Murray Rothbard rejected, in the strongest terms, this Marshallian attempt at a synthesis of marginalist innovations with the legacy of Ricardo. And with it, he rejected Marshall’s attempted synthesis of labor and waiting as elements of “real cost.” To understand why, we must start with Rothbard’s distinction between the judging of actions ex ante and ex post. In judging ex ante, an actor determines which future course of action is most likely to maximize his utility. Judgment ex post, in contrast, is an assessment of the results of past action. Rothbard denied that “sunken costs” could confer value. “….cost incurred in the past cannot confer any value… now.”  “It is evident… that once the product has been made, ‘cost’ has no influence on the price of the product. Past costs, being ephemeral, are irrelevant to present determination of prices. …” 
Against the doctrine of classical political economy that “costs determine price,” which was “supposed to be the law of price determination ‘in the long run,'” he argued that “the truth is precisely the reverse”:
The price of the final product is determined by the valuations and demands of the consumers, and this price determines what the cost will be. Factor payments are the result of sales to consumers and do not determine the latter in advance. Costs of production, then, are at the mercy of final price, and not the other way around…. 
A revolutionary doctrine, indeed! Only, on closer inspection, it does not seem so revolutionary after all. And the Marshall and Ricardo to whom Rothbard opposed himself so dramatically, turn out to be gross caricatures. Their statement of the cost principle was nothing so crudely metaphysical as “the price of the final product is determined by ‘costs of production….'”  (Rothbard was, if anything, more charitable than Böhm-Bawerk, who felt compelled to deny that there was power “in any element of production to infuse value immediately or necessarily into its product.” )
Admittedly, too, Rothbard made a half-hearted attempt at fairness, in giving a slightly less cartoonish description of the Marshallian “scissors”:
Marshall tried to rehabilitate the cost-of-production theory of the classicists by conceding that, in the “short-run,” in the immediate market place, consumers’ demand rules price. But in the long run, among the important reproducible goods, cost of production is determining. According to Marshall, both utility and money costs determine price, like blades of a scissors, but one blade is more important in the short run, and another in the long run….
But he immediately proceeded to tear Marshall’s doctrine apart–or rather a caricature of it. In this straw-man version of Marshall, a modern counterpart of the scholastic realists of the Middle Ages, the “long run” was a phenomenon with concrete existence.
Marshall’s analysis suffers from a grave methodological defect–indeed, from an almost hopeless methodological confusion as regards the “short run” and the “long run.” He considers the “long run” as actually existing, as being the permanent, persistent, observable element beneath the fitful, basically unimportant flux of market value….
Marshall’s conception of the long run is completely fallacious, and this eliminates the whole groundwork of his theoretical structure. The long run, by its very nature, never does and never can exist….
To analyze the determining forces in a world of change, [the economist] must construct hypothetically a world of non-change [i.e., the Evenly Rotating Economy]. This is far different from… saying that the long run exists or that it is somehow more permanently or more persistently existent than the actual market data…. The fact that costs equal prices in the “long run” does not mean that costs will actually equal prices, but that the tendency exists, a tendency that is continually being disrupted in reality by the very fitful changes in market data that Marshall points out. 
(We have already seen, by the way, that Marshall’s long-run is not equivalent to the Austrians’ hypothetical world of non-change, or ERE, but rather to the Austrian “final equilibrium” toward which the economy tends, but never approaches).
Compare Rothbard’s version of Marshall to what Marshall himself said, as we have already quoted him above:
But in real life such oscillations are seldom as rhythmical as those of a stone hanging freely from a string; the comparison would be more exact if the string were supposed to hang in the troubled waters of a mill-race, whose stream was at one time allowed to flow freely, and at another partially cut off…. For indeed the demand and supply schedules do not in practice remain unchanged for a long time together, but are constantly being changed, and every change in them alters the equilibrium amount and the equilibrium price, and thus gives new positions to the centres about which the amount and the price tend to oscillate. 
There is a constant tendency towards a position of normal equilibrium, in which the supply of each of these agents [i.e., factors of production] will stand in such a relation to the demand for its services, as to give to those who have provided the supply a sufficient reward for their efforts and sacrifices. If the economic conditions of the country remained stationary sufficiently long, this tendency would realize itself in such an adjustment of supply to demand, that both machines and human beings would earn generally an amount that corresponded fairly with their cost of rearing and training…. As it is, the economic conditions of the country are constantly changing, and the point of adjustment of normal demand and supply in relation to labour is constantly being shifted. 
More important than the deviation of most prices from their normal value, at any given time, is the fact that they will tend toward this value over time if not impeded by monopolistic privilege. As Schumpeter wrote, although there may always be a positive average rate of profit, “[i]t is sufficient that… the profit of every individual plant is incessantly threatened by actual or potential competition from new commodities or methods of production which sooner or later will turn it into a loss.” The price trajectory of any particular capital or consumer good, under the influence of competition, will be toward cost: “for no individual assemblage of capital goods remains a source of surplus gains forever…”  Or in the words of Tucker, “competition [is] the great leveler of prices to the labor cost of production.” 
Setting aside Rothbard’s caricature of Marshall’s views (i.e., his supposed view of the long-run as actually existing in some real sense, as a static model like the Evenly Rotating Economy), we find that Marshall actually said something quite like what Rothbard said: the price of reproducible goods tends toward the cost of production. Equilibrium price and the “long run,” like the Austrian “final equilibrium,” are not viewed in conceptual realist terms as actually existing things. Rather, they are theoretical constructs for making real world phenomena more comprehensible. The Austrian pose of radical skepticism, when it is ideologically convenient, effectively deprives economists of the ability to make useful generalizations about observed regularities in the phenomena of the real world.
The problem with Rothbard’s critique of Marshall is that it could be applied with almost as much justice to Rothbard himself. For example, Rothbard admitted that cost of production could have an indirect effect on price, through its effect on supply. In his discussion of the distinction between ex ante and ex post judgments, from which we quoted above, he also proclaimed it “clear that [the actor’s] ex post judgments are mainly useful to him in the weighing of his ex ante considerations for future action.  And directly after his statement quoted above that “‘cost’ has no influence on the price of the product,” he went on at greater length:
That costs do have an influence in production is not denied by anyone. However, the influence is not directly on the price, but on the amount that will be produced or, more specifically, on the degree to which factors will be used…. The height of costs on individual value scales, then, is one of the determinants of the quantity, the stock, that will be produced. This stock, of course, later plays a role in the determination of market price. This, however, is a far cry from stating that cost either determines, or is co-ordinate with utility in determining, price. 
But this is almost exactly how Marshall himself explained the action of the cost principle, at length, in his discussion of Jevons’ critique of Ricardo, in Appendix I of Principles of Economics. Indeed, one can find many passages in the Principles of Economics in which Marshall describes the action of cost on price through supply, in language almost identical to that of Rothbard above. Marshall did not claim that the price of a specific present good was mystically “determined” by its past cost of production. He argued, rather, that prices over time tended toward the cost of production through the decisions of producers as to whether market prices justified future production.
And the Austrians attached some very compromising qualifications to their bald statements that utility determined value, and that final price determined the cost of production. Böhm-Bawerk, in Positive Theory, wrote that value was determined by “the importance of that concrete want… which is least urgent among the wants that are met from the available stocks of similar goods. [emphasis added]”  Rothbard wrote that “[t]he price of a good is determined by its total stock in existence and the demand schedule for it on the market. [emphasis added]”  Likewise: “In the real world of immediate market prices, …it is obvious to all that price is solely determined by valuations of stock — by ‘utilities’ — and not at all by money cost…. [M]ost economists recognize that in the real world (the so-called ‘short-run’) costs cannot determine price…. [emphasis added]”  This sounds awfully similar, in practice, to Marshall’s understanding of the predominance of the “utility” blade of the scissors in the “short run.” The difference, as we saw above, was that Rothbard denounced the very idea of the “long run” as utterly meaningless.
Rothbard’s qualifications of the utility principle suggest a weakness of the subjective theory of value which we have recurrently pointed to in the sections above: it can be taken literally only to the extent that we ignore the dynamic aspect of supply, and treat the balance between demand and existing stocks of supplies at any point as given, without regard to the time factor.
This is true both of the Austrians’ utility theory of value of consumer goods, which assumes fixed stocks at the point of exchange, and of their imputation theory of factor prices, which likewise assumes a fixed stock of higher-order goods. As Dobb criticized the latter,
If the situation is handled in terms of concrete capital-goods (dispensing with the genus of “capital” as a supposedly scarce factor), then if these goods are reproducible there should be no reason for any positive rate of profit at all in strictly static conditions. If all inputs other than labour are produced inputs, whence the specific “scarcity” from which profit is supposed to arise? If assumptions of full static equilibrium are consistently adhered to, then production in the capital-goods sector of the economy will tend to be enlarged until the output of goods is eventually adapted to the need for them…. With the supply of them fully adapted to the demand for them for purposes of current replacement, there will no longer be any ground for their prices to be above the (prime) cost of their own current replacement (or depreciation). 
Dobb also wrote of the Austrian “assumption of given supplies of various factors, with consequential demand-determination of all prices….  Later in the same work, Dobb remarked on the artificiality of value theories based entirely on the short-term balance of supply and demand:
….in order to make such statements, a number of things have to be taken as given (as — to take the extreme case — in all statements about Marshallian “short-period”, or quasi-short-period, situations): data that are dependent variables at another, and “deeper”, level of analysis….
One way of illustrating what is meant when one speaks of contexts in which demand-determined exchange-relations are applicable may be the following. One could suppose that all productive inputs were natural objects available at any given date in given nature-determined amounts [e.g., Marshall’s meteoric stones]…. But then, of course, the process of production as ordinarily viewed… would be non-existent….
To the extent, per contra, that human activity is assigned a major role in the production process and reproducible inputs… replace scarce natural objects, the essentials of the economic problem become different….
But if a formal mode of determination in terms of scarcity-relations… can be constructed, and can convey some information, in a situation of naturally-determined means or inputs, why should it not be able to do so in analogous situations where any set of n means or inputs, although not dependent on natural limitations, are necessarily determined as to their supplies in some other way? … Indeed, this is quite possible; but… subject to the restrictive condition that the set of n means or inputs is already given as datum. The restriction is a large one. It excludes from consideration all situations in which these supplies are likely to change (i.e. to change as a “feedback” effect of their prices), and analysis thus restricted can make no pronouncement as to why and how these changes occur or as to their effects–for which reason we spoke of the situations to which such a theory can apply as “quasi-short-period situations”. 
In Political Economy and Capitalism, Dobb wrote in similar terms of the Austrian assumption that, “in any given set of conditions, the supply of such ultimate productive factors was fixed.”  He qualified this in a footnote by adding, “Strictly speaking, the Austrians did not assume, or need to assume, that the supply of basic factors of production was unchangeable: merely that the quantity of them was determined by conditions external to the market, and hence could be treated as independent.”  Nevertheless, the practical effect was that, “[b]eing limited by an unalterable (for the moment) scarcity, these factors, like any commodity, would acquire a price equal to the marginal service which they could render in production: these prices formed the constituent elements of cost.  This required deliberately abstracting the “theory of value” of factors of production from cost, or any “characteristics affecting the supply.” 
In addition, the Austrian theory of factor pricing is, in a sense, an elaborate exercise in question-begging. Saying that factors are priced according to their marginal productivity is just another way of saying the price is based on capitalizing expected profit and rent. But the latter quantities, and their natural level in a free market, are precisely the points at issue between the mutualist and Austrian versions of free market theory.
As James Buchanan characterized it, the subjective theory was an attempt to apply the classical theory of value for goods in fixed supply to all goods, both reproducible and not.
The development of a general theory of exchange value became a primary concern. Classical analysis was rejected because it contained two separate models, one for reproducible goods, another for goods in fixed supply. The solution was to claim generality for the simple model of exchange value that the classical writers had reserved for the second category. Exchange value is, in all cases, said the marginal utility theorists, determined by marginal utility, by demand. At the point of market exchange, all supplies are fixed. Hence, relative values or prices are set exclusively by relative marginal utilities. 
Marshall believed, by the way, that production cost influenced demand, even in the short run, through buyers’ expectations of future changes in price as output increased. For a similar case of the effect of expectations on demand-price, we need go no further than electronic goods. How many people have postponed the purchase of a DVD player in the expectation that they would be produced more cheaply in a year or two?
For the Austrians, by definition, “value” was identical to market price at any given time. “Future price” was indeed subject to change, through producers’ reactions to present price; but to go so far as to introduce “equilibrium price” as a useful concept, or to claim a relation between equilibrium price and cost of production, was a no-no. Theoretical constructs are well and good — but only for Austrians.
The Austrian doctrine that utility determines price, if taken literally, is utter nonsense. The doctrine is true only with the qualifications that they, parenthetically, provided: that value is determined without regard to the long run, but only by the existing stocks of supplies in relation to market demand at any given time. And these qualifications, taken with Rothbard’s admission that cost of production indirectly affected price through its effects on supply, bring the substance of Rothbard’s theory quite close to that of Marshall.
Rothbard’s caricature of Marshall closely parallels the straw-man version of classical political economy which Jevons congratulated himself on destroying over a century ago. And Marshall’s analysis of the Jevonian critique of Ricardo, which we saw above, could be turned against Rothbard to great effect: if we consider Marshall’s actual doctrine, rather than Rothbard’s crude parody of it, it is apparent that the two are much closer in substance than Rothbard would admit; but if we are to take the doctrines of either Marshall or Rothbard as lampooned by their enemies–as the bare assertion either that cost “determines” price, or that utility “determines” price–the truth is much closer to the former than to the latter assertion.
Once we take into account changes in supply in response to changes in demand, we end up with a model in which the supply of goods adjusts to demand until the marginal price equals marginal cost; and the supply of factors of production, when it is elastic, will increase until factor prices reflect the cost of providing them. In other words, exactly what Ricardo and the rest of the classical school said.
The subjectivist utility and imputation doctrines, as stated, are true as far as they go; but they depend on taking the statements in other than the ordinary or obvious sense, and attaching special qualifications to them that render them irrelevant to the traditional problems of political economy. Perhaps that’s just the point.
$15.00 for the first copy. $13.00 for every additional copy.
88. Rothbard, Man, Economy, and State 239.
89. Ibid. 292.
90. Ibid. 302-3.
91. Ibid. 304.
92. Böhm-Bawerk, Capital and Interest 140.
93. Rothbard, Man, Economy, and State 305.
94. Marshall, Principles of Economics 346-7.
95. Ibid. 577.
96. Joseph Schumpeter, Ten Great Economists From Marx to Keynes (New York: Oxford University Press, 1965) 40-1.
97. Benjamin Tucker, “Does Competition Mean War?” Liberty August 4, 1888, in Tucker, Instead of a Book 405.
98. Rothbard, Man, Economy, and State 239.
99. Ibid. 292.
100. Böhm-Bawerk, Positive Theory of Capital 148.
101. Murray Rothbard, Power and Market: Government and the Economy (Kansas City: Sheed Andrews and Mcmeel, Inc., 1970, 1977) 88-9.
102. Rothbard, Man, Economy, and State 303.
103. Dobb, Theories of Value and Distribution 205-6.
104. Ibid. 114.
105. Ibid. 179-82.
106. Dobb, Political Economy and Capitalism 160.
107. Ibid. 160n.
108. Ibid. 160.
109. Ibid. 140.
110. James Buchanan, Cost and Choice: An Inquiry in Economic Theory, vol. 6 Collected Works (Indianapolis: Liberty Fund, 1999) 9.