but rather
er monopolizes all the oranges in the world (very unlikely a can of some drink capable of satisfying in a similar man-
but possible event) then that monopolist of oranges would ner the needs the orange juice is satisfying.
become a monopoly supplier of the orange juice. This situa- However, the Crocean argument here would have been:
tion would require government action. why stop at grapefruits, watermelons or tangerines? What
Block’s objection is an interesting one: he says basically about the other non-tangible components of every single
that the oranges are not some isolated homogenous goods choice? How about the satisfaction of consuming oranges,
that satisfy some homogenous market need called “demand instead of watermelons? Or of consuming any kind of juice
for orange juice”. No, orange juice is just one of the possi- as long as it is provided by an unhampered market, irre-
ble products that can satisfy demand for a certain type of spective of how this affects the narrower physiological reac-
drinks; for example for the soft drinks. If a monopoly sup- tion of our body to the different kinds of juice? Or drinking 51
plier increases price of the orange juice, the orange juice juice provided by domestic manufacturers? Or foreign ones,
COSMOS + TAXIS
consumers would turn to the substitutes, such as the ap- if a consumer is a free-trade zealot who enjoys reward-
ple juice, or peach juice, or even the carbonated drinks or ing foreign suppliers and fostering free-trade, irrespective
beer. The main point is that the demand for orange juice is of price? Are we supposed to attach a higher utility to the
not infinitely inelastic, or to put it differently, the relevant bodily reactions over the emotional or intellectual satisfac-
market in which the orange juice producers are selling is tions accompanying the enjoyment of differently produced
not the market for orange juice, but rather the market for and marketed kinds of juice? If a monopolist of orange
soft drinks, or in some cases maybe even the market for all juice “withholds” the supply or charge higher price, and the
drinks. Dixit Block: quantity sold drops, the only praxeological conclusion we
are allowed to draw from this is that one component of the
Professor Kirzner, in attempting to show that mar- typical pattern of satisfying the need for drinking increased
ket monopoly implies exclusive control over a re- in price and decreased in quantity sold. Nothing more.
source, states, “Without access to oranges, entry into People changed their preferences for buying a given quan-
the production of orange juice is blocked”. But, in the tity of orange juice. That does not imply anything about the
real world, consumers distinguish between biologi- juice’s contribution to their subjective utility today, in two,
cally and chemically identical things: Chiquita banan- four days or in a month.
as and Perdue chickens being the most famous cases
in point. Now, the Chiquita banana company by no CONCLUSION
means controls all bananas, but it is the complete and
full monopolist of the resource known as “Chiquita Benedetto Croce developed many essential features of the
bananas”. Is the company a monopolist in the Mises- high theory of Austrian economics, especially theory of val-
Kirzner view (assuming the demand elasticities neces- ue, cost and method of economic science. He anticipated
sary for monopoly price)? If yes, then there is an aw- and in some respects maybe offered a superior formulation
ful lot of monopoly running loose on the free market. than Mises, Robbins, Rothbard, Kirzner and other authors
Consumers’ sovereign desires are being balked at al- who were written, to various degrees, in the Mengerian
most every turn, and perhaps we will soon be faced causal-realistic tradition of economics. This is particular-
with the specter of an Austrian supported government ly the case with Croce’s theory of utility and demonstrat-

ed preference, with their radical and perhaps even nihilis- NOTES
tically subjectivist undertones, whereas in the domains of
apriori character of economics, the theory of cost and prax- 1 See for example Croce 1917 and 1922.
eology his contribution was primarily in anticipating the 2 Croce’s principal thoughts in economic theory are
works of classical “Austrians” of the 20th century. In both contained in two letters to Wilfredo Pareto (Croce
cases Croce’s contribution was ignored for two separate rea- 1966; 1967).
sons: first, because of highly unsystematic anf fragmentary 3 For a defense of Robbinsian method against the
character of his economic writings, consisting mostly in a Kirzner’s critique see Salerno 2009.
couple of letters to Pareto and in some offhand comments 4 This pragmatist stance is shared by Mises’ pupil
in Philosophy of the Practical, and second in the profession- Rothbard, especially 1976.
al prejudice of academic economists against a philosopher 5 For an excellent defense of the hard-core Misesian
who wants to say anything of value in economics. However, praxeology and criticism of Hayek, Shackle and
the significance, astuteness and even originality of Croce’s Lachmann’s “nihilist” attacks on it, see Selgin 1987.
economic writing, forces a historian of ideas to rectify 6 For a classic philosophical exposition of this idea
this injustice and recognize his contribution to economic of irreducibility of an individual experience of
theory. consciousness see Nagel 1974.
7 The difference between ice in the winter and ice in the
summer invoked by Rothbard 2009, 15f-16f.
REFERENCES
52
Block, Walter. 1977. Austrian Theory of Monopoly: A Critique.
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Journal of Libertarian Studies, Vol. 1, No. 4: 271-279.

Buchanan, James. 1969. Cost and Choice. Chicago: Markham.
Croce, Benedetto. 1917. Logic as the science of the pure concept.
Trans. Douglas Ainslie. London: Macmillan.
. 1922. Aesthetic as science of expression and general linguistic.
New York: Noonday Press.
. 1966. Historical materialism and the economics of Karl Marx.
Trans. C. M. Meredith and with an introduction by
A. D. Lindsay. New York: Russell & Russell.
. 1967. Philosophy of the practical: economic and ethic. Trans.
Douglas Ainslie. New York: Biblo and Tannen.
Friedman, Milton. 1953/1966. Essays in Positive Economics. Chicago:
University of Chicago Press.
Hayek, Friedrich August. 1974. The Pretence of Knowledge. Nobel
Prize in Economics. Nobel Prize Committee.
. 1952/2010. Studies on the Abuse and Decline of Reason. Ed.
Bruce Caldwell. Chicago: University of Chicago Press,
Herbener, Jeffrey. 1997. The Pareto Rule and Welfare Economics.
The Review of Austrian Economics, 10(1): 79-106.
Kirzner, Israel. 1976. Economic Point of View. 2nd ed. Kansas City:
Sheed and Ward, Inc.
Mises, Ludwig von. 1998. Human Action: A Treatise on Economics.
Scholars edition. Auburn: Ludwig von Mises Institute.
. 2000. The Equations of Mathematical Economics. Quarterly
Journal of Austrian Economics, vol. 3, no. 1: 27–32.
. 2007. Theory and History. Auburn: Ludwig von Mises
Institute.
Nagel, Thomas. 1974. What is it Like to be a Bat? The Philosophical
Review Vol. 83, No. 4: 435-450.
Quine, Willard von Orman. 1969. Epistemology Naturalized.
Ontological Relativity and Other Essays. New York: Columbia
University Press. pp. 69–90.

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Robbins, Lionel. 1932. An Essay on the Nature and Method of

Economic Science. London: MacmiIlan.
Rothbard, Murray. 1956. Toward a Reconstruction of Utility and
Welfare Economics. In: On Freedom and Free Enterprise: Essays
in Honor of Ludwig von Mises. Mary Sennholz, ed. Princeton:
D. Van Nostrand.
. 1976. Praxeology as the Method of Austrian Economics. In:
Dolan Edwin ed. The Foundations of Modern Austrian Economics
(Studies in Economic Theory). New York: New York University
Press.
. 2009. Man, Economy and State. The second scholars’ edition.
Auburn: Ludwig von Mises Institute.
Salerno, Jospeh. 2009. Lionel Robbins: Neoclassical Maximizer or
Proto-Praxeologists. The Quarterly Journal of Austrian Economics,
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the Controversy in Austrian Economics. The Review of Austrian
Economics (2): 19-58.
53
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Jankovic Block Ostrom

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Tragedy of the Partnership: A Critique of

The academic reception of Elinor Ostrom’s work in the social sciences

and tacit, spontaneous-order knowledge for social cooperation and

government control. Rather, she discussed some interesting variations

II. The Model and the Problems with It

dividing up a territory among the two or more herders. And then

Those recommending the imposition of privatization on the herders

contractual variations in the case of a multi-person ownership over

the resource in question is “open to all,” as Hardin clearly says, so no

Written legal documents dating back to 1224 provide information regard-

Ostrom is here simply employing a definitional8 sleight of hand:

alpine territory belongs either to the cantons or to private owners or

1. Each September, a list of eligible fishers is prepared, consisting

Ostrom (1990: 19) further explains how the fishermen in question

What is [needed is] . . . an adequately specified theory of collective action

What is really important here is that Ostrom properly characterizes the

arose when two or more individuals purchased or acquired through

III. The Sources of Error

Both centralization advocates and privatization advocates accept a central

Obviously, Ostrom is a proponent of the standard political science

lawbreakers. If any of these elements are missing, there could not be

Private-property rights depend upon the existence and enforcement of a

The best and perhaps quickest way to demonstrate the absurdity of

the ancient Roman common law. But it was interpreted in accordance

If we judge the Roman republican institutions and practices by the

by an international community of merchants and used to govern their

Merchants were obliged to observe their commitments. Good faith was

However, not only did the private, customary codes of merchants

could have jeopardized the business by prolonging the adjudications.

The Law Merchant was a completely private system of law, devel-

protection and creating “public goods,” such as physical protection or

1. Clearly defined boundaries, 2. Congruence between Appropriation

This again shows that Ostrom’s understanding of the distinction

better, could be applied to private property rights. Take, for example,

IV. Ostrom’s Misguided Hayekianism

One of the curious elements in Ostrom’s theory of commons

Hayek uses the concept of decentralized knowledge to develop a

important role of tacit knowledge of local circumstances of time and

Ostrom is a brilliant scholar. Her research is meticulous. She intimately

divergences: Block and Garschina (1996); Ebeling (1992); Herbener (1991);

Anderson, Terry, and P. J. Hill. (1979). “An American Experiment in Anar-

Rawls, John. (1971). A Theory of Justice. Cambridge: Harvard University Press.

———. (2004a). “Public Goods and Private Solutions in Maritime History.”

Heterogeneous Capital and the Coasean Firm – A Critique of Some Recent

Article · November 2014

The user has requested enhancement of the downloaded file.

Capital theory, firm, Coase, Austrian School.

A bilingual interdisciplinary journal 29

30 New Perspectives on Political Economy

2. Coase’s theory of the firm and Misesian entrepreneurship

A bilingual interdisciplinary journal 31

32 New Perspectives on Political Economy

A bilingual interdisciplinary journal 33

As D. H. Robertson points out, we find islands of conscious power in this ocean of

...islands of non-calculable chaos swell to the proportions of masses and conti-

34 New Perspectives on Political Economy

A bilingual interdisciplinary journal 35

36 New Perspectives on Political Economy

4. Klein and Foss reinterpretation

A bilingual interdisciplinary journal 37

38 New Perspectives on Political Economy

A bilingual interdisciplinary journal 39

7 For a critique of this assumption see Demsetz 1988.

40 New Perspectives on Political Economy