Question

The major criticism of Marshallian cost curve-based regulatory policy made by James Buchanan and Friedrich Hayek in their interview on “pattern prediction and scientism” is that,

a.Consumers know their preferences only at the time of acting, so that to use models which assume the future is based on the past with mathematical certainty is a false science (scientism)

b. Mainstream economics does not use cost-of-production as a basis for regulatory decisions and this prevents regulators from exercising their superior knowledge

c. Regulators know in detail but not in general about economic phenomena

Answer 1

Here, option (a ) is the correct answer. In the interview on pattern prediction and scientism by James Buchanan and Friedrich Hayek, they state that the pattern prediction made by the consumers are only based on the preferences at the time of acting and uses mathematical models to predict the future based on the past which is a false science.

The Marshallian cost curve combines the income and substitution effects to predict the cost. The income effect is the change in consumption when the consumer income falls, but the prices remains the same. The substitution effect refers to the change in consumption arising when the prices changes, but there is enough income to maintain the same utility at the initial prices. He states about the income effect and the price effect to predict this. When there is a rise in price of one good, It would result in shifting the budget set inward and thus makes the consumer effectively poorer. This is called as the income effect. The price effect state that the consumer faces a different set of market trade offs as a result of this.

Thus, from the analysis made above, the theory would make the consumers predict the costs based on the supply side economics and some mathematical formulations. But, Hayek and Buchanan states that this prediction using a mathematical modelling cannot be dealt as a true measure of future as it considers the past to analyse and regulate the future models. This was a serious critique of the Marshallian cost curve.