From the Analytical Viewpoint of the Austrian School, Monetarists and Keynesians Use Very Similar Approaches and Methodologies

We must emphasize that from the analytical viewpoint we adopt in our book, i.e., that of the Austrian School, monetarists and Keynesians use very similar approaches and methodologies. Like monetarists, Keynes held no capital theory to enable him to understand the division of economic processes into productive stages and the role time plays in such processes. Furthermore his macroeconomic theory of prices rests on such concepts as the general price level, the overall amount of money in circulation, and even the velocity of circulation of money. Nevertheless certain significant peculiarities of Keynesian thought warrant discussion.

--Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, trans. Melinda A. Stroup (Auburn, AL: Ludwig von Mises Institute, 2006), 542-543.

The Ricardian Counterrevolution Erupted with Piero Sraffa’s Review of Hayek’s Book, Prices and Production

We must not forget that although neo-Ricardians may have been circumstantial allies to the Austrians in their criticism of the neoclassical trend, the neo-Ricardians’ stated objective is precisely to neutralize the influence (which is not yet strong enough, in our opinion) exerted on economics since 1871 by the subjectivist revolution Menger started. The Ricardian counterrevolution erupted with Piero Sraffa’s review of Hayek’s book, Prices and Production, as Ludwig M. Lachmann points out in his article, “Austrian Economics under Fire: The Hayek-Sraffa Duel in Retrospect”... We should also mention Joan Robinson’s work published in 1953 and devoted to criticizing the neoclassical production function.... On the neoclassical side, see the famous article by Paul A. Samuelson, who declared his unconditional surrender to the Cambridge Switching Theorem.

--Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, trans. Melinda A. Stroup (Auburn, AL: Ludwig von Mises Institute, 2006), 575n93.

Pure Time-Preference Theory: The Idea That the Phenomenon of Interest Is in No Way Dependent upon Physical Productivity

Almost invariably, contemporary economists have reacted to renewed discussions of the pure time-preference theory with utter disbelief and plain bewilderment. These critics have found the theory simply incredible; the idea that the phenomenon of interest is in no way dependent upon physical productivity is one that the critics find patently absurd; that serious thinkers should accept this absurdity, they find quite incomprehensible. The present paper does not seek to argue any superiority of PTPT [pure time-preference theory] over its competitors in the field of interest theories. Rather we seek to dispel the bewilderment that moderns display in regard to it. This task of clarification will turn out to involve certain “philosophical,” extra-economic issues that are of significance for economists in their own right, in several respects.

--Israel M. Kirzner, "The Pure Time-Preference Theory of Interest: An Attempt at Clarification," in The Pure Time-Preference Theory of Interest, ed. Jeffrey M. Herbener (Auburn, AL: Ludwig von Mises Institute, 2011), 100.

Reserve Banking Inherently Inflationistic

Quite apart from the reduction in reserve requirements, however, a magnification of the reserve base came about simply as a result of the creation of a central banking system. This is because of the fact that a system of central banking operates to dilute cash, so that reserves in effect go further. In a system devoid of bankers' banking, reserves consist of lawful money in the vaults of individual banks; in a system incorporating central banking, legal reserves for the member banks of the system exist simply as deposit liabilities of the bankers' banks.

--C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle: A Study of the Great Depression in the United States (New York: The Macmillan Company, 1937), 24.

For the French Élite, Capturing the German Bundesbank Is the Great Prize in the European Monetary War

For the French élite, money is not the lubricant of the economy but the most important lever of power. Capture of the Bundesbank is thus, for them, the great prize in the European monetary war. To secure it, they have been willing to tempt Germany with the lure of political union, while never intending to deliver it.

--Bernard Connolly, The Rotten Heart of Europe: The Dirty War for Europe's Money (London: Faber and Faber, 1996), 4.

Böhm-Bawerk Rejects the Marshallian View of Determining the Supply Side by “Objective” Considerations of Given and Known Production Costs

Böhm-Bawerk reproached Marshall for blocking, in the English-speaking world, the clear reception of the subjectivist revolution that Menger had started and, specifically, for attempting to rehabilitate Ricardo’s old objectivism, at least on the supply side, in using supply and demand functions to explain price determination. Indeed Marshall used the metaphor of the famous scissors with two blades (supply and demand) that jointly set (equilibrium) prices in the market. While Marshall accepted that demand is basically determined by subjective considerations of utility, he believed that the supply side was mainly determined by “objective” considerations involving the historical (that is, “given” and known) cost of production.

--Jesús Huerta de Soto, The Austrian School: Market Order and Entrepreneurial Creativity (Cheltenham, UK: Edward Elgar, 2008), 53.

The Fear of Deflation Is a Decisive Barrier Towards the Installment of a Better Monetary System

I had decided to write on deflation because I regarded the fear of deflation as a decisive barrier towards the installment of a better monetary system. The fear of falling prices has again and again been misused to justify monetary inflation with all its detrimental consequences. Especially, in times of crises the specter of deflation is invoked to inflate the money supply with the aim to prop up failed elites. Indeed, in December 2007 a storm was in the making that a few months later brought the international financial system to the verge of collapse. In autumn 2008 after the default of Lehman Brothers, a deflationary spiral was on its way to wipe away the international banking system and with it highly indebted governments, companies, and individuals. It was a unique opportunity to have a system liquidated that through institutional inflation continually redistributes wealth, generates business cycles, hampers savings and growth, and protects the political and economic elites from competition.

--Philipp Bagus, preface to In Defense of Deflation, Financial and Monetary Policy Studies 41 (Cham, CH: Springer International, 2015), vii.

Ridding Europe of the Hated Deutschmark

Governments of Latin countries, and especially France, regarded the Euro as an efficient means of getting rid of the hated Deutschmark. Before the introduction of the Euro, the Deutschmark was a standard that laid bare the monetary mismanagement of irresponsible governments. While the Bundesbank inflated the money supply, it produced new money at a slower rate than the high inflation of—especially Southern European—countries, who used their central banks most generously to finance deficits. The exchange rate against the Deutschmark served citizens in those countries as a standard of comparison. Governments of high inflation countries feared the comparison with the Bundesbank. The Euro was a means to end the embarrassing comparisons and devaluations.

Governments of high inflation countries did not fear the newly established European Central Bank. While the new central bank would look like a copy of the Bundesbank from the outside, from the inside it could be put under political pressure and gradually become a central bank more like that of Latin central banks. Actually, Southern Europe has control over the ECB. The council of the ECB is composed of the directors of the ECB and the presidents of the national central banks. All have the same vote. Germany and Northern, hard currency countries such as the Netherlands, Luxembourg and Belgium hold the minority of votes against countries like Italy, Portugal, Greece, Spain, and France, whose governments are less averse to deficits. These Latin countries had strong labor unions and high debts making them inherently prone to inflation.

--Philipp Bagus, The Tragedy of the Euro, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2012), 43-44.

The Big Error of All Quantity Theorists Is to assume That Money Is Only a "Veil" and That Increases in the Quantity of Money Only Have Influence on the Price Level, or on the Purchasing Power of the Money Unit

The big error of all quantity theorists, from the British classicists to Milton Friedman, is to assume that money is only a "veil," and that increases in the quantity of money only have influence on the price level, or on the purchasing power of the money unit. On the contrary, it is one of the notable contributions of "Austrian School" economists and their predecessors, such as the early-eighteenth-century Irish-French economist Richard Cantillon, that, in addition to this quantitative, aggregative effect, an increase in the money supply also changes the distribution of income and wealth. The ripple effect also alters the structure of relative prices, and therefore of the kinds and quantities of goods that will be produced, since the counterfeiters and other early receivers will have different preferences and spending patterns from the late receivers who are "taxed" by the earlier receivers. Furthermore, these changes of income distribution, spending, relative prices, and production will be permanent and will not simply disappear, as the quantity theorists blithely assume, when the effects of the increase in the money supply will have worked themselves out.

--Murray N. Rothbard, The Case Against the Fed (Auburn, AL: Ludwig von Mises Institute, 2007), 25-26.

The Origins of Economic Theory Itself Can Be Traced to Irish Banker Richard CantilIon

It seems clear that Cantillon was an important influence on the development of Austrian economics, and that he can be considered a member of the Austrian School. Carl Menger had a copy of the Essai in his library prior to the publication of The Principles of Economics.

Indeed, the origins of economic theory itself can be traced to CantilIon. William Stanley Jevons, one of the cofounders of the marginalist revolution, and the economist who is generally credited with rediscovering Cantillon, called the Essai "a systematic and connected treatise, going over in a concise manner nearly the whole field of economics.... It is thus the first treatise on economics." He dubbed the work the "Cradle of Political Economy." Joseph Schumpeter, the great historian of economic thought and student of Eugen von Böhm-Bawerk, described the Essai as "the first systematic penetration of the field of economics." In his treatise on the history of economic thought, Murray N. Rothbard named Cantillon "the founding father of modern economics."

--Mark Thornton, "Richard Cantillon: The Origin of Economic Theory," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 13-14.

Ludwig von Mises Had Predicted the Depression during the Heyday of the Great Boom of the 1920s

Ludwig von Mises had predicted the depression during the heyday of the
great boom of the 1920s—a time, just like today, when economists and politicians, armed with a “new economics” of perpetual inflation, and with new “tools” provided by the Federal Reserve System, proclaimed a perpetual “New Era” of permanent prosperity guaranteed by our wise economic doctors in Washington. Ludwig von Mises, alone armed with a correct theory of the business cycle, was one of the very few economists to predict the Great Depression, and hence the economic world was forced to listen to him with respect.

--Murray N. Rothbard, Economic Depressions: Their Cause and Cure (Auburn, AL: Ludwig von Mises Institute, 2009), 42-43.

The New Order Was a Striking Reversion to Old-Fashioned Mercantilism

In many ways, the new order was a striking reversion to old-fashioned mercantilism, with its aggressive imperialism and nationalism, its pervasive militarism, and its giant network of subsidies and monopolistic privileges to large business interests. In its twentieth-century form, of course, the New Mercantilism was industrial rather than mercantile, since the industrial revolution had intervened to make manufacturing and industry the dominant economic form. But there was a more significant difference in the New Mercantilism. The original mercantilism had been brutally frank in its class rule, and in its scorn for the average worker and consumer. Instead, the new dispensation cloaked the new form of rule in the guise of promotion of the overall national interest, of the welfare of the workers through the new representation for labor, and of the common good of all citizens.

--Murray N. Rothbard, War Collectivism: Power, Business, and the Intellectual Class in World War I (Auburn, AL: Ludwig von Mises Institute, 2012), 8.

The Classical Gold Standard Broke Down Because People Trusted Government Promises

If the classical gold standard worked so well, why did it break down? It broke down because governments were entrusted with the task of keeping their monetary promises, of seeing to it that pounds, dollars, francs, etc., were always redeemable in gold as they and their controlled banking system had pledged. It was not gold that failed; it was the folly of trusting government to keep its promises. To wage the catastrophic war of World War I, each government had to inflate its own supply of paper and bank currency. So severe was this inflation that it was impossible for the warring governments to keep their pledges, and so they went “off the gold standard,” i.e., declared their own bankruptcy, shortly after entering the war.

--Murray N. Rothbard, What Has Government Done to Our Money? (Auburn, AL: Ludwig von Mises Institute, 2010), 92.

World War II Might Be Considered as a Coalition War: The Morgans Got Their War in Europe, the Rockefellers Theirs in Asia

During the 1930s, the Rockefellers pushed hard for war against Japan, which they saw as competing with them vigorously for oil and rubber resources in Southeast Asia and as endangering the Rockefellers’ cherished dreams of a mass “China market” for petroleum products. On the other hand, the Rockefellers took a non-interventionist position in Europe, where they had close financial ties with German firms such as I. G. Farben and Co., and very few close relations with Britain and France. The Morgans, in contrast, as usual deeply committed to their financial ties with Britain and France, once again plumped early for war with Germany, while their interest in the Far East had become minimal. Indeed, U.S. Ambassador to Japan, Joseph C. Grew, former Morgan partner, was one of the few officials in the Roosevelt administration genuinely interested in peace with Japan.

World War II might therefore be considered, from one point of view, as a coalition war: the Morgans got their war in Europe, the Rockefellers theirs in Asia. Such disgruntled Morgan men as Lewis W. Douglas and Dean G. Acheson (a protégé of Henry Stimson), who had left the early Roosevelt administration in disgust at its soft money policies and economic nationalism, came happily roaring back into government service with the advent of World War II. Nelson A. Rockefeller, for his part, became head of Latin American activities during World War II, and thereby acquired his taste for government service.

--Murray N. Rothbard, Wall Street, Banks, and American Foreign Policy, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), 33.

Only Government Compulsion Could Sustain a Successful Cartel

Characteristically, it was Albert Fink who saw it first. If the railroads could not form successful cartels by voluntary action, then they would have to get the government to do the job for them. Only government compulsion could sustain a successful cartel. As Fink put it in a letter as early as 1876, “Whether this cooperation can be secured by voluntary action of the transportation companies is doubtful. Governmental supervision and authority may be required to some extent to accomplish the object in view.”

The railroad men were scarcely averse to calling in government to help solve their problems. As we have seen, the railroads had been hip deep in government subsidy for many years, and particularly since the Civil War. Of the railroad presidents in the 1870s, 80% held political jobs before, during, or after their tenure. Specifically, of 53 railroad presidents in the 1870s, 28 held down political jobs before or during their presidency, and 14 went into them after they left their railroad posts.

--Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 67.

Putting a Central Bank Across: Manipulating a Movement, 1897-1902

Around 1900, two mighty financial-industrial groups, each consisting of investment banks, commercial banks, and industrial resources, confronted each other, usually with hostility, in the financial, and more importantly, the political arena. These coalitions were (1) the interests grouped around the Morgan bank; and (2) an alliance of Rockefeller-Harriman and Kuhn, Loeb interests. It became far easier for these financial elites to influence and control politicians and political affairs after 1900 than before. For the "Third Party System," which had existed in America from 1856 to 1896, was comprised of political parties, each of which was highly ideological and in intense conflict with the opposing party. While each political party, in this case the Democratic, the Republican, and various minor parties, consisted of a coalition of interests and forces, each was dominated by a firm ideology to which it was strongly committed. As a result, citizens often felt lifelong party loyalties, were socialized into a party when growing up, were educated in party principles, and then rode herd on any party candidates who waffled or betrayed the cause. For various reasons, the Democratic and Republican parties after 1900, in the Fourth and later Party Systems, were largely non-ideological, differed very little from each other, and as a result commanded little party loyalty. In particular, the Democratic Party no longer existed, after the Bryan takeover of 1896, as a committed laissez-faire, hard-money party. From then on, both parties rapidly became Progressive and moderately statist.

Since the importance of political parties dwindled after 1900, and ideological laissez-faire restraints on government intervention were gravely weakened, the power of financiers in government increased markedly. Furthermore, Congress—the arena of political parties—became less important. A power vacuum developed for the intellectuals and technocratic experts to fill the executive bureaucracy, and to run and plan national economic life relatively unchecked.

--Murray N. Rothbard, The Case Against the Fed (Auburn, AL: Ludwig von Mises Institute, 2007), 90-91.

Central Banking Is Designed to Remove the Limitations Free Banking Imposes on Inflation

Free banking, then, will inevitably be a regime of hard money and virtually no inflation. In contrast, the essential purpose of central banking is to use government privilege to remove the limitations placed by free banking on monetary and bank credit inflation. The Central Bank is either government-owned and operated, or else especially privileged by the central government. In any case, the Central Bank receives from the government the monopoly privilege for issuing bank notes or cash, while other, privately-owned commercial banks are only permitted to issue demand liabilities in the form of checking deposits.

--Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 125.

What to Austrians Is Most Objectionable Is the Neoclassical Style of Thought, Borrowed from Classical Mechanics

But what to Austrians is most objectionable is the neoclassical style of thought, borrowed from classical mechanics, which makes us treat the human mind as a mechanism and its utterances as determined by external circumstances. Action is here confused with mere reaction. There is no choice of ends. Given a ‘comprehensive preference field’ for each agent, what is there to choose? The outcome of all acts of choice is here predetermined. In response to changing market prices men perform meaningless acts of mental gymnastics by sliding up and down their indifference curves. All this is far removed from meaningful action in our ‘life-world’.

--Ludwig M. Lachmann, "Austrian Economics: A Hermeneutic Approach," in Economics and Hermeneutics, ed. Don Lavoie (London: Routledge, 2005), 133.

Ludwig Lachmann and the Centrality of Radical Subjectivism

Few will dispute the observation that the unifying thread running through Lachmann’s social science was his radical subjectivism. It was radical subjectivism that Ludwig Lachmann deployed in order to deepen our understanding of economic processes. And if one seeks to characterize the intellectual odyssey which made up Lachmann’s scholarly career, it seems fair to portray it as a consistent series of deepened, pioneering extensions—the radicalization, if you will—of his own subjectivism. And, we shall see, it is certain characteristic features of Lachmann’s subjectivism which raise the problems with which we wish to grapple in this lecture.

Lachmann was entirely unsatisfied by what he called “subjectivism as the expression of human ‘disposition.’”  It is simply not enough to recognize that decisions made by consumers express the structures of their preferences. Such recognition for the role of subjective tastes would be entirely compatible with the statement of Pareto—a statement cited by Lachmann with disagreement so obviously profound as to border on disbelief—to the effect that once the consumer has left us a picture of his indifference map, we no longer need him at all, since, we then already know exactly what he will decide to do. For Lachmann subjectivism represents, most importantly, “a manifestation of spontaneous action.” By this way of putting it, Lachmann meant to draw attention to the power of the active human mind to frustrate any pretensions by Paretian—or other—economists to predict, simply on the basis of given scarcity constraints impinging on given preferences, what action will in fact be taken.

--Israel M. Kirzner, The Driving Force of the Market: Essays in Austrian Economics, Foundations of the Market Economy (London: Routledge, 2003), 55.

The Subjectivism of the Austrian School

Subjectivism has never, of course, meant any challenge to the possibility of “objective truth” in economics. It has never claimed that “everything is merely a matter of subjective interpretation” by the would-be economist. What the subjectivism of the 1870s challenged was the basic—if unstated—classical tenet that ultimately the only determinant of social-economic phenomena is the objective physical environment. All economic science has endeavored to account for real-world phenomena. The classical economist believed that these phenomena are to be seen as having been inexorably determined by the underlying physical realities. The availability of scarce natural resources, in conjunction with population and its demographics, basically determine the course of human history. What emerges over history is inescapable, it cannot be substantially altered by human will. Economic history emerges as automatically determined by the objective conditions governing and surrounding production. It was against this premise that Menger did revolutionary battle in his 1871 Grundsätze—written, we are told, in what he himself described as “a state of morbid excitement.”

--Israel M. Kirzner, The Driving Force of the Market: Essays in Austrian Economics, Foundations of the Market Economy (London: Routledge, 2003), 41-42.

Phillips, McManus, and Nelson Claim That the Roots of the Great Depression Go Back to the Monetary Inflation and Credit Expansion Begun by the Fed in 1922

C.A. Phillips, T.F. McManus, and R.W. Nelson claimed that the roots of the Great Depression go back to the monetary inflation and credit expansion begun by the Fed in 1922.

Phillips, McManus, and Nelson leave no doubt of Fed culpability for the boom-bust of the 1920s and 1930s:

The Federal Reserve System, in other words, entered upon an active policy of positive control. Banking developments in this country from 1922 onward were almost entirely the consequence of Federal Reserve control operations. Dr. Miller’s characterization of the 1927 “boot-strap lifting” experiment as “one of the most costly errors committed by it or any other banking system in the last 75 years” applies with equal force to the experiments of 1922 and 1924. In the formulation and execution of an essentially inflationistic policy of control, the Board must be charged with a colossal error, the ultimate effect of which was, as Dr. Miller himself admits, the depression.

Murray Rothbard, in his account of the Great Depression written contemporaneously with Friedman’s, calculated that the money stock increased from $45.3 billion on June 30, 1921 to $73.3 billion on June 30, 1929, a rise of nearly 62 % or 7.7 % annually. As with increases in bank credit, increases in the money stock came in waves during 1922–1923, late 1924, late 1925, and late 1927. Rothbard showed that the entire increase came in the form of money substitutes, as currency in circulation was $3.64 billion in 1929 and $3.68 billion in 1921. The main cause of the increase in bank money substitutes was an increase in reserves.

--Jeffrey Herbener, "Fed Policy Errors of the Great Depression," in The Fed at One Hundred: A Critical View on the Federal Reserve System, ed. David Howden and Joseph T. Salerno (Cham, CH: Springer International, 2014), 44-45.

The Economic Significance of the Heterogeneity of Capital Is That Each Capital Good Can Only be used for a Limited Number of Purposes

All capital resources are heterogeneous. The heterogeneity which matters is here, of course, not physical heterogeneity, but heterogeneity in use. Even if, at some future date, some miraculous substance were invented, a very light metal perhaps, which it was found profitable to substitute for all steel, wood, copper, etc., so that all capital equipment were to be made from it, this would in no way affect our problem. The real economic significance of the heterogeneity of capital lies in the fact that each capital good can only be used for a limited number of purposes. We shall speak of the multiple specificity of capital goods.

--Ludwig M. Lachmann, Capital and Its Structure (Kansas City: Sheed Andrews and McMeel, 1978), 2.

Socialism Will Require Abandoning the Freedom of the Consumer

In view of these difficulties, it is not surprising that practically all who have really tried to think through the problem of central planning have despaired of the possibility of solving it in a world in which every passing whim of the consumer is likely to upset completely the carefully worked-out plans. It is more or less agreed now that free choice of the consumer (and presumably also free choice of occupation) and planning from the center are incompatible aims. But this has given the impression that the unpredictable nature of the tastes of the consumers is the only or the main obstacle to successful planning. Maurice Dobb has recently followed this to its logical conclusion by asserting that it would be worth the price of abandoning the freedom of the consumer if by the sacrifice socialism could be made possible. This is undoubtedly a very courageous step. In the past, socialists have consistently protested against any suggestion that life under socialism would be like life in a barracks, subject to regimentation of every detail. Dr. Dobb considers these views as obsolete. Whether he would find many followers if he professed these views to the socialist masses is not a question which need concern us here. The question is whether it would provide a solution to our problem.

--Friedrich A. Hayek, "Socialist Calculation II: The State of the Debate, 1935," in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), 158.

Mises's Argument: Marx's Concept of Central Planning is Utopian, Demonstrably Unworkable

My main purpose in this section is to examine Mises's argument that Marx's concept of central planning is "utopian" in Marx's own sense of the word -- that is, is demonstrably unworkable, as is revealed through an analysis of the way the existing capitalist economy works. Mises contends that advanced technological production is too complex to be subsumed under a conscious plan and therefore must be broken up into subplans that require coordination. But since Marxian socialism eschews the use of money, there is no suitable common denominator for the quantitative calculations that decentralized coordination requires.

--Don Lavoie, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (Cambridge: Cambridge University Press, 1985), 60.

The Socialist Calculation Debate of the 1930s Was the Most Important Theoretical Controversy in the History of the Field of Comparative Economics

The socialist calculation debate of the 1930s is widely acknowledged to have been the most important theoretical controversy in the history of the field of comparative economics. Alexander Eckstein was not exaggerating when he referred to the debate as a "theoretical controversy ... of far-reaching importance in the study of comparative economics" that "focused on a range of problems that had a profound impact on the development of the field."

--Don Lavoie, introduction to Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (Cambridge: Cambridge University Press, 1985), 1.

The Ricardian Vision Versus the Mengerian Vision of the Production Process

When we move from Smith’s world to the world of Ricardo’s Principles we find that things are not so simple. Ricardo strove valiantly to apply Smith’s insights and method to a world in which much of the productive equipment was in the form of heterogeneous “machinery.” He salvaged homogeneity by banishing considerations of change, by focusing on the conditions of the “long-run” stationary state. Those who followed Ricardo thus came to see this long-run equilibrium not only as the condition toward which the economy was always moving, but also as a sort of essential reality that characterized the market system below the surface reality of which our senses may at any time be aware.

In this sense, all modern-day theorists who work in terms of stationary or steady-state economics are “Ricardians.” Their approach is to be contrasted with that of Carl Menger who, while also following Adam Smith in some respects, offered a different vision of the economy and of the process of production. For Menger production was characterized by a time structure of production that was the result of individual intertemporal planning. There is no suggestion that the economy is in a stationary-state equilibrium.

--Peter Lewin, introduction and outline to Capital in Disequilibrium: The Role of Capital in a Changing World, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), 9.

Much of the Reluctance of Economists to deal with the Theory of Capital Is a Result of the Historical Context in Which It Was Developed

As will become clear from the discussion below, much of the reluctance of economists to deal with the theory of capital is a result of the historical context in which it was developed. The history of thought in capital theory contains volumes of discussion on intricate technical and sometimes philosophical issues that modern economists have come to think they can do quite well without. This impression was strongly reinforced by the Keynesian revolution and Keynes’s summary dismissal of capital theory as irrelevant. Even with the emergence of a more critical approach to Keynesian macroeconomics, this habit of ignoring the deeper issues that a consideration of the nature of capital invites was not broken. Capital theory is widely (if tacitly) regarded as a topic in the history of economic thought.

--Peter Lewin, introduction and outline to Capital in Disequilibrium: The Role of Capital in a Changing World, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), 4.

Most Students of Economics Encounter the Theory of Capital as Part of a Theory of Finance and/or Project Evaluation

Most students of economics encounter the theory of capital as part of a theory of finance and/or project evaluation. When considering the question of how to measure (known or estimated) values that occur at different points in time, they get introduced to the arithmetic of present values. And while the notion of present value can be elaborated and dissected in many subtle ways, its basics derive from some very straightforward, intuitive ideas. It is surprising, then, to find that capital theory is regarded as a particularly esoteric and largely irrelevant part of economics.

Obviously, although present-value arithmetic is an important part of an understanding of capital, it is only a part of that understanding. It is the other parts that have been regarded as obscure and irrelevant. Although capital theory may be difficult, it is hard to see that it could justifiably be judged as irrelevant. After all, the market economies of the world are often referred to as “capitalist” economies. Surely a good understanding of the meaning and significance of the “capital” in “capitalist” is of some importance, for history and for policy. If capital is that phenomenon that makes market economies different, ought we not to accord it a prominent place in the education of an economist?

--Peter Lewin, introduction and outline to Capital in Disequilibrium: The Role of Capital in a Changing World, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), 4.

To Understand Disastrous Economic Policies Like the Dot-Com Bust and Housing Bubble, Study the Battles over Capital and Capital Theory

In the world of economic policy, the relevance of (Austrian type) capital theory has increased dramatically. The appeal of what Ludwig Lachmann referred to as “neoclassical formalism” has not diminished. Policy-makers, following the counsel of their economic advisors, who are ruled by a belief in the significance of economic aggregates, have persistently ignored, indeed precipitated, capital structure distortions; the results of which have been two major domestic economic crises (the dot-com bust and the housing-bubble meltdown), a global credit crisis, a chronic fiscal deficit and an exploding debt burden that threatens to destroy the very fabric of the economy’s value-creating potential.This book is designed for those who wish to understand, in a thorough and fundamental way, the nature and significance of capital. What makes an economy “capitalist”? How does value get created over time? If we get this wrong we may end up paying a high price indeed.

The erroneous ideas upon which disastrous economic policy has been based have come down from the intellectual forebears of the current generation of economic advisors. A full appreciation of this entails understanding the nature of battles fought long ago over the nature and significance of capital and capital theory. Accordingly, the focus of this book on this particular aspect of the history of economic thought remains very relevant.

--Peter Lewin, preface to the second edition of Capital in Disequilibrium: The Role of Capital in a Changing World, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011), xi.

Rothbard on Keynes: The General Theory Was Merely Old and Oft-Refuted Mercantilist and Inflationist Fallacies

Keynes's General Theory was, at least in the short run, one of the most dazzlingly successful books of all time. In a few short years, his “revolutionary” theory had conquered the economics profession and soon had transformed public policy, while old-fashioned economics was swept, unhonored and unsung, into the dustbin of history.

How was this deed accomplished? Keynes and his followers would answer, of course, that the profession simply accepted a starkly self-evident truth. And yet The General Theory was not truly revolutionary at all but merely old and oft-refuted mercantilist and inflationist fallacies dressed up in shiny new garb, replete with newly constructed and largely incomprehensible jargon. How, then, the swift success?

Part of the reason, as Schumpeter has pointed out, is that governments as well as the intellectual climate of the l930s were ripe for such conversion. Governments are always seeking new sources of revenue and new ways to spend money, often with no little desperation; yet economic science, for over a century, had sourly warned against inflation and deficit spending, even in times of recession.

--Murray N. Rothbard, Keynes, the Man (Auburn, AL: Ludwig von Mises Institute, 2010), 37.

Government As Robber: Rothbard Versus Public Choice Theorists

We are now in a position to analyze government and its relationship to the market. Economists have generally depicted the government as a voluntary social institution providing important services to the public. The modern “public choice” theorists have perhaps gone furthest with this approach. Government is considered akin to a business firm, supplying its services to the consumer-voters, while the voters in turn pay voluntarily for these services. All in all, government is treated by conventional economists as a part of the market, and therefore, as in the case of a business firm or a membership organization, either totally or in part neutral to the market.

It is true that if taxation were voluntary and the government akin to a business firm, the government would be neutral to the market. We contend here, however, that the model of government is akin, not to the business firm, but to the criminal organization, and indeed that the State is the organization of robbery systematized and writ large. The State is the only legal institution in society that acquires its revenue by the use of coercion, by using enough violence and threat of violence on its victims to ensure their paying the desired tribute. The State benefits itself at the expense of its robbed victims. The State is, therefore, a centralized, regularized organization of theft. Its payments extracted by coercion are called “taxation” instead of tribute, but their nature is the same.

--Murray N. Rothbard, "The Myth of Neutral Taxation," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 459-460.

During the 1930s, Fisher and the Chicago School Were Pre-Keynes Keynesians

During the 1930s, therefore, the Fisher-Chicago position was that, in order to cure the depression, the price level needed to be “reflated” back to the levels of the 1920s, and that reflation should be accomplished by:

1. the Fed expanding the money supply, and
2. the Federal government engaging in deficit spending and large-scale public works programs.

In short, during the 1930s, Fisher and the Chicago School were “pre-Keynes Keynesians,” and were, for that reason, considered quite radical and socialistic—and with good reason.

--Murray N. Rothbard, "Milton Friedman Unraveled," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 906-907.

The Key Problem with Friedman’s Fisherine Approach Is the Same Orthodox Separation of the Micro and Macro Spheres

The third major feature of the New Deal program was proto-Keynesian: the planning of the “macro” sphere by the government in order to iron out the business cycle. In his approach to the entire area of money and the business cycle—an area on which unfortunately Friedman has concentrated most of his efforts—Friedman harks back not only to the Chicagoans, but, like them, to Yale economist Irving Fisher, who was the Establishment economist from the 1900s through the 1920s. Friedman, indeed, has openly hailed Fisher as the “greatest economist of the twentieth century,” and when one reads Friedman’s writings, one often gets the impression of reading Fisher all over again, dressed up, of course, in a good deal more mathematical and statistical mumbo-jumbo.

But the key problem with Friedman’s Fisherine approach is the same orthodox separation of the micro and macro spheres that played havoc with his views on taxation. For Fisher believed, again, that on the one hand there is a world of individual prices determined by supply and demand, but on the other hand there is an aggregate “price level” determined by the supply of money and its velocity of turnover, and never the twain do meet. The aggregate, macro, sphere is supposed to be the fit subject of government planning and manipulation, again supposedly without affecting or interfering with the micro area of individual prices.

--Murray N. Rothbard, "Milton Friedman Unraveled," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 903-904.

Milton Friedman Is the Establishment’s Court Libertarian, According to Murray Rothbard

Mention “free-market economics” to a member of the lay public and chances are that if he has heard the term at all, he identifies it completely with the name Milton Friedman. For several years, Professor Friedman has won continuing honors from the press and the profession alike, and a school of Friedmanites and “monetarists” has arisen in seeming challenge to the Keynesian orthodoxy.

However, instead of the common response of reverence and awe for “one of our own who has made it,” libertarians should greet the whole affair with deep suspicion: “If he’s so devoted a libertarian, how come he’s a favorite of the Establishment?” An advisor of Richard Nixon and a friend and associate of most administration economists, Friedman has, in fact, made his mark in current policy, and indeed reciprocates as a sort of leading unofficial apologist for Nixonite policy.

In fact, in this as in other such cases, suspicion is precisely the right response for the libertarian, for Professor Friedman’s particular brand of “free-market economics” is hardly calculated to ruffle the feathers of the powers-that-be. Milton Friedman is the Establishment’s Court Libertarian, and it is high time that libertarians awaken to this fact of life.

--Murray N. Rothbard, "Milton Friedman Unraveled," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 895.

The Knightians Deny Time Preference and Base Interest Return Solely on Productivity of Capital

Of current schools of economic thought, the most fashionable have been the econometric, the Keynesian, the institutionalist, and the neo-classic. “Neo-classic” refers to the pattern set by the major economists of the late nineteenth century. The dominant neoclassical strain at present is to be found in the system of Professor Frank Knight, of which the most characteristic feature is an attack on the whole concept of time preference. Denying time preference, and basing interest return solely on an alleged “productivity” of capital, the Knightians attack the doctrine of the discounted MVP and instead advocate a pure MVP theory. The clearest exposition of this approach is to be found in an article by a follower of Knight’s, Professor Earl Rolph.

--Murray N. Rothbard, "Professor Rolph on the Discounted Marginal Productivity Theory," in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 277.

The Most Important Economic Element in This War Ideology Was Inflationism

When the first edition of this book was published twelve years ago, the nations and their governments were just preparing for the tragic enterprise of the Great War. They were preparing, not merely by piling up arms and munitions in their arsenals, but much more by the proclamation and zealous propagation of the ideology of war. The most important economic element in this war ideology was inflationism.

--Ludwig von Mises, preface to the second German edition of The Theory of Money and Credit, trans. H.E. Batson (Indianapolis: Liberty Fund, 1981), 33.

Interest Is a Rate, or Ratio, between Present and Future, between Future Earnings and Present Price or Payment

Thus, Fetter was the first economist to explain interest rates solely by time preference. Every factor of production earns its rent in accordance with its marginal product, and every future rental return is discounted, or "capitalized," to get its present value in accordance with the overall social rate of time preference. This means that a firm that buys a machine will only pay the present value of expected future rental incomes, discounted by the social rate of time preference; and that when a capitalist hires a worker or rents land, he will pay now, not the factor's full marginal product, but the expected future marginal product discounted by the social rate of time preference.

As Fetter pointed out, interest is not, like rent or wages, an annual or monthly income, an income per unit time earned by a factor of production. Interest, on the contrary, is a rate, or ratio, between present and future, between future earnings and present price or payment.

--Murray N. Rothbard, introduction to Capital, Interest, and Rent: Essays in the Theory of Distribution, by Frank Fetter (Kansas City: Sheed Andrews and McMeel, 1977), 4-5.

It Is for His Service in Paying Factors Now That the Capitalist Earns an Interest Return, a Return for Time Preference

If we assume, for example, that there are no business loans but only stock investment, this point is easier to understand. When a man saves and invests in a productive process, he pays workers and other factors now in exchange for services that will yield a product, and therefore an income, at some future time. In short, the capitalist-entrepreneur hires or invests in factors now and pays out money (a present good) in exchange for productive services that are future goods. It is for his service in paying factors now, in advance of the fruits of production, that the capitalist normally earns an interest return, a return for time preference. In sum, every factor of production (whether labor, land, or capital goods) earns, not its marginal value productivity, according to the current conventional explanation, but its marginal productivity discounted by the interest rate or time preference; and the capitalist earns the discount.

--Murray N. Rothbard, introduction to Capital, Interest, and Rent: Essays in the Theory of Distribution, by Frank Fetter (Kansas City: Sheed Andrews and McMeel, 1977), 11-12.

Neither Keynes Himself, Nor Those of His Colleagues Who Influenced Him, Had Really Grasped the "Law of Markets"

Keynes' own reference to the law was based upon a quotation, not from Say's own enunciation, but from a rather unsatisfactory exposition of the idea in J. S. Mill's Principles of Political Economy; and the passage Keynes quoted was torn from a context which throws essential light upon its implications. The young economists at Cambridge whose outlook Keynes found congenial and with whom he discussed his developing ideas, must surely have been unaware of Mill's incomparably more satisfactory treatment of the same topic in his Unsettled Questions in Political Economy, or they could hardly have failed to draw his attention to it. I feel even more certain that they could not have been aware of James Mill's astonishing Commerce Defended (1808) which is a better exposition of Say's law than Say's original enunciation of it. My own judgment is that neither Keynes himself, nor those of his colleagues who influenced him, had really grasped the "law of markets" to which Say's name has become attached.

--William H. Hutt, A Rehabilitation of Say's Law (Athens, OH: Ohio University Press, 1974), 24-25.

The Fault of Inflation Is in the Legalized Counterfeiting Operations of the Government Itself--The Power to Create New Money

The fault of inflation is not in business “monopoly,” or in union agitation, or in the hunches of speculators, or in the “greediness” of consumers; the fault is in the legalized counterfeiting operations of the government itself. For the government is the only institution in society with the power to counterfeit—to create new money. So long as it continues to use that power, we will continue to suffer from inflation, even unto a runaway inflation that will utterly destroy the currency.

--Murray N. Rothbard, introduction to the third edition of America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), xxix.

Mitchellians, Keynesians, and Marxians Are Convinced That Business Cycles Spring from Deep within the Capitalist System

Yet, on closer analysis, the common reaction is by no means self-evident. It rests, in fact, on an unproven assumption—the assumption that business cycles in general, and depressions in particular, arise from the depths of the free-market, capitalist economy. If we then assume that the business cycle stems from—is “endogenous” to—the free market, then the common reaction seems plausible. And yet, the assumption is pure myth, resting not on proof but on simple faith. Karl Marx was one of the first to maintain that business crises stemmed from market processes. In the twentieth century, whatever their great positive differences, almost all economists—Mitchellians, Keynesians, Marxians, or whatnot—are convinced of this view. They may have conflicting causal theories to explain the phenomenon, or, like the Mitchellians, they may have no causal theory at all—but they are all convinced that business cycles spring from deep within the capitalist system.

--Murray N. Rothbard, introduction to the first edition of America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), xxxviii.

Rothbard: Milken's Real Crime Was Attacking the Rockefeller Corporate Power Elites with Takeover Bids (Leveraged Buy-Outs)

What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high-yield bonds (the “leveraged buy-out”).

The new takeover process enraged the Rockefeller-type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the Establishment. In the process Drexel Burnham grew from a small, third-tier investment firm to one of the giants of Wall Street.

The Establishment was bitter for many reasons. The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market. The competition also proved inconvenient for firms who issue and trade in blue-chip, but low-yield, bonds; these firms soon persuaded their allies in the Establishment media to sneeringly refer to their high-yield competition as “junk” bonds.

People like Michael Milken perform a vitally important economic function for the economy and for consumers, in addition to profiting themselves. One would think that economists and writers allegedly in favor of the free market would readily grasp this fact. In this case, such entrepreneurs aid the process of shifting the ownership and control of capital from inefficient to more efficient and productive hands—a process which is great for everyone, except, of course, for the inefficient Old Guard elites whose proclaimed devotion to the free markets does not stop them from using the coercion of the federal government to try to resist or crush their efficient competitors.

--Murray N. Rothbard, "Michael R. Milken vs. the Power Elite," in Making Economic Sense, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 183-184.

The Real Slayer of Keynesianism Came with the Double-Digit Inflationary Recessions of the 1970s and 1980s

But the real slayer of Keynesianism came with the double-digit inflationary recession of 1973–74, followed soon by the even more intense inflationary recessions of 1979–80 and 1981–82. For if the government was supposed to step on the spending accelerator during recessions, and step on the brakes during booms, what in blazes is it going to do if there is a steep recession (with unemployment and bankruptcies) and a sharp inflation at the same time? What can Keynesianism say? Step on both accelerator and brake at the same time? The stark fact of inflationary recession violates the fundamental assumptions of Keynesian theory and the crucial program of Keynesian policy. Since 1973–74, Keynesianism has been intellectually finished, dead from the neck up.

--Murray N. Rothbard, "Keynesianism Redux," in Making Economic Sense, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 47.

Keynesian Doctrine Is Breathtakingly Simple: Recessions Are Caused by Underspending and Inflation Is Caused by Overspending

Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending. Of the two major categories of spending, consumption is passive and determined, almost robotically, by income; hopes for the proper amount of spending, therefore, rest on investment, but private investors, while active and decidedly non-robotic, are erratic and volatile, unreliably dependent on fluctuations in what Keynes called their “animal spirits.”

Fortunately for all of us, there is another group in the economy that is just as active and decisive as investors, but who are also—if guided by Keynesian economists—scientific and rational, able to act in the interests of all: Big Daddy government. When investors and consumers underspend, government can and should step in and increase social spending via deficits, thereby lifting the economy out of recession. When private animal spirits get too wild, government is supposed to step in and reduce private spending by what the Keynesians revealingly call “sopping up excess purchasing power” (that’s ours).

--Murray N. Rothbard, "Keynesianism Redux," in Making Economic Sense, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 46.