David Rockefeller in the late ’30s reading Oscar Morgenstern’s The Limits of Economics
David Rockefeller, grandson of John D. Rockefeller, died recently at the age of 101. He was known for many things. But perhaps the least known of his accomplishments was his dissertation for which he was awarded a Ph.D. in economics from the University of Chicago in 1940. This dissertation was published by the University of Chicago Press as a book in 1941 entitled Unused Resources and Economic Waste. Although the book is hard to find, I was able to secure a copy and read it. I include here the Preface from the book (Rockefeller, Preface).
The book is very heavily influenced by Frank H. Knight. This means that there is much subtlety, self-critical reflection and, above all, caution in the claims made. It also shows the less beneficial influence of Abba P. Lerner insofar as Rockefeller buys the market-socialist idea that under a form of socialism the attributes of pure competition might be approximated. Nevertheless, this idea is of quite minor importance in the book. The topic of the dissertation (and hence the book) was suggested by F.A. Hayek when Rockefeller was at student at the London School of Economics for one year in the mid-1930s.
The book, as the title indicates, is about unused resources and whether or not they constitute waste from an economic perspective. The topic was a major concern during the Great Depression and thereafter. Unfortunately, Rockefeller does not deal with the business cycle issues that may have been foremost in the reader’s mind (both then and today). Nevertheless, there is a good deal of valuable analysis regarding the connection – or lack thereof – between unused resources and waste.
Rockefeller is at great pains to show how unused resources are the outcome of entrepreneurial expectations. Suppose a firm expects demand to rise and then fall over a period of time. It may be quite economical to build a plant that is sufficient to produce for that demand for a number of years and then let it sit idle in whole or in part for a few years after that. Risk can also cause resources to go unused if the planner finds that demand turns out to be too low or costs too high. Uncertainty in the Knightian sense (the absence of clear-cut objective probabilities) can induce a planner to build a plant of great flexibility but at the cost of not being at minimum technological cost for any output. All of this is designed to show that there is no sense in equating unused resources with waste from the point of view of the firm. Certainly this is true in the ex ante sense but also in the ex post if we do not hold entrepreneurs to the standard of perfect foresight.
So what is waste? This is the unrealized net value that could be attained but is not. In the above examples, entrepreneurs do the best they can, so practically speaking, there is no waste. But waste can be engendered by monopoly, legal restraints, political barriers and so forth. Therefore, waste may occur at different levels of analysis and of constraints. What is not waste from the perspective of the firm — say the monopolist producing less than “ideal” output and hence using a smaller physical plant which does not produce at the lowest possible cost for that output — may yet be waste from the perspective of society. Waste “can only have meaning in connection with environmental conditions which are subject to change by means of conscious human action” (p.226). Waste is the foregoing of value due to a failure to act. Overcoming waste involves changing the current constraints.
But some people have suggested that we to take constraints that produce waste as simple givens. Rockefeller cautions us, just as his teacher Knight did, not to adopt a deterministic view of the world.
[I]f all of the psychological forces influencing the actions of, say, the entrepreneur were taken into account, as well as the institutional and other environmental conditioning limiting his behavior, the entrepreneur would be powerless to choose any course of action other than the one actually pursued. …But in that case all discussions of purposive action would be meaningless (232)
Thus it is not true that background social and political conditions deterministically give rise to institutions or constraints that produce waste. Entrepreneurs may be able to find more efficient methods of production. Policymakers may be able to reduce or eliminate monopoly power and the consequent social waste. But often this is not accomplished. One fundamental reason is inattentiveness of the entrepreneur or the policymaker.
Waste as it has been defined in this chapter implies unrealized value or satisfaction due to the inattentiveness on the part of the leaders of the group in question [family, firm, political entity] to the interests whose furtherance along established lines was their recognized responsibility (233-34).
Unfortunately, there is not much discussion of this in the book.
The book is dominated by a concern for the role of expectations in creating the appearance, but not the reality, of resource waste. The technologically feasible use of resources is not always the economically feasible. Sometimes not using a resource creates value and sometimes using a resource is wasteful.
There is Austrian content in the book — mostly in the overlap area between Hayek and Knight. But Rockefeller was a Knightian. The book also shows well his competence as an economist. What if he had pursued an academic career? I think he would have made significant contributions. But would that have been a waste from his perspective?