The Supply Side of the Economy Disappeared When John Hicks Introduced IS-LM into Economic Theory

The problem of this approach goes back almost to the beginning of Keynesian macro with John Hicks’ “Mr Keynes and the Classics” (1937). It was this article that introduced IS-LM to economic theory and in which Hicks used the same model of aggregate demand to explain both the classical and Keynesian approach. Yet with the model entirely demand-side, it ought to be obvious that if one were actually to understand what pre-Keynesian economists were attempting to argue, and to do so within their own terms, that it would be impossible to use a model built on variations in demand. With IS-LM the supply side of the economy disappeared.... At no point is there any representation of the supply-side of the economy where decisions to produce are considered. It is demand that will automatically elicit a supply and determines the level of activity.

--Steven Kates, "Why Keynesian Concepts Cannot Be Used to Explain Pre-Keynesian Economic Thought: A Reader's Guide to Classical Economic Theory," Quarterly Journal of Austrian Economics 17, no. 3 (Fall 2014): 320.

Morgan O. Reynolds on Court Intellectual and Fed Insider Frederic S. Mishkin

Another prominent economist is Frederic S. Mishkin, professor at the Columbia Business School and former member of the Board of Governors at the Federal Reserve System, who fiercely defends the effectiveness of monetary policy: “…financial crises of the type we have been experiencing provide a strong argument for even more aggressive monetary policy easing than normal.”  And aggressive “easing” (not “inflating” or printing) we have certainly had, in spades, thanks to court intellectuals such as Mishkin. Recent estimates put the sum of all emergency bailouts at more than $20 trillion. Professor Mishkin, author of 15 books and numerous articles on monetary policy, is a Fed insider. We can therefore expect little (radical) insight from him on financial fundamentals, and he delivers none. No, Mishkin concentrates on policy “refinements” like “inflation targeting.”

--Morgan O. Reynolds, "The Poverty of Modern Macroeconomic Theory and Power of Austrian Business Cycle Theory," Quarterly Journal of Austrian Economics 13, no. 3 (Fall 2010): 21.

The Economics Profession Came to Embrace the Theory of Natural Monopoly after the 1920s When It Adopted the Engineering Theory of Competition

The economics profession came to embrace the theory of natural monopoly after the 1920s, when it became infatuated with "scientism" and adopted a more or less engineering theory of competition that categorized industries in terms of constant, decreasing, and increasing returns to scale (declining average total costs). According to this way of thinking, engineering relationships determined market structure and, consequently, competitiveness. The meaning of competition was no longer viewed as a behavioral phenomenon, but an engineering relationship. With the exception of such economists as Joseph Schumpeter, Ludwig von Mises, Friedrich Hayek, and other members of the Austrian School, the ongoing process of competitive rivalry and entrepreneurship was largely ignored.

--Thomas J. DiLorenzo, "The Myth of Natural Monopoly," Review of Austrian Economics 9, no. 2 (1996): 46.

The Equation of Exchange Facilitates the Comparison of Competing Schools of Economic Thought

The equation also facilitates the comparison of competing schools of thought. Considering in sequence Keynesianism and Early and Late Monetarism can provide a basis for setting out the distinctive perspective that emerges from the theory of free banking. [The comparison of schools facilitated by the equation of exchange is wholly independent of the unique qualities of Austrian macroeconomics, which features the intertemporal allocation (and possible misallocation) of resources and requires theorizing at a lower level of aggregation.] The case against central banking and in favor of free banking, then, is preceded by some history of thought--possibly more than some may think justified. The comparison of schools of thought is included for two reasons. First, some writers have recently gotten it wrong, presenting monetarist ideas under the Keynesian label. Second, the case for free banking contains arguments that are sufficiently close to Keynes's own that they need to be distinguished explicitly from his.

--Roger W. Garrison, "Central Banking, Free Banking, and Financial Crises," Review of Austrian Economics 9, no. 2 (1996): 110-111.

Underlying All Theories of Money and Banking Is the Familiar Equation of Exchange: MV = PQ

Underlying all theories of money and banking--as well as all prescriptions of policy and recommendations for reform--is the familiar equation of exchange: MV = PQ. For the economy as a whole, buying must equal selling, where buying is represented by the total supply M of money times the frequency (the circulation velocity V) with which each monetary unit on average is spent and where selling is represented by the average price P of goods times the total quantity Q of goods sold. Although true by construction, the equation of exchange helps us to keep in view the interdependencies that characterize the macroeconomy. It is impossible, for instance, to conceive of a change in only one of the four magnitudes represented in the equation of exchange. Any one change implies some offsetting change or changes on one side or the other of the equation--or possibly on both sides. For instance, a decrease in money's circulation velocity, which simply reflects an increase in the demand for money, must be accompanied by (1) an increase in the money supply, (2) a decrease in prices, or (3) a decrease in real output sold (or by some combination thereof).

--Roger W. Garrison, "Central Banking, Free Banking, and Financial Crises," Review of Austrian Economics 9, no. 2 (1996): 110.

The Limitations of Neoclassical Price Theory and the Implications of Austrian Theories of Competition and Entrepreneurship for Public-Choice Theory

Public choice can be defined as the application of economic theory and methodology to the study of politics and political institutions, broadly defined. Neoclassical price theory has been one of the principal tools of the public-choice theorist, having been applied to address such questions as why people vote, why bureaucrats bungle, the effects of deficit finance on government spending, and myriad other questions regarding the operations and activities of governments. There has indeed been a public-choice "revolution" in economics. But neoclassical price theory has its limitations, many of which have been investigated by Austrian economists. These limitations have implications for the study of public choice. Namely, if neoclassical price theory is itself flawed, then perhaps its applications to the study of political decision making has produced uncertain results.

I shall explore two strands of Austrian economics—theories of competition and of entrepreneurship—and their implications for public-choice theory. I do not claim to provide an exhaustive examination of public-choice theory from an Austrian perspective, but only to offer a few insights. The first section notes some limitations of applying the neoclassical competitive model to the study of political decision making. The next discusses the implications of placing more emphasis on the role of political entrepreneurship in the study of public choice.

--Thomas J. DiLorenzo, "Competition and Political Entrepreneurship: Austrian Insights into Public-Choice Theory," Review of Austrian Economics 2, no. 1 (1988): 59.

Keynes's Apostasy from Marshallian Economics Led to a Heretical Body of Economics Designed to Effect a Rapid Transition to the Millennium

Section 4 contains an account of Keynes's apostasy from Marshallian economics in consequence of the Great Depression and his endeavor, beginning in 1932, to formulate a heretical body of economic analysis and policy, which was designed to effect a rapid transition to the millennium. In the fifth and concluding section of the paper, I present the case that the basic building blocks of the General Theory, including the theories of effective demand and liquidity preference and the concept of the marginal efficiency of capital, are fashioned out of the Moorite ethical precepts that Keynes presumed would guide action in his imagined millennial state.

--Joseph T. Salerno, "The Development of Keynes's Economics: From Marshall to Millennialism," Review of Austrian Economics 6, no. 1 (1992): 6.

Keynes Viewed Marshallian Economics as a Tool for Guiding the Capitalist Economy toward the Post-Scarcity Millennium

In creating his sociopolitical vision, Keynes drew mainly upon the ethical philosophy of G. E. Moore, the political philosophy of Edmund Burke, and the economics of Alfred Marshall. From Marshall, Keynes also adopted the millennialist theoretical framework which the former constructed as a prop for his "preaching of mid-Victorian morality, seasoned by Benthamism."

I trace the development of Keynes's millennialist theory of social evolution, upon which, I argue, his sociopolitical vision is based. I also suggest that, during the decade of the 1920s, in which this development mainly occurred, Keynes viewed Marshallian economics as a tool for guiding a dynamic and useful but unsteady and unethical capitalist economy toward the impending post-scarcity millennium and that his Treatise on Money was intended as a handbook for just this purpose.

--Joseph T. Salerno, "The Development of Keynes's Economics: From Marshall to Millennialism," Review of Austrian Economics 6, no. 1 (1992): 6.

Hayek I and Hayek II: From Mises's Methodology to Popper's Methodology

Even within the corpus of Hayek's own work a distinction may be made. A scholar who distinguishes two different strains of thinking within Hayek's own writing was Hutchison. He labels the early publications as Hayek I (before 1936) and the later ones as Hayek II (1937 and thereafter). Of the earlier period Hutchison states: "Affinities with the ideas of Austrian predecessors, notably with those of his 'mentor' Mises, are apparent." In  contrast, the first publication of the latter period (Hayek 1937), Hutchison comments:

It certainly marks a vital turning point, or even U-turn, in Hayek's methodological ideas, and ought to be, but has not been recognized as marking a fundamental shift . . . The main insights of this article are quite incompatible . . . with the methodological ideas in his previous writings.

The new dispensation in Hayek had mainly to do with a shift from praxeological (e.g., Misesian) methodology to that based on logical positivism (e.g., Popper), and from an emphasis on appraisement to one of lack of full information regarding questions of central planning and socialism.

--Walter Block and Kenneth M. Garschina, "Hayek, Business Cycles, and Fractional Reserve Banking: Continuing the De-Homogenization Process," Review of Austrian Economics 9, no. 1 (1996): 79.

The Marxist John O'Neill Attacks Friedrich A. Hayek's Conceptualization of the Market as an Information Providing Mechanism

In a relatively recent article, the Marxist John O'Neill put forward a radical critique of the market order; one that has often been given more implicit articulation by other socialists, but had not been given its fully explicit statement until O'Neill's article. I will here argue that this critique amounts to a fallacy.

Although O'Neill's critique was directed towards the increasing prominence of market socialism, he primarily argued against perhaps the best known Austrian defense of the market, that is to say, Hayek's conceptualization of the market as an information providing mechanism. Hayek's conceptualization and corresponding defence of the market in knowledge terms is well-known and influential among recent market socialist writers.

--Nicolai Juul Foss, "Information and the Market Economy: A Note on a Common Marxist Fallacy," Review of Austrian Economics 8, no. 2 (1995): 127.

The Horizontal and Vertical Expansion of the Hayekian Triangles Represent the Over-Consumption and Mal-Investment of the Credit Expansion Policy

The crucial element of the model is the third tool—the Hayekian Triangles—which simply represents the inter-temporal structure of production. In Figure 2, the horizontal and vertical expansion of the Hayekian Triangles represent the over-consumption and mal-investment which take place as a consequence of the credit expansion policy adopted by the monetary authority. Garrison observes:

In effect, the Hayekian Triangle is being pulled at both ends (by cheap credit and strong consumer demand) at the expense of the middle—a tell tale sign of the boom's unsustainability.

However, these are only the short-run effects. In the long run, the effects are reversed, which is why Garrison calls it “the theory of the unsustainable boom.”

--Adrián O. Ravier, "Rethinking Capital-Based Macroeconomics," Quarterly Journal of Austrian Economics 14, no. 3 (Fall 2011): 353-354.

The Essential Fallacy of John Maynard Keynes and His Early Disciples: Paper Money Was a Suitable Means to Alleviate Scarcity

The essential fallacy of John Maynard Keynes and his early disciples was to cultivate the monetary equivalent of alchemy. They believed that paper money was a suitable means to alleviate the fundamental economic problem of scarcity. The printing press was, at any rate under certain plausible conditions of duress, a substitute for hard work and savings and cutting prices.

--Jörg Guido Hülsmann, "New Keynesian Monetary Views: A Comment," Quarterly Journal of Austrian Economics 6, no. 4 (Winter 2003): 73.

Economists Have Routinely Rejected the Postulate That Economic Theory Should Be Realistic

For more than forty years, economists have routinely rejected the postulate that economic theory should be realistic. Ever since Milton Friedman (1953) sketchily outlined a positivistic methodology for economics, most students of our science have come to endorse Friedman’s view and have claimed that the only quality standard of economic reasoning was its predictive power. Good theories yield fairly correct predictions whereas bad theories yield wrong predictions.... One of the few schools of economic thought that has consistently adhered to the postulate of economic realism is the Austrian School.

--Jörg Guido Hülsmann, "Economic Science and Neoclassicism," Quarterly Journal of Austrian Economics 2, no. 4 (Winter 1999): 3.

Oskar Lange's Famous "Market-Socialist" Response to Mises's Challenge of the Impossibility of Rational Central Planning

The entire debate concentrated on attempts to answer the initial challenge by Mises that rational central planning of the vast and complex modern economy would be "impossible." Without private ownership of the means of production, he argued, there could be no competitive market for these capital goods, and without markets, there could be no prices for the various scarce means of production. Lacking the guide of market prices, the central planners would be "in the dark" as to the relative scarcity of different components of the capital structure and so would invariably fail to combine and use them efficiently.

The famous "market-socialist" response by Lange is generally understood to have effectively answered Mises by first admitting the indispensability of "markets" and "prices," and by then arguing that these could be reconciled with "public" or "common" ownership of the means of production. Lange considered the Walrasian simultaneous-equation formulation that had been advanced by Enrico Barone in 1908 to be a rigorous and conclusive answer to Mises' claim that socialism was "theoretically impossible." He invoked Fred Taylor's "trial and error" method as a refutation of the Hayek-Robbins thesis that socialism, though theoretically possible, was impracticable.

However, this entire elaborate answer to the Austrian challenge is premised upon a particular neoclassical reading of that challenge. Clearly if, as this paper contends, the neoclassicals, including Lange himself, fundamentally misunderstood the Austrian challenge they are supposed to have refuted, the challenge ought to he considered anew. However, before we can confidently embark on such a reconsideration, we should attempt to offer a plausible explanation of how the economics profession came to misunderstand the calculation debate so thoroughly.

--Don Lavoie, "A Critique of the Standard Account of the Socialist Calculation Debate," Journal of Libertarian Studies 5, no. 1 (Winter 1981): 41-42.

The First Principle of Economics Is Spontaneous Order or Undesigned Order

The principle of spontaneous order -- or of "undesigned order", as it might more properly be called -- can be viewed as the first principle of economics. Indeed, James Buchanan has recently gone so far as to suggest that it is the only principle of economics. The principle is, in any case, a cornerstone of modern economics, whether we trace modern (i.e., post-mercantilist) economics back to Adam Smith and the other Scottish moral philosophers, or to the Physiocrats. With this principle, scholars for the first time could see economic phenomena as interdependent events. Indeed, this principle made it possible to reason systematically and coherently about economic phenomena. Much of nineteenth century economics can be seen as consisting of developments of this principle (along with minority criticisms of the principle and the systems of thought deduced therefrom).

On the other hand, most of twentieth century economics has consisted of reactions against systems in which this principle plays a central role. In this, Keynesian economics is but one among a family of theories that deny the existence of a spontaneous or undesigned market order in which plans are coordinated. The reaction has been so complete, that what was taken by earlier economists to be an empirical law -- the existence of a spontaneous market order -- is now frequently viewed as the product of ideological bias or prejudice. If anything, modern economic discussions presuppose the absence of the very order whose existence was the cornerstone of much of nineteenth century economics.

--Gerald P. O'Driscoll Jr., "Spontaneous Order and the Coordination of Economic Activities," Journal of Libertarian Studies 1, no. 2 (1977): 139-140.

Milton Friedman’s Plucking Model Has Been Used to Argue Against the Relevance of the Austrian Business Cycle Theory

Milton Friedman’s “Plucking Model” has been used to argue against the relevance of theories of the “boom” preceding economic downturns, such as Austrian Business Cycle Theory (ABCT). According to Friedman, output data show that economies follow a trend, with recessions being temporary setbacks prior to a return to a trend approaching the economy’s maximum feasible output. Economies do not substantially go over trend during a boom; they collapse and then return to trend. Recessions “pluck” output downwards, but booms do not have similar effects in the opposite direction, as shown in Figure 1. Therefore, busts are what is to be explained, not the boom. While defenders of ABCT have objected to this interpretation, it remains an effective rhetorical point among macroeconomists.

--Ryan H. Murphy, "The Plucking Model, the Great Recession, and Austrian Business Cycle Theory," Quarterly Journal of Austrian Economics 18, no. 1 (Spring 2015): 40-41.

The Old Welfare Economics Crashed to the Ground When Lionel Robbins Demonstrated That Interpersonal Utility Comparisons Were an Impossibility

When Murray N. Rothbard published his seminal article, "Toward a Reconstruction of Utility and Welfare Economics," these were bold words indeed, considering the disarray into which welfare economics had fallen by 1956. The Old Welfare economics had crashed to the ground decades before when Lionel Robbins, building on the subjective-value foundation laid by Ludwig von Mises, demonstrated that its underpinning--interpersonal utility comparisons--was an impossibility. Being subjective, utility has no cardinal index and, thus, no common cardinal units could possibly exist for the purpose of comparing the utility of different individuals. Since individual ordinal rankings of utility cannot be compared, the argument advanced by Pigouvian welfare theorists, that redistribution of wealth from the rich to the poor would increase social welfare because of diminishing marginal utility of money, fails. To the chagrin of advocates of Old Welfare redistributionist policies, economists conceded that the subjective nature of utility renders cardinal measurement, a necessary requisite of interpersonal utility comparisons, impossible. Moreover, they admitted that advocates of such policies were not value-free economists but ethicists advancing their own, usually egalitarian, ethical biases.

--Jeffrey M. Herbener, "The Pareto Rule and Welfare Economics," Review of Austrian Economics 10, no. 1 (1997): 79-80.

We Are Not the Government; the Government Is Not Us

The State is almost universally considered an institution of social service. Some theorists venerate the State as the apotheosis of society; others regard it as an amiable, though often inefficient, organization for achieving social ends; but almost all regard it as a necessary means for achieving the goals of mankind, a means to be ranged against the “private sector” and often winning in this competition of resources. With the rise of democracy, the identification of the State with society has been redoubled, until it is common to hear sentiments expressed which violate virtually every tenet of reason and common sense such as, “we are the government.” The useful collective term “we” has enabled an ideological camouflage to be thrown over the reality of political life.

We must, therefore, emphasize that “we” are not the government; the government is not “us.” The government does not in any accurate sense “represent” the majority of the people. But, even if it did, even if 70 percent of the people decided to murder the remaining 30 percent, this would still be murder and would not be voluntary suicide on the part of the slaughtered minority.

--Murray N. Rothbard, "The Anatomy of the State," in Egalitarianism as a Revolt Against Nature and Other Essays, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 55-56.

The Two Classes of Credit: Commodity Credit and Circulation Credit

Every serious discussion of the problem of credit expansion must start from the distinction between two classes of credit: commodity credit and circulation credit.

Commodity credit is the transfer of savings from the hands of the original saver into those of the entrepreneurs who plan to use these funds in production. The original saver has saved money by not consuming what he could have consumed by spending it for consumption. He transfers purchasing power to the debtor and thus enables the latter to buy these nonconsumed commodities for use in further production. Thus the amount of commodity credit is strictly limited by the amount of saving, i.e., abstention from consumption. Additional credit can only be granted to the extent that additional savings have been accumulated. The whole process does not affect the purchasing power of the monetary unit.

Circulation credit is credit granted out of funds especially created for this purpose by the banks. In order to grant a loan, the bank prints banknotes or credits the debtor on a deposit account. It is creation of credit out of nothing. It is tantamount to the creation of fiat money, to undisguised, manifest inflation. It increases the amount of money substitutes, of things which are taken and spent by the public in the same way in which they deal with money proper. It increases the buying power of the debtors. The debtors enter the market of factors of production with an additional demand, which would not have existed except for the creation of such banknotes and deposits. This additional demand brings about a general tendency toward a rise in commodity prices and wage rates.

--Ludwig von Mises, The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression, ed. Percy L. Greaves Jr., trans. Bettina Bien Greaves and Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), 193-194.

Natural Interest Rate, Money Rate of Interest, and the Fluctuations of the Business Cycle

In conformity with Wicksell’s terminology, we shall use “natural interest rate” to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. “Money rate of interest” will be used for that interest rate asked on loans made in money or money substitutes. Through continued expansion of fiduciary media, it is possible for the banks to force the money rate down to the actual cost of the banking operations, practically speaking that is almost to zero. As a result, several authors have concluded that interest could be completely abolished in this way. Whole schools of reformers have wanted to use banking policy to make credit gratuitous and thus to solve the “social question.” No reasoning person today, however, believes that interest can ever be abolished, nor doubts but what, if the “money interest rate” is depressed by the expansion of fiduciary media, it must sooner or later revert once again to the “natural interest rate.” The question is only how this inevitable adjustment takes place. The answer to this will explain at the same time the fluctuations of the business cycle.

--Ludwig von Mises, The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression, ed. Percy L. Greaves Jr., trans. Bettina Bien Greaves and Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), 107-108.

Unsuspected Origins of Modern Austrian Economics: The Historical School on Capital and Economic Calculation

There are some elements in the body of Austrian Economics that definitely stem from the Historical school. Surprisingly, the Historical school acts as the model for Mises’s capital concept and, by implication, for his economic calculation argument against socialism.... In order to make his case, Mises has to presuppose several historical institutions that only exist in developed and monetized market economies. In this context, he draws on concepts developed by the Historical school. It was not necessary for him to acknowledge his debt to this school — and possibly he was not even aware of it — because he could act on the authority of Carl Menger, at least regarding the capital concept they both employed. Carl Menger himself, however, derived the capital concept on which Mises would later rely directly from Richard Hildebrand, a member of the Historical school.

--Eduard Braun, "Unsuspected Origins of Modern Austrian Economics: The Historical School of Economics on Capital and Economic Calculation," in The Next Generation of Austrian Economics: Essays in Honor of Joseph T. Salerno, ed. Per Bylund and David Howden (Auburn, AL: Ludwig von Mises Institute, 2015), 76.

Professor Mises Transformed the Wicksellian Theory into an Explanation of the Credit Cycle

Here it is only necessary to point out that Professor Mises has improved the Wicksellian theory by an analysis of the different influences which a money rate of interest different from the equilibrium rate exercises on the prices of consumers’ goods on the one hand, and the prices of producers’ goods on the other. In this way, he has succeeded in transforming the Wicksellian theory into an explanation of the credit cycle which is logically satisfactory.

--Friedrich A. Hayek, "Theories of the Influence of Money on Prices," in Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2008), 217.

In a Money Economy, the Actual or Money Rate of Interest May Differ from the Equilibrium or Natural Rate

Put concisely,Wicksell’s theory is as follows: If it were not for monetary disturbances, the rate of interest would be determined so as to equalize the demand for and the supply of savings. This equilibrium rate, as I prefer to call it, he christens the natural rate of interest. In a money economy, the actual or money rate of interest (“Geldzins”) may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.

--Friedrich A. Hayek, "Theories of the Influence of Money on Prices," in Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2008), 215.

The Automatic Adjustment of Supply and Demand Can Only Be Disturbed When Money Is Introduced into the Economic System

The argument of the foregoing chapters has demonstrated the main reason for the necessity of the monetary approach to trade cycle theory. It arises from the circumstance that the automatic adjustment of supply and demand can only be disturbed when money is introduced into the economic system.

--Friedrich A. Hayek, "Monetary Theories of the Trade Cycle," in Prices and Production and Other Works: F.A. Hayek on Money, the Business Cycle, and the Gold Standard, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2008), 51.

An Inappropriate Simplification: Introducing the Time Factor into the Theory of Capital in the Form of the Average Period of Production

I had little idea that this task of systematisation would uncover serious gaps in the reasoning which had yet to be bridged, and that some of the simplifications employed by the earlier writers had such far-reaching consequences as to make their conceptual tools almost useless in the analysis of more complicated situations. The most important of these inappropriate simplifications, of the dangers of which I became aware at a comparatively early stage, was the attempt to introduce the time factor into the theory of capital in the form of one single relevant time interval -- the "average period of production". But it gradually became clear that this supposed simplification evaded so many essential problems that the attempt to replace it by a more adequate treatment of the time factor raised a host of new questions which had never been really considered and to which answers had to be found.

--Friedrich A. Hayek, preface to The Pure Theory of Capital (1941; repr., Auburn, AL: Ludwig von Mises Institute, 2009), vi.

The Austrian Theory of the Business Cycle Emerges from a Simple Comparison of Savings-Induced Growth with a Credit-Induced Boom

The Austrian theory of the business cycle emerges straightforwardly from a simple comparison of savings-induced growth, which is sustainable, with a credit-induced boom, which is not. An increase in saving by individuals and a credit expansion orchestrated by the central bank set into motion market processes whose initial allocational effects on the economy's capital structure are similar. But the ultimate consequences of the two processes stand in stark contrast: Saving gets us genuine growth; credit expansion gets us boom and bust.


--Roger W. Garrison, "The Austrian Theory: A Summary," in The Austrian Theory of the Trade Cycle and Other Essays, ed. Richard M. Ebeling (Auburn, AL: Ludwig von Mises Institute, 1996), 112.

The Escape Route of Socialist Economists: Private Goods Versus Public Goods

What, then, does the “escape route” that socialist economists have found in order to avoid drawing Molinari’s conclusion look like? Since Molinari’s time it has become increasingly common to answer the question of whether there are goods to which different sorts of economic analyses apply in the affirmative. As a matter of fact, nowadays it is almost impossible to find a single economic textbook that does not make and stress the vital importance of the distinction between private goods, for which the truth of the economic superiority of a capitalist order of production is generally admitted, and public goods, for which it is generally denied.

--Hans-Hermann Hoppe, A Theory of Socialism and Capitalism (Auburn, AL: Ludwig von Mises Institute, 2010), 225-226.

Mises's Concept of Economic Calculation: The Means by Which Entrepreneurs Adjust the Structure of Production to Accord with Consumer Wants

I argue that Mises’s concept of economic calculation—the means by which entrepreneurs adjust the structure of production to accord with consumer wants—belongs at the forefront of Austrian research into the nature and design of organizations.There is a unique Austrian perspective on economic planning, a perspective developed over the course of the socialist calculation debate.

--Peter G. Klein, "Economic Calculation and the Limits of Organization," in The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Auburn, AL: Ludwig von Mises Institute, 2010), 2.

Marxist and Austrian Class Analysis: The State As an Exploitative Firm

Marxism, because it correctly interprets the state as exploitative (contrary, for instance to the public choice school, which sees it as a normal firm among others), is on to some important insights regarding the logic of state operations. For one thing, it recognizes the strategic function of redistributionist state policies. As an exploitative firm, the state must at all times be interested in a low degree of class consciousness among the ruled. The redistribution of property and income--a policy of divide et impera--is the state's means with which it can create divisiveness among the public and destroy the formation of a unifying class consciousness of the exploited.

Secondly, the state is indeed, as Marxists see it, the great center of ideological propaganda and mystification: Exploitation is really freedom; taxes are really voluntary contributions; non-contractual relations are really "conceptually" contractual ones; no one is ruled by anyone but we all rule ourselves; without the state neither law nor security would exist; and the poor would perish, etc. All of this is part of the ideological superstructure designed to legitimize an underlying basis of economic exploitation.

--Hans-Hermann Hoppe, "Marxist and Austrian Class Analysis," in Requiem for Marx, ed. Yuri N. Maltsev (Auburn, AL: Ludwig von Mises Institute, 1993), 65.

Early Rational-Expectations Proponents Criticized Orthodox-Keynesian Models Because Keynesian Models Assume Nobody Learns from Experience

The most dramatic mainstream response to the crisis in Keynesian economics was the development of the "Rational Expectations" approach to macroeconomics. In the hands of Robert E. Lucas (1972), Thomas Sargent and Neil Wallace (1975), Robert Barro (1976), and others, the Rational-Expectations story was at once a critique of Orthodox-Keynesian reasoning as well as an alternative to it. The grounds on which early Rational-Expectations proponents criticized Orthodox-Keynesian models were quite sound. In its simplest form, their argument was that Keynesian models, and particularly Keynesian policy conclusions, were based on the illogical proposition that economic agents, in reacting to fiscal and monetary variable changes, will make systematic errors. Rather than learning from the experience of past policy, they will react the same way each time to, say, countercyclical changes in the money supply. It would be impossible to gauge the amount of stimulus or restraint needed in a given situation if agents reacted differently with learning, but Orthodox-Keynesian models, even the most complicated, were based on the assumption of an intertemporally stable behavioral structure of the economy. As Roger Garrison and I have pointed out, this basic truth of the Rational Expectations school was anticipated by Mises as early as 1953.

--Don Bellante, "The Fork in the Keynesian Road: Post-Keynesians and Neo-Keynesians," in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, ed. Mark Skousen (New York: Praeger Publishers, 1992), 122-123.

The Crisis in Keynesian Theory over the Incompatibility of Rising Inflation Coupled with Rising Unemployment Was Resolved by Ignoring It

There were several responses among mainstream economists to the intellectual crisis associated with the demise of Orthodox Keynesianism. One such response was the growing popularity of Post-Keynesian economics. In many respects, this response was a return to the most primitive version of Keynesian economics, wherein output determination is the subject of economic analysis, but money-wage and price-level movements are seen as sociologically determined (in a tussle over the distribution of income). Hence, the crisis in Keynesian theory over the incompatibility of rising inflation coupled (sometimes) with rising unemployment was resolved by ignoring it, in effect, through seeking refuge in what is really a noneconomic theory of inflation.

--Don Bellante, "The Fork in the Keynesian Road: Post-Keynesians and Neo-Keynesians," in Dissent on Keynes: A Critical Appraisal of Keynesian Economics, ed. Mark Skousen (New York: Praeger Publishers, 1992), 122.