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Critique of Austrian Economics

Part I:  The Legacy of Friedrich Hayek

Section I:  The Aggregate Production Structure

Skousen reprints Rothbard’s “Illustration of the Aggregate Production Structure” with a slight revision, the removal of some extraneous lines (1990, p. 187).  See Figure 1.  His revision is a good one; it makes the graph look more like the histogram that it is.  Skousen then illustrates his own “Idealized Aggregate Production Structure” (1990, p. 195).  See Figure 2.

Figure 2 is confusing in that it appears that the vertical axis measures time and the horizontal axis measures consumption.  Actually, consumption is the intersection of the graph with the horizontal axis.  So what does the horizontal axis measure?  This is not made clear until we read that “Time is measured on the vertical line, while both price and quantity combined (i.e., total [yearly] revenue) for each stage is measured along the horizontal line” (1990, p. 207).  Indeed, thereafter the APS graphs (p. 206 et passim) have the vertical and horizontal axes labeled “time” and “revenue,” respectively.

Skousen defines A and c explicitly (1990, p. 196).  The area, A, represents the gross output of an economy during one year.  The rate of interest, r, is assumed to be constant throughout all stages.

A = $$\frac{i(e^{tr}-l)}{r}$$    with r $$\neq$$ 0        Eq. 1  (Skousen 1990, p. 196)

Also, c, the total consumption value in any one year, is defined as

c = i.$$e^{tr}$$       Eq. 2  (Skousen 1990, p. 196)

If one were concerned that Skousen’s Structure of Production was going to turn into a math book, there was no need.  These equations never appear again.  For the remainder of his book, Skousen draws the APS as a slightly concave line which abruptly intersects the time axis (1990, p. 206 et passim), demonstrating that he never really believed it was exponential and/or he does not know what exponential functions look like.

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