Monopoly Can Be Meaningfully Defined Only As a Grant of Privilege by the State

[Rothbard] expounds a completely new theory of monopoly—that monopoly can be meaningfully defined only as a grant of privilege by the State, and that a monopoly price can be attained only from such a grant. In short, there can be no monopoly or monopoly price on the free market.

--Murray N. Rothbard, preface to revised edition of Man, Economy, and State with Power and Market, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2009), lvii.

One of Rothbard’s Greatest Accomplishments in Production Theory Was Integrating Temporal Production-Structure Analysis with Pure-Time-Preference Theory

In Man, Economy, and State, Rothbard elaborates a unified and systematic treatment of the structure of production, the theory of capital and interest, factor pricing, rent theory, and the role of entrepreneurship in production.... One of Rothbard’s greatest accomplishments in production theory was the development of a capital and interest theory that integrated the temporal production-structure analysis of Knut Wicksell and Hayek with the pure-time-preference theory expounded by Frank A. Fetter and Ludwig von Mises.

Although the roots of both of these strands of thought can be traced back to Böhm-Bawerk’s work, his exposition was confused and raised seemingly insoluble contradictions between the two. They were subsequently developed separately until Rothbard revealed their inherent logical connection.

--Joseph T. Salerno, introduction to the second edition of Man, Economy, and State with Power and Market, by Murray N. Rothbard (Auburn, AL: Ludwig von Mises Institute, 2009), xxvii.

Rothbard on Keynes: The Keynesian Wonderland Where All Economic Truths are Vitiated or Reversed

Of particular interest to us is the sudden emergence of the “unemployment problem” in economic theory. The Keynesians, in the mid-1930’s, inaugurated the fashion of declaiming: Neoclassical economics is all right for its special area, but it assumes “full employment.” Since “orthodox” economics “assumes full employment,” it holds true only so long as “full employment” prevails. If it does not, we enter a Keynesian wonderland where all economic truths are vitiated or reversed.

--Murray N. Rothbard, Man, Economy, and State with Power and Market, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2009), 582.

The Neoclassical Synthesis Jumbled Together the Marshallian and Walrasian Approaches to Price Determination with Keynesian Macroeconomics

After World War II, a new and stifling orthodoxy known as the “neoclassical synthesis” had descended upon economics, especially in the United States. This so-called “synthesis” was actually a hodgepodge of the three disparate approaches that had overwhelmed the Mengerian causal-realist approach in the interwar period. It jumbled together the Marshallian and Walrasian approaches to price determination with Keynesian macroeconomics. The first two approaches focused narrowly on analyzing the determination of unreal, equilibrium prices either in single markets (partial equilibrium) or in all markets simultaneously (general equilibrium). Keynesian macroeconomics denied the efficacy of the price system altogether in coordinating the various sectors of an economy confronted with the “failure of aggregate demand.”

--Joseph T. Salerno, introduction to the second edition of Man, Economy, and State with Power and Market, by Murray N. Rothbard (Auburn, AL: Ludwig von Mises Institute, 2009), xxi-xxii.

The "Psychological School" of Modern Subjectivist Economics

The expression “Psychological School” is frequently employed as a designation of modern subjectivist economics. Occasionally too the difference in method that exists between the School of Lausanne and the Austrian School is indicated by attributing to the latter the “psychological” method. It is not surprising that the idea of economics as almost a branch of psychology or applied psychology should have arisen from such a habit of speech.

--Ludwig von Mises, Epistemological Problems of Economics, trans. George Reisman, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2013), 139.

How the Lausanne School of Economics Differs From the Austrian School of Economics

Menger’s successor at the University was Friedrich von Wieser. He was a highly cultured gentleman, had a fine intellect, and was an honest scholar. Before many others, he was fortunate to become acquainted with the work of Menger, the significance of which he recognized immediately. He enriched the thought in some respects, although he was no creative thinker and in general was more harmful than useful. He never really understood the gist of the idea of Subjectivism in the Austrian School of thought, which limitation caused him to make many unfortunate mistakes. His imputation theory is untenable. His ideas on value calculation justify the conclusion that he could not be called a member of the Austrian School, but rather was a member of the Lausanne School [Leon Walras et al. and the idea of economic equilibrium], which in Austria was represented brilliantly by Rudolf Auspitz and Richard Lieben.

What distinguishes the Austrian School and will lend it immortal fame is precisely the fact that it created a theory of economic action and not of economic equilibrium or non-action. The Austrian School, too, uses the idea of rest and equilibrium, which economic thought cannot do without. But it is always aware of the purely instrumental nature of such an idea, and similar aids. The Austrian School endeavors to explain prices that are really paid in the market, and not just prices that would be paid under certain, never realizable conditions. It rejects the mathematical method, not because of ignorance of mathematics or aversion to mathematical exactness, but because it does not emphasize a detailed description of a state of hypothetical static equilibrium. It has never suffered from the illusion that values can be measured. It has never misunderstood that statistical data belong to economic history only, and that statistics have nothing to do with economic theory.

--Ludwig von Mises, Notes and Recollections with the Historical Setting of the Austrian School of Economics, ed. Bettina Bien Greaves, trans. Hans Sennholz (Indianapolis: Liberty Fund, 2013), 24.

Ludwig von Mises Became an Austrian Economist around Christmas 1903 When He Read Carl Menger's Book "Principles of Economics"

When I first arrived at the University, Carl Menger was close to the termination of his teaching career. The idea that there was an Austrian School of economics was itself hardly recognized at the University, and I myself was not at all interested in it at that time.

Around Christmas, 1903, I read Menger’s Grundsätze der Volkswirtschaftslehre [Principles of Economics] for the first time. It was the reading of this book that made an “economist” of me.

Personally I met Carl Menger only many years later. He was then already more than seventy years old, hard of hearing, and plagued by an eye disorder. But his mind was young and vigorous. Again and again I have asked myself why this man did not make better use of the last decades of his life.

--Ludwig von Mises, Notes and Recollections with the Historical Setting of the Austrian School of Economics, ed. Bettina Bien Greaves, trans. Hans Sennholz (Indianapolis: Liberty Fund, 2013), 22.

It Seemed Incomprehensible to Me That This Garbled Hegelianism Could Exert Such an Enormous Influence

When I entered the university, I, too, was a thorough statist [interventionist]. But in contrast to my fellow students I was consciously anti-Marxian. I knew little of the works of Marx at that time. But I knew the most important writings of [Karl] Kautsky [prominent post-Marxian socialist theoretician]; I was a diligent reader of the Neue Zeit; and I had followed the debate among socialists about revisionism of socialism [attempted removal of internal Marxian paradoxes and glaring unrealities] with considerable interest. I was repelled by the staleness of Marxian literature. Kautsky seemed really absurd. When I finally engaged in an intensive study of the important works of Marx, Engels, and Lassalle, I was provoked to contradict them on every page. It seemed incomprehensible to me that this garbled Hegelianism could exert such an enormous influence.

--Ludwig von Mises, Notes and Recollections with the Historical Setting of the Austrian School of Economics, ed. Bettina Bien Greaves, trans. Hans Sennholz (Indianapolis: Liberty Fund, 2013), 11.

Around 1900 the Historical Method Was Believed to be the Only Scientific Method for the Sciences of Human Action

At that time, around 1900, historicism was at the zenith of its career. The historical method was believed to be the only scientific method for the sciences of human action. From the height of his historical clarity, the “historical political economist” was looking with unspeakable disgust on the “orthodox dogmatist.” Economic history was the science in fashion. In the German-speaking world [Gustav] Schmoller was adored as the great master of “political economy.” And from all over the world ambitious young men flocked to his seminar.

--Ludwig von Mises, Notes and Recollections with the Historical Setting of the Austrian School of Economics, ed. Bettina Bien Greaves, trans. Hans Sennholz (Indianapolis: Liberty Fund, 2013), 2.

Socialist Economic Calculation and the Scurrilous Hegelian Metaphysics of the Marxian Doctrine

The socialist tracts deal with everything except the essential and unique problem of socialism, viz., economic calculation. It is only in the last years that socialist writers have no longer been able to avoid paying attention to this primordial matter. They have begun to suspect that the Marxian technique of smearing “bourgeois” economics is not a sufficient method for the realization of the socialist utopia. They have tried to substitute a theory of socialism for the scurrilous Hegelian metaphysics of the Marxian doctrine. They have embarked upon designing schemes for socialist economic calculation. Of course, they have lamentably failed in this task.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:703.

The Praxeological Character of Socialism: One Will Alone Acts

The essential mark of socialism is that one will alone acts. It is immaterial whose will it is. The director may be an anointed king or a dictator, ruling by virtue of his charisma, he may be a Führer or a board of Führers appointed by the vote of the people. The main thing is that the employment of all factors of production is directed by one agency only. One will alone chooses, decides, directs, acts, gives orders. All the rest simply obey orders and instructions. Organization and a planned order are substituted for the “anarchy” of production and for various people’s initiative. Social cooperation under the division of labor is safeguarded by a system of hegemonic bonds in which a director peremptorily calls upon the obedience of all his wards.

In terming the director society (as the Marxians do), state (with a capital S), government, or authority, people tend to forget that the director is always a human being, not an abstract notion or a mythical collective entity. We may admit that the director or the board of directors are people of superior ability, wise and full of good intentions. But it would be nothing short of idiocy to assume that they are omniscient and infallible.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:695-696.

Observations on the Evolution of the Time-Preference Theory

It seems plausible to assume that the mere fact that interest is graduated in reference to periods of time should have directed the attention of the economists, intent upon developing a theory of interest, upon the role played by time. However, the classical economists were prevented by their faulty theory of value and their misconstruction of the cost concept from recognizing the significance of the time element.

Economics owes the time-preference theory to William Stanley Jevons and its elaboration, most of all, to Eugen von Böhm-Bawerk. Böhm-Bawerk was the first to formulate correctly the problem to be solved, the first to unmask the fallacies implied in the productivity theories of interest, and the first to stress the role played by the period of production. But he did not entirely succeed in avoiding the pitfalls in the elucidation of the interest problem. His demonstration of the universal validity of time preference is inadequate because it is based on psychological considerations.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 2:488.

The Alleged Absence of Depressions Under Totalitarian Management

Many socialist authors emphasize that the recurrence of economic crises and business depressions is a phenomenon inherent in the capitalist mode of production. On the other hand, they say, a socialist system is safe against this evil.

As has already become obvious and will be shown later again, the cyclical fluctuations of business are not an occurrence originating in the sphere of the unhampered market, but a product of government interference with business conditions designed to lower the rate of interest below the height at which the free market would have fixed it. At this point we have only to deal with the alleged stability as secured by socialist planning.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 2:565.

Ignoring the Currency Theory’s Criticism of the Banking Theory, Statist Theory has Prescribed the Banking Theory

Statist Theory has tried to explain every social phenomenon by the operation of mysterious power factors. It has disputed the possibility that economic laws for the formation of prices could be demonstrated. Failing to recognize the significance of commodity prices for the development of exchange relationships among various moneys, it has tried to distinguish between the domestic and foreign values of money. It has tried to attribute changes in exchange rates to various causes—the balance of payments, speculative activity, and political factors. Ignoring completely the Currency Theory’s important criticism of the Banking Theory, Statist Theory has actually prescribed the Banking Theory. It has moreover even revived the doctrine of the canonists and of the legal authorities of the Middle Ages to the effect that money is a creature of the government and the legal order. Thus, Statist Theory prepared the philosophical groundwork from which the inflationism of recent years developed.

--Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory, trans. Bettina Bien Greaves, ed. Percy L. Greaves Jr. (Indianapolis: Liberty Fund, 2011), 43-44.

Rothbard: Communism Is a Dreamworld Because It Believes That Individuals Can Cast Off All Natural Limitations

There he writes that communism 'corresponds to the development of individuals into complete individuals and the casting off of all natural limitations'. How are 'all natural limitations' cast off? - a tall order indeed. Let Marx explain. As soon as the division

of labour comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him...He is a hunter, a fisherman, a shepherd, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticize after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd or critic.

More broadly, Gray remarks 'that each individual should have the opportunity of developing all his faculties, physical and mental in all directions, is a dream which will cheer the vision only of the simple-minded, oblivious of the restrictions imposed by the narrow limits of human life'. 'For life', Gray points out, 'is a series of acts of choice, and each choice is at the same time a renunciation...'. The necessity of choice, Gray perceptively reminds us, will exist even under communism.

--Murray N. Rothbard, Classical Economics, vol. 2 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 325.

Rothbard: Communism Will Create a World of Autistic Dilettantes

Particularly important for Marx is that communism does away with the division of labour. By being free of specialization, the division of labour, and working for others (including the consumers) man as labourer is freed from all limits.... as Engels put it in his Anti-Dühring, the disappearance of the division of labour will mean that productive labour will give 'each individual the opportunity to develop all his faculties, physical and mental, in all directions and exercise them to the full'.

The idea of everyone developing all of their faculties 'in all directions' is mind-boggling, and conjures up the absurd picture of a world of autistic dilettantes, each heedless of social demand for their services or products, and each dabbling whimsically and sporadically in every activity. This image is confirmed by Marx's most famous passage describing the communist system in Part I of his 'The German Ideology', an unpublished essay written in 1845-46. There he writes that communism 'corresponds to the development of individuals into complete individuals and the casting off of all natural limitations'. How are 'all natural limitations' cast off? - a tall order indeed.

--Murray N. Rothbard, Classical Economics, vol. 2 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 325.

The Essential Problem of Universalistic, Collectivistic, and Holistic Social Philosophy Is: By What Mark Do I Recognize the True Law?

The essential problem of all varieties of universalistic, collectivistic, and holistic social philosophy is: By what mark do I recognize the true law, the authentic apostle of God’s word, and the legitimate authority. For many claim that Providence has sent them, and each of these prophets preaches another gospel. For the faithful believer there cannot be any doubt; he is fully confident that he has espoused the only true doctrine. But it is precisely the firmness of such beliefs that renders the antagonisms irreconcilable. Each party is prepared to make its own tenets prevail. But as logical argumentation cannot decide between various dissenting creeds, there is no means left for the settlement of such disputes other than armed conflict. The nonrationalist, nonutilitarian, and nonliberal social doctrines must beget wars and civil wars until one of the adversaries is annihilated or subdued. The history of the world’s great religions is a record of battles and wars, as is the history of the present-day counterfeit religions, socialism, statolatry, and nationalism.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 1:147-148.

According to Universalism, Conceptual Realism, Holism, and Collectivism, Society Is an Entity Living Its Own Life

According to the doctrines of universalism, conceptual realism, holism, collectivism, and some representatives of Gestaltpsychologie, society is an entity living its own life, independent of and separate from the lives of the various individuals, acting on its own behalf and aiming at its own ends which are different from the ends sought by the individuals. Then, of course, an antagonism between the aims of society and those of its members can emerge. In order to safeguard the flowering and further development of society it becomes necessary to master the selfishness of the individuals and to compel them to sacrifice their egoistic designs to the benefit of society. At this point all these holistic doctrines are bound to abandon the secular methods of human science and logical reasoning and to shift to theological or metaphysical professions of faith. They must assume that Providence, through its prophets, apostles, and charismatic leaders, forces men who are constitutionally wicked, i.e., prone to pursue their own ends, to walk in the ways of righteousness which the Lord or Weltgeist or history wants them to walk.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 1:145.

The Collectivist Dogma

It ascribes to the universals objective real existence, even an existence superior to that of individuals, sometimes, even, flatly denying the autonomous existence of individuals, the only real existence.

Collectivism transforms the epistemological doctrine into an ethical claim. It tells people what they ought to do. It distinguishes between the true collective entity to which people owe loyalty and spurious pseudo entities about which they ought not to bother at all. There is no uniform collectivist ideology, but many collectivist doctrines. Each of them extols a different collectivist entity and requests all decent people to submit to it. Each sect worships its own idol and is intolerant of all rival idols. Each ordains total subjection of the individual; each is totalitarian.

--Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005), 166-167.

 

The Great God Society Versus the Impudent Individual

In contrasting society and the individual and in denying to the latter any “true” reality, the collectivist doctrines look upon the individual merely as a refractory rebel. This sinful wretch has the impudence to give preference to his petty selfish interests as against the sublime interests of the great god society. Of course, the collectivist ascribes this eminence only to the rightful social idol, not to one of the pretenders. When the collectivist extols the state, what he means is not every state but only that regime of which he approves, no matter whether this legitimate state exists already or has to be created.

--Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005), 169.

The Fundamentals of an Austrian Macroeconomics: The Market for Time and the Market for Money

Roger Garrison has argued that time and money are the ‘universals of macroeconomic theorizing’. In that paper, he defines the Austrian approach to macroeconomics by its willingness to take both time and money seriously. His critique of mainstream macroeconomics is that the various schools of thought (Keynesianism, monetarism, New Classicism, and, by extension, New Keynesianism) treat time and money far too superficially in comparison to the central roles that they play in real-world economies. Garrison summarizes this point: ‘Time is the medium of action; money is the medium of exchange…And it is precisely the “intersection” of the “market for time” and the “market for money” that constitutes macroeconomics’ unique subject matter.’ The problem with mainstream macroeconomics is that its notions of time and money are so abstract and unrealistic as to prevent serious consideration of how the markets for each actually behave.

--Steven Horwitz, introduction to Microfoundations and Macroeconomics: An Austrian Perspective, Foundations of the Market Economy (London: Routledge, 2003), 3.

Is There an Austrian Macroeconomics?

In the eyes of many economists, Austrians are seen as rejecting the whole concept of macroeconomics in favor of a focus on microeconomic phenomena such as price coordination and entrepreneurship. There is some truth to this perception. In a great deal of the post-revival (i.e., since 1974) literature in Austrian economics, Austrians have tried to define themselves in terms of their methodology (subjectivism) and their understanding of the market as a competitive discovery process rather than as tending toward, or mimicking, general equilibrium. Austrians’ self-described ‘uniqueness’ has almost exclusively been focused on microeconomics. Even Hayek, in his last book, referred to macroeconomics in sneer quotes, suggesting that a rejection of the subdiscipline was still alive and well in some Austrian quarters. It comes then as little surprise that much of the microeconomic and methodological work in the post-revival literature in Austrian economics finds its roots in Hayek.

--Steven Horwitz, introduction to Microfoundations and Macroeconomics: An Austrian Perspective, Foundations of the Market Economy (London: Routledge, 2003), 1.

Röpke Rejects the Over-Saving Argument

This is an over-saving argument and Röpke will have none of it. In the following passage, he rejects the over-saving argument in precisely the form it was later raised by Keynes in the General Theory:

Some ... even go to the length of asserting that there is a permanent tendency for investment to be outrun by savings and therefore a tendency towards a chronic depression which is only interrupted by short-lived fits of concentrated investment. According to these gloomy pessimists -- mostly sanguine inflationists in disguise, if not actually prophets of the end of capitalism -- our economic system is headed for a sort of economic 'entropy' where all economic energy will be paralysed by a suffocating excess of savings ....

Enough has been said on these points to make a refutation of such wild surmises hardly necessary. It all boils down to the question as to whether it is conceivable that savings can ever become so abundant that we do not know what to do with them even at a rate of interest approaching zero. To this question, of course, only one answer is possible. Over-saving as such is an inconceivable thing, belonging to the same species as other economic scares like over-production.

--Steven Kates, Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 118.

The Inflexible Price and Wage Theory of the Business Cycle

The inflexible price and wage theory of the business cycle says that capitalists and businessmen are reluctant to change prices and therefore, in the face of continuously rising spending, business owners step up production since there will be more demand for goods with a greater volume of spending if prices have not risen to offset the spending. This constitutes the essence of the expansion phase of the business cycle. Eventually, businessmen give in and raise prices because, as advocates of this theory state, firms run out of excess capacity with which to increase production. Hence, prices rise to catch up with the increased spending, production is reduced, and the contraction phase of the business cycle sets in.

The above description is one way Keynesians use “sticky price and wage theory” to explain the business cycle. Another version of the theory says that spending increases during the expansion but decreases during the contraction. The expansion phase in this version looks like the expansion phase discussed in the first version of the theory. As spending increases during the expansion, prices and wages do not rise quickly enough and thus employment and output expand in response. If prices and wages increased sufficiently in the face of the increased spending, according to Keynesians, no increased output or employment would result.

The contraction phase is a little different than in the first version of the theory. Here, as spending contracts during the recession or depression, prices and wages do not fall quickly enough to offset the decreased spending. If they did fall quickly enough, the same goods and labor could be purchased with the decreased money and spending. Therefore, output and employment would not decline and the contraction could be averted. In this scenario, inflexible price and wage theory is supposed to explain why output fluctuates more during the cycle than prices. It is also supposed to explain why recessions and depressions can be so deep and last so long.

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 46.

Closely Related to the Overproduction Theory of the Business Cycle Is the Underconsumption Theory

Closely related to the overproduction theory of the business cycle is the underconsumption theory of the cycle. This theory has been put forward by Sismondi, Keynes, and others. Although the details may vary among supporters of this theory, the main claim is that when there is not enough consumptive spending in the economy, goods go unsold, workers are laid off, and businesses shut their doors. In other words, a depression occurs. One reason given why there is not enough consumptive spending is that capitalists might shift their spending from hiring workers to purchasing capital goods (i.e., substitute capital for labor). This means workers will be paid less and thus will allegedly not have enough money with which to consume all the goods produced. Whatever the reason given for the lack of consumption, the result is the same according to supporters of underconsumption theory: economic crisis and depression.

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 13.

The Overproduction Theory of the Business Cycle Originated with Socialist Thinkers

The overproduction theory of the business cycle originated with socialist thinkers or those who leaned in that direction and was advocated by such individuals as Thomas Malthus, the nineteenth-century Swiss socialist J. C. L. de Sismondi, and Karl Marx. This theory says recessions and depressions occur because capitalism is characterized by periods of too much production. During these periods of excess production, businesses begin to accumulate inventory, cannot sell the inventory at profitable prices, and must cut back on production. The cutback in production leads to workers being laid off, factories being shut down, and causes a general decline in business activity. Hence, recessions and depressions result from overproduction in the free market.

Employment and production increase only after the inventories of businesses have been depleted sufficiently to make production profitable once again. So the economy goes back and forth between these periods of overproduction and production, in an endless cycle.

The specific reasons why it is said capitalists periodically produce too much vary, but it is generally based on the belief that the need and desire for goods is limited and the rapidly expanding production in a capitalist society inherently leads to the supply of goods outstripping the limited need and desire. If the need and desire for goods is less than the supply, then of course the demand will also be insufficient to purchase all the goods produced. Hence, production is periodically reduced back down to the demand for goods in recurring recessions and depressions.

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 9-10.

 

In a Sense, Real Business Cycle Theory Is Worse Than Keynesian “Sticky Price Theory”

In a sense, RBC [Real Business Cycle] theory is worse than Keynesian “sticky price theory.” The Keynesians are right to claim that the characteristics of perfect competition do not hold in reality because these characteristics have nothing to do with the nature of competition. The RBC theorists are not deterred by this and claim that the business cycle consists of natural fluctuations within a perfectly competitive equilibrium. While it may seem plausible that expansions are consistent with market clearing economic activity, it is more difficult to believe this for contractions. This is the case in particular for severe contractions. Are we to believe that the recession of the early 1980s, the recession of 2008–9, and even the Great Depression were fluctuations in which markets cleared?

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 82.

Mises Claims That All Nonmonetary Explanations of the Business Cycle Are Invalid

I show that RBC [Real Business Cycle] theory, in all of its variations, is not a valid theory of the business cycle. Hence, it does not provide a valid explanation of recessions and depressions. This is the case primarily because it does not explain the type of economy-wide fluctuations we see and the events that occur on the side of money during the business cycle. These observations, in essence, were made long ago by the great Austrian economist Ludwig von Mises in his comments on nonmonetary explanations of the business cycle. He showed that they are all invalid. My analysis goes much farther than Mises’s analysis because I go into much more detail to show why RBC theory is invalid. I also cover a far broader range of topics than Mises. However, his analysis does serve as a guide for my analysis.

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 80.

Real Business Cycle (RBC) Theories Are Nonmonetary Explanations of the Business Cycle

Real business cycle (RBC) theories are nonmonetary explanations of the business cycle. Supporters of RBC theory claim that business cycles arise due to changes in real factors, instead of monetary factors, in the economy. The focus is on alleged causes of the business cycle that emanate from places other than changes in the supply of money and spending. Further, such cycle theory assumes markets are always in equilibrium (i.e., they always clear, even during recessions and depressions).

Probably the most popular version of RBC theory claims that changes in the level of technology affect the economy such that it causes fluctuations in output and employment (i.e., a business cycle).

Another RBC theory is the fad theory of the cycle. If a product suddenly comes into fashion, there will be an increase in demand for the product and a boom will be created in the production of that product.... If the expansion is widespread enough, it might create the expansion phase of a general business cycle, according to supporters of this theory. When the fad ends, demand and production decline and create a slump.

--Brian P. Simpson, Remedies and Alternative Theories, vol. 2 of Money, Banking, and the Business Cycle (New York: Palgrave Macmillan, 2014), 79.

Understanding Say's Law Prevents One from Making the Error of Believing That Depressions can be due to Over-Production or Over-Saving

Röpke's Crises and Cycles was the last major work published in the English language on business cycle theory before the publication of the General Theory. In this work, Röpke explicitly refers to the insights of Say and Ricardo in providing the first understanding of the nature of the business cycle. He then shows how an understanding of Say's Law prevents one from making the error of believing that depressions can be due to over-production or over-saving.

--Steven Kates, introduction to Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 7.

Say's Law Was the Basis for the Classical Theory of the Business Cycle and Recession

What therefore remains the greatest irony is that Say's Law, far from assuming full employment, was instead the basis for the classical theory of the cycle. Rather than Say's Law being a denial of the possibility of recession, it was actually part of the explanation for it. Recessions were not caused by a failure of demand, but rather were due to problems associated with the structure of demand relative to the structure of supply. Demand, according to Say's Law, was constituted by supply, that is, by the sale receipts received from selling one's production. If one could not sell then one could not buy. The reason for a failure to sell was that one had miscalculated about what others wished to buy. If production miscalculations occurred in one part of the economy during the expansion phase of the cycle, then excess stocks of unsold goods would be the result, and incomes lower than anticipated would be earned. In consequence, demand for other products would be lower than was originally anticipated, and the economy would contract.

--Steven Kates, introduction to Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 4.

Are Recessions Caused by the Supply of Commodities in the Aggregate Surpassing the Demand?

The central issue in the debates over Say's Law was thus whether recessions might be due to 'a supply of commodities in the aggregate surpassing the demand', that is, whether recessions are caused by deficient effective demand. The answer, according to Say's Law, was no. Moreover, as the quotation from Mill also shows, Say's Law also denies the possibility of 'a general overproduction of wealth', which is the same phenomenon as a deficiency of demand. Demand deficiency and over-production are two ways of describing the same phenomenon: too much production relative to the demand for it. It was this possibility which Say's Law was formulated to deny.

--Steven Kates, introduction to Say's Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way (Cheltenham, UK: Edward Elgar, 2009), 1-2.

The Methodenstreit (Dispute Over Methods): The Austrian School Versus the German Historical School

Austrian economists have a reputation for intensive—some would say excessive—ruminations on the methodology of economics. The Austrian moniker itself originates in the Methodenstreit between the early Austrians and the German historical school. The Austrians argued that abstract economic theory has a central role to play in understanding economic phenomena, while the historical school insisted that economists require a large body of evidence about particular historical circumstances before making theoretical pronouncements.

--Adam Martin, "Austrian Methodology: A Review and Synthesis," in The Oxford Handbook of Austrian Economics, ed. Peter J. Boettke and Christopher J. Coyne (New York: Oxford University Press, 2015), 13.

The Foundation of the Austrian Boom-Bust Cycle Theory Is the Cantillon Effects

The foundation of the Austrian boom-bust cycle theory is a general principle of monetary theory known as Cantillon effects.... With Cantillon effects, the allocation of resources and the valuation of assets (bubbles) are shaped by nonneutral monetary changes. Two empirical generalizations contributed to the Austrian emphasis on the importance of the capital-structure approach in analyzing the macroeconomy. In a fractional reserve banking system, especially one supported by a central bank, money creation can be accompanied by credit creation. Credit may be made available in excess of available savings as banks extend loans to entrepreneurs. The money and credit creation process reduces interest rates relative to equilibrium rates. The new pattern of money expenditure directs resources into more labor-saving and “roundabout” methods of production. In addition, a market rate below the natural rate may provide an incentive for reduced saving (higher consumption). The lower interest rate used as a discount factor combined with an inflation-induced illusion of higher expected profits creates a “wealth” or “net worth” effect which artificially increases consumption expenditures during the money-induced boom.

--John P. Cochran, "Capital-Based Macroeconomics: Austrians, Keynes, and Keynesians," in The Oxford Handbook of Austrian Economics, ed. Peter J. Boettke and Christopher J. Coyne (New York: Oxford University Press, 2015), 173.

Monetarism, New Keynesianism, and Real Business Cycles Assume Money Is Neutral; Austrians Assume Money Is Non-Neutral

The neutrality of money holds a central place in modern macroeconomics and monetary economics. In the long run, changes in the supply of money do not affect real variables such as the level of gross domestic product (GDP), the growth rate of GDP, or the rate of unemployment. Changes in the money supply do not alter relative prices; that is, the ratio of prices between goods and services remains the same after a monetary contraction or expansion takes place. Variations in the money supply only influence the aggregate price level. All prices change equally when the money supply changes. Increases or decreases in the money supply alter only the level of nominal variables. Most macroeconomic models accept this proposition, at least for the long run. For example, both Monetarism and New Keynesianism accept the long-run neutrality of money. Models of real business cycles begin with the assumption that money is neutral in both the long and short run.

In sharp contrast, the non-neutrality of money has a central role within the Austrian approach to monetary economics. Increases in the money supply do affect relative prices and real variables in the short run. Changes in the supply of money alter relative prices, which influence individual decision-making regarding the types of goods and services to consume. Either increases or decreases in the money supply affect the market rate of interest. As a result, savings and investment patterns change. Money has a non-neutral impact on the economy.

--J. Robert Subrick, "Money Is Non-Neutral," in Handbook on Contemporary Austrian Economics, ed. Peter J. Boettke (Cheltenham, UK: Edward Elgar, 2010), 111.

Capitalism Is the Only Feasible System of Social Organization Based on the Division of Labor

Every examination of the different conceivable possibilities of organizing society on the basis of the division of labor must always come to the same result: there is only the choice between communal ownership and private ownership of the means of production. All intermediate forms of social organization are unavailing and, in practice, must prove self-defeating. If one further realizes that socialism too is unworkable, then one cannot avoid acknowledging that capitalism is the only feasible system of social organization based on the division of labor.

--Ludwig von Mises, Liberalism: The Classical Tradition, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005), 59.

The Doctrine of Polylogism

When carried to its ultimate logical consequences this attitude implies the doctrine of polylogism. Polylogism denies the uniformity of the logical structure of the human mind. Every social class, every nation, race, or period of history is equipped with a logic that differs from the logic of other classes, nations, races, or ages. Hence bourgeois economics differs from proletarian economics, German physics from the physics of other nations, Aryan mathematics from Semitic mathematics. There is no need to examine here the essentials of the various brands of polylogism.

--Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2005), 21-22.

Monetarism Seeks to Explain the Major Economic Phenomena Through a Single Variable, the Supply of Money

The purpose of this chapter is to present and critically evaluate the major propositions of the monetarist school of economic thought, that is, the school of economic thought according to which the quantity of money is the utmost important economic variable whose changes affect the behaviour of the entire economic system. Although the characterisation Monetarism was coined by Karl Brunner in 1968 to describe a school of economic thought that includes, besides Milton Friedman (1912–2006) and Anna Schwartz (1915–), Bruner himself and Allan Metzler among others, it is in fact a very old school of economic thought since its traces can be found in early nineteenth century. The University of Chicago, where monetarism was developed, clings to a free market tradition that restricts government’s intervention should be kept to a minimum and seeks to explain the major economic phenomena through a single variable, the supply of money.

--Lefteris Tsoulfidis, Competing Schools of Economic Thought (Berlin: Springer-Verlag, 2010), 301.

Classical, Keynesian, Neoclassical, Monetarism, New Classical, Real Business Cycles, New Keynesian, the Microeconomic Revolution of the 1930s, Sraffa Critique of the Firm, Neoclassical Synthesis, and Capital Theory

Thus, although this book deals with the history of economic thought, it does not necessarily follow a historic (in the sense of the order of presentation) approach, but rather a logical one, that is to say it deals with the social conditions associated with the emergence of a school of economic thought, its evolution, and its contemporary influence. One cannot write a book on the history of economic thought without writing separate chapters on the major economists of the past, that is, Adam Smith, David Ricardo, Karl Marx, and J.M. Keynes. Of course these economists formed schools of economic thought, that is, the classical and the Keynesian. As for the neoclassical school of economic thought, the ideas of its founders, that is, Stanley Jevons, Karl Menger, Léon Walras, and Alfred Marshal are put together into a single chapter and school of economic thought. The book also studies the evolution of current mainly macroeconomic approaches, that is, monetarism, new classical economics, real business cycles, and new Keynesian economics. Furthermore, we include separate chapters such as the microeconomic revolution of the 1930s, the upshot of Sraffa’s-based critique of the neoclassical theory of the firm, the neoclassical synthesis, capital theory, and a final chapter that summarizes and critically evaluates the major schools of economic thought.

--Lefteris Tsoulfidis, introduction to Competing Schools of Economic Thought (Berlin: Springer-Verlag, 2010), 1.

Mises on National (Anti-Marxian) Socialism

Marxian socialism is beckoning: “Class war, not national war!” It is proclaiming: “Never again [imperialistic] war.” But it is adding in thought: “Civil war forever, revolution.”

National socialism is beckoning: “National unity! Peace among classes!” And it is adding in thought: “War on the foreign enemy!”

These solutions distill the ideas which are dividing the German nation into two hostile camps.

--Ludwig von Mises, Critique of Interventionism: Inquiries into Present Day Economic Policy and Ideology, trans. Hans F. Sennholz (Auburn, AL: Ludwig von Mises Institute, 2011), 81-82.

A Soviet Response to Mises: Professor Mises as a Theorist of Fascism

Viennese professor Ludwig Mises is a very angry guy and he very strongly dislikes Marx and Marxism. Just speaking between us, he shouldn’t dislike it one bit. If not for Marxism, our professor would have to beg for handouts, since he has never managed to prove himself in science. Crushing Marxism, however, is a very profitable business.

“The science of the so-called Marxists,” states Mises, “can be no more than ‘scholasticism.’” Mises talks about “men and women who are in this business” with total disregard. They beat the air, live by canonized Marxian dogmas, with their writings mattering only because it helps their political careers; their “science” only pursues party goals; and the whole argument about revisionism and dictatorship is not scholarly, but is purely political.

--Ludwig von Mises, Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression, vol. 2 of Selected Writings of Ludwig von Mises, ed. Richard M. Ebeling (Indianapolis: Liberty Fund, 2002), 381-382.

Although Capital Is Central to Issues of Market Coordination, Capital Theory Held No Broad Interest

In 1941, The Pure Theory of Capital was too late -- and too obscure -- to catch the attention of an economics profession that was fixated upon John Maynard Keynes. Although capital is central to issues of market coordination, capital theory held no broad interest, even prior to the developing era of Keynesian economics:

In the Cambridge tradition that governed Keynes's brief study of economics, the Mill-Jevons theory of capital, later developed by Böhm-Bawerk and Wicksell was not seriously considered. By about 1930, these ideas had been largely forgotten in the English-speaking world.

By Hayek's own description, The Pure Theory of Capital is a 'highly abstract study of a problem of pure economic theory' that attempts to establish the 'fundamentals' that must serve 'more concrete work on the processes which we observe in the real world'. In particular, Hayek wished to remedy earlier expositions of a monetary theory of business cycles and to respond to criticisms that arose primarily from 'the inadequacy of its presentation of the theory of capital which it presupposed'.

--Gerald R. Steele, "Hayek's Pure Theory of Capital," in Elgar Companion to Hayekian Economics, ed. Roger W. Garrison and Norman Barry (Cheltenham, UK: Edward Elgar, 2014), 71.

The Body of Hayek's Work on Spontaneous Order Constitutes a Comprehensive Refutation of Marxian Theory

Of all socialist thinkers it is Marx who identifies social progress with the conscious control that will come with the advent of socialism. The frequent attacks by Marx and Engels against the 'anarchy of production', and the demand for an ex ante coordination of economic life where competition and spontaneous order give way to conscious human design, underlies the view that market society 'alienates' humankind from its character as a 'species being'. According to Marx, 'true' freedom requires an end to the subjugation of the worker (and the capitalist) to the 'blind power' of the market and its replacement by system where, 'production by freely associated men ... is consciously regulated by them in accordance with a settled plan'. For Marx, the conditions for such an order are imminent in the historical progression of capitalism itself, with the increasing concentration of industry in the hands of fewer enterprises under 'monopoly capitalism', paving the way for the ultimate overthrow of the market and its replacement with conscious planning.

Seen in this context, the body of Hayek's work on spontaneous order constitutes a comprehensive refutation of Marxian theory. The only circumstances in which conscious control would be possible on a society-wide basis would be those where the conditions of economic life are so few and simple that they could be surveyed by a single person or board. If humankind is to rely on conscious direction as the principal tool of social organization then it must confine itself to a primitive form of existence.

--Mark Pennington, "Hayek on Socialism," in Elgar Companion to Hayekian Economics, ed. Roger W. Garrison and Norman Barry (Cheltenham, UK: Edward Elgar, 2014), 261-262.

The Circulation Credit Theory of the Trade Cycle (also called the Monetary Theory)

Of all the theories of the trade cycle, only one has achieved and retained the rank of a fully-developed economic doctrine. That is the theory advanced by the Currency School, the theory which traces the cause of changes in business conditions to the phenomenon of circulation credit. All other theories of the crisis, even when they try to differ in other respects from the line of reasoning adopted by the Currency School, return again and again to follow in its footsteps. Thus, our attention is constantly being directed to observations which seem to corroborate the Currency School’s interpretation.

--Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory, trans. Bettina Bien Greaves, ed. Percy L. Greaves Jr. (Indianapolis: Liberty Fund, 2011), 102-103.

Over-Investment Theories of the Business Cycle: The Neo-Wicksellian School

Writers who believe that monetary forces operating under a particular form of credit organisation (banking system) produce the disequilibrium between the lower and higher stages of production.

This type of theory, which is frequently called the "Neo-Wicksellian" school, may perhaps be included amongst the monetary explanations of the business cycle, inasmuch as the active cause which disturbs the equilibrium is a monetary one. But the business cycle is for these writers more than a purely monetary phenomenon. Monetary forces produce a real maladjustment, the consequence of which is the breakdown of the boom. Crisis and depression cannot be explained purely by contraction of the circulating medium, although deflation may come in as a secondary and intensifying element. Among the writers whose theories fall within this group are HAYEK, MACHLUP, MISES, ROBBINS, RÖPKE and STRIGL.

--Gottfried Haberler, Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, 3rd ed. (1943; repr., Lake Success, NY: United Nations, 1946), 31-32.

Harvest Theories: Agriculture and the Business Cycle

The relation between changes in the agricultural situation and industrial fluctuations is much more complicated than many people think. There exist a good many theories on the subject, which are not easy to reconcile though all are either based on, or backed by, statistical research. One group of theories, which includes the writings of W. S. JEVONS, H. S. JEVONS, and H. L. MOORE, seeks to account for the periodicity of business cycles by establishing the existence of a similar periodicity in agricultural output. The chain of causation runs from cosmic influences to weather conditions, from weather conditions to harvests, and from harvests to general business.

--Gottfried Haberler, Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, 3rd ed. (1943; repr., Lake Success, NY: United Nations, 1946), 151.