Ȇȃ Partʺ: EconomicsPareto’s system of equations to demonstrate that “all the economic cate-
gories of the old regime must reappear, though maybe with other names:
prices, salaries, interest, rent, profit, saving, etc.” (ȀȈǿȇ/ȀȈȂȄ, p.ȁȇȈ). Ļe
Ministry of Production, through deliberate arrangement, would have to
satisfy the two conditions that would result automatically from perfect
competition, that is, equalization of prices with cost, and minimization
of costs of production. Ļe system of equations giving the correct allo-
cation of resources and labor would be identical with the system reflect-
ing the operation of free competition. However, Barone assumed that the
Ministry would actually have to formulate and solve such equations, so
he referred skeptically to “the laborious and colossal centralization work
of the Ministry (assuming the practical possibility of such a system)”
(p.ȁȈǿ).
Ļe concept of “optimum conditions” is either explicit or implicit in
the work of Barone and many post-Mises writers. If one makes a number
of assumptions—such as that people’s preferences as workers and con-
sumers are to “count” and that an ethically desirable income distribu-
tion can be achieved—then it is possible to deduce certain conditions
which must prevail in a situation of maximum welfare as a situation in
which no household could be made still better without some other house-
hold being made worse off in consequence. Following Vilfredo Pareto,
J.R. Hicks, Paul Samuelson, Abram Bergson, M.W. Reder, Abba Lerner,
Oskar Lange, and other recent writers have explicitly formulated sets of
optimum conditions. Ļe optimum conditions are the heart of modern
welfare economics.
To save time, I shall not read a typical set of optimum conditions. Ļe
conditions are more easily followed when seen in print than when merely
heard, anyway. Suffice to say that Professor Hayek has summed up several
of the conditions very neatly: “the marginal rates of substitution between
any two commodities or factors must be the same in all their different
uses” (ȀȈȃȇ, p.ȆȆ).
Ļe optimum conditions may be restated briefly in terms of “costs.”
Ļe total cost incurred in the production of the optimum amount of
any commodity must be a minimum, that is, the average cost at opti-
mum output must be a minimum. Ļe optimum output of each com-
modity is specified by the condition that marginal cost equal price. Ļe
“prices” used in valuing outputs and measuring costs need not be thought
of as market prices; they can—in principle—be mere indexes inversely
proportional to the common subjective marginal rates of substitution for