Volume 12, Issue s1 -

Austrian economists are perhaps most well-known for developing the theory of the market process – how producers and consumers, guided by market prices, are able to coordinate their actions over time. In this paper we extend Austrian insights to the provision of fundamental governance goods. It is typically thought that such goods, because of their publicness, cannot be provided by market mechanisms. We argue orthodox public finance and political economy is mistaken in this regard. The market process applied to governance goods, which we call political pricing ¸ is capable of creating governance environments conducive to a high degree of social cooperation under the division of labor. We highlight some problems with orthodox public finance and political economy approaches, theoretically develop a market process approach to governance, and discuss two examples of such mechanisms in creating wealth.

Exploration and production (E&P) companies must replace oil produced with new proved reserves in order to sustain their existence, generate future revenues and value. Extensions constitute the largest type of additions to new proved reserves. Adding reserves through extensions is capital intensive and both the real price of oil (represented by real refiner acquisition cost) and real interest (represented by real yield on 10 year Treasury bond) will influence the investment in new discoveries of proved reserves. However, recent periods of unusually high commodity prices and ultra-low interest rates, often linked to monetary policy, may have led to an over-investment in reserves through extensions. Accordingly, using U.S. data (1977–2014) we test for the existence of “explosive behavior” in the volume of extensions over time with financial time series econometric methods referred to as right-tail ADF tests which have traditionally been used for identifying speculative bubbles in asset markets. Empirical evidence identifies a period of explosive (“bubble-like”) behavior in the time series of extensions having occurred beginning 2010 through 2014. This research provides an Austrian explanation for the empirical results consistent with the notion of malinvestment.

This paper explains why institutional quality impacts the productivity of investment. The existing empirical literature finds that a given level of investment creates more economic growth in more economically free countries. We draw on insights from Austrian economics, particularly the economic calculation debate and associated knowledge problems, to provide a theoretical explanation for why entrepreneurs are able to better value investment opportunities in more economically free countries which, in turn, leads to higher economic growth.

This paper incorporates insights from social capital theory into the traditional Austrian business cycle theory (ABCT). Whereas in the standard Austrian narrative, recovery processes entail the reallocation of investment resources from more towards less-capital intensive industries, social capital may represent an alternative avenue for investment energies. Unique characteristics of social capital are surveyed and strategic opportunities for leveraging social capital by different decision maker types are explained. Recognizing social capital developments amidst business cycles helps to account for the long-term resilience and continual social progress of economic performance amidst increasingly interventionist central banking practices.

Abstract: In this paper I present a financial framework, known as Economic Value Added or EVA®, used to value firms and apply it to topics highlighted in the Austrian literature. In particular I contrast the market process emphasis in the Austrian literature with the neoclassical firm profit maximization and the role of Kirzner’s entrepreneurial alertness . Then I show how these micro topics can be aggregated into macro issues such as the Cantillon Effect, an aggregate average period of production, and the impact of country risk into value creation.

The ability to rationally evaluate time-consuming productive activities is what distinguishes capitalism from alternative social systems. Capital-accounting provides the framework for such evaluations that allow decision-makers to calculate the relative values to them of alternative productive activities. In this paper I show how insights from Austrian Capital Theory help to understand this process of evaluation. Austrian economics stresses that evaluation is an essentially subjective process. Entrepreneurs’ estimates of future earnings, which depend on the consumers’ subjective evaluations of the produced products, will vary and they must compete for productive resources in a dynamic trial and error social process. Entrepreneurial evaluations, nevertheless, can be described in terms of familiar financial concepts that encapsulate both the capital-value and the duration of any contemplated business venture. Value and time are the two essential dimensions of dynamic business valuation. I examine these concepts with a view to describing that social process, using what can be known and what needs to be imagined. I conclude that there is no silver bullet formula or method to evaluate a business that would give an objectively correct answer – obviously not, or else we would not have need of a competitive market process – but there are certain logical elements that are universal in any production evaluation decision that should be emphasized.

This paper discusses valuation within the judicial processes by comparing the adversarial and inquisitorial systems of litigation. It evaluates adversarial and inquisitorial litigation on the legal systems’ ability to aid processes that lead to discovery of knowledge. It argues that much of the information required for accurate valuation must be discovered . While the adversarial method of litigation is essentially a competitive model of evidence production; the inquisitorial system comprises only the expert/principle searcher, and lacks a competitive discovery process. Therefore, as a system, adversarial litigation may be more conducive for error minimization in enforcing rules than inquisitorial litigation. On the question of business valuation of firms under Chapter 11, both the adversarial and inquisitorial systems are problematic, given that market competition leading to discovery of prices and valuation is impossible within the judicial system of valuation.