Mercantilism As the Economic Aspect of Absolutism

'Mercantilism' is the name given by late nineteenth century historians to the politico-economic system of the absolute state from approximately the sixteenth to the eighteenth centuries. Mercantilism has been called by various historians or observers a 'system of Power or State-building' (Eli Heckscher), a system of systematic state privilege, particularly in restricting imports or subsidizing exports (Adam Smith), or a faulty set of economic theories, including protectionism and the alleged necessity for piling up bullion in a country. In fact, mercantilism was all of these things; it was a comprehensive system of state building, state privilege, and what might be called 'state monopoly capitalism'.

--Murray N. Rothbard, Economic Thought Before Adam Smith, vol. 1 of An Austrian Perspective on the History of Economic Thought (Auburn, AL: Ludwig von Mises Institute, 2006), 213.

Herbert Hoover and the Myth of Laissez-Faire: Hoover Was a Preeminent "Corporate Liberal"

The conventional wisdom, of historian and layman alike, pictures Herbert Hoover as the last stubborn guardian of laissez-faire in America. The laissez-faire economy, so this wisdom runs, produced the Great Depression in 1929, and Hoover's traditional, do-nothing policies could not stem the tide. Hence, Hoover and his hidebound policies were swept away, and Franklin Roosevelt entered to bring to America a New Deal, a new progressive economy of state regulation and intervention fit for the modern age.

The major theme of this paper is that this conventional historical view is pure mythology and that the facts are virtually the reverse: that Herbert Hoover, far from being an advocate of laissez-faire, was in every way the precursor of Roosevelt and the New Deal, that, in short, he was one of the major leaders of the twentieth-century shift from relatively laissez-faire capitalism to the modern corporate state. In the terminology of William A. Williams and the New Left, Hoover was a preeminent "corporate liberal."

--Murray N. Rothbard, "Herbert Hoover and the Myth of Laissez-Faire," in A New History of Leviathan: Essays on the Rise of the American Corporate State, ed. Ronald Radosh and Murray N. Rothbard (New York: E.P. Dutton, 1972), 111.

Professor Rothbard and the Theory of Interest

You tell me your theory of interest, and I'll have a good guess about the rest of your economics. Interest is just another word for profit? You're a Ricardian. To collect interest is to exploit labor? You're a Marxian. The interest rate is wholly determined by the growth rate of capital? You're a Knightian. Interest is fundamentally a monetary phenomenon? You're a Keynesian.

Professor Rothbard is none of these. This much is not in dispute. The controversy comes when we begin to distinguish Rothbardians from Fisherians. Are time preferences of market participants and capital productivity independent co-determinants of the rate of interest, as Irving Fisher would have it? Or does time preference alone—the systematic discounting of the future—account for the payment that we call interest?

This latter view, which is properly attributed to Ludwig von Mises, is adopted by Professor Rothbard. Borrowing phraseology from Milton Friedman, it might be claimed that interest is always and everywhere a time-preference phenomenon in the same sense that inflation is always and everywhere a monetary phenomenon. Rothbard's defense of the time-preference theory of interest and his use of the theory as a building block in his treatise on economics inspires the remainder of this essay.

--Roger W. Garrison, "Professor Rothbard and the Theory of Interest," in Man, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, ed. Walter Block and Llewellyn H. Rockwell Jr. (Auburn, AL: Ludwig von Mises Institute, 1988), 45.

The New Deal Constituted a Radical Displacement of the Morgans by a Coalition Led by the Rockefellers, the Harrimans, Kuhn-Loeb, and the Lehman Brothers

The Rockefellers and their intellectual and technocratic entourage were, indeed, central to the New Deal. In a deep sense, in fact, the New Deal itself constituted a radical displacement of the Morgans, who had dominated the financial and economic politics of the 1920s, by a coalition led by the Rockefellers, the Harrimans, Kuhn-Loeb, and the Lehman Brothers investment banking firms. The Business Advisory Committee of the Department of Commerce, for example, which proved highly influential in drawing up New Deal measures, was dominated by the scion of the Harriman family, W. Averill Harriman, and by such Rockefeller satraps as Walter Teagle, head of Standard Oil of New Jersey. Here we have space to trace only the influence of the Rockefellers, allied with the Wisconsin progressives and the graduates of the settlement houses, in creating and imposing on America the Social Security System.

--Murray N. Rothbard, The Progressive Era, ed. Patrick Newman (Auburn, AL: Mises Institute, 2017), 356.

The House of Morgan Creates the Federal Reserve System: The Central Bank Will Be Run by Benjamin Strong Jr in New York

In their joining together to draft, and then to lobby for, the new Federal Reserve System, the House of Morgan was clearly very much the senior partner in the enterprise. The secret meeting of a handful of top bankers at the Jekyll Island Club in November 1910 that framed the prototype of the Federal Reserve Act was held at a resort facility provided by J.P. Morgan himself. The Federal Reserve, in its first two decades, contained two loci of power: the main one was the head, then called the governor, of the Federal Reserve Bank of New York; of lesser importance was the Federal Reserve Board in Washington. The governor of the New York Fed from the beginning until his death in 1928, was Benjamin Strong, who had spent his entire working life in the Morgan ambit. He was a vice president of the Bankers Trust Company, established by the Morgans to engage in the new and lucrative trust business; and his best friends in the world were his mentor and neighbor, the powerful Morgan partner Henry P. Davison, as well as two other Morgan partners, Dwight Morrow and Thomas W. Lamont. So highly trusted was Strong in the Morgan circle that he was brought in to be the personal auditor of J. Pierpont Morgan, Sr., during the panic of 1907. When he was offered the post of governor of the New York Fed in the new Federal Reserve System, the reluctant Strong was convinced by Davison that he could operate the Fed as a “real central bank . . . run from New York.”

--Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 264.

Ludwig von Mises Built His Business Cycle Theory on Three Previously Unconnected Elements

He built his great business cycle theory on three previously unconnected elements. One was the Ricardian demonstration of the way in which government and the banking system habitually expand money and credit, driving prices up (the boom) and causing an outflow of gold and a subsequent contraction of money and prices (the bust). Mises realized that this was an excellent preliminary model, but that it did not explain how the production system was deeply affected by the boom or why a depression should then be made inevitable. Another element was the Böhm-Bawerkian analysis of capital and the structure of production. A third was the Swedish “Austrian” Knut Wicksells’ demonstration of the importance to the productive system and to prices of a gap between the “natural” rate of interest (the rate of interest without the interference of bank credit expansion) and the rate as actually affected by bank loans.

--Murray N. Rothbard, The Essential von Mises (Auburn, AL: Ludwig von Mises Institute, 2009), 21-22.

Benjamin M. Anderson Asserts That the Fundamental Flaw in the Quantity Theory of Money Is That It Conceals the Underlying Microeconomic Phenomena

It is easy to understand why a theory such as the one monetarists hold, which is constructed in strictly macroeconomic terms with no analysis of underlying microeconomic factors, must ignore not only the effects of credit expansion on the productive structure, but also, in general, the ways in which “general price level” fluctuations influence the structure of relative prices. Rather than simply raise or lower the general price level, fluctuations in credit constitute a “revolution” which affects all relative prices and eventually provokes a crisis of malinvestment and an economic recession. The inability to perceive this fact led the American economist Benjamin M. Anderson to assert that the fundamental flaw in the quantity theory of money is merely that it conceals from the researcher the underlying microeconomic phenomena influenced by variations in the general price level. Indeed monetarists content themselves with the quantity theory’s equation of exchange, deeming all important issues to be adequately addressed by it and subsequent microeconomic analyses to be unnecessary.

--Jesús Huerta de Soto, Money, Bank Credit, and Economic Cycles, trans. Melinda A. Stroup (Auburn, AL: Ludwig von Mises Institute, 2006), 526-527.

The Major Deformation of a Genuine Gold Standard Perpetrated by the British in the 1920s Was the Gold-Exchange Standard

The major twist, the major deformation of a genuine gold standard perpetrated by the British in the 1920s, was not the gold bullion standard, unfortunate though that was. The major inflationary camouflage was to return, not to a gold standard at all, but to a “gold-exchange” standard. In a gold-exchange standard, only one country, in this case Great Britain, is on a gold standard in the sense that its currency is actually redeemable in gold, albeit only gold bullion for foreigners. All other European countries, even though nominally on a gold standard, were actually on a pound-sterling standard. In short, a typical European country, say, “Ruritania,” would hold as reserves for its currency, not gold but British pounds sterling, in practice, bills or deposits payable in sterling at London. Anyone who demanded redemption for Ruritanian “rurs,” then, would receive British pounds rather than gold.

--Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 384-385.

Distrust of Government and Politics in American Monetary Affairs Has Been Deep and Widespread for Many Years and for Very Good Reasons

This distrust of government and politics in American monetary affairs has been deep and widespread for many years, and for very good reasons. Our record in this field has been bad, as have been the records of many other countries, notably those in Latin America and the Near East. Witness the blundering way in which our Congress handled American bimetallism from 1791 to the Civil War, Jackson's war with the Second United States Bank, and our subsequent sad experiences with the bank notes of the wildcat banks. Witness our 17 years' experience with inconvertible greenbacks from 1862 to 1879, our unfortunate silver legislation of 1878 and 1890, and the absurd and highly expensive silver policies of Franklin D. Roosevelt's administrations.

--Edwin Walter Kemmerer, Gold and the Gold Standard: The Story of Gold Money, Past, Present and Future (New York: McGraw-Hill Book Company, 1944), 181.

We Have Gold Because We Cannot Trust Governments

The typical gold standard prior to 1914 was highly automatic. Gold flowed freely in international trade from the places where it was cheap to the places where it was dear, always seeking to maintain its international-value level, with free coinage in a large part of the world and with widespread interconvertibility on demand with other kinds of currency. Normally, man's interference with the automatic functioning of the gold standard prior to the First World War was small and was limited chiefly to the manipulation of discount rates by central banks and to a small-amount of open-market operations. The resort, moreover, to these means of "keeping under control" the international movement of gold frequently did more harm than good. The highly automatic character of the prewar gold standard was one of its great virtues. "We have gold," says an old proverb, "because we cannot trust Governments."

--Edwin Walter Kemmerer, Gold and the Gold Standard: The Story of Gold Money, Past, Present and Future (New York: McGraw-Hill Book Company, 1944), 180-181.

The Law Has Been Perverted into an Instrument of Legal Plunder

But even in his time—writing in the late 1840s—Bastiat was alarmed over how the law had been “perverted” into an instrument of what he called legal plunder. Far from protecting individual rights, the law was increasingly used to deprive one group of citizens of those rights for the benefit of another group, and especially for the benefit of the state itself. He condemned the legal plunder of protectionist tariffs, government subsidies of all kinds, progressive taxation, public schools, government “jobs” programs, minimum wage laws, welfare, usury laws, and more.

The system of legal plunder (which many now celebrate as “democracy”) will erase from everyone’s conscience, he wrote, the distinction between justice and injustice. The plundered classes will eventually figure out how to enter the political game and plunder their fellow man. Legislation will never be guided by any principles of justice, but only by brute political force.

--Thomas J. DiLorenzo, foreword to The Law, by Frédéric Bastiat (Auburn, AL: Ludwig von Mises Institute, 2007), v-vi.

The Rothbard Deposit Bank Practices Honest, Noninflationary 100 Percent Reserve Banking

Let us assume we now have a Rothbard Deposit Bank. It opens for business and receives a deposit of $50,000 of gold from Jones, for which Jones receives a warehouse receipt which he may redeem on demand at any time. The balance sheet of the Rothbard Deposit Bank is now as shown in Figure 7.1.

Fifty thousand dollars’ worth of gold has simply been deposited in a bank, after which the warehouse receipts circulate from hand to hand or from bank to bank as a surrogate for the gold in question. No fraud has been committed and no inflationary impetus has occurred, because the Rothbard Bank is still backing all of its warehouse receipts by gold or cash in its vaults.

The amount of cash kept in the bank’s vaults ready for instant redemption is called its reserves. Hence, this form of honest, noninflationary deposit banking is called “100 percent reserve banking,” because the bank keeps all of its receipts backed fully by gold or cash.

--Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 94-95.

Charles I's Gold Confiscation Shortly before the English Civil War Motivated Private Goldsmiths to start Banks of Deposit in England

In England, there were no banks of deposit until the Civil War in the mid-seventeenth century. Merchants were in the habit of keeping their surplus gold in the king’s mint in the Tower of London—an institution which of course was accustomed to storing gold. The habit proved to be an unfortunate one, for when Charles I needed money in 1638 shortly before the outbreak of the Civil War, he simply confiscated a large sum of gold, amounting to £200,000, calling it a “loan” from the depositors. Although the merchants finally got their money back, they were understandably shaken by the experience, and forsook the mint, instead depositing their gold in the coffers of private goldsmiths, who were also accustomed to the storing and safekeeping of the valuable metal. The goldsmith’s warehouse receipts then came to be used as a surrogate for the gold money itself.

--Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 88.

Deposit Banking Began As a Totally Different Institution from Loan Banking

Deposit banking began as a totally different institution from loan banking. Hence it was unfortunate that the same name, bank, became attached to both. If loan banking was a way of channeling savings into productive loans to earn interest, deposit banking arose to serve the convenience of the holders of gold and silver. Owners of gold bullion did not wish to keep it at home or office and suffer the risk of theft; far better to store the gold in a safe place. Similarly, holders of gold coin found the metal often heavy and inconvenient to carry, and needed a place for safekeeping. These deposit banks functioned very much as safe-deposit boxes do today: as safe “money warehouses.” As in the case of any warehouse, the depositor placed his goods on deposit or in trust at the warehouse, and in return received a ticket (or warehouse receipt) stating that he could redeem his goods whenever he presented the ticket at the warehouse. In short, his ticket or receipt or claim check was to be instantly redeemable on demand at the warehouse.

--Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 85.

F.A. Hayek Introduced an Element of Great Confusion into the Study of French Liberalism

Unfortunately, an element of great confusion has been introduced into the study of French liberalism through some of the writings of F.A. Hayek, principally his influential essay, “Individualism: True and False.” In this rather baffling work, Hayek attempts to distinguish two traditions of individualism (or liberalism). The first, basically a British and empirical line of thought, represents genuine liberalism; the second, French (and Continental), is a no true liberal tradition, but rather a rationalistic deviation that leads “inevitably” to collectivism. This follows from the contrasting social theories underlying the two approaches. Where the first appreciated the truth regarding social institutions, that they originated and developed “spontaneously,” the second held them to be the product of deliberate human “contrivance or design.”

--Ralph Raico, "The Centrality of French Liberalism," in Classical Liberalism and the Austrian School (Auburn, AL: Ludwig von Mises Institute, 2012), 220.

Vilfredo Pareto and the Liberal Doctrine of Class Conflict

Few economists are as often and as highly celebrated for their knowledge of modern intellectual history as Albert O. Hirschman. Yet Hirschman is obviously at a total loss when confronted with a clear statement of the liberal doctrine of class conflict, in Vilfredo Pareto’s Cours d’économie politique (1896–97). Here Pareto speaks of the struggle to appropriate the wealth produced by others as “the great fact that dominates the whole history of humanity.” To Hirschman’s ear this “sounds at first curiously—perhaps consciously—like the Communist Manifesto.” But Pareto quickly “distances himself from Marxism” by using the term “spoliation,” and by ascribing spoliation, or plunder, to the dominant class’s control of the state machine. Evidently, Hirschman has not the slightest inkling that Pareto was presenting, in the customary terminology, a generations-old liberal analysis that goes back at least to the first decades of the nineteenth century.

--Ralph Raico, "The Conflict of Classes: Liberal vs. Marxist Theories," in Classical Liberalism and the Austrian School (Auburn, AL: Ludwig von Mises Institute, 2012), 185.

A Bank of Deposite Is an Institution Established Solely for the Safe Keeping of the Coin and Bullion of Individuals and for Facilitating Mercantile Payments

A bank of deposite is an institution established solely for the safe keeping of the coin and bullion of individuals, which would otherwise have to be kept in iron chests or less secure receptacles, and for facilitating mercantile payments by the transfer upon its books by checks or drafts of the various amounts standing to the credit of the depositors, thus saving the labor of repeated countings, and the expense of repeated transportations of the precious metals from house to house, accompanied at the same time by a diminished risk from fire or pillage, and a diminished wear and tear of the coins by friction.

As regards the operations of this particular species of banks, the reader will perceive that they add nothing to the existing amount of the currency, and that they take nothing from it. The credits on their books represent certain quantities of bullion ascertained by weight, placed there for safe keeping, without any authority on the part of the administrators of the bank to lend it, or to apply it to any purpose whatever, until called for by its owners, or transferred by them to other persons; and hence it is clear, that such banks exercise no influence whatever over the currency, by contracting or expanding its amount.

--Condy Raguet, A Treatise on Currency and Banking (1840; repr., New York: Augustus M. Kelley, 1967), 68-69.

Hayek Believes the Gold Standard Cannot Be Implemented Because Governments Will Not Play According to the Rules

My conviction is that the hope of returning to the kind of gold standard system which has worked fairly well over a long period is absolutely vain. Even if, by some international treaty, the gold standard were reintroduced, there is not the slightest hope that governments will play the game according to the rules. And the gold standard is not a thing which you can restore by an act of legislation. The gold standard requires a constant observation by government of certain rules which include an occasional restriction of the total circulation which will cause local or national recession, and no government can nowadays do it when both the public and, I am afraid, all those Keynesian economists who have been trained in the last thirty years, will argue that it is more important to increase the quantity of money than to maintain the gold standard.

--Friedrich A. Hayek, A Free-Market Monetary System and the Pretense of Knowledge (Auburn, AL: Ludwig von Mises Institute, 2008), 12.

The Gold-Exchange Standard: Inflation on the Sly

The gold-exchange standard is a misleading disguise that gives inflation the honest appearance of a procedure for the settlement of international liabilities. If central banks want inflation because they expect it to result in expansion, let them have it overtly and in broad daylight. They should not rely on capital shifts to bring it about for them on the sly.

--Jacques Rueff, The Monetary Sin of the West, trans. Roger Glémet (New York: The Macmillan Company, 1972), 47.

Rational Expectations Critiques of Keynesian Macromodels and Monetarist Models

Though RE [Rational Expectations] critiques have centered on Keynesian macromodels, monetarist models are also susceptible to these criticisms. An example using early formulations of the Natural Rate hypothesis illustrates both the general nature of the problem and its universality. In the past, Professor Milton Friedman and others have pictured economic agents as forming expectations adaptively, for example, forming expectations of future inflation rates on the basis of averages of past rates. As is now well known, this behavior would result in underestimation of the inflation rate when it is accelerating and overestimation when it is decelerating. Agents are thus being treated as biased or irrational in their expectations, as has been explained by Wallace.

--Gerald P. O'Driscoll Jr., "Rational Expectations, Politics, and Stagflation," in Time, Uncertainty, and Disequilibrium: Exploration of Austrian Themes, ed. Mario J. Rizzo (Lexington, MA: D.C. Heath and Company, 1979), 155-156.

Roundabout Production

Human labor can be employed in production such that its direct goal is the finished product. An appropriate example, repeatedly cited since the times of Wilhelm Roscher, is of a nation of fishermen who directly employ their labor for the purpose of catching fish. This labor will reach a higher degree of productivity if the fishermen are able to produce a boat and other fishing tools. In this case, labor first must be expended in order to produce these "produced factors of production," but the reward for this expenditure will be a greater return. The essence of this process has been seen (Jevons and Böhm-Bawerk) in the combination of human labor and fruits of nature (natural resources) that are directed into a time-consuming roundabout method of production.

The general thesis would then read: An increase in the returns of production is not only possible by increasing the factors of production, but also by lengthening the roundabout methods of production, i.e., by using the same number of factors of production in such a way that more time elapses between their initial employment in production and the attainment of the finished product.

--Richard von Strigl, Capital and Production, trans. Margaret Rudelich Hoppe and Hans-Hermann Hoppe, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2000), 2-3.

Michael A. Heilperin Predicted the Collapse of the Bretton Woods Gold Exchange Standard

Like the more famous advocate of the gold standard, Jacques Rueff, Heilperin was long an opponent of the gold exchange standard and presented insightful and prophetic critiques of the system, especially as it operated during the Bretton Woods era (1946-1971). His prophecies of its eventual and inevitable collapse, though derided when they were initially advanced, were right on the money in light of later developments. This serves as an invaluable illustration of the usefulness of sound deductive economic theory in the forecasting of the evolution and devolution of broad patterns of economic activities. Moreover, Heilperin's objections to the gold exchange standard have contemporary relevance in view of the support for a return to a system of the Bretton Woods type that has been voiced by a number of prominent supply siders and other advocates of a monetary "price rule."

--Joseph T. Salerno, "Gold and the International Monetary System: The Contribution of Michael A. Heilperin," in The Gold Standard: Perspectives in the Austrian School, ed. Llewellyn H. Rockwell Jr. (Auburn, AL: Ludwig von Mises Institute, 1992), 82.

The British Currency School and the Principle of Sound Money

Throughout his body of work on monetary economics, Mises steadfastly proclaimed his adherence to the basic doctrines of the mid-nineteenth century British Currency School and, in fact, upheld its “currency principle” as the essence of his own conception of sound money. According to the currency principle, the ideal monetary system was one in which the supply of money, comprising circulating gold plus bank notes and deposits redeemable in gold, should be made to behave exactly like the supply of a pure gold money.

I contend that Mises was indeed an admirer and follower of the Currency School, and that he deliberately attempted to revise and improve its doctrine and apply it to contemporary conditions. Second, I review Mises’s strong support for a free banking system and argue that it was based on his view that free banking would result in the almost total suppression of the issue of new fiduciary media and thus produce a money supply that functioned exactly as a “purely metallic currency” (in the terminology of the Currency School).

--Joseph T. Salerno, "Ludwig von Mises as Currency School Free Banker," in Theory of Money and Fiduciary Media: Essays in Celebration of the Centennial, ed. Jörg Guido Hülsmann (Auburn, AL: Ludwig von Mises Institute, 2012), 96.

The Legalized Counterfeiting of Monetary Issue Enables the State to break the Production-Monetary Income Chain to Its Own Advantage

There is no mystery in the fact that the state clung to its control of money even while temporarily relinquishing its grip on other areas of the economy. For one thing, as we have seen, control over a nation's money is a prerequisite for dictation over the rest of the economy. Another reason for the state's vital interest in money is that only through such control can it break the production-income nexus of the free market. We have seen that, on the free market, the only way to obtain money is to produce and sell goods or services to those who wish to buy; thus, the only way to acquire money from other people is to provide them with services which they desire. But there is only one way to break the requirement of producing desired goods and services to obtain money; and that is to gain control of the means of creating money. If one can create new money simply and easily, then one can enter the market to consume goods and services without first having to produce any oneself. On the market, private individuals cannot do this, as this constitutes the crime of "counterfeiting."

--Murray N. Rothbard, "Money, the State, and Modern Mercantilism," in Central Planning and Neomercantilism, ed. Helmut Schoeck and James W. Wiggins (Princeton, NJ: D. Van Nostrand Company, 1964), 141.

The Charge of "Atomism" in Theoretical Economics

We should like to mention another opinion particularly widespread among German economists which ultimately, like the one previously discussed, has its roots in the mechanical application of certain points of view of historical research to theoretical economics and in a one-sided outlook on the problems of the latter. It can therefore be disposed of at this point. We mean the charge of atomism which is made in modem German literature against economics in the most frivolous way, indeed against everybody who is concerned with the true problems of theoretical economics. It is supposedly based on the fact that economic phenomena theoretically are reduced ultimately to individual economic efforts or to their simplest constituent elements, and are thus explained.

--Carl Menger, Investigations into the Method of the Social Sciences with Special Reference to Economics, ed. Louis Schneider, trans. Francis J. Nock (New York: New York University Press, 1985), 90-91.

The Eminent Swedish Economist Gustav Cassel: A Planned Economy Will Always Tend to Develop into Dictatorship

The most powerful brief statement of this interaction with which I am acquainted occurs in a lecture delivered by the eminent Swedish economist, the late Gustav Cassel. This was published in a pamphlet with the descriptive but rather cumbersome title: From Protectionism Through Planned Economy to Dictatorship. I take the liberty of quoting an extensive passage from it:

The leadership of the State in economic affairs which advocates of Planned Economy want to establish is, as we have seen, necessarily connected with a bewildering mass of governmental interferences of a steadily cumulative nature. The arbitrariness, the mistakes and the inevitable contradictions of such policy will, as daily experience shows, only strengthen the demand for a more rational coordination of the different measures and, therefore, for unified leadership. For this reason Planned Economy will always tend to develop into Dictatorship.

--Henry Hazlitt, "The Road to Totalitarianism," in On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises, ed. Mary Sennholz (1956; repr., Auburn, AL: Ludwig von Mises Institute, 2008), 84.

All Brands of Historicism Emphatically Reject Economics

All brands of historicism—the German and the British historical schools of the social sciences, American institutionalism, the adepts of Sismondi, Le Play, and Veblen, and many kindred "unorthodox" sects—emphatically reject economics.

The historicists do not eliminate economic reasoning from their treatises. While rejecting an economic doctrine they do not like, they resort in dealing with events to fallacious doctrines long since refuted by the economists.

--Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution (1957; repr., Auburn, AL: Ludwig von Mises Institute, 2007), 208.

For Socialism the Problem of Distribution is the Economic Problem

On logical grounds, treatment of the problem of income should properly come at the end of any investigation into the life of the socialist community. Production must take place before distribution is possible, therefore, logically, the former should be discussed before the latter. But the problem of distribution is so prominent a feature of Socialism as to suggest the earliest possible discussion of the question. For fundamentally, Socialism is nothing but a theory of 'just' distribution; the socialist movement is nothing but an attempt to achieve this ideal. All socialist schemes start from the problem of distribution and all come back to it. For Socialism the problem of distribution is the economic problem.


--Ludwig von Mises, Socialism: An Economic and Sociological Analysis, new ed., trans. J. Kahane (1951; repr., New Haven: Yale University Press, 1962), 151.

 

Dissatisfaction with Perfection Competition and with the Notion of Market Equilibrium

A characteristic feature of the Austrian approach to economic theory is its emphasis on the market as a process, rather than as a configuration of prices, qualities, and quantities that are consistent with each other in that they produce a market equilibrium situation. This feature of Austrian economics is closely bound up with dissatisfaction with the general use made of the concept of perfect competition.

Ludwig M. Lachmann indicated that his own unhappiness with the notion of equilibrium primarily concerns the usefulness of the Walrasian general-equilibrium construction rather than that of the simple Marshallian partial-equilibrium construction. But it is precisely in the context of the simple short-run one-good market that I shall point out some of the shortcomings of the equilibrium approach.

--Israel M. Kirzner, "Equilibrium versus Market Process," in The Foundations of Modern Austrian Economics, ed. Edwin G. Dolan (Kansas City: Sheed and Ward, 1976), 115.

On the Central Concept of Austrian Economics: Market Process

In setting up the market process as the central concept of Austrian economics, as opposed to the general-equilibrium approach of the neoclassical school, Austrian economists have a choice of strategies: They might, on the one hand, attempt to show the absurdity of the notion of general equilibrium, the arid formalism of the style of thought that gave rise to it, and its "irrelevance" to many urgent problems. They might, without denying the significance of equilibrating forces, stress the time aspect and show that the equilibrating forces can never do their work in time, that long before general equilibrium is established some change will supervene to render the data obsolete.

The market process is the outward manifestation of an unending stream of knowledge. This insight is fundamental to Austrian economics. The pattern of knowledge is continuously changing in society, a process hard to describe. Knowledge defies all attempts to treat it as a "datum" or an object identifiable in time and space.

--Ludwig M. Lachmann, "On the Central Concept of Austrian Economics: Market Process," in The Foundations of Modern Austrian Economics, ed. Edwin G. Dolan (Kansas City: Sheed and Ward, 1976), 126-127.

The Samuelson-Hicks Neoclassical-Keynesian Synthesis

The three decades between the end of the Second World War and 1975 saw the triumph of the “neoclassical-Keynesian synthesis” and of the mathematical formalism of equilibrium analysis in our discipline. Indeed, during this period, equilibrium analysis became master of economic science, though we should note that economists fell into two major camps concerning their use of the notion of equilibrium.

One camp followed Samuelson, who, after the publication of his Foundations of Economic Analysis,  joined Hicks in pioneering the neoclassical-Keynesian synthesis. Samuelson expressly embraced Lange and Lerner’s theory on the possibility of market socialism, and thus he blindly adopted the stance of these neoclassical authors regarding the challenge posed by the theorem of the impossibility of socialism, which Mises had discovered.

--Jesús Huerta de Soto, The Austrian School: Market Order and Entrepreneurial Creativity (Cheltenham, UK: Edward Elgar, 2008), 95.

The Neo-Ricardian Counterrevolution Seriously Threatens the Neoclassical Approach to Economics

There is no need for me to deal at great length with the neo-Ricardian counterrevolution of our day. Its numerous exponents in Cambridge and elsewhere are propagating its cause with considerable enthusiasm and remarkable polemical skill. Suffice it to say that, for the first time, the neoclassical ascendancy, established by John Bates Clark, Irving Fisher, Vilfredo Pareto, and Knut Wicksell around the turn of the century, appears seriously threatened. The defensive strategy adopted by such outstanding neoclassical leaders as John Hicks and Frank H. Hahn leaves the impression that they are only too well aware of the weakness inherent in the position they have inherited.

--Ludwig M. Lachmann, "Austrian Economics in the Age of the Neo-Ricardian Counterrevolution," in The Foundations of Modern Austrian Economics, ed. Edwin G. Dolan (Kansas City: Sheed and Ward, 1976), 217.

The Great Divide between the Austrian and the Gossen Schools: Analyzing Hypothetical Equilibrium Prices or Analyzing Actual Market Prices

Just as the classical economists had done before them, the Gossen School analyzed prices as they would be if certain special conditions were fulfilled: they analyzed hypothetical equilibrium prices rather than actual market prices. It is here, then, that we find the great divide between the Austrian and the Gossen Schools. Menger paved the way for dealing with real-world prices. His work made economics more scientific in the true sense of the word—increasing knowledge about real things—while the writings of Gossen, Jevons, and Walras dealt not with matters of fact, but only conjectures.

--Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007), 134.

The Differences between Menger and Gossen, Jevons, and Walras Play a Major Role in the Development of Austrian Economics

By following Gossen, Jevons and Walras developed a marginal-utility theory of prices that was markedly less successful at describing observed reality than was Menger’s marginal-value approach. The differences between Menger on the one hand, and Gossen, Jevons, and Walras on the other, might seem arcane, but they came to play a major role in the development of Austrian economics, and it is against this background that one must appreciate the significance of Mises’s contributions.

Jevons’s marginal utility thus played structurally the same role that marginal value played in Menger’s theory—it delivered an explanation of market prices—but where marginal utility explains the price of a good by the good’s direct impact on human feelings, Menger’s marginal value explains the price of a good by how the good ranks in importance compared to other goods, according to the needs of the individuals involved in the pricing process.

--Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007), 129, 132.